An Owner’s Guide to Sale Leaseback in Commercial Real Estate

For business owners, the real estate you occupy is one of your most valuable assets. But is that value working as hard for you as it could be? A sale leaseback transaction is a powerful financial tool that allows you to unlock the capital tied up in your property while maintaining complete operational control. This strategy offers a compelling alternative to traditional financing, enabling you to convert a fixed asset into liquid capital for growth, debt reduction or other corporate objectives.

So, what is a sale leaseback? It is a financial arrangement where a company that owns and occupies a property sells it to an investor and simultaneously signs a long-term lease to continue using it. The seller becomes the tenant, and the buyer becomes the landlord. This guide will explore how this strategic transaction can benefit both business owners and real estate investors.

Define Sale Leaseback

A sale leaseback is a transaction where an owner-occupant sells their commercial real estate to a buyer (typically an investor) and then immediately leases it back under a long-term agreement. The seller transitions to a tenant, and the buyer becomes a landlord, receiving regular rent payments.

How Does a Sale Leaseback Work?

At its core, a sale leaseback is a straightforward process. An owner-occupant sells their property and immediately enters into a long-term sale leaseback agreement to rent the property from the new owner. This agreement, often structured as a sale leaseback net lease, dictates the terms of the tenancy, including the lease duration, rental rate and responsibilities for property expenses like taxes, insurance and maintenance.

For the seller, this unlocks 100% of the property's equity. For the buyer, it creates a predictable, long-term income stream backed by the tenant's business operations. The process transforms a non-liquid real estate asset on the seller’s balance sheet into cash, while the buyer acquires an income-producing property with a committed tenant already in place.

Benefits of a Sale Leaseback for Owner-Occupiers

For companies in sectors like manufacturing, logistics or convenience retail, where significant capital is invested in facilities, a sale leaseback real estate transaction offers numerous strategic advantages.

Unlock Trapped Equity and Improve Liquidity

The most significant benefit is the immediate conversion of real estate equity into cash. Unlike traditional debt financing, which may only provide 70-80% loan-to-value, a sale leaseback allows you to access up to 100% of your property's market value. This infusion of capital can be used to:

• Fuel business expansion and growth initiatives
   
• Invest in new technology or equipment
   
• Pay down existing corporate debt
   
• Fund a shareholder buyout or dividend
   
• Strengthen the company’s balance sheet

Attractive Cost of Capital

In many cases, a sale leaseback can offer a more favorable "cost of capital" compared to other financing options like mezzanine debt or issuing equity. By analyzing the effective rental rate as a percentage of the sale price (the capitalization rate, or "cap rate"), business owners can compare this implied financing cost to the interest rates on loans or the dilution from selling shares. This makes sale leaseback financing a highly competitive capital source.

Maintain Full Operational Control

A common concern for business owners is losing control of a critical facility. However, a well-structured, long-term lease ensures you maintain complete operational control of your property for the duration of the agreement, which can often be 15-20 years or more, with options to renew. You continue to run your business without interruption, just as you did when you owned the building.

Portfolio Optimization and Flexibility

For companies with multiple locations, such as c-store or gas station operators, sale leasebacks provide a way to strategically manage a real estate portfolio. You can choose to sell certain properties while retaining others, allowing you to reallocate capital to higher-performing locations or new market opportunities.

High-Level Tax and Accounting Considerations

A sale leaseback can have positive implications for your financial statements. By selling the asset, you remove the property and associated depreciation from your balance sheet. The lease payments are then treated as a rental expense, which is typically fully tax-deductible. While accounting standards have evolved, this structure can still improve key financial ratios. It is crucial to consult with your accounting and tax advisors to understand the specific impacts on your business.

Benefits for Investors and Buyers

For investors, a sale leaseback transaction offers a unique opportunity to acquire high-quality properties with stable, long-term income. This is especially true in the net lease sector.

Stable, Long-Term Passive Income

The foundation of a sale leaseback's appeal is the long-term lease signed at closing. These leases, often 15+ years, provide a predictable stream of rental income. In a sale leaseback net lease structure (such as a triple net or NNN lease), the tenant is responsible for property taxes, insurance and maintenance, making it a relatively passive investment for the landlord.

Built-In Inflation Protection

Most modern sale leaseback agreements include contractual rent escalations. These can be fixed annual increases (e.g., 2% per year) or periodic bumps (e.g., 10% every five years). This built-in growth helps protect the investor’s income stream against inflation over the long term.

