Keeping the real estate and selling only the funeral home operations

The day you close, your largest remaining asset may be a lease with one tenant whose building is useless to almost anyone else. That tenant is borrowing against the business, owes a bank first, and has never run a funeral home under its own name. Keeping the real estate can still be the right call. It just turns a one-day sale into a relationship that may last fifteen years.

This page is about living with that choice. For the side-by-side of selling the building, splitting the sale, or leasing it back, start with selling the business and the real estate, and see the year-by-year comparison of rent vs. sale.

What changes when you become your buyer’s landlord?

Your income now depends on someone else’s operation, and your claim stands behind the buyer’s lender in practice. You also keep the owner’s duties: taxes, insurance, structure, and any environmental history.

Three things are different from an ordinary rental. The tenant is usually a new owner with a large loan. The building is special-use, so a vacancy can last a long time. And your family name may still be on the sign, so a weak tenant affects your reputation as well as your rent. Treat the lease as the second half of the sale, negotiated at the same time and with the same care.

What lease will the buyer’s lender accept?

Expect the lender to ask for a written lease whose term, counting renewal options only the buyer can exercise, is at least as long as the loan. Expect requests for a landlord’s waiver and an assignment of the lease as well.

The SBA’s SOP 50 10 8.1 sets the frame. Change-of-ownership proceeds amortize over no more than 10 years when no real estate is financed. In its section on borrowers in leased space, the SOP says the 7(a) lease term, “including renewal options exercisable only by the Borrower, should equal or exceed the term of the loan,” and that an assignment of lease and landlord’s waiver should be obtained. That section is triggered by large leasehold improvements, but in our experience most acquisition lenders ask for the same terms anyway.

Two other SOP rules matter more than sellers expect:

• Rent is not added back. For historical debt coverage, the SOP lets lenders add back rent “when the owner-occupied commercial real estate is part of the transaction.” In a leaseback it is not, so your rent reduces the cash available for the buyer’s loan payments.
• The buyer’s house may be pledged. Without the building as collateral, the loan is less likely to be fully secured. When there is a shortfall, the SOP says the lender must take available equity in personal real estate solely owned by 20% owners and guarantors, subject to limited exceptions.

How does the rent you charge change the price you get?

Directly. A buyer’s lender sizes the loan from cash flow after rent, so a higher rent lowers the price an SBA buyer can pay for the business.

You may still prefer the higher rent, if you value income over a lump sum. Make that choice on purpose. Test your own figures in the SBA loan and DSCR calculator, and see a full illustrative operations sale with a leaseback.

Which lease terms matter most to a funeral home landlord?

The ones that decide who pays for big repairs, what happens if the tenant sells, and how you eventually exit. Rent gets the attention, but these terms decide whether the rent keeps arriving.

The landlord’s waiver deserves a careful read. It typically lets the buyer’s lender reach equipment and fixtures in the building after a default. Agree on which items are the tenant’s, such as the retort or the removal vehicles, and which belong to the building.

How should you plan the property’s long-term exit?

Pick a likely exit now and write the lease to support it. The four common paths are a sale to the tenant, a sale to an investor with the lease in place, a hold for heirs, and a later exchange into other real estate.

A tenant purchase option sets the price formula today, so the eventual buyout is mechanical. A sale to an investor works best with a long remaining term, a strong guaranty, and estoppel rights in the lease. Holding until death can help heirs, because under 26 U.S.C. § 1014 inherited property generally takes a basis equal to fair market value at death. If you sell during life, IRS Topic 409 explains that unrecaptured Section 1250 gain from depreciation is taxed at up to 25%. The IRS like-kind exchange guidance confirms a 1031 exchange can defer gain on real property, which can let you trade the building for property that needs no funeral tenant.

Also plan for the bad case. If the operator fails, a building with a chapel and prep room may sell best to a church, school, or other non-funeral user; our guide to selling a funeral home building to a non-funeral buyer explains that market.

What is the timeline, and who needs to know?

Negotiate the main lease terms alongside the letter of intent, not after it. The lease is a closing document the lender must approve, so a late lease fight delays everything.

A typical sequence: a market rent opinion before marketing, lease term sheet with the LOI, full lease drafted during diligence, then the landlord’s waiver, estoppel, and any subordination signed at closing. Confidentiality is simpler than in a full sale, because staff see the same building and the same sign. Family members who co-own the property, though, must agree early. A sibling who wants to sell the building outright can derail the whole plan.

What mistakes do owners make when they keep the building?

The common ones are setting rent to replace lost income, writing a short or vague lease, and forgetting that the tenant may sell. Each one shows up years after closing.

If you are also carrying part of the price, read seller financing in funeral home sales with your lease in hand. Talk to your CPA and attorney about holding the property in its own entity and about the tax trade-offs before you sign. The lease is one workstream; the seller’s hub covers the rest of the sale.