Acquiring the operating real estate is often a logical decision for entrepreneurs looking to build property assets. But what are the advantages and disadvantages of this acquisition? Should one create a real estate company? Is real estate an obstacle to business transfers? Here’s a look at some implications of property ownership.
Acquiring property within the operating company vs. creating a Real Estate company
The solution is not the same for everyone: it will depend, among other things, on the shareholder’s objectives. However, it can already be noted that, at the start of operations, it is preferable to acquire real estate directly within the company to deduct VAT on construction work, for example, and to benefit from investment subsidies.
If the goal is to sell the business (the operational part) in the coming years, it is better to acquire the property in a separate company. This way, the seller can retain the real estate company after the sale and continue to benefit from rental income. This approach often suits the buyer, who may want to invest initially in the operations and may not have enough cash to purchase the property. If this route is chosen, the seller can also grant the buyer an option on the property or the shares of the real estate company, which the buyer can exercise once the acquisition loan for the operating business has been paid off.
Of course, there are solutions for separating the real estate from the operating company before a business sale. If the outright sale of the real estate is not preferred due to high taxes (for both the seller and the buyer via registration fees), one can consider a partial spin-off of the company. This division into two companies can be advantageous, but it must comply with certain regulations and must be justified by reasons beyond purely fiscal motives. The spin-off must be conducted under the careful supervision of a specialized tax advisor.
What is the impact of Real Estate on my Company’s valuation?
In most cases, but not always, real estate must be considered a financial asset that is added to the value of the company, just like cash.
In practice, when using valuation methods based on yields or cash flows (the multiples method or discounted cash flow method), a fictional rent will be deducted from the company’s results, and the value of the property will be added at the end to determine the company’s share value. The choice of the fictional rent amount must be based on what the company needs to operate normally. In some cases, this rent may be lower or higher than the rent that would be charged for the property occupied by the company. This happens when the company uses high-end premises when it is not necessary, or if the poor condition of the building does not provide decent working conditions for employees.
This maneuver aims to assess operational and real estate yields at different levels of risk.
The company I want to buy owns Real Estate. Does this make my bankers feel secure? True or false?
As always, with business transfers, there is no one-size-fits-all answer. It depends on the company’s debt level and equity.
A heavily indebted property will have a low net value and will therefore weigh less in the company’s share price.
On the other hand, a property with little debt may complicate the financing of the acquisition and will likely require a greater personal effort from the buyer.
If the company does not have enough distributable equity, it cannot offer the property as collateral (the “financial assistance” mechanism is prohibited by law in most cases). As a result, the buyer will have to finance the real estate through their acquisition loan for the company’s shares, which usually lasts 5 to 7 years, or even 10 years in rare cases.
If, on the contrary, the company has significant distributable equity, a debt push-down mechanism can be implemented.
In other words, in certain cases, it is possible to refinance the real estate within the target company. This operation will generate excess cash that can be distributed as dividends to the buyer’s holding company, exempt from withholding tax under the RDT (final taxed income, under certain conditions). However, it is important to adhere to the rules for dividend distribution, particularly the double liquidity-solvency test for SRLs. Since this operation may take time, banks generally agree to provide bridge financing to the holding company while the dividend is being distributed and used to repay the loan. In this way, the real estate will be financed over a standard period of 15 to 20 years, with a mortgage in favor of the bank to significantly reduce its risk. The operational part will be financed in the holding company throughout 5 to 7 years.
Conclusion:
The presence of real estate in a company for sale can indeed be an obstacle, but solutions exist and should be studied and implemented well in advance, sometimes more than a year before the desired sale date. This is why it’s crucial to contact your business transfer advisor as early as possible. A tax advisor can guide you through the necessary steps and implement them effectively.
