Is Your Business a Good Candidate for a Sale-Leaseback?

Investors that buy sale-leaseback properties describe their own criteria in much the same way: the seller must own the real estate, the facility should be important to the business, the company should have a solid financial record or market position, and it should intend to stay for the long term. Those four points are the investor's test. A fifth, the use of proceeds, is yours alone, because the investor is indifferent to what you do with the money.

Work through the four sections below with your partners and your CFO or controller. Answer the checklist questions honestly, then use the scoring guide at the end.

It sounds obvious that you must own the building, but ownership is often less tidy than owners remember. The property may be held by a separate limited liability company owned by some of the partners and not others, by a family trust, or by a retired founder. Each of those parties has to agree to sell, and each has its own view of price and its own tax position.

• ✓Who exactly holds title: the operating company, a separate real estate entity, a trust or individuals?
• ✓Do all of the owners of that entity support a sale?
• ✓Is there an existing lease between the real estate entity and the operating company, and what does it say?
• ✓Is there a mortgage, what is the payoff, and is there a prepayment charge?
• ✓Do other loan agreements restrict a sale of the property or require lender consent?
• ✓Are there known title, survey, zoning or environmental issues?

A separate ownership entity is not a problem in itself. It does mean the people receiving the sale proceeds may not be the same people who will bear the rent, which needs to be discussed openly before a buyer is involved.

Sale-leaseback leases are long. One large net lease investor states that most involve terms of ten years or more, and another industry guide describes terms that commonly run longer than that with renewal options. Investors pay for the length and certainty of the rent, so a company that can only commit for a few years will either receive a lower price or find few buyers.

• ✓Will this building still fit our operations for the full initial term a buyer is likely to want?
• ✓Is there room to grow here, on the site or within the building?
• ✓Is the location right for our workforce, customers and suppliers for the long run?
• ✓Are any changes coming, such as automation, consolidation or a new product, that would change our space needs?
• ✓If the company were sold, would a buyer want to stay at this site?

If you expect to move within a few years, a sale of the building with a short leaseback while you relocate, or a plain sale, may serve you better than a long lease you will need to exit.

The buyer is taking a long-term bet on your company's ability to pay rent. It will ask for several years of financial statements and will want to understand the business behind them. You do not need a public credit rating. You do need a record, or a market position, that makes continued rent payment believable.

• ✓Do we have several years of reviewed or audited financial statements we are prepared to share under confidentiality?
• ✓Has the business been profitable, and if results have been uneven, can we explain why?
• ✓How large would the proposed rent be compared with our earnings?
• ✓How much debt will the company carry after the transaction?
• ✓Is revenue concentrated in a few customers or contracts?
• ✓Would a parent company or owner be asked to guarantee the lease, and are we willing?

Companies with weaker or more volatile results can still complete a sale-leaseback. The investor compensates for the added risk through price, a guaranty, a security deposit or a combination. Knowing in advance how your statements will read lets you present them with context instead of leaving the buyer to draw its own conclusions.

This is the part only you can judge, and it decides whether the transaction creates value or merely moves it around.

• ✓What specifically will the net proceeds fund?
• ✓What return or cost saving do we expect from that use?
• ✓How does that compare with the rent we will pay, including increases, over the term?
• ✓Could a loan, a refinance or a line of credit meet the same need at a lower long-run cost?
• ✓Has our CPA estimated the tax on the sale so that we know the after-tax proceeds?
• ✓Has our CPA explained how the lease will be reported under ASC 842 and how it affects our loan covenants?

The last question matters because the leaseback does not sit outside the financial statements. Under ASC 842 a seller-lessee records a right-of-use asset and a lease liability for the leaseback when the transaction qualifies as a sale. Some loan agreements define debt in ways that pick up lease liabilities and others do not, so read the definitions with your lender.

1. Strong on all four parts: you are a clear candidate. The work ahead is running a competitive process and negotiating the lease well.
2. Strong on ownership, site and use of proceeds but uneven financials: still a candidate. Expect a narrower group of buyers and requests for credit support, and prepare the financial story carefully.
3. Strong financials but an uncertain future at the site: consider a shorter leaseback, selling and relocating, or waiting until the plan for the location is settled.
4. No defined use for the proceeds: pause. Selling a building to hold cash rarely justifies a long rent obligation.
5. Ownership is disputed or a lender will not consent: resolve that first. No buyer can close until it is.

This assessment mirrors the first step in how TAG works with an owner: understanding the financial goals, operational requirements and future plans before any valuation or outreach. If the answers point away from a sale-leaseback, it is better to learn that before the building is on the market.

Being a good candidate is about fit, not size. A single-location family business with a sound plan can be a better candidate than a much larger company with no clear use for the cash.