We own our office building through a separate real estate entity and want to retain the property while selling only our operating business. How do we structure the lease agreement on our exit runway so it increases the value of the business while securing a stable long-term tenant for our real estate?

Question

Tyler Smith · Accepted Answer

Retaining the real estate while selling your operating business is an excellent way to secure long term passive income, but it requires careful structuring on your exit runway. If you do not separate these assets cleanly, you risk turning a valuable property into a major deal hurdle.

First, you must establish a formal, arm's length lease agreement between your real estate entity and the operating business. The rent must be set at true market rates. If you are charging the business below-market rent to save on taxes, or over-charging to extract cash, your historical EBITDA is distorted.

A buyer will adjust your historical financials to reflect market-rate rent during due diligence anyway, so you should make this adjustment yourself at least twelve to twenty-four months before going to market.

Ensure the lease terms are highly standard, typically a triple-net lease with a five-year initial term and options to renew. The lease must be fully assignable to the new owner without requiring additional landlord consent, which prevents the buyer from renegotiating rent down during the transaction.

By cleaning up this arrangement on your runway, you present the buyer with a clean, predictable expense on the business income statement, while securing a highly stable, institutional tenant for your real estate holding company.