A sale-leaseback (also written sale and leaseback or sale & leaseback) is a transaction where an owner of real estate sells the property to an investor and immediately leases it back under a long-term lease. The seller becomes the tenant (lessee) and the buyer becomes the landlord (lessor). The primary purpose is to unlock cash tied up in the property while allowing the original occupant to continue operating the business from the same location.
Sale-leasebacks are common for single-tenant industrial buildings, big-box retail, corporate offices, medical facilities and other specialized real estate (data centers, manufacturing plants). Markets with strong demand for long-term, net-leased assets—industrial/logistics and stabilized retail—are especially suitable.
The owner decides to monetize equity. Valuation looks at market value, cap rates and the effect of lease terms (rent, length, tenant credit). Expect a valuation range rather than a single number until bids are received.
The property is marketed (often off-market for confidentiality). Buyers provide term sheets outlining purchase price, proposed lease economics, lease start date and key conditions. Seller evaluates price vs non-price terms (rent amount, lease length, TIs, renewal options).
Buyers run title, survey, environmental (Phase I/II), leases and financial due diligence. Sellers must secure lender consents if there’s an existing mortgage, and any municipal permits or entitlements required for the continued use.
At closing the buyer pays the purchase price, title transfers, and the lease commences—often on the same day. Leases are typically long-term (10–30 years) and may be triple net (NNN) or other structures.
After closing the tenant performs under the lease (pay rent, maintain property per lease). The landlord handles rent collection, property monitoring and enforcement of lease covenants. Lease administration includes tracking TIs, insurance, CAM reconciliations and renewals.
Sale-leasebacks convert illiquid real estate into cash that can be used to pay down debt, fund expansion, acquire equipment, return capital to shareholders, or support working capital needs.
Sellers eliminate ownership responsibilities (capital expenditures, landlord risk, insurance and property taxes if lease is NNN) while keeping operational continuity at the same site.
Proceeds can improve liquidity ratios, reduce leverage, or be redeployed to higher-return uses. However, lease obligations may appear on the balance sheet depending on accounting standards, so the net impact on leverage and ROA varies.
Buyers gain stabilized cash flow from a known tenant, often at attractive cap rates. Long-term, creditworthy tenants reduce vacancy risk and support predictable yield-based returns.
Sellers become tenants with fixed rent obligations that may be higher over time than prior carrying costs. Long leases reduce flexibility if the business needs to downsize or relocate.
Ownership rights are lost—major renovations, subletting, or sale of the property by the landlord can be constrained by lease terms. Termination or early exit provisions are typically limited and costly.
Existing lenders may demand payoff or amend covenants. Tax treatment can be complex (sale vs financing) and may create unexpected tax liabilities. Covenants in corporate debt may restrict or condition sale-leaseback transactions.
Sale proceeds depend on market cap rates and investor appetite. Selling into a weaker market can produce a lower price; conversely, a buyer may demand rent concessions for perceived tenant or market risk.
Net proceeds = sale price − transaction costs (broker fees, legal, appraisal, environmental remediation reserves, loan payoffs/discounts, closing costs). Sellers should model net cash after these outflows.
Proceeds can reduce debt (improve debt/equity), increase cash (improve liquidity) and potentially raise ROA by redeploying capital. However, rent is an operating expense that can lower EBITDA. Under current accounting standards, many leases produce a right-of-use asset and lease liability that affect leverage calculations.
Compare monthly/annual rent vs previous mortgage payments plus other ownership costs (taxes, insurance, maintenance). Rent may be lower or higher than prior carrying cost depending on negotiated terms and market conditions—model multiple scenarios.
Sale proceeds used to pay debt can improve covenant compliance, but adding a long-term rent obligation may create new coverage challenges. Always model covenant tests post-transaction.
Under IFRS 16 and ASC 842, most long-term leases generate a right-of-use asset and lease liability on the lessee’s balance sheet. A sale-leaseback may be accounted for as a sale if sale criteria are met; otherwise, it’s treated as a financing and the seller/lessee recognizes a liability.
Selling the property can trigger taxable gain if proceeds exceed tax basis. For the buyer, the purchase establishes a new depreciable basis. Tax consequences vary by jurisdiction—consult tax counsel to understand timing and rates.
If transfer-of-control tests or sale criteria fail (e.g., seller retains significant control or risks), accounting rules treat the transaction as a financing: the seller keeps the asset on the balance sheet and recognizes a financing liability rather than a sale gain.
Document sale criteria analysis, lease classification, allocation of sale proceeds, related party terms (if any), and any post-closing obligations. Disclose key judgments and impacts on KPIs, covenants and tax positions.
Buyers often use the capitalization (cap) rate method: Sale Price = Net Operating Income / Cap Rate. Cap rates reflect market yield expectations adjusted for tenant credit, lease term and property condition.
Negotiated price can differ from market value due to urgency, competitive bidding, or unique buyer objectives. Premiums may be paid for very strong tenant credit or strategic locations; discounts may reflect required TIs, environmental risk or short lease terms.
Longer leases, investment-grade tenant credit, NNN structures, and rents indexed to inflation support higher prices (lower cap rates). Short leases or uncertain renewals reduce price (higher cap rates).
