What Is a Sale-Leaseback?
In a sale-leaseback, a company that owns property sells it to an investor and, at the same closing, becomes the tenant under a long-term lease on the same asset. Nothing changes operationally — the business keeps running out of the same building — but the balance sheet transforms, with a fixed asset replaced by cash and a stream of future rent payments owed to the new landlord.
Buyers are typically REITs, pension funds, or specialized net-lease investors seeking stable, bond-like rental income from creditworthy tenants. The assets involved range from corporate headquarters and distribution centers to restaurant chains and casino properties; several major casino operators have monetized billions of dollars of real estate this way while continuing to operate the venues as tenants.
How a Sale-Leaseback Works
Pricing revolves around the capitalization rate: sale price roughly equals the first year's rent divided by the cap rate. A distribution center sold for $100 million at a 7% cap rate carries about $7 million of initial annual rent, typically with built-in escalators over a 10-to-20-year term. Most deals use a triple-net structure that pushes property-level costs such as taxes and upkeep onto the tenant.
Compared with a mortgage, a sale-leaseback usually unlocks the asset's full market value rather than the 60% to 75% a lender would advance against it. The accounting benefit has narrowed, though: under ASC 842, the lease returns to the seller's balance sheet as a right-of-use asset and a corresponding lease liability, so credit analysts largely see through the structure and treat capitalized rents as debt-like obligations.
Why Sale-Leasebacks Matter
Companies use the proceeds to redeploy capital into higher-return uses, whether that means funding expansion or paying down expensive debt. Private equity sponsors are heavy users of the structure, executing sale-leasebacks on asset-rich targets at closing to reduce the equity check in a leveraged buyout — retail, restaurant, and healthcare deals frequently feature this move.
The trade-offs deserve equal attention. The seller locks in a permanent rent obligation that behaves like fixed-rate debt, gives up any future appreciation of the property, and loses flexibility if it later wants to exit the location. Interviewers in real estate and sponsors groups like to test whether candidates can weigh the cheap-capital argument against the loss of asset ownership and the credit implications of capitalized leases.
