Sale-leaseback

A sale-leaseback shows up on both sides of a business sale. A seller who owns the building the business operates from can sell the real estate separately from the operating company, sometimes to help fund retirement or diversify away from having most of their wealth tied up in one property. A buyer can use the same technique after closing — selling real estate that came with the deal to a third party and leasing it back — to reduce how much acquisition debt is needed up front.

What changes once the lease is in place

• The former owner becomes a tenant, subject to the same lease risks as any other tenant — rent escalation, renewal terms, and the landlord’s obligations
• The buyer of the real estate becomes a landlord to the operating business, which is a different relationship than owning and operating both together
• The operating business generally still needs to negotiate assignment or estoppel terms with the new landlord going forward, the same as any commercial tenant would

Where it fits in deal structuring

A sale-leaseback is one of several ways to right-size how much of a purchase price is financed through debt on the operating business versus carried separately through real estate. Splitting the two can make the operating-business loan easier to underwrite, since the lender is no longer being asked to size a loan against a blended value that includes a building.

What commonly goes wrong

A lease signed under time pressure to close a deal can end up shorter, or on less favourable terms, than either party would negotiate outside a transaction — and once signed, the operating business has effectively traded ownership certainty for lease risk, including the risk that the landlord does not renew on acceptable terms down the road.