Sale-Leaseback Glossary: 35 Terms Explained

1. Read the deal terms first. They describe who is involved and the documents you will sign.
2. Read the lease terms next. These are the provisions you will live with after closing.
3. Use the valuation terms when you receive an offer, so you can see how price and rent are connected.
4. Take the accounting and tax terms to your CPA as a list of topics to cover, not as answers.

Terms are defined as they are generally used in US commercial real estate. Individual contracts can define a word differently, and the definition in your own documents is the one that counts.

• Sale-leaseback: a transaction in which an owner sells property it occupies and leases it back from the buyer at the same closing.
• Seller-lessee: the company that sells the building and becomes the tenant. Accountants use this term.
• Buyer-lessor: the investor that buys the building and becomes the landlord.
• Owner-occupier: a business that owns the building it operates from. This is the starting point for a sale-leaseback.
• Letter of intent (LOI): a short, mostly non-binding document setting out price, rent, lease term and other main business points before the contracts are drafted.
• Purchase and sale agreement (PSA): the binding contract for the sale of the property, covering price, inspections, title, conditions and closing.
• Due diligence period: the time the buyer has under the PSA to investigate the property and the tenant, during which it can usually withdraw.
• Earnest money: a deposit the buyer places with the title company to show commitment. The PSA says when it becomes non-refundable.
• Estoppel certificate: a signed statement from a tenant confirming the key facts of its lease, which a future buyer or lender of the building will rely on.
• Closing: the day funds are paid, any mortgage is paid off, the deed transfers and the lease takes effect.

• Net lease: a lease under which the tenant pays building expenses in addition to rent.
• Triple net lease (NNN): a net lease under which the tenant pays property taxes, insurance and maintenance on top of base rent.
• Absolute net lease: the strictest form of triple net lease, in which the tenant is responsible for essentially all costs of the building, leaving the landlord with a hands-off investment.
• Base rent: the fixed rent stated in the lease, before taxes, insurance and maintenance.
• Rent escalation: a scheduled increase in base rent, either a fixed amount or percentage or an adjustment tied to an inflation index.
• Initial term: the first, committed period of the lease, before any renewals.
• Renewal option: a right, held by the tenant, to extend the lease for a further period on terms set out in the lease.
• Assignment: transferring the lease to another party, such as the buyer of your business. Leases state when landlord consent is needed.
• Sublease: renting all or part of the space to another party while you remain the tenant responsible to the landlord.
• Guaranty: a promise by another party, such as a parent company or an owner, to pay if the tenant does not.
• Surrender: returning the building to the landlord at the end of the lease in the condition the lease requires.

Two leases can both be called triple net and still divide roof, structure and replacement costs differently. Read the repair clauses, not the label.

• Net operating income (NOI): the income a property produces after operating expenses and before debt payments, depreciation and income taxes. Under a triple net lease it is close to the base rent.
• Capitalization rate (cap rate): net operating income divided by the price or value of the property. Investors use it to turn rent into a price.
• Market rent: the rent a comparable building would command in an arm's-length lease in the same market today.
• Above-market rent: rent set higher than market rent, sometimes agreed to support a higher sale price. It raises long-run occupancy cost and has accounting consequences.
• Tenant credit: the investor's assessment of how likely the tenant is to pay rent and perform the lease for its full term.
• Residual value: what the building is expected to be worth at the end of the lease, which depends on its condition, location and usefulness to other tenants.
• Net proceeds: what the seller keeps after the mortgage payoff, closing costs and taxes on the sale.

These entries describe concepts. They are not advice, and the outcome for your company depends on facts your CPA will need to review.

• ASC 842: the US accounting standard for leases. Under it, lessees record right-of-use assets and lease liabilities for operating leases longer than 12 months, which includes a leaseback.
• Right-of-use (ROU) asset: the asset a tenant records to represent its right to use leased property during the lease term.
• Lease liability: the obligation a tenant records for its future lease payments, measured on a present-value basis.
• Operating lease and finance lease: the two classifications of a lease for a tenant. If a leaseback is classified as a finance lease, the transaction does not qualify for sale accounting.
• Failed sale: the accounting term for a sale-leaseback that does not qualify as a sale. The seller keeps the asset on its books, continues to depreciate it and records the cash received as a financial liability.
• Adjusted basis: the tax measure of your investment in the property, which your CPA computes. The IRS describes a gain as the amount realized from a sale that exceeds adjusted basis.
• Section 1031 exchange: a provision under which an exchange of real property held for business or investment for other like-kind real property generally does not result in recognized gain. Whether a seller in a sale-leaseback can use it is a specialized question for a tax advisor.

One related idea is worth knowing even though it is not counted above: depreciation recapture. IRS guidance explains that when depreciated business real estate is sold, part of the gain may have to be recognized as ordinary income under these rules. Your CPA calculates it.

Knowing the words lets you ask sharper questions of each advisor. A few to start with:

• ✓Is the lease we are being offered triple net or absolute net, and which repairs are ours?
• ✓What cap rate is implied by the offer, and what rent is it based on?
• ✓Is the proposed rent at, above or below market rent for comparable buildings?
• ✓Do we have a renewal option, and how is the renewal rent set?
• ✓Can we assign the lease to a buyer of our company without the landlord blocking the sale?
• ✓Will the leaseback be an operating lease, and does the transaction qualify as a sale under ASC 842?
• ✓What are the estimated net proceeds after payoff, costs and tax?

We walk clients through these terms as they appear in real offers, because a definition means more when it is attached to a number in your own deal.