Buyers commission appraisals and market studies. Sellers should expect independent valuation scrutiny and be prepared to explain any unique revenue streams or cost structures that affect NOI.
Common terms range from 10–25 years with multiple renewal options. Sellers often seek shorter initial terms or flexible renewals; buyers prefer long, non-cancelable terms for yield certainty.
NNN (tenant pays taxes, insurance, maintenance) is common. Escalators can be fixed steps, CPI-linked, or market resets at renewal. Rent negotiation balances initial rent level against escalation and lease length.
Clarify who funds TIs and capital expenditures. Buyers typically prefer tenants to handle routine maintenance; capital projects can be negotiated as landlord-funded with amortization or tenant-funded with allowances.
Tenants often seek assignment/sublet flexibility and limited termination rights. Landlords usually want restrictions with consent rights and protections for income and asset value.
Investors may require personal or corporate guarantees, letters of credit or security deposits—especially if tenant credit is below investment grade.
Review outstanding loans, subordination requirements, easements, and obtain lender consent or payoff terms.
Confirm zoning allows current use and any required permits (healthcare, industrial operations, special waste handling).
Review tenant financials if not obvious, occupancy needs, special infrastructure requirements and any workforce implications from ownership change.
Sellers should focus on price, favorable rent escalation, renewal/termination rights, and limited future obligations (capex, exclusivity). Consider staged sales or partial interests for flexibility.
Buyers prioritize conservative rents relative to market, long non-cancelable terms, NNN obligations, strong guaranties and environmental protections.
Higher sale prices typically require accepting higher rents or shorter rent-free periods. Tenants may negotiate lower initial rent for landlord-funded TIs amortized in the lease.
Use CPI-linked escalators for inflation protection, set TI reimbursement schedules and define renewal rent as fixed formula, CPI + spread, or market rent with capped increases to mitigate dispute risk.
Review permitted use, casualty and condemnation allocation, restoration obligations, and casualty proceeds allocation to ensure operational continuity and fair recovery mechanics.
Include protections for the landlord against tenant bankruptcy (e.g., adequate assurance provisions) and for the tenant against landlord insolvency where practicable.
Obtain estoppel certificates confirming existing lease terms and performance. Ensure lender consents are documented to avoid post-closing disputes.
Real estate, tax and bankruptcy laws vary by jurisdiction—local counsel should confirm enforceability of lease provisions and tax consequences.
Refinancing preserves ownership but may offer less liquidity than a sale and often requires debt service. Sale-leaseback is preferable when ownership is less important than immediate cash or when balance-sheet de-leveraging is a priority.
Straight lease keeps ownership with a third-party landlord; sale without leaseback requires relocation. Sale-leaseback is chosen when the tenant must remain onsite but wants capital.
Strong tenant credit, favorable tax treatment for lease payments, urgent capital needs or a desire to offload landlord responsibilities favor sale-leasebacks.
These are top performers for sale-leasebacks because of predictable operations, low landlord intervention and investor demand for long-term net-leased assets.
Retail and office can work if tenant credit and long-term demand are strong. Specialized assets like medical clinics or data centers attract niche investors but require technical diligence.
Check local cap rate trends, vacancy rates, and investor fundraising targeting net-leased product to judge appetite and price expectations.
Typical timeline: 8–16 weeks from marketing to close for straightforward deals; 3–6 months or longer if complex issues (environmental remediation, lender payoffs or public company approvals) arise.
Expect broker fees (often 2–3% of sale), legal fees, appraisal and environmental costs, survey, title and escrow fees. Total transaction costs commonly range from 3–7% of sale price depending on complexity.
Environmental red flags, lender non-consent, poor tenant credit or change-in-use restrictions are common fast-fail issues.
A privately held manufacturer occupies a 50,000 sq ft plant. The firm needs $5M for equipment and working capital but cannot relocate production. Ownership is willing to sell the facility and lease it back.
Tradeoffs included selling at a price that gave the owner required cash while accepting a rent level and a long lease. Key risks: environmental liability at the plant, lender consent for the mortgage payoff, and future growth requiring expansion beyond the site.
For the owner: sale-leaseback delivered the needed capital without relocation but created a long-term occupancy cost. For the investor: the deal secured a long-term tenant with a stable industrial use and a predictable income stream—subject to environmental and credit due diligence.
Yes—selling the property can create a taxable gain and change depreciation profiles. Lease payments may be deductible as an operating expense. Tax outcomes depend on jurisdiction and deal structure—consult a tax advisor.
Yes. Owners can sell portions of a property, ground leases, or phased interests. Partial deals increase structuring complexity but can preserve some ownership upside.
Existing mortgage lenders commonly require consent and may demand payoff or revised loan terms. Early engagement with lenders is essential.
Typical terms range 10–25 years; many deals center on 10–15 years with renewal options. Lease length influences price, rent and investor demand.
Evaluate net proceeds after costs, impact on KPIs and covenants, lease economics (rent/escalator/NNN), and non-price protections (renewals, expansion rights). Rank offers by net cash, ongoing occupancy cost and operational flexibility.
Review IFRS 16 and ASC 842 for lease accounting, and consult local tax rules for taxable gain and depreciation. Work with accountants and legal counsel to document sale criteria and lease classification.
