Sale-Leasebacks for Private-Equity-Backed Companies

A private equity sponsor buys a company to grow its operating earnings and sell it. Real estate the company happens to own is usually not part of that plan. It ties up capital in an asset with a different return profile from the business, and future buyers of the company may not pay full value for it.

A sale-leaseback converts that real estate to cash. In a 2026 article, the law firm Torys describes sponsors using these transactions to reduce the equity required to close an acquisition and to keep capital in the operating business instead of in fixed property. The company continues to operate from the same sites as a tenant.

You will hear the terms opco and propco. Opco is the operating company: the business, its people, contracts and equipment. Propco is the property company: an entity that holds the real estate and leases it to opco.

The split can be used in several ways.

• Sale-leaseback at acquisition. The real estate is sold to an investor at the same time the sponsor buys the company, and the proceeds fund part of the purchase price.
• Sale-leaseback during the hold. A company the sponsor already owns sells its real estate to fund add-on acquisitions, capital projects, debt reduction or a distribution.
• Internal propco. The real estate is moved into a separate affiliate that leases it to opco, sometimes as a first step toward a later sale or separate financing.
• Seller keeps the property. In some acquisitions the selling owners retain the real estate in their own entity and lease it to the company the sponsor has bought.

In every version, opco ends up with a lease. The terms of that lease are what determine whether the structure helps or hurts the business.

Rent is an operating expense. A company that owned its building and now leases it reports lower earnings before interest, taxes, depreciation and amortization, because rent has replaced a cost of ownership that sat below that line. Since companies are commonly valued as a multiple of those earnings, a lower figure means a lower sale price for the business.

The sponsor's calculation is whether the cash received for the real estate exceeds the value given up in the operating company. The Torys article illustrates this with a worked example in which the reduction in the company's sale price at exit is smaller than the proceeds received for the property. The advisory firm Stout makes the same point from the other side, noting that the added rent expense lessens earnings and therefore the price of the operating entity.

The outcome depends on the relationship between the price the real estate investor pays for each dollar of rent and the multiple a future buyer pays for each dollar of earnings. That relationship is specific to each company and each property, and it should be modeled, not assumed.

Setting rent above what the market would bear raises the real estate price today and lowers the company's earnings for the life of the lease. A future buyer of the business will see it immediately.

Sponsors typically plan to own a company for a limited number of years. Sale-leaseback leases typically run much longer. The lease is therefore inherited by the next owner, by management and by the employees.

A balanced view recognizes both outcomes. Where proceeds are invested in the business or used to reduce expensive debt, and the rent is one the company can carry, the company can emerge stronger. Where proceeds are distributed and the company is left with high fixed rent, it enters the next downturn with less room to adjust. A lender can renegotiate. A lease obligation is harder to change, and failing to pay rent puts the company's premises at risk.

• Fixed cost. Rent and its scheduled increases continue regardless of revenue.
• Footprint rigidity. Closing or consolidating sites is difficult when each is under a long lease, especially if several properties are tied together in one master lease.
• Change of control. If the lease requires landlord consent to a sale of the company, the landlord gains leverage over the sponsor's exit.
• Credit support. Parent guaranties or deposits given at signing may need to be replaced when ownership changes.

Under US GAAP, a sale-leaseback does not remove the occupancy obligation from the balance sheet. When the transfer qualifies as a sale, the seller removes the building from its books and records a right-of-use asset and a lease liability for the leaseback, as the Journal of Accountancy's guide to ASC 842 sets out. If the transfer does not qualify as a sale, for example because the seller holds an option to repurchase the real estate, the same guide explains that the transaction is accounted for as a financing: the building stays on the books and the cash received is recorded as a liability.

Two practical points follow. First, structure terms such as repurchase options with the company's accountants involved, since they can change the accounting result. Second, read the credit agreement before marketing the property. Loan documents commonly restrict asset sales and sale-leaseback transactions, may require proceeds to be applied to the debt, and define leverage and coverage ratios in ways that may or may not count lease obligations. Lender consent is often needed, and it is easier to obtain early.

Management teams usually stay with the business longer than the sponsor does. They have good reason to care about the lease.

• ✓Is the rent at a level the business could afford in a weak year, and how does it compare with market rent for the building?
• ✓Are rent increases fixed and predictable over the whole term?
• ✓Can the lease be assigned on a sale of the company without discretionary landlord consent, and on what conditions?
• ✓If several properties are included, can individual sites be substituted, subleased or released?
• ✓Are there financial covenants or reporting requirements in the lease, and can the company meet them?
• ✓Who pays for roofs, structure and major systems over a long term?
• ✓Do renewal options give the company control of critical sites beyond the initial term?
• ✓Has the lender consented, and how do the proceeds flow under the credit agreement?

TAG represents the occupier in these transactions: the company that sells and then lives with the lease. We evaluate each property, negotiate price and lease terms together and keep the long-term operating needs of the business in view while the sponsor's timeline drives the deal.