Are you wondering if a sale-leaseback is a good idea for your business? There are many benefits to sale-leasebacks. For landlords and commercial real estate investors, sale-leasebacks allow you to easily acquire an easy long-term tenant. Business owners benefit by relieving themselves of the burdens that can come with owning property. In this article, we’ll answer the question “What is a sale-leaseback?” and explain why and how a sale-leaseback transaction can occur.
What is a sale-leaseback in commercial real estate?
In commercial real estate, a sale-leaseback occurs when a property is sold to someone else (called the buyer-lessor) and then leased back to the original owner (the seller-lessee or seller-tenant), allowing a business owner to continue using the property but without owning the property. “A sale-leaseback happens when the owner-occupier of a commercial property sells it to an investor who, in turn, leases the property back to the original owner, typically under a long-term lease (generally 10 to 20 years), said Ben Reinberg, Founder and CEO of Alliance (check out our interview with Ben after you read this). “This can be an ideal option for sellers looking to free up capital that can be reinvested in the business.”
Often, Reinberg explained, sale-leasebacks occur in medical real estate, with seller-tenants being medical providers who wish to “maintain proximity to their existing patient base.” “Other commercial sectors in which sale-leasebacks are a common disposition strategy include conventional office, retail, and industrial,” Reinberg added.
Why do a sale-leaseback?
There are a number of reasons why someone would do a sale-leaseback. There are pros and cons to a sale-leaseback, depending on your situation.
Leaseback pros: increased capital, tax deductions, and more
The main reason people do sale-leasebacks is to free up capital that they can use in their business and therefore improve their balance sheets. “Proceeds can be reinvested in the business to hire new employees, upgrade equipment, or make other enhancements that support long-term growth,” Reinberg said.
Sale-leasebacks also come with tax deductions for the lessee. Reinberg also noted, “Businesses that agree to rent their space back from a new owner often have more negotiating power than a typical tenant and can structure their lease in a way that retains control over the property.”
A sale-leaseback agreement can also be good for the buyer, who is leasing the property back to the original owner. “For the buyer, I think the biggest pro would be you’re getting a stabilized real estate asset with a long-term tenant in place,” said Patrick Moroney, Director of Real Estate at Zoned Properties.
Leaseback cons: potential loss on property appreciation
On the other hand, there can be cons to a sale-leaseback transaction. The main downside for the seller is that the property might appreciate in value, causing them to lose out on that appreciation. “There is a chance the owner-occupier might sell for less than the property will be worth in the future, or enter into a long-term lease only to have market rents decrease below their monthly lease payments,” Reinberg noted.
Sale-leaseback tax implications
In a sale-leaseback situation, rental payments are fully tax deductible, meaning the payments can be subtracted from the renter’s gross income. In conventional mortgage financing, the borrower can only deduct interest and depreciation. However, oftentimes, rental deductions exceed depreciation deductions, making a sale-leaseback a better option in terms of tax deductions.
It’s worth noting that under ASC 842 (the current lease accounting standard), both the seller-lessee and the buyer-lessor need to evaluate whether the transaction qualifies as a sale under ASC 606. If it does, the seller recognizes a gain or loss on the sale portion and accounts for the leaseback as a new lease. If it doesn’t qualify as a sale, the transaction is treated as a financing arrangement instead. This distinction matters because it affects how the deal shows up on your financial statements, so it’s worth discussing with your accountant before structuring the transaction.
How a sale-leaseback works step by step
If you’re considering a sale-leaseback, here’s what the process typically looks like:
Step one: property valuation. The seller hires an appraiser or works with a broker to determine the fair market value of the property. This sets the baseline for negotiations with potential buyers.
Step two: find a buyer-investor. The seller identifies an investor or institution willing to purchase the property. These buyers are often REITs, private equity firms, or net lease investors looking for stabilized, long-term income.
Step three: negotiate the lease terms. Before closing the sale, both parties agree on the leaseback terms, including the lease length, rental rate, renewal options, and who is responsible for maintenance, taxes, and insurance. Most sale-leasebacks use a triple net lease (NNN) structure, where the tenant covers these costs.
Step four: close the sale. The property changes hands just like any other commercial real estate transaction, with title transfer, due diligence, and closing costs.
Step five: begin the leaseback. The seller becomes the tenant immediately after closing and continues operating from the property as before — just without ownership responsibilities.
The entire process can take anywhere from 60 to 180 days depending on the complexity of the deal, the property type, and how quickly the financing is arranged.
