When an owner holds both the school operation and the underlying real estate, the question of whether to sell them together is one of the first and most consequential questions we work through. There is no universally correct answer — the right path depends on tax position, retirement planning, appetite for ongoing involvement, and the specific real estate itself. But there are clearly better and worse paths for any given owner, and this article walks through the three common options and the factors that distinguish them.

This article is general information, not tax or legal advice. The paths below involve significant tax, estate, and liability implications. Owners should consult their CPA, estate attorney, and tax counsel before committing to a structure.

The Three Common Paths

School owners who hold the underlying real estate typically choose among three paths at a sale: selling them together, retaining the real estate as a long-term landlord, or retaining the real estate under a defined-term lease. Each has distinct trade-offs.

Path 1 — Sell Together

Selling the school business and the real estate together is the simplest structure. One transaction, one closing, one buyer, one tax event.

The upside is simplicity. The buyer gets a bundled asset — the operating business plus the physical plant it depends on — which many buyer categories prefer. Family-office buyers in particular often require real estate ownership as a condition of entering a transaction. Platform-backed acquirers vary. The transaction typically closes faster than a split structure and involves lower legal and advisory costs.

Important considerations:

  • Headline pricing is typically higher, because the real estate value is explicit rather than negotiated separately
  • The tax event is concentrated into a single year, which can push the seller into higher brackets
  • Capital-gains exposure applies to both the business goodwill and the real estate appreciation simultaneously
  • A potential 1031 like-kind exchange is available for the real estate component only — the business sale cannot be deferred this way
  • Optionality is removed — the owner no longer has flexibility to adjust

Selling together is the right choice when the seller wants a clean exit, has no appetite for ongoing involvement with the property, and is willing to accept the concentrated tax event.

Path 2 — Sell the Business, Retain the Real Estate as Landlord

Retaining the real estate and leasing it to the new owner preserves a long-term income stream and creates optionality for future transactions or estate planning.

Under this path, the seller sells only the operating business. The buyer signs a lease — typically 10 to 20 years with options to renew — and pays market rent to the seller. The seller continues to own the building and collects rental income indefinitely, with the ability to sell the real estate separately at a later date (and potentially use a 1031 exchange at that time).

This path works when:

  • The seller wants ongoing passive income from a familiar asset
  • The real estate has appreciation potential independent of the school
  • The seller is comfortable with the obligations of being a landlord, including maintenance, repairs, and the risk that the tenant business may not survive the full lease term
  • The seller's estate planning benefits from retaining a long-term appreciating asset

Important considerations:

  • Headline price of the business sale is lower than a combined transaction, because the real estate is not included
  • The seller remains tied to the operational health of a business they no longer control — if the school closes, the lease income stops
  • Rental income is ordinary income rather than long-term capital gains
  • Property management obligations continue indefinitely unless the lease is a triple-net structure

Retaining the real estate as a landlord is attractive to sellers whose retirement planning benefits from predictable rental income and who are comfortable with concentration risk in a single tenant.

Path 3 — Sell the Business, Retain the Real Estate Under a Defined-Term Lease

The third path is a hybrid: the seller sells the business, retains the real estate, and signs a lease with a specified term (typically 5 to 10 years) at the end of which the real estate can be sold to a different buyer or redeveloped.

This path provides a window — long enough for the new owner of the business to establish operations, long enough for a 1031 exchange to be available later, and short enough to preserve optionality.

Important considerations:

  • The business transaction and the eventual real estate transaction are typically with different buyers, which complicates diligence and timing
  • The seller can time the real estate sale to a favorable tax year
  • Property management obligations exist for the lease term
  • A buyer concerned about long-term tenancy stability may discount the business purchase price

This path is attractive to sellers who want partial deferral of the tax event and who are not ready to commit to being a long-term landlord but are willing to carry the obligation for a defined window.

Tax Considerations (and the Required Disclaimer)

The three paths above have materially different tax implications. A few general observations:

  • Allocation of purchase price between business and real estate matters significantly. The business portion generates ordinary and capital-gains income; the real estate portion generates capital gains and may qualify for installment-sale treatment or deferral.
  • 1031 like-kind exchanges apply to real estate only. Business goodwill, equipment, and operating assets do not qualify.
  • Depreciation recapture on the real estate is a frequent surprise. Buildings depreciated over operating years are subject to recapture at ordinary income rates on the depreciated portion of the gain.
  • Installment sales can be used for the business portion to spread the tax event, with specific restrictions.

This is a necessarily condensed overview. Owners should consult a qualified CPA and tax attorney before committing to any structure. The optimal path for one owner is rarely the optimal path for another.

What Buyer Preference Looks Like

Different buyer categories prefer different structures. In rough terms:

  • Independent operators often prefer leasing the building when the lease rate is modest, because it lowers the capital required at closing
  • Regional groups vary — some strongly prefer owning real estate for operational control, others prefer leased sites for scalability
  • Family-office buyers typically prefer or require real estate ownership
  • Platform-backed acquirers vary by platform — some are heavy owners, some are heavy lessees

The buyer categories most likely to transact with your school influence which structural paths are even available. We cover the buyer landscape in detail in our article on who is buying schools in 2026.

Making the Decision

The right path depends on three things: your tax position, your retirement planning, and your appetite for ongoing involvement with the property.

A rough decision framework:

  • If simplicity and a clean exit matter most → sell together
  • If predictable long-term income matters most → retain as landlord
  • If flexibility and tax timing matter most → defined-term lease, then sell

The right path also depends on how the broader valuation framework applies to your specific school, since the real estate structure interacts with the four valuation factors in meaningful ways.

Frequently Asked Questions

Can I retain only part of the real estate — for example, the playground parcel? In some cases, yes. The feasibility depends on parcel configuration, zoning, and licensing requirements. CDSS licensing requires contiguous outdoor space meeting Title 22 standards.

What is a reasonable lease rate for the school building? Market lease rates for child-care-licensed buildings in California typically fall between $18 and $40 per square foot per year depending on condition, location, and tenant-improvement levels. Rent as a percentage of school revenue should generally fall between 8% and 15% to support a sustainable operating model.

Can I do a 1031 exchange on the business sale? No. The 1031 like-kind exchange rules apply only to real estate. The business goodwill, equipment, and other intangibles do not qualify.

Does retaining the real estate affect the valuation of the business sale? Yes, through the lease structure. A below-market lease to the buyer effectively transfers value from the real estate to the business price; an above-market lease does the opposite. Both are negotiable but should be modeled before structuring.