Acquiring a holding company?

December 27, 2022

by a searcher from University of Virginia in Oakland, CA, USA

Hello all, I am grateful to have found this community.

I have become increasingly curious about whether, and to what extent, I could potentially benefit from "merging" my privately held real estate investment properties onto the balance sheet of an acquired business.

Knowing each situation is unique, what characteristics for an operating business might make more or less sense to fit this possible approach?

Let's assume my overall objective is to maximize the tax situation post-acquisition.
The properties are cash flow positive (but require lumpy capex), and have fixed leverage with healthy debt service coverage and ample equity. I had initially planned to use a credit line tied to one of them to partially fund the acquisition, but could consider more creative structures. As of now, I am still lacking a target for acquisition.

Thanks in advance for any insight, perspective, advice, etc.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Very interesting question. A couple of initial thoughts upon reading this. First, I think you need to spend some time with your accountant from a tax perspective and attorney from a legal / liability perspective to determine the benefits and negatives of merging those properties into an operating company or holding company. Most attorneys recommend holding real estate investments in separate entities to provide liability protection for each entity. Often times you can still get the same tax treatment doing so, of you may be able to have them roll up into your holding company.

Secondly, from a lending perspective, if you are looking to leverage those properties for cash for your transaction or operating capital, there are several different approaches. Part of it will depend on what lending program you are using for your acquisition. If you plan to use an SBA 7A loan product to acquire a new company, then you likely want to leverage your real estate ahead of time and outside of the SBA loan program as an SBA 7A lender could be required to take seconds on those properties as additional collateral for an SBA 7A loan if that loan is not fully secured by the collateral that is part of the acquisition. However, if those properties are already adequately levered, the SBA will not require those to be pledged. You can also look at various other products to do a cash out in advance or a line of credit. Keep in mind if the debt is on the same books as the operating company and a lender with a conventional loan has covenants or conditions requiring you do not exceed a certain leverage ratio, this could put additional stress on the balance sheet.

I would be more than happy to discuss options and try to better understand what you are looking to do at any time. You can ping me here or at redacted Good luck.

Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

The general rule is to keep real estate outside of an operating company for both legal and tax reasons. Also, NEVER put real estate inside an entity that is taxed as a corporation, whether C or S.

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