What types of properties are common in sale-leasebacks?
Sale-leasebacks are most common with properties where the business has a strong reason to stay in place. These include medical offices and healthcare facilities (where proximity to patients matters), industrial and warehouse properties (where specialized build-outs make relocation expensive), retail locations with established foot traffic, and restaurants or franchise locations tied to specific markets.
Single-tenant properties tend to be the most attractive to buyers in sale-leaseback transactions because they offer a predictable, long-term income stream with a built-in tenant who has a vested interest in maintaining the property.
Key lease terms to negotiate in a sale-leaseback
The lease terms in a sale-leaseback are just as important as the sale price. Here are the terms that matter most for the seller-tenant:
Lease length. Most sale-leaseback leases run 10–20 years. A longer lease gives the tenant more stability but may lock in rental rates that become unfavorable if the market shifts.
Renewal options. Negotiate one or more renewal periods (typically five–10 years each) to ensure you can stay in the property long-term without renegotiating from scratch.
Rent escalations. Most leases include annual rent increases, often tied to CPI (Consumer Price Index) or a fixed percentage (typically 1%–3% per year). Understand how these escalations will affect your costs over the full lease term.
Maintenance responsibilities. Under a triple net lease, the tenant pays for property taxes, insurance, and maintenance on top of rent. Under a gross lease, the landlord covers those costs but charges higher rent. Make sure you know which structure you’re agreeing to.
Right of first refusal. This gives you the option to buy the property back if the investor decides to sell in the future, which can be valuable if the property appreciates significantly.
Example of a commercial sale-leaseback
One example of a commercial sale-leaseback transaction involves a cannabis real estate sale that Moroney worked on in Phoenix, Arizona. The property owners needed to expand their current property and raise money to do so, because growing cannabis can be expensive, Moroney explained. “I was able to bring a landlord partner that they were comfortable with,” Moroney said. “And they ended up selling the building to them. They were able to free up some money to finish their grow, which improved their business and operations.”
Sale-leaseback vs. traditional financing
When a business needs capital, a sale-leaseback isn’t the only option. Here’s how it compares to other common approaches:
A traditional mortgage lets you keep ownership of the property and build equity over time, but ties up capital in the property and adds debt to your balance sheet. A sale-leaseback frees up that capital immediately and converts ownership into an operating expense.
A cash-out refinance lets you pull equity out of a property you already own by taking out a new, larger mortgage. You keep ownership, but you’re adding debt and monthly payments. A sale-leaseback eliminates the property from your balance sheet entirely.
A line of credit provides flexible borrowing power but typically at lower amounts than the full value of a property. A sale-leaseback can unlock the full fair market value of the asset.
The right choice depends on your specific situation: how much capital you need, whether you want to retain ownership long-term, and what your balance sheet looks like. Many businesses find that working with a CRE financing platform helps them evaluate all their options side by side before committing to any one structure.
Leasing over owning can be beneficial to your business
As a whole, the number of sale-leasebacks is currently increasing, mainly due to rising rent and property costs. Whether you’re exploring a sale-leaseback, a refinance, or another financing strategy for your commercial property, comparing your options across multiple lenders is the best way to find terms that work for your business.
Lev helps commercial real estate professionals find and compare financing options faster. Instead of cold-calling lenders one by one, Lev’s AI-powered platform matches your deal with the right capital sources in minutes. Get started with free credits and see what’s available for your next deal.
Sale-leaseback FAQs
What is a sale-leaseback in commercial real estate?
A sale-leaseback is a transaction where a property owner sells their building to an investor and then leases it back, continuing to operate from the same location as a tenant. The seller gets immediate capital from the sale, while the buyer gets a stabilized asset with a long-term tenant already in place.
How long do sale-leaseback leases typically last?
Most sale-leaseback leases run 10–20 years, with renewal options that can extend the total occupancy period to 25–30 years or more. The length depends on the needs of both parties and the type of property involved.
Who pays for maintenance in a sale-leaseback?
It depends on the lease structure. In a triple net lease (the most common structure for sale-leasebacks), the tenant pays property taxes, insurance, and maintenance costs. In a gross lease, the landlord covers those expenses but charges higher base rent.
Is a sale-leaseback a good idea?
It depends on your goals. If you need to free up capital to grow your business and don’t want to take on additional debt, a sale-leaseback can be an excellent strategy. However, you give up ownership and any future appreciation in the property’s value, so it’s important to weigh the trade-offs carefully.
