Modelling Real Estate acquisition as part of a deal
March 14, 2022
by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Toronto, ON, Canada
Dear community,
For the first time I'm considering acquiring the real estate where my target operates as part of a deal. Being new to real estate modelling, I was wondering about any useful tips and best practices you might be able to share? I'm modeling the following:
- Purchase price
- Mortgage payments (Principal & Interest)
- Building depreciation which would increase EBITDA of the business and reduce taxes (one of the pros I see)
- Appreciation of the building during the ownership period using historical trends (it is is prime urban location)
- Value of the building at exit
- Other costs like maintenance and insurance are already part of the business P&L
Am I missing something?
Thank you!
from Yeshiva University in Boca Raton, FL, USA
Bear in mind that property (specifically commercial real estate) is valued primarily based on the income - so if you're assume your building is increasing in value, it's because your rent (albeit from the opco pocket to the realty pocket) is increasing too. This is relevant in a situation where you want to sell the business - lower EBITDA for opca; or it's relevant if you want to sell the real estate - it will only be worth what you're willing to pay in rent.
"Typically" you'll see the opco paying rent to get the realty co to $0 income after accounting for depreciation and mortgage interest. But I imagine there is no real typical. (And then if you're going to sell the real estate, you sign a new lease adjusted to market +/-.)
from California State University, Sacramento in Seattle, WA, USA
I’ll also add that when real estate is included we don’t want the extra collateral and longer term to mask the underlying acquisition metrics. Make sure the underlying business acquisition dynamics make sense and the extra term isn’t allowing you to acquire a higher than justified price for the actual business. The business acquisition should make sense all on its own.
Also think about what you could do with the extra cash required for the real estate acquisition. Would that capital be better utilized to transition the company and or grow it.