Deal including real estate

searcher profile

September 18, 2023

by a searcher from Columbia University in New York, NY, USA

All - Working through a deal on which there's a substantial amount of real estate. I would normally try to just rent the property from the seller, but they want to sell, and its nice property.

Looking for feedback from this group on how you might think through a) valuation implications and b) financing implications. On the face of it, the real estate makes the deal seem rich on a cashflow basis, but there is of course value in the dirt/buildings. Happy to take any thoughts.

2
17
164
Replies
17
commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great questions. It is hard to cover in a post like this, but I will do my best. First, buying the real estate is going to require additional equity into the transaction. Depending on the type of loan you are looking at between 10% to 25% in equity required on the real estate. 10% is possible with SBA financing but if you need to go with more conventional financing most lenders will finance between 80 to 85% of the purchase price for owner-occupied properties and some lenders will only finance 75% right now in this market. So you have to determine if you will get a return on the additional equity you need to bring to the table.

Now you do get to add rent expense back to cash flow when buying the real estate. If you are going to pick up a savings by owning versus renting, that additional cash flow comes back to help support the overall transaction.

Loan terms are longer for real estate. Typically fixed rates with amortizations of 20 to 25 years. So you will see much better terms on the real estate then you will typically see on straight business acquisition debt. If you use 7A SBA financing, there is the opportunity to extend the amortization out on the business acquisition debt by combining the debt and the amortizations, which usually works to decrease annual debt service by 10 to 20% depending on how much of the acquisition is assigned to the real estate.

I would be more than happy to discuss your particular situation at any time. You can reach me here or directly at redacted
commentor profile
Reply by a searcher
from Duquesne University in Pittsburgh, PA, USA
^redacted‌ the valuation for the business and the valuation of the real estate are going to be two different terms and rates, and are going to be treated separately as clearly explained by ^redacted‌. In most cases, the combined loan payment schedule can result in a better NOI. Is the rent payment going to be a lot higher than the expected mortgage payment? If so, I would consider adding the real estate to the deal. BTW, depending upon the location and your situation, I would be interested in investing in the real-estate.
commentor profile
+15 more replies.
Join the discussion