Commercial Real Estate Might Help you Sell it
By Steve Mariani
There may be much more to consider when the CRE is an option. We all understand our main focus is selling businesses, right? If we wanted to sell real estate then that’s the market we’d be in. So why start considering the it now when a seller contacts you to list a business? Here’s why. The laws in each state are different and either securing a real estate license or brokering with another broker many times makes this prohibitive and this is usually the basis for passing on it. When beginning to discuss listing options with a potential seller very few brokers take seriously the option to sell the land and building with it for these reasons but if he can get that business sold and in a shorter timeframe, it very well could be a homerun.
What would the actual SDE or cash flow look like if the entire loan term was 25 years and rent payments become an addback? The SDE or cash flow typically increases, A LOT.
Today we’re going to go through a case study where the CRE makes the deal happen, the broker had no idea this could make the difference and until we did the math both ways, we didn’t either.
BUSINESS PURCHASE ALONE
The business alone was selling for 790K
Rent NOT INCLUDED in SDE is 65K per year
We then added 150K (100K working capital and EST closing costs of 50K)
Total project cost = 940K
SDE or cash flow of the business = 225K per year
Buyer wanted to put down 200K
Loan amount of 740K was the initial request to us
Actual debt service (based on a 10 maximum term) would be 106,560K per year and using the most aggressive lender we needed to include a 1.25X for debt service coverage. We must prove 133,200K was available to service debt.
Seller required salary draw based on the above must NOT exceed 91,400K to be approved
The issue
The buyer has 4 children, a house and 2 car payments which demanded a minimum of 115K per year to support the buyer’s household expenses. This amount had to be accounted for in lender cash flow calculations. Purchasing this business only could not be possible based on this buyer’s salary requirement.
The solution
After discussing the scenario with he buyer, broker and seller it was determined that the seller was also willing to consider selling the land and building with the business. Doing the math based on including the CRE, the new financing looked like this.
The business alone was selling for 790K
The CRE was available for an additional 700K
We then added 150K (100K working capital and EST closing costs of 50K)
Total project cost became = $1,640,000
SDE or cash flow of the business = 225K per year plus rent addback = 290K per year
Buyer wanted to put down 200K – We increased his down payment to 270K
Requested loan amount now became 1,385,000 for both and can now be termed out to 25 years.
Actual debt service (based on a 25 year maximum term) would be 124,176K per year and using the most aggressive lender we needed to include a 1.25X for debt service coverage. We must prove 155,220K was available to service debt.
Now the buyer’s required salary draw based on the above must NOT exceed 134,780K to be approved. More than enough to cover the 115K required by this borrower to support their household.
When reviewing the above the important factors to consider are the much lower annual debt service expense when the business portion of the loan is extended to 25 years to match the real estate term. The buyer in this scenario did have to increase his down payment upward from 200K to 270K but now enjoys an actual annual cash flow increase of $47,384 AND he is now paying off his own building.
The increase of 70K down payment actually earned this buyer an additional $47K per year. Once he understood the SBA rules surrounding the CRE purchase he immediately understood the benefit. The lender now had the personal household expenses covered for the buyer and that allowed this loan to be approved.
The SBA rule that allows for this structure changed just slightly in 2018 from previous years and it now states the following when combining multiple use loan proceeds:
“May use blended maturity or the maturity up to the maximum for the asset class comprising 51% or more of the use of proceeds.”
Based on this rule and our above scenario we made sure the CRE included in the transaction did comprise 51% or more of our loan, which then allowed us to term the entire loan out to 25 years and secure a lender approval based on the updated debt service coverages.
Bottom line in all this, SBA is on a path to continue the growth of small business across America and is obviously more focused on our success so let’s capitalize on this and strike while the iron is hot. We all know that lenders come and lenders go, but if you are not closing at least 94% of your received lender term sheets then it may be time for a change. Give us a try and learn what real customer service looks like. Diamond Financial has been building broker success since 1996 and only provides loans to broker included transactions.
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