I have seen a few businesses recently where the owners bought their building 20+ years ago and it has appreciated much more than their business has grown. And they have not adjusted the rent they pay themselves. In one example a fair market rent would reduce their SDE 60% and in another it would reduce it 110%. Yes, they are basically working to pay themselves rent.
Ideas
1) Push for a fair market rent adjustment and pay fair market for the CRE.
2) Buy the business only and require a 10 year lease at the current low rate the owner paid themselves. With an option to buy the CRE at the end of the lease.
3) Buy the business like normal and then ask the seller to hold a note for the CRE at 1.5% interest and 25 years.
I doubt any of these would be acceptable to the seller since they have a broker. How would you handle this?
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by a searcher
from Duke University
in Chapel Hill, NC, USA
in Chapel Hill, NC, USA
1yr ago
How to Handle Expensive CRE?
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by a lender
1yr ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I have been seeing this a lot as well. You need to be sure the cash flow can support the debt you are seeking after the fair market rent adjustment. I am seeing many sellers not being realistic about what their business is worth. They want both the value on the real estate and still think they have strong cash flow for a high multiple for the business. The numbers just do not work. It will likely be. challenge to educate them on it until enough people tell them no. Happy to take a look and see if we can be of any assistance. You can reach me here or directly at redacted
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by a searcher
1yr ago
from Kennesaw State University in Atlanta, GA, USA
from Kennesaw State University in Atlanta, GA, USA
Thanks ^redacted. ^redacted this is probably obvious but you should always underwrite the business and RE separately to understand their true respective values. If the seller wants to keep the current team employed with the business, there might be a way to get a good RE acquisition here using that angle. If the seller just wants a cash payout, then it seems like the business is forced to relocate and the deal might die as a result.
One idea: Create a note that allows you to buy the RE (for a price that works for you and the seller) but with two different paydown options. 1) pay fixed monthly payments based on what the business can afford today (1.5% over 25 years - like you already said) OR 2) buy the RE and pay "X%" of revenue (5% or whatever works for the business), which ever amount is greater. As you grow the business, the seller makes more each month and the debt payoff gets accelerated by whatever the growth rate of the biz is. This creates an incentive for the seller to help you grow the business and get their money faster. They'll get paid what they want for the RE but just at two different timelines. This would have to be 100% seller note, obviously. If the seller wants to keep the company alive/team employed but still wants to realize the true value of the RE, this might be the best way to go. They're just banking on your ability to grow the company.
If the RE is larger in size than the business needs, you could always buy and rent half of it to another company or parcel it out. Maybe something else you can explore.
At any rate, if the deal ends up falling through, try to lock up the RE for less than market value and assign the contract to another buyer who's willing to pay market price. If you go this route, make sure your RE contract is assignable. At least you can make some money on the deal this way. If you want to explore this, send me a DM. Happy to help.
One idea: Create a note that allows you to buy the RE (for a price that works for you and the seller) but with two different paydown options. 1) pay fixed monthly payments based on what the business can afford today (1.5% over 25 years - like you already said) OR 2) buy the RE and pay "X%" of revenue (5% or whatever works for the business), which ever amount is greater. As you grow the business, the seller makes more each month and the debt payoff gets accelerated by whatever the growth rate of the biz is. This creates an incentive for the seller to help you grow the business and get their money faster. They'll get paid what they want for the RE but just at two different timelines. This would have to be 100% seller note, obviously. If the seller wants to keep the company alive/team employed but still wants to realize the true value of the RE, this might be the best way to go. They're just banking on your ability to grow the company.
If the RE is larger in size than the business needs, you could always buy and rent half of it to another company or parcel it out. Maybe something else you can explore.
At any rate, if the deal ends up falling through, try to lock up the RE for less than market value and assign the contract to another buyer who's willing to pay market price. If you go this route, make sure your RE contract is assignable. At least you can make some money on the deal this way. If you want to explore this, send me a DM. Happy to help.
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