private schools

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August 07, 2023

by a searcher from University of Virginia-Darden - Darden School of Business in Charlotte, NC, USA

Has anyone bought a private school before? I am looking into buying a Montessori school. I am attracted to it by stability of cash flows, but concerned with lower growth opportunities. Also curious how folks finance real estate in the context of private school purchase.

Thank you

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I agree with some of what has already been said. We have done quite a bit of financing for various daycares and Montessori schools over the years. Although the businesses themselves have some value, depending on how much the real estate costs it could have value well above the business value. If you decide to buy the real estate at the same time, you get the advantage of adding back that rent expense (minus any separate property expenses like real estate taxes) to cash flow. This can provide an enhancement to cash flow. However, you would then need to bring additional equity for the real estate, and you would have that tied up in an asset whose value is largely going to be derived from the strength of the school operating from it.

One thing to consider on the SBA 7A side, is that if the real estate is over 50% of the acquisition costs, you can get a 25 year amortization on the entire debt, real estate plus business debt. If the real estate is less than 50% of the transaction cost, then if you put them both in one loan you would get a blended amortization where 25 years would be put against the real estate portion and 10 years against the business portion, and you would end up with an amortization somewhere between 10 and 17.5 years. This blended amortization usually has the impact of cutting monthly debt service down by 10 to 20% versus doing both loans separately.

If you are limited in your SBA exposure (if you decide to go the SBA route) you could finance the building via an SBA 504 loan and the business via an SBA 7A loan. You could also go Pari Passu where you finance as much as possible on an SBA 7A loan (Note A) and then the Bank does a second loan with terms matching the SBA 7A loan (Note B) on a pari passu basis where it shares in the collateral with Note A.

Happy to discuss options or help you run numbers to see what makes the most economic sense. You can reach me here or directly at redacted Good luck.
commentor profile
Reply by a searcher
from Eastern Washington University in Seattle, WA, USA
I have seen a few ways that people buying schools handle the RE. There are multiple way to go about it,

1. Put both the RE and operating business in the SBA loan and get pari passu for anything above the cap

2. Buy the operating business and sign a lease on the RE with the current owners for however long negotiated (some owners like this because they dont want to pay taxes)

3. Buy the operating business with SBA and get conventional commercial debt for the RE (and hope for a long amortizaiton period haha)

4. Buy the operating business and the RE but find a buyer for the RE directly after the transaction and sign a NNN lease with them for however long negotiated.

Probably more examples out there, but those are the ones that are top of mind.

All depends on if you want to run it lean with just operating businesses or own the RE as well. Feel free to reach out if you want to chat further about the topic!
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