A sale-leaseback is a transaction in which a property owner sells the real estate to an investor and immediately leases it back under a long-term lease, keeping full occupancy and operations. The seller converts owned real estate into cash and becomes a tenant. The buyer receives a lease-backed income stream, usually on a net lease.
How Does a Sale-Leaseback Work?
A sale-leaseback works by splitting the sale and the lease into one linked deal. The owner sells the building for its market value, then signs a lease, commonly a long-term net lease, that fixes rent for the buyer. Rent is typically set as a capitalization rate on the sale price. Single-tenant net lease cap rates averaged 6.87% in the third quarter of 2025, per Commercial Property Executive data from The Boulder Group.
The seller's goal is to unlock capital tied up in real estate without moving out of the property it operates from. Because the deal is priced on the credit of the tenant and the lease terms, a strong tenant and a long lease produce a lower cap rate and therefore a higher sale price for the seller.
Party | Gives | Gets |
Seller-lessee | Ownership of the real estate | Cash equal to full market value; continued occupancy as tenant |
Buyer-lessor | Purchase price in cash | Title plus a long-term lease income stream |
Accounting treatment changed under ASC 842. A sale-leaseback no longer produces off-balance-sheet financing; the lessee records a right-of-use asset and a lease liability. Both parties must first confirm that control of the asset actually transferred, or the deal is treated as a financing rather than a sale.
Why a Sale-Leaseback Matters
A sale-leaseback matters because it can raise more capital than a mortgage on the same property. A mortgage advances only a portion of value, commonly 75% to 80% at typical loan-to-value ratios, while a sale-leaseback monetizes 100% of market value. The trade is control: the seller gives up ownership and future appreciation in exchange for cash and a long lease.
Cost can also favor the structure. Commercial Property Executive has reported that a sale-leaseback may price 200 to 300 basis points below a company's cost of mortgage debt in some cases. The quotable point for an operator: a sale-leaseback converts a building into cash at full value while the company keeps using it, but the rent it signs becomes a fixed obligation that a lender will read like debt.
Example
A company owns a distribution facility worth $20,000,000 free and clear. It executes a sale-leaseback at a 7.0% cap rate and signs a 15-year net lease. Annual rent equals the sale price times the cap rate. The table compares the capital raised against a 75% loan-to-value mortgage on the same building.
Path | Calculation | Capital raised | Ongoing obligation |
Sale-leaseback | Sell at $20,000,000; rent = $20,000,000 x 7.0% | $20,000,000 | $1,400,000 annual rent |
75% LTV mortgage | $20,000,000 x 75% | $15,000,000 | Debt service on $15,000,000 loan |
The sale-leaseback raises $5,000,000 more than the mortgage, the full equity trapped in the building, but the company no longer owns the asset and commits to $1,400,000 in year-one rent before escalations. Whether that trade is worthwhile depends on what the company earns redeploying the extra $5,000,000 against the rent it now pays.
Variations and Edge Cases
A sale-leaseback is not a single form: lease type, term, escalation, and the sale-versus-financing test all change the outcome. The table below covers variants an operator should confirm before modeling one.
Variant | Treatment |
Net vs gross lease | Most are net leases, so the seller-tenant keeps paying taxes, insurance, and maintenance |
Failed sale test | If control does not transfer under ASC 842, the deal is accounted for as financing, not a sale |
Lease term and credit | Longer terms and stronger tenant credit compress the cap rate and lift the sale price |
Rent escalations | Fixed steps or CPI resets raise the tenant's cost over the term and affect buyer yield |
Bargain repurchase option | A below-market buyback right can cause the transaction to fail sale treatment |
The common mistake is treating the headline sale price as free cash. The leaseback rent is a long-term fixed obligation, and lenders and rating agencies read capitalized lease rent much as they read debt.
Sale-Leaseback vs Mortgage
A sale-leaseback is often confused with a mortgage, because both raise cash against a property, but they differ in what the owner keeps. A sale-leaseback sells the property and leases it back, raising up to 100% of market value while giving up ownership and appreciation. A mortgage keeps ownership and advances only a portion of value, commonly 75% to 80%, as secured debt to be repaid.
The distinction is ownership and upside. A sale-leaseback tenant no longer benefits if the property appreciates and pays rent instead of debt service. A mortgage borrower retains title and any future value gain but carries a loan, an amortization schedule, and refinancing risk that the leaseback seller has shed.
Frequently Asked Questions
How is sale-leaseback rent determined?Sale-leaseback rent is usually set by applying a capitalization rate to the sale price. Single-tenant net lease cap rates averaged 6.87% in the third quarter of 2025, per Commercial Property Executive. At a 7.0% cap rate, a building sold for $20,000,000 carries $1,400,000 in year-one rent, before any escalations in the lease.
Is a sale-leaseback better than a mortgage?A sale-leaseback can raise more capital than a mortgage, monetizing 100% of a property's value versus the roughly 75% to 80% a mortgage advances. The trade-off is ownership: the seller gives up title and future appreciation and takes on long-term rent. A mortgage keeps ownership but advances less and must be repaid.
Does a sale-leaseback stay off the balance sheet?No. Under ASC 842, a sale-leaseback no longer provides off-balance-sheet financing. The seller-lessee records a right-of-use asset and a lease liability, and both parties must confirm that control of the asset transferred before treating the deal as a true sale rather than a financing.
Related Terms
Cap Rate
Loan-to-Value Ratio
Net Operating Income
Rent Escalation Clause
Debt Service Coverage Ratio