REAL ESTATE LEASE/BUY
Hi All,
I'm looking at a specialty construction business in which the real estate is also available for either sale or lease. My preference is to lease (at least at first), but how should I be thinking about evaluating terms? I get the sense based on real estate-only listings in the area that the payment amount the seller is asking for is high for the region/type of facility (but I'm no expert and I know that small variances in location, etc. mean a lot). Then again I'm not sure it's worth "spending" goodwill negotiating something that, for context, is on the order of 10% of SDE.
Also, how should I think about whether a sale-leaseback might make sense (seeing as purchasing the building is an option)?
Thanks in advance for any thoughts.
https://www.searchfunder.com/post/anyone-have-experience-with-acquiring-real-estate-along-with-the-business
Then here, ^[redacted] recommends lease with right to buy in 1 year:
https://www.searchfunder.com/post/acquiring-a-business-purchasing-the-property-as-part-of-the-acquisition
For a business where the existing Real Estate is critical to operations (location, installation costs, etc), you're going to want it some point for control.
If your rent is 10% of SDE, at a "10% cap" RE rate, then value of RE close to 100% SDE. If you are paying 3x SDE, then real estate would only add another 1x to your deal (or 25% of total deal).
You'll need to determine "market value" of rent. I'm sure you'll get best answer by paying for an appraisal, however, I would start by using LoopNet to peruse listings of similar Square Footage, Location, and Industry. Grab PDF prints of these for your comp records. Grab these for Rental and For Sale properties in a reasonable radius. For small town areas, this is challenging to find enough comps sometimes. This will give you an "upper end" since you're looking at asking price, not what actually closes. You'll see relevant cap rates on the for sale and relevant lease rates on the for rent.
If they're asking for a lot below what you find, you may find you're getting a good deal on rent and don't want to say anything other than get a long term lease in place. Or, buy the RE (if seller doesn't know what they have), increase rent on yourself then refi, sell, etc.
I had this delay/kill a deal for me beginning of this year, as seller realized they were under market rent. They wanted to adjust, which took a lot of SDE out of the deal! What I learned: Sellers may have an incentive to make rent artificially higher in the process (especially off market deals), increasing value of real estate (at 10% cap RE value you're paying 10X whereas for business you are going to be paying maybe 3x-4x!).
In the end, do you want to pay 5x-10x on RE in addition to your 3x-4x on the business?