By Tenant Advisory Group · Updated
Short answer
A sale-leaseback runs in a set order. You define what the company needs, estimate value and supportable rent, decide the lease terms you want, take the opportunity to investors, sign a letter of intent, let the buyer complete due diligence while the purchase agreement and lease are negotiated, then close. The lease starts at closing and rent begins under its terms.
The whole sequence at a glance
Owners who have bought or sold property before will recognize parts of this process. What is different is that two negotiations run side by side, one over the sale and one over the lease, and each affects the other. Here is the order in which things normally happen.
- Set objectives: how much capital the company needs, what it is for, and how long you expect to stay at the site.
- Estimate value and rent: what the building is worth, what rent the market and the business can support, and how the two connect.
- Design the lease you want: term, rent increases, renewal rights, repair responsibilities and flexibility.
- Prepare the property and the financial story investors will review.
- Approach investors and collect offers.
- Negotiate and sign a letter of intent with the chosen buyer.
- Negotiate the purchase agreement and the lease while the buyer conducts due diligence.
- Close: the buyer funds, your mortgage is paid off, the deed transfers and the lease begins.
- Operate as a tenant and pay rent under the lease.
The rest of this guide explains what happens inside each stage and what you should have decided before moving to the next.
Steps 1 to 3: decisions you make before any investor is involved
The first stage is internal. Agree among the owners on why you are doing this. A company raising money for a new production line will want a different deal from one providing liquidity to a retiring partner. Compare the sale-leaseback with borrowing and with simply keeping the building, and settle how long the business realistically needs this location.
Next comes valuation, and it has two halves. One is the value of the real estate. The other is the rent, because an investor prices the building largely from the income the lease will produce. Rent that is higher produces a higher price, but you are the one who pays it for the entire term. A sound estimate looks at what comparable space rents for and at what your income statement can carry.
Then write down the lease you want before anyone hands you theirs. Investors arrive with a preferred form. Sellers who know their own priorities on term, increases, renewals, repairs, alterations and assignment negotiate from a position, not from a reaction.
Talk to your CPA and your lenders during this stage. Tax on the sale, the accounting for the lease and any consent your lenders must give all affect what the deal is worth to you.
Steps 4 and 5: preparing and going to investors
Investors will examine two things: the building and the company that will pay the rent. Before outreach, gather what they will ask for so that surprises surface on your schedule.
- Do we have the deed, the current title policy and the most recent survey?
- Are there existing environmental reports, and do we know of any past issues on the site?
- What is the age and condition of the roof, parking areas and mechanical systems?
- Are several years of financial statements ready to share under a confidentiality agreement?
- What is the mortgage payoff amount and is there a prepayment charge?
- Is the building held by the operating company or by a separate entity?
Outreach is normally confidential. The opportunity is presented to a selected group of investors who buy this type of property, and each signs a confidentiality agreement before receiving financial information. Employees, customers and competitors do not need to know the building is being sold. Offers come back stating a price, a rent, a lease term, increases and the main conditions.
Step 6: the letter of intent
The letter of intent, or LOI, is a short document that records the business deal: price, initial rent, lease term, rent increases, renewal options, who is responsible for which repairs, the length of the buyer's inspection period, the deposit and the target closing date. It is mostly non-binding, but it sets the frame for everything that follows.
Terms left out of the LOI are harder to win later, because the buyer has priced its offer on the assumptions it made. If the right to assign the lease to a future buyer of your company matters, or you need the landlord to be responsible for the roof, it belongs in the LOI. Choosing the buyer is also not only about the top number. Certainty of closing, the source of the buyer's funds and how it behaves as a landlord all carry weight.
Step 7: due diligence and documents in parallel
Once the LOI is signed, two tracks begin at once. On the first, the buyer investigates. It orders a title commitment and survey, an environmental assessment and a property condition report, and it reviews the company's financial statements. Problems found here can lead to a request for a price reduction, a repair, a holdback of funds at closing or, in the worst case, a withdrawal.
On the second track, the attorneys negotiate the purchase and sale agreement and the full lease. This is where the summary terms from the LOI turn into binding language, and where details such as casualty, insurance requirements, default and cure periods, and surrender conditions are settled. The lease is typically finalized as an exhibit to the purchase agreement so that both are fixed before the inspection period ends.
Your job in this stage is to respond quickly and keep the lease from drifting. We track both tracks for our clients so that a concession on one document is weighed against its cost in the other.
Steps 8 and 9: closing day and the first rent payment
Closing is handled by the title company. The buyer wires the purchase price. From that money the title company pays off your mortgage and any prepayment charge, pays transfer taxes, title charges and the other closing costs allocated to you, and prorates items such as property taxes. The remainder is wired to you. The deed is recorded in the buyer's name, and you and the buyer sign the lease, which takes effect immediately.
From then on you are a tenant. Rent is due on the schedule in the lease, usually monthly, and under a net lease you keep paying property taxes, insurance and maintenance much as you did as owner. Calendar the dates that now govern your occupancy: rent increases, the deadline to exercise each renewal option, required insurance certificates and any financial reporting the lease obliges you to deliver to the landlord.
Set aside part of the proceeds for the tax your CPA expects on the sale before committing the rest to its intended use.
Frequently asked questions
Is the lease signed before or after the sale closes?
At the same time. The lease is negotiated during the contract period, attached to the purchase agreement and signed at closing, so there is no gap in your right to occupy.
Is a letter of intent binding?
Most of it is not, apart from provisions such as confidentiality. It still matters, because both sides treat its terms as the baseline for the binding documents.
Will our employees and customers know the building is being sold?
They do not have to. Outreach is normally limited to selected investors under confidentiality agreements, and operations continue unchanged at closing.
When do we receive the money?
At closing, after the title company pays off any mortgage and deducts closing costs. Any tax on the sale is paid later, on the schedule your CPA advises.
Sources
This guide is general information, not legal, tax or accounting advice. Have your attorney and CPA review any sale-leaseback before you commit to it.