May the Lease Be with You: The Basics of Sale-Leasebacks

Commercial real estate has historically offered higher expected returns compared to many traditional investments, largely due to its illiquidity, operational complexity, and market-specific risks. These returns often come at the cost of active involvement, management oversight, and capital commitments. For investors seeking exposure to real estate’s income and appreciation potential—without the hands-on demands of direct ownership—sale-leasebacks present an attractive middle ground. By acquiring stabilized properties with built-in tenants and long-term leases, both institutional and individual investors can achieve risk-adjusted returns with a relatively passive profile, making sale-leasebacks a compelling strategy in today’s capital-conscious environment.

A sale-leaseback is a transaction in which an owner-occupant sells its real estate to a third-party investor and simultaneously enters into a long-term lease for continued use of the premises. This structure effectively separates ownership of the real estate from the operation of the business, enabling the seller to reallocate capital while the buyer secures a stabilized, income-generating asset. Sale-leasebacks can vary in terms and length, with most deals spanning multiple years with triple-net (NNN) or absolute-net leases.

Strategic Rationale for Owner-Occupants

An owner-occupant/owner-user is an individual or business that both owns and occupies a property for the purpose of conducting its primary operations, rather than holding the asset purely for investment or leasing income. Owner-occupants pursue sale-leasebacks for a variety of strategic reasons with the most notable being capital reallocation. A sale-leaseback unlocks equity tied up in real estate allowing companies to reinvest in higher-return business operations, pursue acquisitions, or deleverage their balance sheet. Additionally, sale-leasebacks can enhance financial transparency, converting fixed assets into cash and potentially improving return on assets and other key financial metrics. In strong market conditions, companies can monetize their real estate at compressed cap rates, capturing maximum value.

Institutional Appeal for Investors

Sale-leasebacks offer a range of attributes that make them attractive to an investor:

Stabilized, Bond-Like Cash Flows

Sale-leaseback assets are often structured with long-term, NNN or absolute-net leases in place, under which the tenant is responsible for all operating expenses, including taxes, insurance, and maintenance. Additionally, under these leases, tenants are typically obligated to cover all property-related expenses, including repairs, replacements, and major building systems over the life of the lease. While this reduces exposure to operating and capital risks, it remains important to assess the tenant's ability and willingness to meet these obligations, as well as the remaining useful life of the building systems at acquisition.

This lease structure can create highly predictable, low-volatility income streams that resemble the fixed payments of a bond. The contractual nature of the rent payments, combined with minimal landlord responsibilities, makes these assets appealing to investors seeking stable, income-focused returns. However, the strength of these cash flows ultimately depends on the creditworthiness of the tenant and the specific terms of the lease.

Tenant Alignment and Commitment

As a former owner-user, the tenant typically has a long-standing history at the property, often spanning many years or even decades. This deep operational presence may indicate a strategic importance of the location to their business, a high cost or disruption associated with relocating, and/or a strong understanding of the property’s physical condition and operating expenses. These factors contribute to reduced occupancy risk and stronger alignment of interests between tenant and investor. While these factors can contribute to lower occupancy risk and better alignment of interests, they are not guaranteed and should be evaluated on a case-by-case basis.

Credit Risk and Execution Discipline

A defining feature of sale-leaseback transactions is the concentration of income and risk in the creditworthiness of a single occupant. Unlike multi-tenant investments that allow for diversification across users and lease maturities, sale-leasebacks hinge almost entirely on the financial strength and long-term viability of the tenant.

Accordingly, investors must approach these transactions with the combined lens of a real estate underwriter and a credit analyst. Core considerations include:

Tenant Covenant Strength

A robust understanding of the tenant’s financial position, operating history, and industry outlook is critical to assessing long-term lease performance. Key considerations include historical revenue and EBITDA trends, EBITDA-to-rent coverage ratio [EBITDA/Rent], EBITDA-to-interest [EBITDA/Interest] coverage ratio, debt-to-equity ratio [Total Liabilities/Total Shareholder’s Equity], and liquidity metrics such as the current ratio [Current Asset/Current Liabilities].

Risk of Relocation and Asset Criticality

Investors should evaluate the risk that the tenant may vacate at lease expiration or default, which is influenced in part by how essential the property is to their operations. Properties that serve as mission-critical facilities—such as corporate headquarters, manufacturing plants, or main distribution centers—tend to carry lower relocation risk. To assess this, investors should review the tenant’s site plan and operational footprint, examine historical occupancy duration, consider the cost and complexity of relocation, and engage management, if possible, to understand the property's functional role. Properties that are easily replaceable or underutilized may carry higher risk.

Facility Utility and Residual Value

Should the tenant default or vacate, the underlying real estate must be capable of supporting re-tenanting or alternate uses. Properties located in markets with strong demand, flexible layouts, and functional utility—such as clear heights, loading capabilities, or access to infrastructure—are generally more resilient. For manufacturing-oriented sale-leasebacks, it’s important to consider the cost and complexity of removing specialized equipment, as well as the building’s adaptability for future users. Highly customized facilities may present greater leasing risk if they are not easily convertible for general industrial or commercial use.

Investors should model multiple scenarios, including lease renewal, re-tenanting costs, and market softening. The ability to exit or reposition the asset is a fundamental part of prudent underwriting.

Ultimately, the long-term performance of a sale-leaseback investment is only as strong as the tenant’s credit profile and the resilience of the underlying asset. While the structure offers compelling yield potential and operational simplicity, it requires rigorous diligence and thoughtful lease structuring. Drawing on our experience evaluating and executing industrial sale-leaseback transactions, we’ve found that identifying mission-critical properties occupied by financially sound tenants—paired with adaptable, well-located real estate—is key to long-term success. When carefully underwritten, these investments can offer consistent cash flow and an attractive balance of income and downside protection within a broader real estate allocation.

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