Business and property
Business sales that include commercial real estate
When the owner also owns the building, the transaction has two assets, two valuations and often two financing structures. Handled correctly it widens the buyer pool; handled loosely it stalls at appraisal.
Four ways the property can be handled
Sell the business and the property together
One buyer takes both. Common in manufacturing, distribution, automotive, hospitality and veterinary transactions where the location is part of the business.
Sell the business, lease the property to the buyer
The owner keeps the real estate as an income asset and grants the buyer a lease at market rent, usually with an option to purchase.
Sell the business, sell the property separately
Two transactions, two buyer pools, two closings. Used when an investor pays more for the property than an operator will.
Sell the business, relocate it
Where the site is not essential and the property is worth more in another use.
Valuing the business and the property
Separate the two values
Recast the operating earnings with a market rent charge so the business is valued on what it earns as a tenant. The property is then valued on its own comparables. Adding the two avoids counting the same value twice.
Set market rent honestly
An owner paying themselves below-market rent inflates SDE; above-market rent depresses it. Buyers and lenders will normalize this either way.
Expect an appraisal
Where financing is involved, the lender orders a commercial appraisal. It, not the asking price, will govern the loan amount on the property.
Allocate the purchase price
The purchase agreement allocates value between real estate, equipment, inventory, intangibles and goodwill. That allocation drives the tax outcome for both sides, so it is modeled before the letter of intent, not after.
Financing
Acquisition debt for the operating business and debt secured on owner-occupied property are usually underwritten on different terms and amortization periods. SBA 7(a) is commonly used for business acquisition, and SBA 504 for owner-occupied commercial real estate; eligibility, occupancy requirements and loan limits are set by the lender and by SBA rules, so confirm both before pricing an offer.
Property diligence checklist
- Title, survey and any easements or encroachments
- Zoning, permitted use and certificate of occupancy
- Environmental review — a Phase I is standard for industrial and automotive sites
- Roof, structure, HVAC and any deferred maintenance
- Property tax history and reassessment risk on transfer
- Existing mortgage terms, prepayment penalties and lien releases
Business and real estate: common questions
What happens when real estate is included in a business sale?
The operating business and the property are valued separately and then combined into one transaction. The business is priced on normalized earnings with a market rent charged against those earnings, and the property is priced on its own value, which prevents the same income being counted twice.
Can I sell my business and keep the property?
Yes. Many owners sell the operating business and retain the real estate, granting the buyer a lease. The lease term, rent, renewal options and assignment rights then become part of the deal, because a buyer's lender will look at whether occupancy is secure for the life of the loan.
What is owner-occupied commercial real estate?
Owner-occupied commercial real estate is property used by the business that operates in it, commonly held in a separate entity owned by the same principals. It is treated differently from investment property in both valuation and acquisition financing.
How is SBA 504 different from SBA 7(a) in an acquisition with property?
The SBA 7(a) program is generally used for the acquisition of the operating business and can include real estate in the same loan, while the 504 program is directed at owner-occupied real estate and long-lived equipment. Structure, terms and eligibility are set by the lender and the SBA, so confirm the route before pricing the deal.
How is a business with real estate valued?
Charge market rent to the business, value the business on the resulting earnings, value the property on comparable sales and income, then present the combined figure. Buyers and appraisers will separate the two values again, so a combined multiple that hides the property value tends to fail in diligence.
General information only, not legal, tax, appraisal or lending advice. Property, tax and disclosure rules vary by state and municipality.