We own the commercial real estate our operating business occupies and plan to retain the property as a passive landlord post-sale. How do we establish the post-closing lease rate and terms so we do not depress the operating company EBITDA multiple or leave rental income at risk?

Question

Tyler Smith · Accepted Answer

Carving out the real estate while selling the operating business creates a direct friction point between your corporate valuation multiple and your personal real estate yields. In a sale, buyers calculate enterprise value off trailing EBITDA. Every additional dollar of rent expense you charge the business reduces EBITDA by one dollar, which directly destroys four to eight dollars of transaction value at a typical multiple.

Conversely, setting the rent artificially below market to artificially inflate EBITDA leaves you with an unviable commercial lease and an underperforming personal asset once the company is under new ownership.

To optimize both sides of the transaction, follow a disciplined valuation process:

- Commission an independent third-party commercial appraisal six months before entering the market. Determine the fair market rent for industrial or commercial space in your submarket. Using an objective benchmark prevents the buyer from arguing that your rent is an unadjusted related-party distortion.
- Normalize your historical financials. In your sell-side Quality of Earnings analysis, recast trailing twelve-month expenses using the appraised fair market rent as a standard pro-forma adjustment, ensuring the EBITDA multiple reflects reality.
- Structure a standard long-term commercial lease. Institutional buyers typically expect a five to ten year initial term on a commercial triple-net basis, where the operating company pays all taxes, insurance, and structural maintenance. Include consumer price index annual rent escalators capped between two and three percent.
- Secure the lease with a corporate parent guarantee or a standard letter of credit equal to three to six months of gross rent to protect your cash flow if the buyer defaults.

Separating the brick-and-mortar asset from the operating engine allows you to maximize your exit liquidity without sacrificing long-term rental income.