When does a sale-leaseback beat conventional owner-user financing?

Sale-leaseback decision factors and execution mechanics

Capital open: a sale-leaseback monetizes 100% of property value, vs. 70%-90% LTV with conventional financing. The difference funds business growth (capex, M&A, working capital) without diluting equity.

Lease structure: typical SLB lease is 15-25 years with 1-2% annual escalators, multiple renewal options, and triple-net (NNN) cost structure where the tenant pays taxes, insurance, and maintenance. Pricing is set by the buyer's required cap rate, which depends on tenant credit and property quality.

Tenant credit: investment-grade tenants (IG) command tight cap rates (5%-6.5% for net-lease IG) and access to credit-tenant-lease (CTL) financing. Non-rated middle-market tenants face wider cap rates (6.5%-8.5%) and limited financing optionality.

Tax considerations: sale of appreciated property triggers gain recognition (capital gain plus depreciation recapture). Sponsor counsel should evaluate whether a 1031 exchange is preferable, and confirm any ordinary-income tax-leakage scenarios. Not tax advice, confirm with counsel.

Accounting treatment: under FASB ASC 842, the seller-lessee recognizes a right-of-use asset and lease liability. If sale-leaseback fails to qualify as a sale (e.g., tenant repurchase option present), the transaction is treated as a financing on the balance sheet.

When SLB beats conventional: business needs more cash than 70%-90% LTV provides; property is non-strategic; tenant credit supports tight cap rate. When conventional beats SLB: property is mission-critical (continuity-of-occupancy risk); property has significant appreciation potential; sponsor wants ownership control over capex and renovations.