Manufacturing Business Real Estate

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December 15, 2023

by a searcher from Harvard University - Harvard Business School in Pittsburgh, PA, USA

I would love opinions concerning the option to buy real estate during the acquisition of a manufacturing company. How would you value a manufacturing business that owns the real estate; would you back out a market-based rent from Adj EBITDA?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. Typically speaking you would add-back any rent the company is currently paying and then make an adjustment for what the fair market rent would be for the property they are utilizing. That will allow you to value the business excluding the property. Sometimes sellers are passing through more cash flow in rent than market rent for tax reasons. If that is the case you have two options. You can give the seller the credit for the difference (if they have a good broker they are likely already doing so) or you could use the lower cash flow number and use what they are paying as market rent. This might allow you to get a slightly better price on the business.

As for buying the real estate, that is all about what value you think the property ultimately has for you. The real estate will tie up capital on the acquisition side. If you are doing conventional financing you would likely need to bring 20 to 25% equity into the acquisition. If you are going to use SBA financing you could finance up to 90% of the real estate purchase. If you finance the real estate into an SBA 7A loan and the real estate is 51% or more of the total cost, you can finance the real estate and business acquisition together over the 25-year real estate amortization. If the real estate is less than 51% of the total acquisition price, then you can finance both together over a blended amortization (somewhere between 10 and 17.5 years) with the business debt on a 10 year amortization blended with the real estate debt on a 25-year amortization. This usually equates to a 5 to 20% monthly cash flow savings versus financing them both separately depending on how much of the debt is real estate related.

If you are worried about maximizing your exposure on the SBA programs, you could use the SBA 504 loan program for the real estate acquisition. Only 40% of the acquisition price counts against your $5 million SBA limit using the SBA 504 exposure, so it could be a way to do more of the debt using an SBA loan. I would be more than happy to talk through options with you at any time. You can reach me here or directly at redacted Good luck.
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Reply by a professional
from University of New Haven in Cromwell, CT, USA
I agree with David's assessment but determine market based terms and conditions for the lease - triple net for example. Based on the FMV rent and terms - remove any expenses that are not in conformity with market based terms. also remove the depreciation from cash flows that are associated with the RE. Leasehold improvements are a little more tricky but for the most part leave them in.

The tricky part becomes where substantial improvements - additions for example are part of leasehold improvements. Agaain need to look at normal transacations - would an independent owner make the improvements for the tenant and increase the rent? Judgment is necessary.

The final step rent expense will reduce cash flows.
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