Rent Addback when purchasing real esatate
February 16, 2022
by a searcher from University of Massachusetts Amherst - Isenberg School of Management in New York, NY, USA
I'm looking at a company that is for sale with the real estate included. It is all part of one entity, he owns the real estate outright and is not currently paying rent to himself or any other entity.
Assuming I would use the SBA 7A and 504 products, what is the correct way to model cash flow in this scenario? If I add in a market rent expense and include the real estate cost in my debt servicing, wouldn't I essentially be paying twice for the real estate?
Thanks,
Ken
from University of Pennsylvania in New York, NY, USA
The "most accurate" way to do it would be to deduct market rent from the business cash flows for the purpose of valuing the business, then using that market rent to value the real estate separately (generally valued using cap rates).
That said, cap rates for real estate translate to much higher multiples of cash flow than small biz multiples, so I would try to avoid splitting up the value like that in your negotiations with the Seller.. But that method will give you a better sense of what you're actually buying -- in theory, you could complete a sale-leaseback of the real estate post-closing in which you receive that market price and pay that market rent.
from The University of Chicago in Chicago, IL, USA
1) Think as if, you are buying two assets, a) the business that pays rent X and expenses it, and b) the building that has rent income of X. Run pro-forma and ROI for both.SBA will finance each. The business loan will be, say 10 yrs amortization, the building loan 25 yrs
2) Depending on the the size of the building loan, it may be possible to combine the two loans into one. This will result in the business loan amortized over a longer period. P+I of this one loan will be lower than the P+I of the two loans discussed above.
Happy to talk other pro/cons.