Sale-Leaseback

Lease Terms That Matter Most

• Length and renewals. Real estate leasebacks usually run for long initial terms with renewal options. Make sure the total term covers how long you expect to need the site.

• Rent escalations. Fixed annual increases, or increases tied to inflation, can change the total cost considerably over a long lease.

• Expense responsibility. Under a triple-net lease the tenant pays property taxes, insurance and maintenance, and sometimes structural repairs. Read exactly which items fall on you.

• Repurchase rights. A right of first refusal or a purchase option can keep a path back to ownership, though some repurchase rights affect how the deal is accounted for.

• Assignment and subletting. If you might sell the company or downsize, you want the right to assign or sublease on reasonable terms.

• Alterations and expansion. Plants and specialized facilities often need changes over time. Clarify what you can modify and who owns the improvements.

How It Compares With a Cash-Out Refinance

A cash-out refinance keeps you as owner, so you keep future appreciation and the property itself at the end. But the lender will typically advance only part of the value, may impose covenants, and sets a maturity that may need refinancing later. Selling and leasing back can raise more cash and removes the mortgage, but you give up ownership, future appreciation and control of the property once the lease runs out.

Companies that expect to stay in a location for decades and believe the property will gain value often prefer to keep it. Companies that place more value on cash for operations, growth or an ownership transition often prefer to sell.

Accounting, Tax and Other Trade-Offs

Under current U.S. lease accounting standards (ASC 842), most leases, including operating leases, are recorded on the balance sheet as a right-of-use asset and a lease liability. The transfer must also qualify as a sale to be accounted for as one. If it does not, for example because the seller keeps certain repurchase rights, it is treated as a financing instead.

For taxes, the seller generally recognizes gain or loss on the sale, and rent on a true lease is generally deductible. The IRS can treat a deal as a loan if the seller keeps the benefits and burdens of ownership. Other trade-offs include losing future appreciation, taking on a long rent commitment and having less freedom to relocate. Because the results depend on the details, review any proposed deal with your accountant and legal counsel before signing.

Frequently Asked Questions

Does my company need perfect credit to sell and lease back its building?
No, but the tenant's financial strength affects the price. Investors pay more for properties leased to companies with steady earnings, and they may ask smaller or newer companies for a larger security deposit, a guarantee or higher rent.

What happens when the lease ends?
It depends on the lease. Typical outcomes include renewing under the options in the lease, negotiating a new lease, buying the property back if you hold that right, or moving out.

How long does a real estate deal take?
Timelines vary with the property and the buyer. Appraisals, environmental reports, title work and lease negotiation usually take weeks to a few months, and having financial statements, surveys and property records organized shortens the process.

Explore Financing Options for Your Business

A sale-leaseback can raise significant capital, but it is a long-term commitment. Compare it with a refinance, an asset-based loan and other options, model the rent against what the freed-up cash will earn, and choose the path that leaves your business stronger after closing.

A sale leaseback is a transaction in which a business sells an asset it owns, most often its real estate, and immediately leases it back from the buyer. The company keeps using the property as before, but it turns equity tied up in the asset into cash it can put to work elsewhere.

The structure is most associated with owner-occupied buildings such as plants, warehouses, offices, stores and medical facilities, but it also works with equipment, vehicle fleets and other long-lived assets. This guide explains how these deals work, what buyers look for, which lease terms matter most and where the trade-offs are.

How the Transaction Works

1. Valuation. The owner gets an estimate of the asset's market value and, for real estate, the rent the property can support.

2. Marketing to buyers. The owner or an advisor gathers offers from investors who buy occupied properties or assets with a lease attached.

3. Letter of intent. The parties agree on price, rent, lease length, renewal options and who pays which expenses.

4. Due diligence. The buyer reviews title, environmental reports, property condition and the tenant company's financial statements.

5. Closing. The sale and the lease are signed at the same time. Any existing mortgage is paid off from the proceeds, and the seller receives the remaining cash.

Assets That Work in a Sale-Leaseback

• Industrial and manufacturing facilities, including plants, distribution centers and warehouses.

• Office buildings and headquarters owned by the operating company.

• Retail and restaurant properties, often sold as multi-location portfolios.

• Healthcare properties such as clinics, surgery centers and dental offices.

• Equipment and fleets, including production machinery, construction equipment, trucks and trailers. Equipment deals rely on liquidation appraisals and shorter leases, so they are covered in a separate guide.

Buyers focus on two things: the quality of the property or asset, and the financial strength of the company signing the lease. A strong tenant in a building that would be easy to re-lease attracts the most competitive pricing.

Why Companies Sell and Lease Back

• Fund growth such as new locations, acquisitions, product lines or hiring, without selling equity.

• Pay down or replace debt, including loans with near-term maturities or high rates.

• Recapitalize the business ahead of an owner buyout, a family transition or a distribution to shareholders.

• Raise more than a mortgage provides. A mortgage lender typically advances only part of a property's value, while a sale can return close to full market value, less transaction costs and any debt payoff.

• Put capital into operations. Many operators earn a higher return on money invested in their business than on money held in a building.

A Worked Example

Consider a hypothetical manufacturer that owns its plant. The building is worth $4,000,000 and carries a $1,000,000 mortgage. In a sale-leaseback, an investor buys the property for $4,000,000. The mortgage is paid off at closing, leaving the company about $3,000,000 before closing costs and taxes.

Investors often set rent by applying a capitalization rate to the price. At a hypothetical 7% rate, rent would be $280,000 a year, or about $23,333 a month, typically on a net lease where the tenant also pays taxes, insurance and maintenance. The company trades its building equity and mortgage payment for $3,000,000 in cash and a long-term rent obligation, so the real question is what that cash will earn inside the business.