Operating businesses backed by their own real estate
When an operating company owns the property it occupies, the transaction has two financing legs with different lenders, different terms and different collateral. Separating them correctly usually produces more total proceeds than selling the two as one blended asset, because each leg gets financed on its own strength.
Written and reviewed by Antoine Campbell. Last reviewed .
This is the category Maurant is built around: an essential service business operating out of a building it owns, where the property makes the business hard to displace and the business makes the property worth holding.
Why the two legs get separated
Commercial mortgage lenders underwrite a rent stream over a long term against real property. Business lenders underwrite cash flow over a shorter term against operating assets. Forcing one lender to do both jobs produces worse terms than letting each do the job it is built for.
Separation also gives the seller options: sell both, sell one, or keep the property and collect rent from the new operator.
The lease is the hinge
Where a market-rate lease is written before financing is arranged, the property lender has something real to underwrite. Where it is written afterward to fit the loan, it usually does not survive appraisal.
- Rent must be at a defensible market level, supported by comparables
- The business must cover that rent and still show earnings a buyer will pay for
- Term, escalations and renewal options determine what the property is worth
- Maintenance and expense responsibilities have to be explicit
What the seller gains
Purchase price allocation between the business assets and the real property has real tax consequences and is reported to the IRS. Your CPA should be involved before the allocation is agreed, not after.
- Two financing sources instead of one, which raises the funded amount
- The choice to retain the property as retirement income
- A cleaner allocation of the purchase price for tax purposes
- Less dependence on any single lender approving the whole transaction
The Equity Carry Method
Maurant's structure for these deals closes both legs simultaneously: the property leg funded by a lender underwriting a market-rate lease, and the operating leg funded with a combination of cash and a carried seller position. The seller chooses how the carried portion is secured. That choice never changes the price.
What Maurant needs to evaluate this
- Deed, title and survey for the property
- Which entity owns the property and how it is taxed
- Current rent charged and its basis
- Three years of tax returns for both the business and the property entity
- Environmental history and any prior assessments
- Deferred maintenance inventory
When Maurant is not the right buyer
- Property with unresolved environmental liability and no remediation path
- Operations that cannot support market rent at any credible level
- Owners unwilling to separate the two values for underwriting
Questions owners ask
- Do I have to sell the building?
- No. Keeping it and leasing to the new operator is a legitimate outcome and a common one.
- What if the property is inside the operating company?
- It complicates both a sale and a refinance. Moving it has tax consequences, so discuss it with your CPA well before a transaction.
- Who sets the market rent?
- Comparable leases, confirmed by the appraisal the property lender orders. It is not a number either side gets to pick.
Sources
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