Rent Expense Add-back

searcher profile

January 18, 2025

by a searcher from George Washington University in Atmore, AL 36502, USA

Is rental expense a legitimate add-back if the deal includes the real estate? I can see where the seller is coming from. However, I'm conflicted. If the business ever moves to a leased property, this becomes a large expense.

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I concur with some of the statements above. You need to first value the business and the real estate separately. The rent being paid by the business to the owner may be more than market or could be less than market. So you need to figure out what market rent is and adjust for that compared to the value of the building when you value the transaction.

However, if you are buying the real estate, then rent can be added back. You are looking at the transaction as it is at that point in time. Now if you plan to move the business because you know the space is too small, you can always try to get the seller to keep the real estate and lease it back. In that case you would add-back the rent and then remove whatever new rent the seller is looking for if there is a difference. If no difference, then you would not add the rent back. I hope this helps to clarify. If you have additional questions you can reach me here or directly at redacted Depending on the type of financing you are using, there can be some beneficial financing strategies to including the real estate in the loan, and some options to lease it with an option to buy it later, and then finance it later. Good luck.
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
As ^redacted‌ indicates, there are two purposes -- DSCR and valuation. For DSCR, the rent is added back as this will no longer be an expense and will be replaced by debt service for the combined loan that the SDE+Rent or EBITDAR will be used to pay for. However, if there are separate prices for the real estate and the business, then the business should be charged a market rent for valuation purposes, with a positive or negative addback to adjust whatever they are currently internally charging themselves to the market rent. This SDE or EBITDA (with an adjustment to market rent) should be used for any analysis that uses P/SDE multiples or P/EBITDA multiples. The business valuation stands on its own as if it were paying a third-party landlord, and the real estate value stands on its own.
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