Sale-leaseback deals are regularly used in the United States’ commercial real estate market and the annual transaction volumes go beyond $7 billion. These kinds of deals provide a distinct opportunity for the businesses that seek to release capital but continue to control their properties operationally. This paper aims at outlining the way sale-leaseback transactions are carried out, their advantages to those involved, and some of the risks associated with them.

What is a Sale-Leaseback Transaction?

Sale-leaseback is a process, whereby the owner of a property sells the commercial real estate and at the same time, purchases it back under a lease agreement. This structure helps the seller (tenant) to stay in the space while also freeing up the value that is locked inside the property. They are most suitable for enterprises in a search for ways to enhance their liquidity position without straining the working capital.

From the side of the buyer, such transactions ensure long-term revenues through the possibility of rent. It is normally associated with the sale of the property through a long-term lease and for this reason, it’s a very safe investment for any company that is interested in steady cash inflows.

Why Businesses Decide on Sale-Leaseback

Sale-leaseback transactions are employed for a number of purposes by various businesses. They can also in turn be used to finance growth activities such as expansion, acquisitions, or any other form of growth in the organization. If the traditional sources of financing are inadequate or expensive, sale-leaseback provides an opportunity to release the capital that is tied to property.

It also enhances balance sheet efficiency, as that structure of a business enterprise is more efficient than the one with many intangible assets on its balance sheet. Firms can sell their owned properties and get cash for it while at the same time having the properties controlled as the latter by the firms. Also, they do not go for new borrowings or the financial constraints that are characteristic of borrowing.

The Benefits and Costs to the Sellers and Buyers

The sale-and-leaseback arrangements are advantageous and disadvantageous to both the buyer-seller. Here’s a quick look at some of the pros and cons:

Pros Cons
Improves seller’s liquidity and working capital The seller loses ownership of the property
Provides the buyer with a long-term, stable tenant Buyer assumes risks of property market declines
Allows sellers to avoid restrictive loan covenants Market conditions may prevent optimal sale price
The seller can focus on their business, not real estate Buyers may face long-term lease obligations

Advantages for Sellers:

  1. Unlocking Capital: Businesses free up capital tied in real estate and use it for expansion or operational needs.
  2. Avoiding Debt: No need for loans, making sale-leaseback a more attractive financing option.
  3. Cash Flow Stability: Sellers continue running their business without the financial burden of owning the property.

Advantages for Buyers:

  1. Steady Income: Buyers benefit from stable rental income while adding a valuable asset to their portfolio.
  2. Long-Term Security: These properties often come with long-term leases, ensuring occupancy and reduced vacancy risks.

However, these transactions do have potential drawbacks.

Disadvantages for Sellers:

  1. Loss of Ownership: Once sold, the property no longer belongs to the original owner.
  2. Lease Obligations: While leasing the property back, sellers must adhere to potentially restrictive lease terms.

Disadvantages for Buyers:

  1. Market Risk: If the market value of the property declines, the buyer might face depreciation issues.
  2. Long-Term Commitments: Buyers can be locked into long-term leases, limiting flexibility in future decisions.

How to Structure a Sale-Leaseback Deal

Each sale-leaseback deal is unique. However, most agreements involve:

  • Long-term leases, often ranging from 10 to 20 years.
  • Rent escalations of 1–2% annually to account for inflation.
  • Potential sublease opportunities if the seller needs added flexibility.

Both parties should negotiate terms carefully, as the lease terms can significantly impact the financial outcome for both the seller and the buyer.

Is a Sale-Leaseback Transaction Right for You?

For businesses that need immediate capital or want to improve liquidity without taking on new debt, sale-leaseback transactions are an ideal solution. They allow sellers to unlock cash while keeping control over the property and their operations. Buyers, in turn, gain an income-generating asset with minimal risk of tenant turnover.

However, it’s essential for both parties to evaluate the market, property value, and potential risks before moving forward.

Work with CHRE for a Successful Sale-Leaseback Transaction

Cindy Hopkins Commercial Real Estate (CHRE) can help you work through the complexities of sale-leaseback transactions. We specialize in matching sellers with the right buyers and ensuring both parties understand the terms and long-term implications of the deal.

We are here to guide you every step of the way, from structuring the sale to negotiating the lease terms. Let us help you raise capital or secure a stable investment, and therefore achieve your real estate goals.