Has anyone has bought real estate as part of their acquisition?
October 15, 2024
by a searcher from Grand Valley State University in Chicago, IL, USA
I'm probably overcomplicating things but the current deal I'm working on would include the building as part of the acquisition - how does this change deal economics? Does it become two separate purchases? I'd love to talk to someone who has experience analyzing a deal like this or previously has acquired something this way.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
There are several advantages from a financing perspective if you are using SBA financing. You can use the SBA 504 loan program to limit your SBA exposure on the building purchase, but you can only then finance 85% of the building purchase via an SBA 504 loan (SBA 504 rule - when there is a change in ownership of the business at the same time you get an SBA 504 loan on the real estate, the advance on the real estate is limited to 85% versus the standard 90% in other circumstances).
If you are using an SBA 7A loan you can get a 25 year term on the debt if you do it separately. If you fund the real estate in the same SBA 7A loan as you do the business, and the real estate is 51% or more of the total cost (with any working capital being assigned to the business portion of the acquisition when calculating total cost), you can get a 25-year amortization on all of the debt. If the business purchase is 50% or more of the purchase price, then you can get a blended amortization on the debt with 10 years assigned to the business portion of the debt and 25 years assigned to the real estate portion of the debt, giving you an amortization on the entire debt between 10 and 17.5-years. This will typically create a 5% to 15% cash flow savings depending on how big the real estate piece of the debt is, versus financing them both in separate SBA 7A loans because you get to push out the business acquisition debt.
I would be happy to help you run through various options. We do this for clients all of the time and help them understand the required down payment and assess the cash flow benefits. You can reach me here or directly at redacted
from York University in Toronto, ON, Canada
- Sometimes the seller is willing to keep the RE and only sell the opco in which case a market lease should be drawn up as part of the acquisition.
- If the seller insists on the RE being sold along with the opco, sometimes the RE is bought by the buyer, sometimes it's sold to a third party and leased back to the opco at a negotiated market rent (this is commonly called a sale leaseback).
- When the buyer decides to buy the RE, typically one entity is set up to purchase the opco with a separate entity set up to purchase the RE.
- For deal economics, the RE gets valued separately from the opco. The RE gets appraised by a professional (or multiple professionals if the buyer and seller have different views on value). For opco, EBITDA is adjusted to reflect what opco would pay if it had to pay market rent (and then the multiple gets applied to that adjusted EBITDA figure).
- (RE appraised value) + (Opco value based on adjusted EBITDA) = Purchase Price
This is what I've seen and are just rules of thumb. Deals can get creative.
Hope that helps and happy to answer follow up questions