Is retaining real estate a wise choice when selling a business?
For many entrepreneurs, it seems like the most obvious route: selling the business but keeping the property. It feels like a safe haven, a retirement provision, and tangible proof of years of hard work. However, in practice, this is a more complex situation than initially anticipated.
What sounds like a stable investment in theory often turns into a complex process in practice, full of tax, financial, and legal pitfalls. Is holding onto the property a smart move, or are you unintentionally creating a burden?
In this article, we guide you through this complex balancing act. We discuss why financiers view your real estate differently after the sale, where bottlenecks arise, and why now is precisely the time to think about your estate planning.
When does holding real estate become part of your estate planning?
Precisely the moment when real estate and the business are separated is a logical time to think in advance about the structuring of family assets.
The stable income stream can make it attractive to transfer (part of) the economic interest in the real estate to the next generation. This gives the real estate a different role: not only as an asset, but as a building block within the wealth structure.
This calls for a comprehensive assessment. Financing, taxation, and family interests converge here. By examining these elements in conjunction, room is created to make well-considered choices that go beyond the transaction alone.
Why do entrepreneurs choose to retain real estate upon sale?
Entrepreneurs choose to hold real estate at sale because it offers security and continuity from various perspectives. Financially, because real estate can constitute a stable source of income. Functionally, because the property is often specifically designed or situated. And emotionally, because it is a place where the company has been built.
At the same time, a buyer views that differently. Especially with private equity The focus lies on growth, return, and cash flows. Real estate usually plays no significant role in this, as financing capacity is preferably spent on the company rather than on real estate. Precisely because interests converge here, the choice is quickly made: the company is sold, while the real estate remains in ownership.
A logical step, but not without consequences.
What happens when real estate and business are separated?
As soon as you separate the real estate from your business, the legal and financial structure changes fundamentally. What was once a single entity is split into two parts, each with its own function within your total assets.
This separation has direct consequences for the role of real estate:
Division of functions
: The real estate is no longer at the service of the company, but acquires an independent position within your asset structure.
Shift in risks
: Risks that were previously part of business operations will explicitly be assigned to the real estate.
Shift in risks
: The focus shifts from doing business to managing real estate as part of your total assets.
This structural change means that real estate plays a different role after the transaction than many entrepreneurs expect beforehand and calls for a renewed look at the structuring of your assets.
How is the view of financiers on real estate changing?
Financiers change their view as soon as real estate acquires an independent risk profile. It shifts from corporate financing to real estate financing, with associated criteria and conditions.
In doing so, the emphasis shifts to a number of important points:
From operating profit to rental income
: The financing is based on contractual cash flows instead of operational performance.
Quality of the rental contract
: The term, indexation, and the creditworthiness of the tenant will determine the financing options.
Loan-to-value and sustainability
: lenders apply stricter frameworks regarding financing rates and ESG requirements.
Type of property and marketability
: Location, marketability, and market attractiveness play a greater role in the assessment.
In practice, this often translates into stricter conditions and a different outcome than entrepreneurs expect beforehand.
What tension arises when retaining real estate after a business sale?
The changed perspective of financiers leads to an interesting field of tension.
On the one hand, the entrepreneur's financial position improves significantly after the sale. The released liquidity creates a stronger equity position and increases personal risk-bearing capacity.
On the other hand, the financing of the real estate actually becomes more complex. Because the real estate becomes separate from the business, financiers assess it as an independent investment with its own risk profile.
This leads to a paradoxical situation: despite a stronger financial starting position, financing options often become more limited and conditions stricter. Banks apply stricter conditions, covenants, and structures, and are more critical regarding which properties are financeable and which are not.
What financing options are available outside of the bank?
Not every bank is willing to finance commercial properties that were previously owner-occupied. This opens the door to alternative sources of financing.
Over the past few years, a broad ecosystem has emerged consisting of:
- Private debt funds.
- Semi-banking institutions.
- International investment funds.
- Informal investors.
These parties often offer more flexibility in structure, acceptance, and repayment. On the other hand, interest rates are generally higher than at traditional banks.
In practice, we see that a broader market approach leads to more options and better alignment with the specific situation of the property.
What are the points to consider when retaining real estate during a business sale?
Good preparation begins well before the sale of the company. In practice, we see that entrepreneurs who only start thinking about real estate and asset structure at a late stage unnecessarily limit their options.
What begins as a logical choice can therefore turn into a pressured process in which multiple complex issues converge simultaneously. Key points of attention are:
Timing of decision-making
: Anyone who only starts thinking about real estate and estate planning just before the finish line unnecessarily limits their own options and room for negotiation.
Accumulation of complexity
: The combination of daily business operations, the sales process, and an additional real estate issue often leads to a high-pressure process.
Cohesion between parts
: Sales, financing, and estate planning influence each other and require an integrated approach.
Realistic valuation
: The value and financeability of real estate may turn out differently after the transaction due to changed assumptions.
Broad market survey
: Timely and broad research into financiers ensures greater flexibility and better terms.
Thorough upfront preparation, combined with a broad market scan, ensures in practice more control, less stress, and a better end result.
Why choose Match Plan?
Match Plan assists entrepreneurs with financing processes and, as an independent advisor, ensures a structured process in which your interests take center stage. What we do for you:
- Comprehensive guidance in which we approach sales, financing, and capital structure as a single entity.
- Experience with complex processes involving the separation of real estate and the business, with an understanding of the associated dynamics.
- Strategic insight to make the right choices in a timely manner and maintain greater control over the process and end result.
- An approach tailored to your specific situation, with regard for both business and private interests.
Match Plan has been advising entrepreneurs on business transfers and financing issues for over 30 years, always with a personal approach. If you are considering a sale involving real estate and family assets, now is the perfect time to structure it properly.
Contact us for a no-obligation introductory meeting. We are happy to think along with you.
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