We own our operating facilities through a separate real estate holding company, and we want to sell the operating business while retaining the real estate. How do we structure the lease agreement to maximize the valuation multiple of our operating company without hurting our long term rental income?

Question

Tyler Smith · Accepted Answer

Keeping your real estate separate from your operating company is an excellent strategy, but it requires precise structuring to avoid damaging your operating valuation. Buyers will scrutinize the lease agreement during diligence to ensure it represents true market terms. If you charge your operating company a below market rent to artificially inflate your EBITDA, the buyer's Quality of Earnings firm will adjust your EBITDA downward, which directly lowers your purchase price. Conversely, if you charge an above market rent to extract cash, the operating company's margins will look weak, also depressing the multiple. You must establish a triple net lease at verified fair market rent before going to market. This creates a clean, predictable expense on your operating income statement. Use your weekly Scorecard metrics to prove that the operating company can comfortably support this rent expense while maintaining top tier margins. By presenting a clean, market rate lease, you preserve your premium operating multiple while securing a stable, long term tenant for your real estate holding company.