The rent you pay yourself is not the rent a buyer pays

If your company occupies a building you own, the rent line on your profit and loss statement is a price term. A buyer’s accountants will restate that rent to market, and the restatement gets multiplied. Fix the rent, the term, the renewal options and who pays taxes, insurance and repairs inside the letter of intent, before price is settled.

What happens to my price when my company pays below-market rent to a building I own?

Below-market rent paid by an operating company to an entity its owner controls overstates that company’s earnings. A buyer’s accountant restates rent to market and reduces earnings by the shortfall, whether the work is a formal quality of earnings report or an informal recast. Earnings are multiplied, so one understated dollar costs several.

A buyer pays for the earnings the business will produce under a new owner, not the earnings produced by an owner who set both sides of the lease. Rent the buyer will pay is a cost. Rent you charged yourself is an artifact.

Do not assume a formal quality of earnings engagement. At this size the normalizing is as often done by the buyer’s accountant, the broker preparing the recast, or the lender’s credit analyst reading returns against the lease. The adjustment lands the same way.

The tax code treats related-party pricing the same way. As of September 2026, where two or more trades or businesses are owned or controlled directly or indirectly by the same interests, Treasury may allocate income and deductions among them where that is necessary to prevent evasion of taxes or clearly to reflect income.

Law: 26 U.S.C. 482.

How much does an understated rent line actually cost at closing?

An understated rent line costs the shortfall multiplied by the purchase multiple, not the shortfall itself. The arithmetic below uses round hypothetical numbers chosen for clarity, not market data. Run your own shortfall through the same two steps: subtract it from earnings, then multiply by whatever multiple the deal is using.

• Your company pays your real estate LLC $60,000 a year for the building.
• Comparable space in your market rents for $120,000 a year. The shortfall is $60,000.
• Reported EBITDA is $1,200,000. The buyer’s review normalizes rent and reports $1,140,000.
• At a hypothetical four times multiple, price moves from $4,800,000 to $4,560,000.
• A $60,000 line item became a $240,000 reduction in price.

Smaller deals are often priced on seller’s discretionary earnings rather than EBITDA. The mechanic does not change. Whatever the multiple is applied to, the rent adjustment comes out of it first.

A dollar of understated rent is not a dollar. At four times earnings it is four dollars, and you pay all four at closing.

You did not lose the $60,000. You moved it to your rent roll. The error is not charging market rent. The error is a history showing the low number while you intend to charge the high one the day after closing.

Should I reset the lease to market before a buyer looks at the numbers?

Resetting rent to market before diligence begins removes the argument. When the lease in place, the rent on the books and the rent the buyer will pay are the same number, there is nothing to normalize and nothing to negotiate. When they differ, the buyer’s advisors pick the market figure, and they will not pick it in your favor.

Get a written market rent opinion first. An appraiser or leasing broker who works that submarket can give you a supportable number with comparables attached. Sign at that number, effective forward, dated the day you sign. Backdating a lease to improve a trailing twelve month figure is a problem you cannot fix later.

The reverse cuts the other way. If you have been charging above-market rent to move cash into the real estate entity, the review normalizes rent down, earnings up and price up. That is not a gift. The buyer will insist the new lease be written at the lower market number, and your building income falls for its whole term.

What lease will an SBA 7(a) buyer’s lender require me to sign?

SBA policy directs the lender to obtain the written lease, and expects the lease term, including renewal options exercisable only by the borrower, to equal or exceed the loan term, with an assignment of lease and a landlord’s waiver, when a substantial portion of loan proceeds or collateral is tied to the leased space.

Know the trigger before you treat that as absolute. As of September 2026, the operative SOP reaches the loan when the lesser of $500,000 or 30 percent of proceeds funds leasehold improvements, or that same share of the collateral is improvements, fixtures, machinery or equipment attached to leased real estate. For 7(a) the lease-term direction is phrased as what the lender should do, SBA has waived it case by case, and the file can be documented when a waiver cannot be obtained. For 504 it is mandatory. Outside the trigger, the lender’s credit policy usually asks for the same term.

As of September 2026, SOP 50 10 8 with technical updates governs through September 30, 2026. SOP 50 10 8.1 was issued August 14, 2026 and takes effect October 1, 2026. A separate procedural notice revised applicant ownership citizenship and residency requirements effective March 1, 2026, reaching delegated loans that receive an SBA loan number on or after that date. Effective-date language differs by processing method, so ask the lender in writing which version governs its file.

Source: SBA SOP 50 10 8 with technical updates (effective June 1, 2025), lease responsibilities; SBA SOP 50 10 8.1, effective October 1, 2026 (SBA Information Notice 5000-880695); SBA Procedural Notice 5000-876626.

Understand what you are signing as landlord. A landlord’s waiver typically subordinates or releases whatever claim you have to property on the premises, including any statutory landlord lien your state gives you, and lets the lender enter to remove and sell equipment and fixtures after a default. Equipment bolted into your building can become a fixture, and priority between the lender and your real estate interest turns on your state’s version of the fixture rules and on who recorded first. Ask for notice of default and a cure period in return.

