Investment Grade Sale-Leasebacks: A Guide for Business Owners

In a sale-leaseback, a company that owns its real estate sells the property to an investor and signs a long-term lease to stay. The company converts real estate equity into cash and keeps operating in the same place; the investor gets a property with a committed tenant. When the tenant has an investment grade credit rating, the lease is especially attractive to buyers, which supports pricing. This guide explains how sale-leasebacks work, their real benefits and costs, the accounting and tax effects, and what to negotiate. For the rating scale, see the investment grade guide.

How a Sale-Leaseback Works

1. The owner-occupier agrees to sell its property to an investor at a price based on the rent it will pay and the cap rate the investor requires.
2. At closing, the company signs a lease, often 10 to 25 years with renewal options, usually triple net, so the company continues to pay property taxes, insurance and maintenance.
3. The company receives the sale proceeds, repays any mortgage on the property, and uses the rest as it chooses.

The rent and price trade-off

A higher rent produces a higher price but a larger long-term obligation; a stronger tenant credit supports a lower cap rate and therefore a higher price for the same rent. Set rent at a level the business can comfortably carry through a downturn.

Benefits

• Capital: converts equity tied up in real estate into cash for growth, acquisitions or repaying other debt.
• Operational continuity: the business stays in place under a long lease.
• Funding source: can raise more than a mortgage on the same property, because pricing is based on the full value rather than a loan-to-value limit.
• Tax deductions: rent is generally deductible as a business expense.

Costs and Trade-Offs

• Lease obligations: under current lease accounting (ASC 842 in the U.S.), the company generally records a lease liability and a right-of-use asset for leases longer than 12 months. Rating agencies and lenders typically treat lease obligations as debt-like, so a sale-leaseback does not automatically reduce leverage; it depends on how the proceeds are used. If the transaction does not qualify as a sale, for example because of certain repurchase options, it is accounted for as a financing.
• Taxes on the sale: the company may owe tax on any gain, and it gives up depreciation on the building, which passes to the buyer.
• Loss of residual value: any future appreciation belongs to the investor.
• Ongoing costs: under a triple net lease the company still pays property taxes, insurance and maintenance, plus rent.
• Flexibility: a long lease limits the ability to relocate or downsize.

Review the accounting and tax effects with your auditors and tax advisors before agreeing to terms.

What to Negotiate

• Initial rent, annual increases and lease term.
• Renewal options, and any purchase option or right of first refusal (with their accounting effects).
• Expense responsibilities, including roof and structure.
• Assignment, subletting and change-of-control rights.
• Which entity signs the lease and whether a parent guarantees it; a stronger guarantor usually means a better price.
• For multi-site companies, whether to sell properties individually or as a portfolio, and any master lease structure.

Where Sale-Leasebacks Are Used

Sale-leasebacks are common for retail stores, quick-service restaurants, convenience stores and gas stations, automotive service, medical office and healthcare facilities, industrial and cold storage buildings, and some offices and hotels. Investors focus on the tenant’s credit, the property’s location and re-use value, and whether the rent is sustainable for the business.

Frequently Asked Questions