What Is a Sale-Leaseback? How It Works for a Business Owner

A sale-leaseback is a real estate transaction where a business sells a building it owns and occupies, then immediately signs a long term lease to keep operating there as a tenant. The owner turns the equity locked in the building into cash, the business never moves, and the buyer gets a property with a tenant already in place.

That is the short answer to what is a sale leaseback. It is also called a sale and leaseback, and it can involve equipment too, but this guide covers commercial real estate. If you are an owner occupier, your building may be the largest asset you own and the hardest one to use. Below is how a sale leaseback transaction works, what it costs you, how it compares with a refinance and how to choose the buyer.

How Does a Sale-Leaseback Work?

It works in 5 steps, and the sale and the lease agreement are negotiated together because each one affects the other.

1. You decide what the cash is for: expansion, equipment, paying off debt or working capital.
2. You work out what the building is worth and what a fair market rent would be for the space you will keep.
3. You agree on the sale price and the lease terms with a buyer, usually in a letter of intent.
4. The buyer does its due diligence: title, survey, environmental reports, building condition and your financials.
5. At closing, ownership transfers, you pay off any mortgage, the proceeds come to you and the lease starts the same day.

Your staff, your phone number and your address stay the same. What changes is that you now pay rent and the buyer is your landlord.

Your attorney and tax advisor should be involved from step 2. Every sale leaseback transaction has tax and accounting consequences that depend on your situation, and we do not give tax advice.

Why Do Business Owners Do a Sale-Leaseback?

Business owners do it to put the capital in their building to work without moving. Many would rather have that money in the operation, improving cash flow, than sitting in the walls.

Common reasons include:

• Growth – Funding an expansion, a new location, more staff or new equipment.
• Debt – Paying off a mortgage or other loans to improve cash flow and clean up the balance sheet.
• Partner or family transitions – Creating cash for a retiring partner without selling the company.
• Diversification – Reducing how much of your net worth sits in one piece of real estate.

A loan only gets you part of what the building is worth. A sale can bring in its full market value, less any mortgage payoff and closing costs, which is why sale leasebacks are often weighed against bank financing.

Sale-Leaseback vs Refinance vs Selling Outright

The right comparison is not this deal against doing nothing. It is this deal against the other ways to get capital out of a building.

Option	Cash you get	You stay in the building?	You keep future appreciation?	What you take on
Sale-leaseback	Full market value, less payoff and costs	Yes, as a tenant	No, unless you retain a stake	Rent for the lease term
Cash-out refinance	A portion of the value	Yes, as owner	Yes	A larger loan and its payments
Sell and move	Full market value, less payoff and costs	No	No	A move and new space to find
Keep the building	None	Yes, as owner	Yes	Nothing new, but the capital stays locked up

If you expect the building to rise sharply in value, or you may move in a few years, this may be the wrong tool.

Pros and Cons of a Sale-Leaseback

The biggest advantage is cash without operational disruption. The biggest drawback is that you give up ownership and take on rent for many years.

Advantages

• Capital comes out of the building and goes into the business.
• Operations do not move, so you keep operational control of the space and customers and staff see no change.
• There is no new loan to repay, only lease payments.
• You set the lease terms before you sell, so you know what you will pay.

Disadvantages

• You lose future appreciation unless you retain a stake.
• Lease payments over many years can add up to more than the cost of owning.
• The lease is a firm commitment, even if the business slows down.
• You give up some control: changes to the building may need the landlord’s approval.
• The sale can create tax costs that reduce what you keep, so model it with your tax advisor.

What Should You Negotiate in the Lease?

The lease matters more than the sale price, because you will live with it long after the money is spent. Most buyers want a commitment of 10 years or more, and many sale leasebacks use a net lease, often a triple net lease, so you keep paying taxes, insurance and maintenance.

Before you sign, get these in writing:

• Rent and increases – Higher rent can support a higher sale price, but you pay it every month. Set lease payments at a level your business can carry in a bad year.
• Term and renewal options – Enough years to protect your location, with options to extend.
• How much space you keep – All of it, or part, with the right to sublease the rest.
• Maintenance – Who pays for the roof, structure and parking lot.
• Alterations – What you can change without asking.
• Expansion and assignment – What happens if you grow, or if you sell the business.
• Purchase rights – Whether you have a right of first refusal if the new owner sells.

How to Choose a Sale-Leaseback Buyer

Choose a buyer the way you would choose a long term partner. You are not only choosing a price. You are choosing the landlord you will deal with for the length of the lease.

Buyers range from public real estate companies and large funds to private investors, family offices and local owner-operators. Ask each one:

1. Do you hold buildings long term, or do you plan to resell?
2. Have you owned and managed this type of property in this market?
3. Who will I call when something goes wrong?
4. Will you fund expansions or improvements later?
5. Can I keep part of the equity?

That last question is where Inventure Capital works differently from most buyers. We offer sale-leaseback with the option to keep a share of the ownership, so you take capital out and still own part of the asset you just sold. We have also asked sellers to commit to the majority of the space, not a token footprint. A seller who still occupies the building and still owns part of it has the same interest in it that we do.

Is a Sale-Leaseback Right for Your Business?

It fits an owner occupier with a clear use for the capital and a real commitment to the location. It is the wrong call if you have no plan for the money, if you might move, or if rent would strain your cash flow.

It tends to fit when:

• The real estate is essential to how you operate.
• The business has steady revenue, stable cash flow and a reasonable credit history.
• You have a use for the cash that matters more than owning the real estate.
• You want to stay for 10 years or more.

Inventure Capital is based in St. Cloud, Minnesota, and we develop, acquire, build and operate commercial real estate across Minnesota and the Upper Midwest. We are an operator, not just a balance sheet, and we set terms around the building and the business. Our sister company, Inventure Real Estate, handles brokerage and property management, so the team that buys your building is also the team that looks after it.

If you are weighing this for your building, read how we approach a sale-leaseback or schedule a call. If you need more space rather than cash, compare it with a build-to-suit lease.

Frequently Asked Questions

This article is general information only. It is not tax, legal or investment advice, and it is not an offer to buy any property or to sell any security. Every deal is specific to the property and the business.