Selling the real estate vs. leasing it to the buyer

When a family owns both the funeral home and the building it sits in, the sale really involves two decisions. One is who buys the business. The other is whether the building leaves with it or stays in the family and becomes a rental. The second decision is often made in a hurry, after the business price is set, when it deserves its own math.

This page runs that math head to head, from the seller’s chair. Our overview of selling the business and the real estate covers all three structures, including a separate sale to a non-funeral buyer, and how each affects the buyer’s financing. Both belong to our valuation hub.

How do selling and leasing the building compare?

Selling trades future income for certainty. Leasing keeps income and appreciation, but adds tenant, vacancy, and repair risk for years. The table sets out the differences that drive the choice.

Some sellers have a third path. Trade press has argued that small firms on valuable corridors can lose value when the building is bundled with the business; Funeral Director Daily’s 2025 summary of a Memorial Business Journal article makes that case. This page sticks to the two options most families weigh.

What is each option worth in today’s dollars?

Put both on the same footing: the after-tax check from a sale now against the present value of after-tax rent plus what the building nets when you sell it later. The discount rate is the key judgment, because it prices the tenant’s risk.

The lease wins only when you treat the tenant as fairly safe. Raise the discount rate two points, or let one bad tenant into the model, and the sale comes out ahead. The “held until death” column reflects 26 U.S.C. § 1014, under which heirs generally take a basis equal to fair market value at death. The 25% rate on depreciation-related gain comes from IRS Topic No. 409. Our taxes on selling a funeral home guide covers the rest of the tax picture.

What discount rate should you use for the lease?

Use the return you would demand to own a single-purpose building leased to one small operator. In the example, the break-even is about 8.9%: below that the lease wins, above it the sale does.

Three facts push the rate up or down. A strong guaranty from a large, well-capitalized buyer lowers it, because default is less likely. A weak guaranty, a short lease, or a building with few alternative users raises it, because a vacancy would last longer and cost more. Your own situation matters too: an owner who needs liquidity, or who would otherwise pay down debt, should use a higher rate than one who would simply hold the cash.

Run the model at two or three rates, as the table does, instead of picking one number. If the answer flips within a point or two, treat the decision as close and let the lease terms, your estate plan, and your appetite for landlord work settle it.

How does a lease change the buyer’s financing?

It lowers the buyer’s purchase price and equity, which can widen the buyer pool, but it puts lender conditions on your lease. You will negotiate with the buyer’s bank as well as the buyer.

Under SBA SOP 50 10 8.1, the lease term, “including renewal options exercisable only by the Borrower,” should equal or exceed the loan term. Expect requests for a landlord’s waiver and a collateral assignment of the lease. A 10-year business loan therefore means you are committing the building for at least ten years, on terms the buyer can extend without you.

The rent also changes the business’s value. Buyers and lenders charge market rent against earnings, so a high rent lowers what the buyer can pay for the operation. Our guide to funeral home add-backs shows how rent is normalized, and valuing funeral home real estate explains how market rent and cap rates are set.

How do you reduce the risk of leasing?

By writing the lease as carefully as the purchase agreement. The stress case above is what these terms are meant to prevent.

1. Get a personal or parent-company guaranty, since an operating company with no other assets is a thin tenant.
2. Use triple-net terms and say who replaces the roof, HVAC, and preparation room ventilation.
3. Add environmental covenants and an exit inspection, because contamination becomes the owner’s problem.
4. Build in escalations, fixed or indexed, so a long lease keeps pace.
5. Limit assignment so a resale of the business does not hand you a weaker tenant.
6. Include a purchase option with a price formula, so a future buyout has a path.

If you later sell the building, the IRS like-kind exchange rules confirm that Section 1031 now covers only real property, which can let you defer the gain into another investment property.

Should you sell the building or lease it?

Decide by what you need the money to do and how much landlord risk you can carry. Price alone does not settle it.

Sell the building if…

• You want a clean exit with no ongoing ties to the business.
• The building needs major capital work within the next few years.
• Your buyer is well funded and willing to pay appraised value.

Lease it to the buyer if…

• You want income and can accept a single-purpose tenant.
• Your tax basis is low and holding fits your estate plan.
• The buyer’s guaranty, operating plan, and lease terms are strong.

The trade-offs of staying on as landlord are covered in keeping the real estate and selling the operations.

What do most owners get wrong about selling vs. leasing?

They compare a year of rent with the sale price instead of comparing values in today’s dollars at a risk-aware discount rate. A rental that looks generous can be worth less than a check.

• Ignoring vacancy. A funeral home building has few alternative tenants.
• Setting rent above market. It shrinks the business price, offsetting the extra rent.
• Accepting a short lease. An SBA buyer’s lender may require a longer term than you planned.
• Forgetting repairs. Roofs, HVAC, and parking lots come due on the owner’s schedule.
• Skipping the full model. Score real estate with your other priorities in The Buyer-Fit Matrix, and see the end-to-end math in our illustrative operations sale with a leaseback.