What is a Sale Leaseback?

A guide to sale leaseback transactions

There are many ways for companies to raise capital: recruiting investors, reinvesting profits, borrowing funds, and selling stock are among some of the most common methods. Each of these methods has its own advantages and disadvantages, and many times, these traditional methods of raising capital come with downsides that can restrict companies from achieving their financial goals. In these cases, companies may begin looking for more creative ways to fund their initiatives.

One capital-raising tool that has become more common in recent years is the sale leaseback. “What is a sale leaseback?” you might ask. In real estate, a sale leaseback is where a company sells all, or a portion of, the real estate that it owns and occupies, while it simultaneously signs a long-term lease to continue to occupy and use the property from the subsequent buyer. It is also common to see sale leasebacks with owned property other than real estate, such as commercial aircraft, cargo barges, solar plants as well as large scale machines and equipment.

Sale leaseback transactions allow the owner/user of a property to extract their equity from an asset while still maintaining their ability to use it. For the seller, a sale leaseback transaction gives them access to the capital they need without incurring debt or impacting their balance sheet. For the buyer, the purchase of a sale leaseback provides a stable, long-term investment with an occupant already in place. Additionally, in some cases, the owner and the future buyer can negotiate the lease to help satisfy their goals.

How do sale leaseback transactions work?

There are typically two agreements involved in a sale leaseback transaction: one that states that the current owner/user will sell the property to an investor at a fixed price that both parties agree upon, with the second stating that the new owner agrees to lease the property to the previous owner with lease terms that both parties agree upon immediately following the sale. While the conditions of each sale leaseback vary, these two agreements form the basis of every sale leaseback transaction.

Structuring the transaction this way provides advantages to both the buyer and the seller. By completing a sale leaseback, the original owner/user of the property ensures that they can continue to use it after the sale with little to no interruption. The buyer also benefits by receiving an immediately cash-flowing asset with no immediate risk of vacancy.