When would you do a sale and leaseback?
Updated: Oct 2
A sale and leaseback makes sense in many situations but tends to be triggered by one of the following four scenarios:
a business has capital tied up in property that would work harder somewhere else,
it needs to raise money and would rather not take on debt or give away equity to do it,
an exit from the business is planned,
M&A where the business being acquired has real estate.
These situations are all quite distinct as are their rationales. The first scenario is the more common one through to a more sophisticated use of sale and leaseback in number four.
A business has capital tied up in property that would work harder somewhere else
Simply put, you should understand the relative cost and value of your assets. If the market values your real estate at 7% and you can get a 10%/15% etc… return on your capital from your operations then there is a value that your business can extract. As long as a sale and leaseback does not interfere with your operations, understanding what it can release to the business could be a key lever.
In essence, you could be:
Funding growth, be it expansion, new sites, capital projects, or acquisitions and where the capital tied up in an existing building would generate a better return deployed into the business.
Restructuring the balance sheet: repaying debt, reducing leverage, or replacing a facility that's approaching maturity.
Structuring an Ownership change: funding a management buyout, a shareholder exit, or a succession event where the property value needs to be realised without selling the business
Portfolio rebalancing: larger businesses actively managing the mix of owned and leased sites across an estate, rather than raising capital for a specific purpose.
You need to raise money and would rather not take on debt or give away equity to do it
As discussed in ‘how does a sale and leaseback compare to secured lending and equity’, there are certain scenarios that will better suit different types of capital. The timing for this will clearly be very much dependent on your business but if the answer to this question is yes, then understanding what a sale and leaseback can release to your business is a simple step.
An exit from the business is planned
As we have explored in other articles including ‘Sale and leaseback as a tool for value creation’, there is an arbitrage between business multiples and real estate yields with real estate investors paying higher prices for these assets. Therefore, if you are contemplating a sale, it is likely that greater proceeds can be achieved with separate sales. The key to success is engaging early and ensuring that the terms that are incorporated into the leaseback are not detrimental to the business sale process.
M&A where the business being acquired has real estate
If you are in growth mode, we see a growing use of sale and leasebacks being used to fund acquisitions and reduce the amount of equity being required. This is typically done in conjunction with the vendor and can run in parallel or post-completion of the deal.
What are the tests that indicate a good fit?
Ownership: the business needs to own the freehold outright (or hold an option to acquire it). Whilst it sounds obvious, part-owned or complex title arrangements are a common blocker.
Commitment: the business needs to be willing to sign a long lease — typically 15+ years. Investors are buying certainty of income (particularly for bespoke real estate) and a short commitment prices badly or does not attract interest at all.
Covenant: the business needs a credit profile an investor is comfortable underwriting. Worth correcting a common misconception here — investment-grade credit isn't required. A solid trading record and demonstrable cashflow is often enough, though it affects pricing.
The property itself: buildings that are useful to more than one occupier attract more interest than highly specialist ones. Location and quality matter, but versatility matters more than people expect. The quality of real estate reduces in importance as the lease term and covenant quality increase
When It Doesn't Fit
The building may not be needed for the long term — if there's a real chance of relocating, consolidating, or outgrowing the site within a decade, a long lease is the wrong commitment.
What this means
The best starting question isn't "should we do a sale and leaseback" but "how long do we need this building, and what else could this capital be doing?" Those two answers decide most of it.
If the tests are passed, the next step is finding out what the property would actually attract — that figure is usually higher than the book value a business has to hand, and it changes the conversation. If you want to familiarise yourself with the different bases of value, look at ‘a comparison of different types of property value’.
The final word
As in many things, understanding what the options are available to you (both in terms of what the process is and what proceeds could be raised) will help you determine when the best time to execute a given strategy will be. No one knows your business better.
