What If There Is Real Estate Attached to the Business? Sell It, Lease It, or Keep It

Option one: sell both together

The buyer purchases the business and the real estate in one transaction, usually with two purchase agreements and two escrows closing at once. This is the simplest outcome for an owner who wants a clean exit and has no interest in being a landlord.

Financing favors it. An SBA 7(a) loan can finance the business and the real estate together, and when real estate is more than half of the loan proceeds the loan term can extend to 25 years, which lowers the buyer's monthly payment. SBA 504 loans, designed for owner-occupied real estate, can be paired with a 7(a) for the business. Lenders like real estate as collateral, so a buyer can often borrow more against a combined deal than against the business alone.

The business has to be priced on its earnings with a market rent included as an expense. If the business has been paying no rent or below-market rent because the owner owns the building, SDE has to be adjusted downward to reflect what a market lease would cost. Otherwise the buyer is paying for earnings that exist only because the rent was free.

The real estate is priced separately, on an appraisal and on comparable sales, and the two prices are presented as two numbers. Buyers and lenders want to see them separately even when they close together, and the purchase price allocation for taxes requires it.

The buyer pool is smaller. A buyer who can afford a $1.5 million business may not be able to afford it plus a $2 million building, even with financing. Some buyers do not want to own real estate. Offering both, with the option to lease instead, keeps the pool open.

Option two: sell the business, lease the building to the buyer

The owner sells the business and becomes the buyer's landlord under a new lease signed at closing. This is the most common structure when the seller owns the property, and often the most valuable.

The seller keeps an appreciating asset that produces income, with a tenant they know, on terms they negotiated. Rental income from a net lease requires little work. The property can be sold later, refinanced, or passed on, and the sale of the business is separated from the timing of the real estate market.

The buyer gets a business with a secure long-term location, which is what their lender requires, without the capital to buy the building. The lease should be long enough to cover the buyer's loan term, ten years with options is standard, at a market rent, with terms a lender will accept.

The lease is negotiated as part of the deal, and it affects the business price. A higher rent lowers the business's earnings and its price. A lower rent raises them but reduces what the building is worth as an investment. The right rent is market rent, supported by comparable leases, so that neither asset is subsidizing the other. We model both numbers together so the seller sees the total.

The seller should think through what they want as a landlord. A triple net lease where the tenant pays taxes, insurance, and maintenance. A personal guarantee from the buyer. A right to approve assignment if the buyer sells the business. An option for the buyer to purchase the property later at a defined price or at appraisal, which some buyers want and which can help sell the business.

Option three: keep the building and the business moves

Rare, and usually only when the building is worth more for another use than as the business's location. A restaurant on a corner that a developer wants. A shop on land zoned for something more valuable. In that case the business may be relocated before sale, or sold with the understanding that it will need to move, which lowers its value. This is a real estate transaction with a business attached, and the analysis starts with the land.

Tax considerations

Selling the real estate produces capital gain on the appreciation and depreciation recapture on the depreciation taken over the years, which is taxed at a higher rate. Owners who have held a building for decades often have a large recapture figure. A 1031 exchange can defer that tax if the seller reinvests in other real estate within the deadlines, which is one reason some owners sell the building and buy a passive investment property with the proceeds.

Keeping the building and leasing it defers the tax entirely, produces income, and gives the owner's heirs a stepped-up basis if the property passes at death. That combination is why many advisors favor the lease option for owners who do not need the cash from the building.

Selling both at once concentrates a large taxable event in one year. Sometimes that is fine. Sometimes staggering the business sale and the building sale across two tax years, or using an installment sale on one of them, produces a better result. This is a conversation with a CPA before the business goes to market, not after an offer arrives.

A worked example

An owner runs a machine shop with $600,000 in SDE from a building he bought in 2004 for $900,000 and has depreciated to a basis of about $500,000. The building appraises at $2.4 million. The business has been paying no rent.

Market rent for the building is $180,000 a year. Adjusted for that rent, the business's SDE is $420,000. At 3 times, the business is worth about $1.26 million.

Option one, sell both. The buyer pays $1.26 million for the business and $2.4 million for the building, $3.66 million total, financed with an SBA loan over 25 years because real estate is most of the deal. The seller's tax bill includes gain on the business, gain on the building, and recapture on the roughly $400,000 of depreciation taken. The buyer pool is limited to buyers who can qualify for a $3.66 million loan, which excludes most individuals.

Option two, sell the business and lease the building. The buyer pays $1.26 million and signs a ten year triple net lease at $180,000 a year with two five year options. The seller's tax bill is on the business only. The seller collects $180,000 a year, indexed, and still owns a $2.4 million asset. The buyer pool includes every individual who can finance a $1.26 million purchase.

Option three, sale-leaseback first. The seller sells the building to an investor at a cap rate around 7 percent, about $2.5 million, signs the ten year lease, then sells the business to a buyer who steps into that lease. The seller has the cash from both, pays tax on both, and has no landlord role afterward.

Most sellers in this position who do not need $2.4 million in cash today choose option two. Those who want to leave entirely, or who want to diversify out of a single property, choose option one or three. The numbers decide, and they are run before the business is listed.

Questions to answer before listing

Does the business's SDE reflect market rent. What is the building worth on an appraisal and on comps. What is the seller's tax basis and recapture exposure. Does the seller want to be a landlord. Would the seller consider a 1031 exchange. What lease terms would a buyer's lender accept. Is the building worth more for another use. Each answer moves the decision, and all of them are easier to get before a buyer is in the room.

How we present it

When an owner holds the real estate, we value the business at market rent, value the real estate on an appraisal and comps, and present the buyer with a choice: purchase both, or purchase the business and sign a lease. We show the seller both outcomes side by side, including estimated taxes, so the decision is made on the numbers.

Most owners who do not need the cash from the building end up leasing it. Most who want a complete exit sell both. Either way, the decision should be made before the listing goes up, so the offering memorandum can present it cleanly and buyers can be qualified for the right transaction.