Law: U.C.C. 9-334, as enacted and varied by your state.

I read the lease and the rent history before I read the add-back schedule, because the add-back schedule is an argument about the lease more often than it is an argument about expenses.

Can I keep the building and still be the landlord if the buyer uses SBA financing?

Being the landlord is not a prohibited role. SBA policy on a complete change of ownership bars the seller from remaining an officer, director, stockholder or employee, with a limited post-closing consulting window measured in the aggregate. Owning the building and leasing it to the buyer is a different relationship entirely.

That bar is written narrowly. It governs a complete change of ownership. Where an original owner stays in and the sale is partial, the SOP treats the seller’s continuing role differently. The consulting window is 12 months under SOP 50 10 8 and 24 months in the aggregate under SOP 50 10 8.1.

Source: SBA SOP 50 10 8; SBA SOP 50 10 8.1 (effective October 1, 2026), change of ownership provisions.

If a buyer finances the real estate through an eligible passive company that leases to the operating company, federal regulation requires that lease, including options to renew exercisable solely by the operating company, to have a remaining term at least equal to the term of the loan. If you keep the building, you supply that term.

Law: 13 C.F.R. 120.111(a)(4).

What other related-party items will diligence pull out of my company?

Related-party items surface as a group because the same review finds them all. Personal vehicles on the company’s books, family members on payroll at compensation unrelated to the work performed, shareholder loans running in both directions, and personal expenses paid by the company are each normalized, each documented, and each raised again in the purchase agreement.

An add-back you cannot document is one the lender will not credit in its debt service calculation, which caps what a financed buyer can pay whatever the buyer wants to pay.

The stakes rise on October 1, 2026. From that date SOP 50 10 8.1 directs the lender to obtain an independent quality of earnings report, engaged by and prepared for the lender, on initial acquisition and business expansion change-of-ownership loans where the business purchase price is $3 million or more, measured before equity injection or seller financing and excluding separately appraised real estate. Other categories sit outside it, and below that price no federal rule forces a report. A report you commissioned is not a substitute.

Source: SBA SOP 50 10 8.1, effective October 1, 2026.

Why do sellers lose the lease negotiation when they leave it until after price?

Sellers who keep the real estate often negotiate price first and lease second. That sequence hands the buyer both sides of the conversation. Once price is fixed in a letter of intent and the buyer has spent money on diligence and a loan application, the only open term left is the lease, and every concession on it is free.

The asymmetry is built into the document. A letter of intent is usually non-binding on price, while its exclusivity and confidentiality clauses usually bind. The buyer can revisit the number. You cannot go find another buyer while exclusivity runs.

Watch the trade. The buyer accepts your price, then finds market rent is lower than you assumed, or the roof is near end of life. You can concede rent, term, repairs or price. The buyer does not care which. They are one pool of money.

Price and lease are one negotiation until the price is agreed. After that they are two, and only one of them is still open.

What should the letter of intent say about the lease?

The letter of intent should fix rent, term, renewal options and the allocation of taxes, insurance and repairs, because those four items determine both the buyer’s cost structure and the building’s value as an investment you continue to own. A letter of intent that says the parties will negotiate a lease in good faith has settled nothing.

Some courts enforce an express promise to negotiate in good faith and some do not. Even then, what is enforced is the conduct of the talks, not a rent number nobody wrote down.

• Base rent as an annual figure, with the escalation percentage or index written out.
• Term in years, long enough to cover the buyer’s acquisition loan.
• Renewal options in number and length, exercisable by the tenant, with the renewal rent mechanism defined.
• Net or gross stated plainly. Who pays taxes, insurance, common area costs and utilities.
• Repairs split between structure, roof and systems and everything else.
• Guaranty and deposit. If the tenant is a new entity with no history, say who guarantees.
• Lender documents. A commercially reasonable waiver and consent to assignment, with notice and cure back to you.
• Purchase option or right of first refusal, if you may sell the building later.

Property tax treatment is state and county law and it varies. As of September 2026, confirm locally whether an ownership change in the operating company, a new long-term lease, or moving the building into another entity is a reassessment event where your building sits.

What should I do in the next thirty days?

The first thirty days should produce three documents: a written market rent opinion, a signed lease at that rent, and a clean schedule of every related-party item in the company. Those three make the rent adjustment disappear from diligence and put the lease terms on your paper rather than the buyer’s.

• Order a market rent opinion from an appraiser or leasing broker in your submarket. Keep the comparables.
• Have the lease drafted and signed now, at market, with the term and options a financed buyer needs.
• List every vehicle, family payroll line, shareholder loan and personal expense, with its supporting document.
• Move personal assets out and clear shareholder loans before the asset schedule is drafted.
• Ask the buyer’s lender which SBA SOP version governs the file, and confirm your lease term clears the loan term.
• Refuse to sign a letter of intent that leaves the lease to later. Put the four terms where the price is fixed.

I ask for the current lease, the rent history and the related-party schedule before I look at a draft letter of intent, because a letter of intent written without them concedes terms the seller has not priced.