Creative Deal Structure - Purchase vs Leasehold.
Hey BP community -
I need some help thinking about how to best structure a commercial deal. I'm looking for that creative BP spirit to help make this one happen!
Here's the situation:
Owner is selling a service business and the building where the business operates in Alameda county, CA. The building is built-out for the specific use of the business, so the two are very tied together. In other words, can't pack up the business and move it elsewhere.
Owner wants $2M for business and building. Building needs $250-300k in repairs, and until the repairs are done the business is losing about 50% of its profits. With the repairs done the business cash flows nicely (including debt payment on loan for purchase) and I think $2M is a good deal. Without the repairs it is breaking even and owners are currently not getting any profit (I know this because I have seen their books and tax records). Owner has owned property and business for decades so property tax basis is very low.
Here is my first thought at structuring the deal:
- Offer Price $2M.
- Owner carry back of $200k loan, 30 year amortization and 5 year balloon payment.
- I take out an SBA loan of $1.7M, put 10% down or $200k (I understand that most SBA lenders require 20% down. I’m hoping the lender will accept the owner carry back as the other 10% down)
- Owner credits back $250k for repairs and I do the repairs.
- Owner credits back $100k to account for lost revenue until repairs are made and business is 100% operational.
- Issues with this structure: I somehow doubt the seller will go for it, my property tax basis will jump up $2000/month, I think it may be tough finding financing for the deal given the large amount of repairs needed and the consequential drop in income over the past year.
Here is an alternative idea:
- Buy just the business and not the property (not sure what the right $ amount would be)
- Get a loan for the purchase of the business
- Sign a Leasehold of 34 years for the property (so it is not considered change of ownership by Assessor’s office and does not trigger new assessment of property tax).
- Owner credits back $250k for repairs and I do the repairs.
- Owner credits back $100k to account for lost revenue until repairs are made and business is 100% operational.
Is a lease hold an idea worth exploring? Anyone have a success story doing a deal with a leasehold?
Any other creative structure ideas?
Thank you very much for any input!