Here’s the set up… A business you are interested in is listed for sale for $900,000. You’ve completed your due diligence and it looks interesting – right industry, right location, right valuation – you’re thinking about making an offer.

The Seller also has the building that the business operates from for sale. The asking price is $1,100,000 and that seems reasonable considering the location, size and condition. You know the commercial property will be sold based upon its actual current appraised value so the price isn’t the concern, but the impact on cash flow to service the additional debt (over double) seems daunting.

Before throwing your hands up consider the following. In most cases a commercial lender WANTS to loan on associated commercial property because it increases their collateral base increasing your chances for approval. There is a lesser known program via the SBA that allows a commercial lenders financing the acquisition of a business and related commercial property to receive a term of 25 years – 15 years longer than a business only 7a loan if the real estate is 50% or more of the total loan amount.

If the property is less than 50% of the combined loans the term is calculated from the relative price of the business vs. the commercial property. So what does this mean? Well, an SBA 7a business only acquisition loan is amortized over a ten year term with 10% down at 6%. A $900,000 business acquisition transaction would carry a $8,992.66 monthly payment.

But, what if you purchased both the business and the commercial property which now requires a 25% total down payment with ~10% of this amount Seller note on full stand-by and 15% Buyer down payment (5% more on both loans). If the total project was $2,000,000 the payment based on a 25 year term at 6% would be $10,953.12 or $1,960.46 more per month.

That intuitively seems like about $24,000 fewer dollars in your pocket over the next 25 years right? Wrong. Because we haven’t considered the cost of renting if we don’t buy the building. There is going to be one or the other – rent or mortgage payment. We know what the incremental mortgage payment is ($1,960.46) but what would the rent likely be? The answer is at an 8% CAP rate the rent would be $7,333.33 per month (ignoring CAM, taxes, insurance, maintenance, etc.) or $5,372.87 rent savings per month.

That’s $1,611,861.00 more in your pocket over the next 25 years not to mention the probably appreciation in value of the commercial property. So, if the buyer can afford the $210,000 ($45,000 additional down payment for the business portion plus $165,000 for the building in this example) in virtually all cases you can see that it more than makes sense to purchase associated commercial real estate when purchasing a business.