Portfolio Diversification

Investors can use sale leasebacks to diversify their portfolios by industry, geography and tenant type. You can acquire assets in resilient sectors like industrial logistics, healthcare or essential retail. Northmarq’s national platform provides investors access to opportunities across the country, from major industrial hubs to high-traffic retail corridors.

Challenges and Risks to Consider

While powerful, a sale leaseback is not without its challenges. Both parties must carefully evaluate the potential risks.

• Credit Quality of the Tenant: For the investor, the primary risk is the tenant's long-term financial health. If the tenant’s business falters and they can no longer pay rent, the investor may be left with a vacant property.
   
• Over-Market Rent: Sellers may be tempted to negotiate a higher sale price in exchange for an above-market rental rate. This can create future problems, making it difficult for the tenant to operate profitably and for the investor to re-lease the property at a comparable rate if the original tenant leaves.
   
• Residual Value Risk: At the end of the lease term, the investor faces the risk that the property may be worth less than anticipated. This is a greater concern for highly specialized properties that are difficult to adapt for a new user.
   
• Interest Rate Volatility: A shifting interest rate environment can impact property valuations. Rising rates may put downward pressure on pricing, affecting both the seller's potential proceeds and the buyer's target yield.

Executing a Sale Leaseback: A High-Level Checklist

A successful sale leaseback requires careful planning and execution. Working with experienced sale leaseback brokers is essential to navigate the process and achieve an optimal outcome.

1. Strategic Readiness Assessment: The first step is an internal evaluation. Does a sale leaseback align with your company’s long-term goals? You must analyze your capital needs, evaluate alternative financing options and confirm that a long-term lease commitment fits your operational plans.
    
2. Financial Modeling and Lease Structuring: This involves determining the market value of your property and modeling different lease scenarios. Key terms to define include the lease duration, rental rate, rent escalations and renewal options. An expert advisor can help structure a lease that is attractive to investors while protecting your operational needs.
    
3. Selecting the Right Sale Leaseback Broker: Choosing a partner with a deep understanding of the sale leaseback market is critical. An experienced sale leaseback broker, like the specialists in Northmarq’s National Net Lease & Sale Leaseback Group, brings market knowledge, valuation expertise and a vast network of qualified buyers. They guide you through the entire process, from valuation to closing.
    
4. Marketing to Qualified Investors: Your broker will create professional marketing materials and confidentially present the opportunity to a curated list of investors pursuing sale leasebacks. This targeted approach ensures you are negotiating with experienced parties who understand the structure and can close efficiently.
    
5. Letter of Intent (LOI) and Due Diligence: After selecting a buyer, you will negotiate and execute an LOI outlining the key business terms. The buyer then begins their due diligence, which includes a detailed review of the property, your company’s financials, environmental reports and more.
    
6. Purchase Agreement and Closing: Once due diligence is complete, the parties negotiate a formal Purchase and Sale Agreement (PSA) and the final lease document. Upon closing, you receive the sale proceeds, and your new lease officially begins.

Geographic Markets and Pricing Dynamics

The value of a sale leaseback property is influenced by local market fundamentals, asset class and credit of tenant. Our Northmarq team has extensive experience selling assets in tertiary markets as well as the major U.S. industrial and logistics hubs like Dallas-Fort Worth, Southern California, New York, Miami, Atlanta or Chicago. Whether it’s a warehouse or distribution center, a medical building or a gas/convenience retail operator, Northmarq has delivered premium pricing for its clients by creating strategic partnerships between middle-market companies and sale leaseback investors.

Northmarq’s extensive market research and presence in offices across the country provide a ground-level understanding of these local dynamics. Our advisors leverage this insight to position your property effectively and ensure you achieve its maximum value, no matter where it's located.

Partner with Northmarq’s Sale Leaseback Experts

A sale leaseback is more than a simple real estate transaction; it's a strategic corporate finance decision. Executing it successfully requires a partner with expertise across capital markets, investment sales and corporate finance.
Northmarq's National Net Lease & Sale Leaseback Group offers a dedicated team of specialists who live and breathe these transactions. Our integrated platform combines deep industry relationships with sophisticated financial analysis and a nationwide reach to connect sellers with the right capital. We provide a seamless, confidential process designed to unlock the maximum value from your real estate.

If you are an owner-occupier considering your capital options or an investor seeking stable, long-term returns, a sale leaseback may be the right solution.

Contact Northmarq’s National Net Lease & Sale Leaseback Group today for a confidential assessment and to learn how a sale leaseback transaction can help you achieve your financial goals.