Attracting Investors to a deal that includes real estate

July 27, 2022

by a searcher from Harvard University in Boston, MA, USA

I'm a self funded searcher looking at submitting an LOI on a manufacturing business where 60% of the purchase is going to real estate (the building where the company operates + a neighboring building on a triple net lease). Right now my modeled IRR is 20% which I know is low, but I was wondering if some investors would be more excited by the real estate component (because it's less risky / more diversified).

I don't really want to split the transaction because I'm planning on using an SBA loan and want the longer loan terms.

I've also seen the leaseback strategy and I'd prefer to keep the real estate if I can.

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

If you are buying both and planning to use SBA financing and more than 50% of the purchase price is for the property, then you could amortize all of the debt over 25 years for the entire transaction. However, where it can become difficult is if the adjoining building that is leased to an outside party is really a separate transaction and if removed from the SBA financing decreases the percentage the real estate makes up on the transaction, in which case you could do a blended amortization between 10 and 25 years for the debt. If the additional building leased out is all part of one parcel that needs to be sold and over 51% of the building is owner occupied by the business, you could roll it all into one loan. If it is a separate parcel and has nothing to do with the business, then you would likely need to break it off into a separate loan. That property you could probably get 80% financing done on, or could do a sale leaseback like you suggested.

Happy to discuss options with you at any time. You can reach me at redacted Thank you.

Reply by a searcher
from University of Notre Dame in Cambridge, MA, USA

Unless what the deal has what Brad mentions ie <50% of EV is the real estate, I would negotiate a right of first refusal for the property with market rate rents to the owner for three years, After you have stabilized the business, you can use a 504 loan to buy the property. The worse position to be in is having a failed business and a piece of commercial property with no tenant.

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