Can You Finance Pharmacy Real Estate and the Business Together?
Buying a pharmacy and the commercial real estate where it operates can be a significant investment. Instead of purchasing the business and property separately, some pharmacists may want to finance both as part of the same transaction.
For pharmacists considering pharmacy practice financing, understanding how business and real estate financing can work together can help when evaluating an acquisition.
Can You Buy the Pharmacy and Building Together?
In some situations, a pharmacist may be able to finance both the pharmacy business and the commercial real estate as part of one financing structure.
The exact structure depends on the lender, financing program, purchase price, property, pharmacy financials, and borrower qualifications.
Combining the two can potentially simplify the transaction by addressing both major purchases within one overall financing plan.
Why Buy the Real Estate With the Pharmacy?
Purchasing the building can provide advantages for a pharmacy owner who plans to operate from the location for the long term.
Potential benefits can include:
- Building equity in commercial real estate
- Greater control over the property
- More control over future occupancy costs
- Potential long-term appreciation
- Greater flexibility over the property
- Eliminating dependence on a third-party landlord
However, purchasing real estate also creates additional financial obligations, so the decision should be evaluated carefully.
How Does Financing Both Work?
When a transaction includes both a pharmacy and real estate, the lender generally needs to evaluate the two components of the transaction.
The pharmacy may be evaluated based on factors such as:
- Revenue
- Profitability
- Cash flow
- Prescription volume
- Inventory
- Accounts receivable
The real estate may be evaluated based on factors such as:
- Purchase price
- Property value
- Property condition
- Location
- Intended use
- Existing liens or obligations
The lender then considers the overall transaction and proposed financing structure.
Can an SBA Loan Finance Both?
SBA 7(a) financing can be used for eligible business purposes including changes of ownership and acquiring or improving real estate. It can also support other eligible uses such as working capital and equipment. This makes it potentially useful for qualifying transactions involving both a pharmacy acquisition and commercial real estate.
The exact amount and structure depend on the transaction and lender underwriting.
What About an SBA 504 Loan?
The SBA 504 program is designed primarily for major fixed assets, including commercial real estate and certain long-term equipment.
Because 504 financing is focused on fixed assets, it is structured differently from 7(a) financing.
A pharmacist considering both the pharmacy acquisition and the building should evaluate which financing program best fits the overall transaction rather than assuming one program will always be appropriate.
Why Cash Flow Matters
When a pharmacist purchases both a business and its real estate, the transaction may create a larger overall financing obligation.
The pharmacy therefore needs to generate sufficient cash flow to support the proposed debt while still providing enough money for normal operating expenses.
Lenders may review historical financial statements and projections to determine whether the combined transaction is financially sustainable.
What If the Pharmacy Already Leases the Building?
A pharmacy owner who currently leases may eventually have an opportunity to purchase the building.
In that situation, the owner already has an established operating history, which can provide lenders with historical financial information to evaluate.
The owner may also already understand the property’s operating costs, location, patient base, and suitability for the pharmacy.
Buying the Building During a Pharmacy Acquisition
A pharmacist purchasing an existing pharmacy may discover that the seller also owns the property.
Instead of buying only the business and continuing to lease the location, the buyer may consider purchasing both.
This can make the transaction larger, but it may also allow the buyer to acquire both the operating business and the underlying real estate.
How Much Can You Finance?
There is no universal financing amount for a combined pharmacy and real estate transaction.
The amount depends on factors including:
- Pharmacy purchase price
- Real estate purchase price
- Pharmacy cash flow
- Property value
- Borrower’s credit profile
- Available equity
- Existing debt
- Financing program
The lender will determine how much financing the transaction can reasonably support.
Don’t Forget the Down Payment
Even when financing both the pharmacy and property, the buyer may still need to contribute equity.
The required contribution depends on the financing structure, lender, transaction, and applicable program requirements.
Pharmacists should also account for closing costs and maintain sufficient liquidity after closing.
Working Capital Still Matters
A common mistake is putting too much available cash into the purchase and leaving too little money for the pharmacy’s operations.
The business may still need cash for:
- Payroll
- Inventory
- Utilities
- Insurance
- Marketing
- Equipment
- Unexpected expenses
A financing structure should consider the pharmacy’s ongoing working capital needs rather than focusing exclusively on the purchase price.
What Documents Will Be Needed?
A combined business and real estate transaction may require substantial documentation.
Depending on the lender, this could include:
- Pharmacy financial statements
- Business tax returns
- Personal tax returns
- Personal financial statement
- Purchase agreement
- Real estate purchase agreement
- Property information
- Existing debt information
- Business valuation
- Real estate appraisal
Starting the documentation process early can help prevent unnecessary delays.
Is Buying the Real Estate Always the Better Choice?
Not necessarily.
Owning the building can provide greater control and create a real estate asset, but it also requires a larger initial investment and creates additional financial obligations.
Leasing may make more sense for a pharmacist who wants to preserve capital for the pharmacy or maintain greater flexibility.
The decision should be based on the pharmacist’s long-term goals, available capital, cash flow, and the economics of the specific property.
Consider the Long-Term Plan
A pharmacist should consider how long they expect to operate from the location.
If the goal is to build the pharmacy for many years, purchasing the property may be worth evaluating.
If the pharmacist expects to relocate, sell the pharmacy, or significantly change the business model, leasing may provide greater flexibility.
Get Financing Reviewed Before Making an Offer
Pharmacists considering a combined pharmacy and real estate purchase should evaluate financing before committing to the transaction.
An early review can help establish a realistic purchase budget and determine whether the pharmacy’s cash flow can support the proposed financing.
It can also help identify potential issues with the property or business before the buyer moves too far into the transaction.
Final Thought
Financing a pharmacy and commercial real estate together can be a potential strategy for pharmacists who want to acquire both the operating business and the property.
The right structure depends on the pharmacy’s financial performance, the property’s value, the purchase prices, the borrower’s financial profile, and the financing program.
Before moving forward, pharmacists should evaluate the entire transaction, including the down payment, monthly debt obligations, working capital needs, and long-term plans for the pharmacy and real estate.
