How a sale-leaseback works
A sale-leaseback has two parts that close simultaneously. First, the business (or its owner) sells the real estate it occupies to an investor at a negotiated price. Second, the business signs a long-term lease with the new owner, typically triple net, and continues operating in the building without interruption. Customers, employees, and vendors see no change. The former owner now has cash equal to the full value of the property, and a rent obligation it designed itself.
- Valuation: a broker opinion of value for the real estate as a leased investment, which depends heavily on the lease terms you intend to sign.
- Lease design: term (commonly 10 to 20 years), renewal options, base rent, escalations, and the division of responsibilities for taxes, insurance, maintenance, roof, and structure.
- Marketing to net lease investors: private buyers, 1031 exchangers, family offices, and institutional net lease funds, depending on size and tenant credit.
- Due diligence: the buyer reviews the business's financials as the future tenant, plus title, survey, environmental, and property condition.
- Simultaneous closing: the deed transfers, the lease commences, and the seller receives proceeds.
Why business owners use sale-leasebacks
The core reason is capital efficiency. A lender will typically advance 60 to 70 percent of a commercial building's value and require personal guarantees and covenants. A sale-leaseback delivers 100 percent of the value with no debt on the balance sheet. Owners use the proceeds to open new locations, buy equipment, pay down expensive debt, fund a partner buyout, or diversify personal wealth away from a single building. In our Santa Fe case study, a regional retailer raised $4.2 million from its flagship location, secured a 15-year lease with renewal options extending to 35 years, and opened three new stores within 18 months.
Sale-leasebacks also simplify succession and business sales. Separating the real estate from the operating company lets an owner sell the business to a successor or acquirer who does not want to buy a building, while the real estate is sold to an investor who does.
Structuring the lease
Because the seller writes the lease it will live under, lease design is where the value is created or lost. Longer terms and investment-grade-like financials produce higher prices and lower cap rates; shorter terms and thin financials do the opposite. Rent should be set at a sustainable level for the business, not inflated to drive price, because an unaffordable rent will cost you the building later and will be discounted by sophisticated buyers.
- Term: 10 to 20 years initial, with multiple 5-year renewal options at defined or capped rents.
- Rent and escalations: fixed annual increases of 1.5 to 3 percent or periodic bumps; avoid uncapped CPI.
- Expense structure: NNN is standard; negotiate who handles roof, structure, and HVAC replacement.
- Tenant improvement rights: the right to alter the space as the business evolves.
- Assignment and subletting: flexibility if the business is sold or restructured.
- Right of first offer or refusal to repurchase the property if the investor later sells.
Tax and accounting considerations
The sale is a taxable event. Gain on appreciated property is subject to federal capital gains tax and depreciation recapture, and New Mexico taxes the gain as ordinary income with a limited state deduction since 2025. If the seller intends to reinvest in other investment real estate, a 1031 exchange may defer the tax; the property sold was held for business use, which qualifies, but the leaseback structure and the identity of the seller and buyer need review by your CPA and qualified intermediary. Going forward, rent is a deductible operating expense, and the lease will generally appear on the balance sheet under current lease accounting standards. Run the after-tax math with your CPA before deciding between a sale-leaseback, a refinance, and a conventional sale.
When a sale-leaseback makes sense, and when it does not
A sale-leaseback makes sense when the business earns a higher return on capital in operations than the real estate yields, when debt is expensive or unavailable, when the owner wants to lock in long-term occupancy at a known cost, or when succession or a business sale is approaching. It makes less sense when the real estate is likely to appreciate faster than the business grows, when the business's financials are too weak to attract a buyer at a fair cap rate, or when the owner expects to need the flexibility to relocate or redevelop the site.
This is general information, not tax or legal advice. Confirm details with your CPA, attorney, and qualified intermediary before acting.
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