Real Estate available for purchase with the business. What do I do?

March 07, 2023

by an intermediary from California State University, Northridge in Los Angeles, CA, USA

I've spoken with some searchers who flat-out avoid opportunities with real estate involved. This is silly. Sure, it might be a liability on the balance sheet, so what else can you do?

This is where you should at least examine if a sale-leaseback of the real estate is a viable option. Perhaps the property is being sold for its appraised value. From there, you go to a real estate broker and get an opinion of value. If the business has good financials and can support a healthy rent coverage, the new lease payments guaranteed by the business could create a nice spread between the appraised value and the value with a lease in place.

Businesses trade on multiples, real estate often trades on cap rates. The "cap rate multiple" is 1/cap rate. So, a 5% cap rate is a 20x multiple, a 6% cap rate is ~16x multiple. Essentially, you're removing rent from EBITDA but selling it at a higher multiple to increase the overall enterprise value. If the goal is to grow the business, the capital can be better used in business operations as opposed to having a mortgage on the balance sheet (and the property is not income-producing).

If there is a healthy enough spread, there can be a simultaneous closing of the real estate and business together with the extra real estate proceeds being used to help fund the business. Additionally, you can buy both the biz and RE, increase EBITDA, then execute a sale-leaseback later to maximize proceeds/value. Happy to discuss this further with anyone. My DMs are open as well.

Reply by a searcher
from Columbia College in Salt Lake City, UT, USA

I'm personally a big fan of Real estate being included although the ultimate structure is usually separated from the business so essentially 2 deals smashed together. The separation allows for plays like the sale lease back among others. It can complicate things if you aren't prepared for a real estate transaction along side the other but if you are, it can be an excellent opportunity.

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

I concur with the earlier comment about the benefit if you are doing an SBA 7A loan. If the real estate purchase is 51% or more of the fully purchase price, you can get a 25-year amortization on the entire debt. This is a huge advantage from a cash flow perspective and in getting the deal to underwrite. You also get to add back any rent expense to cash flow, which can also be valuable if the seller is pulling out more rent then the property is worth. If the business acquisition piece is more than 51% of the acquisition price, then you can use a blended amortization with 25 years getting assigned to the real estate piece and 10 year to the business acquisition piece, and end up with a blended amortization on the entire debt of between 10 and 17.5 years. Depending on the split between real estate and business debt, I usually find this provides between a 5% and 20% cash flow savings over financing them separately.

However, you need to keep in mind that the maximum you can finance under an SBA 7A loan structure is $5 million. If you need more debt than that, then you could use an SBA 7A loan for the business purchase and an SBA 504 loan for the real estate purchase, as the SBA 504 only uses up 40% of the property purchase price towards your guarantee limit. However, if you are still going to exceed your guarantee limit, then you might need to use conventional financing for the real estate purchase, which could require a larger equity infusion of 15% to 25% on the real estate purchase, depending on the lender's policy for owner-occupied real estate financing.

I hope this helps. I am always willing to talk about individual scenarios.

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