Finance term
Sale-Leaseback
Also known as: sale leaseback transaction, sale and leaseback, SLB
Definition
A sale-leaseback is a transaction where a business sells an owned asset (typically real estate or equipment) to an investor and simultaneously signs a long-term lease to continue using the asset as a tenant. It converts illiquid equity into cash while preserving operational use of the asset.
Detailed explanation
Sale-leasebacks have been used in commercial real estate and equipment financing for decades. The structure is simple: the business owner sells a property (or equipment fleet) at fair market value and signs a lease back from the new owner — typically a 10–20 year net lease for real estate, or 3–7 years for equipment. The business receives immediate cash, the investor receives a long-term lease income stream secured by real property.
Primary benefits: (1) Liquidity without borrowing — unlike a mortgage or equipment loan, a sale-leaseback raises equity-level capital without adding debt to the balance sheet. For businesses with low leverage capacity or that want to preserve borrowing availability, this is valuable. (2) Balance sheet optimization — the real estate (or equipment) asset leaves the balance sheet; the lease liability is added under ASC 842 for finance leases, but operating leases appear differently. (3) Tax benefit — lease payments are generally fully deductible as operating expenses. Under property ownership, only mortgage interest + depreciation are deductible (depreciation at 39-year schedule for commercial real estate). Lease payments on a triple-net lease may effectively accelerate the tax deduction relative to long-lived depreciation.
Under ASC 842 (effective for public companies 2019, private companies 2021), sale-leaseback accounting changed significantly. The transaction is recognized as a true sale only if it meets control transfer criteria under ASC 606. If the leaseback is classified as a finance lease, the seller-lessee may not derecognize the asset — the transaction is treated as a financing rather than a sale.
Common sale-leaseback users: retailers (REITs routinely buy retail and restaurant real estate in SLBs), healthcare providers, manufacturers, and companies using their balance sheet to fund growth or acquisitions.
◈ Worked example
- Restaurant group: Multi-location restaurant chain owns 8 of its 15 locations. Sells 6 properties to a REIT at $18M total (FMV). Signs 20-year triple-net leases at $1.35M/year total (5.5% cap rate for buyer). Chain receives $18M cash — used to fund 5 new location buildouts. Balance sheet: $18M real estate asset removed; new operating lease liability added; $18M cash received.
- Equipment SLB: Trucking company owns 50 heavy trucks (FMV $5M). Sells to an equipment leasing company at $4.8M. Signs 4-year operating lease at $105K/month ($1.26M/year). Receives $4.8M cash upfront. Monthly lease payments are fully deductible. Company retains operational use of all 50 trucks while deploying $4.8M into working capital.
- Tax comparison: Own a $2M commercial building (39-year straight-line depreciation = $51K/year deduction). Lease same building under a 15-year NNN at $150K/year — full $150K is deductible. Annual deduction advantage: $99K. At 37% bracket: $36K/year additional tax savings. Over 15 years: $540K additional tax savings from leaseback vs. ownership (before considering mortgage interest deduction).
Common questions
The most-asked questions about Sale-Leaseback — answered straightforwardly.
Is a sale-leaseback better than a cash-out refinance? +
It depends on your objectives. A cash-out refinance keeps you as the property owner and costs less (debt, not equity capital) but adds debt service. A sale-leaseback removes the property from your balance sheet, eliminates appreciation upside, but raises significantly more cash than a typical mortgage (100% of FMV vs. 65–75% LTV for commercial mortgages). If you believe the property will appreciate significantly or want the long-term ownership benefits, refinance. If you need maximum capital and want to focus on your operating business rather than real estate, sale-leaseback may be better.
Can I do a sale-leaseback on equipment or only real estate? +
Both. Equipment sale-leasebacks are common in trucking, construction, manufacturing, healthcare (imaging equipment, specialty medical devices), and technology (data center equipment). Equipment SLBs have shorter terms (3–7 years), account for technology obsolescence, and typically carry higher implicit interest rates than real estate SLBs. Equipment leasing companies, banks with equipment finance divisions, and specialty finance companies provide equipment SLB financing.
What happens at the end of a sale-leaseback lease? +
The lease terms govern. Options typically include: (1) Renewal at a market or predetermined rent; (2) Purchase option — some SLB agreements include the right to repurchase at a predetermined price or fair market value; (3) Vacate — tenant leaves the property. Negotiate renewal and purchase options carefully before signing — you may want operational certainty beyond the initial lease term, especially for long-established locations.
Further reading
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