What a Sale-Leaseback Is and How the Structure Works
A sale-leaseback is an asset-based transaction in which a business sells a property it owns and occupies, typically an office, industrial, retail, or medical building, to an investor or REIT, then immediately signs a long-term lease to keep operating from that same location. The business converts illiquid real estate equity into cash without relocating, and the buyer becomes a landlord collecting rent instead of a lender collecting loan payments.
The lease is usually structured as a triple net (NNN) lease with an initial term of 10 to 20 years, fixed or scheduled rent escalations of 1.5% to 3% annually, and renewal options. The seller-turned-tenant remains responsible for property taxes, insurance, and maintenance. Because the transaction is a sale, it is not underwritten like a loan against debt service coverage ratio in the traditional sense; instead, pricing is set through a capitalization rate applied to the property's market rent.
This differs structurally from SBA 504 or conventional mortgage financing, where the business keeps title and borrows against the asset. In a sale-leaseback, the business gives up ownership and the associated appreciation, tax depreciation, and terminal equity, in exchange for 100% of the property's value in cash rather than the 70% to 90% loan-to-value typical of real estate debt.
Industry Fit
Sale-leasebacks are most common among:
- Manufacturing and industrial operators with a single-purpose building that would be difficult to finance conventionally at high leverage
- Healthcare practices (dental, veterinary, medical office) with stable, long-term occupancy needs
- Restaurant and retail chains using sale-leasebacks on a portfolio basis to fund unit growth
- Distribution and logistics companies that own warehouse space tied to a specific location
The structure fits businesses that need a large lump sum of capital, want to preserve or grow without adding conventional mortgage debt on the balance sheet, or are approaching a recapitalization, acquisition, or ownership transition where clean separation of real estate from operating business value is useful. It fits less well for businesses expecting to relocate or downsize within the lease term, since exiting is costly, and for businesses that view the real estate itself as a long-term appreciating asset they want to retain.
Advance Rates, Pricing, and the APR-Equivalent Cost of Occupancy
Sale-leaseback pricing is expressed as a capitalization rate, not an interest rate, but it converts to a comparable APR-equivalent cost of occupancy that can be measured against real estate debt.
Typical cap rates on owner-occupied sale-leasebacks as of 2026 run roughly 6.5% to 9.5%, depending on property type, tenant credit profile, lease length, and market. Single-tenant industrial and medical properties with strong tenant financials tend to price toward the lower end; retail, hospitality-adjacent, or special-purpose buildings with weaker tenant credit price higher.
Because the "seller" advance rate is effectively 100% of appraised value (the business receives full sale proceeds), the ongoing cost is the annual rent as a percentage of that value, which functions like an APR-equivalent occupancy cost of 6.5% to 9.5% before escalations, rising to an effective 8% to 12% equivalent over a 15- to 20-year term once contractual rent bumps are layered in.
By comparison, SBA 504 debt on owner-occupied property typically prices at an all-in effective rate closer to 6% to 8% APR-equivalent on 80% to 90% loan-to-value, with the business retaining ownership. Conventional bank CRE mortgages run in a similar range but usually cap loan-to-value around 65% to 75%. The sale-leaseback's higher effective cost reflects that the business is monetizing 100% of the asset's value rather than borrowing against a portion of it, and the investor is pricing in long-term lease risk rather than amortizing loan risk.
Accounting and Cash-Flow Implications
Under ASC 842, most sale-leasebacks that qualify as a true sale are recorded as an operating lease, meaning the property and associated mortgage debt come off the balance sheet, replaced by a right-of-use asset and lease liability. This can improve reported leverage ratios and debt-to-equity metrics, which matters for businesses seeking future credit lines, acquisition financing, or a sale of the operating company separate from the real estate.
Cash-flow effects are immediate and substantial: the business receives a lump sum, often used to pay down higher-cost debt, fund expansion, buy out a partner, or support an acquisition, and in exchange takes on a new fixed rent obligation that behaves like debt service but is classified differently. Rent is fully deductible as an operating expense, whereas mortgage financing splits payments between interest expense and non-deductible principal, so the tax treatment differs even though the cash outlay may be comparable.
The business also loses depreciation deductions on the building, since it no longer owns the asset, which is a meaningful offset against the rent deduction benefit and should be modeled by an accountant rather than assumed to be a net tax win.
Risks and Where It Is the Wrong Fit
The core risk is loss of long-term control and upside. Once sold, the business has no claim on future appreciation, and if the local commercial real estate market rises, that value accrues to the new owner. Exiting the lease early, whether due to closure, relocation, or downsizing, typically triggers penalties or requires finding a subtenant, and landlords generally do not permit early termination without significant cost.
Rent escalations mean the effective occupancy cost rises every year regardless of the business's revenue trajectory, which can strain margins for tenants with thin operating leverage. A sale-leaseback also changes the risk profile of the business itself: instead of owning a hard asset that can be sold or refinanced in a downturn, the business has a fixed lease obligation that persists through revenue declines, similar to any other long-term liability.
Finally, the transaction is largely irreversible. Buying the property back later, if even permitted under the lease terms, means repurchasing at then-current market value, which is often materially higher than the original sale price.
Market Conditions Through 2026
Sale-leaseback activity in the owner-occupied segment has remained active through 2026 as elevated interest rates keep conventional mortgage refinancing and 504 debt costs relatively high, pushing some owners to consider monetizing real estate equity outright rather than borrowing against it. Cap rates have stayed range-bound in the mid-to-high single digits for most property types, with industrial and medical assets continuing to command the tightest (lowest) cap rates due to investor demand for long-duration, credit-tenant income streams.