Related-party rent

Definition

Rent paid to a landlord the seller controls, at a price nobody negotiated.

Why It Matters

When the seller owns the building, the rent on the profit and loss is a number they chose, and it can sit far under market to flatter the earnings or far over to move income into the other entity. Either way the earnings you are pricing are wrong until the rent is reset to what an unrelated landlord would charge, and the correction moves the price by the whole multiple. Get a market rent figure from comparable space before you agree a number, and negotiate the lease at the same table as the purchase, because a seller who keeps the building keeps a lever over you after closing.

In numbers: Rent set $3,000 a month under market lifts reported earnings by $36,000, which at a 3x multiple is $108,000 of price that is not really there.