What is a sale-leaseback?

A sale-leaseback is a single transaction with two parts. You sell the property your business owns and occupies, and at the same closing you sign a long-term lease to stay in it. You get the value of the building in cash. You keep operating in the same place, with the same team, the next morning.

How a sale-leaseback works

There are three steps. The property is valued from the rent and an agreed cap rate, typically around 8%, which is the same as roughly 12.5 times the annual rent. You sell it at that price. You become the tenant on a long-term lease, commonly 15 years or more, usually triple-net and built around how you actually operate. Nothing about the building changes. What changes is that the equity stops sitting in the walls and starts working in the business.

What that looks like in numbers

Take a 75,000 square foot building leased at $8.50 per square foot. That is $637,500 of rent a year. At an 8% cap rate the property is worth about $8 million, and you get the same answer either way you run it: divide the rent by 8%, or multiply it by 12.5. That $8 million is what stops being a building and starts being working capital.

Why companies do it

For most owner-occupiers the building is the largest idle asset on the balance sheet. A sale-leaseback converts up to 100% of its value into cash. A lender would advance 60 to 70% against the same property, and would add debt, interest and covenants to do it. Because this is a sale rather than a loan, there is nothing to repay and no covenants to comply with. Owners use the proceeds to fund growth, buy out a partner, retire expensive debt, or put capital behind an acquisition.

What we look at before we buy

We underwrite the operating business, not just the building, because the income is only as dependable as the tenant paying it. Three things decide whether a deal works. Rent has to be covered comfortably by earnings, and we will not structure a lease the business cannot carry. The property has to be mission critical, meaning it is where you actually generate revenue rather than space you could vacate without noticing. And the cap rate has to sit inside the band these transactions price in, which runs roughly from 4% to 15% depending on the property and the tenant. Industrial, manufacturing, warehouse, logistics, healthcare and childcare buildings are what we see most often.

What are the disadvantages of a sale-leaseback?

The main one is ownership. You no longer hold the asset, and you no longer capture its future appreciation. The second is that you take on a long-term rent obligation, which is a fixed cost the business carries through good years and bad. In exchange you take the value now, in cash, and you fix your occupancy cost for a long time on terms you helped set. That trade works when capital compounds faster inside your business than the building appreciates. It works less well when the property is the investment rather than the place you operate.

When we tell people not to do it

More often than a sales pitch would suggest. If the rent needed to justify the price is more than your earnings comfortably cover, the lease becomes a liability rather than a solution, and we will say so rather than structure around it. If the building is genuinely surplus instead of central to how you operate, you are usually better off selling it outright with no lease attached. And if you do not have a use for the capital that beats what the property is quietly earning you, the honest answer is to keep owning it. A sale-leaseback moves capital out of a building and into a business. If the business does not need it, the transaction has no reason to exist.

What happens at the end of the lease?

Nothing sudden, because the answer is negotiated at the start rather than left open. Most leases carry renewal options that let you extend on a schedule agreed up front, which is why terms are quoted as 15 years or more. Some leases also include a right of first refusal, letting you match an offer before the property is sold to someone else. A right to buy the building back is a different matter, and worth understanding before you ask for one. Under US lease accounting, an option for the seller to repurchase the property can stop the transaction qualifying as a sale at all, which would undo most of the reason for doing it. If a buy-back right matters to you, raise it with your accountant while the deal is being structured rather than after.

What causes a sale-leaseback to fail?

Usually the rent. If the lease is priced so the business cannot cover it comfortably out of earnings, the structure is fragile from the first day, and one bad year turns a solved problem into a solvency problem. The second cause is a property that is not genuinely mission critical, because a building the business could leave is a building the business eventually does leave, and the lease stops being dependable for either side. The third is a price set outside what the market supports, which tends to unwind at refinancing or resale. All three are visible before anyone signs, which is why we would rather decline a deal than structure around one.

What a sale-leaseback is not

It is not a loan, so it adds no debt and no covenants. It is not a refinancing, so there is nothing to renegotiate when rates move. It is not a move, so operations continue uninterrupted. It is also not the same as an equipment or vehicle sale-leaseback, which borrows the name for a different asset class. Everything here refers to commercial real estate that a business owns and occupies.

Is a sale-leaseback a good idea?

It depends on what you would do with the money. The fit is strongest when three things are true at once: your business owns the building it operates from, the property matters to how you make money, and you have a use for the capital that beats leaving it in the walls. When all three hold, it is usually a good idea. When any one of them does not, it usually is not. The next step is the arithmetic on your own numbers rather than more reading.

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