Introduction
A consumer company that owns its stores or restaurants is really two businesses: an operating company that sells food or goods, and a real estate company that owns the buildings. A sale-leaseback separates them. The company sells the properties to an investor, usually a net lease real estate investment trust or fund, and signs long leases to keep operating in them. It receives a large cash payment today and commits to paying rent for decades.
Red Lobster shows how the trade can go wrong. When Darden sold the seafood chain to Golden Gate Capital in 2014, the $2.1 billion acquisition was funded partly through a $1.5 billion sale-leaseback, and the chain began paying rent on properties it had once owned, according to CNBC's report on its bankruptcy filing. By May 2024, with sales down, Red Lobster had filed for Chapter 11, was asking the court to reject 108 of its leases and had closed 93 underperforming locations. This article explains how sale-leasebacks work, why buyouts use them, what happens to the rent burden afterward and how bankers judge whether one creates value.
How a Sale-Leaseback Works
- Sale-Leaseback
A transaction in which a company sells real estate it uses in its business, such as stores, restaurants or distribution centers, and simultaneously leases it back from the buyer under a long-term lease. The seller receives cash and keeps operating the properties; the buyer receives a stream of rent backed by the seller's credit and the properties.
The terms are typically designed for the investor's needs. Leases are usually absolute net, so the tenant pays property taxes, insurance and maintenance, run for 15 to 20 years or more with renewal options, and include annual rent escalators. Many portfolios are leased under a single master lease, which prevents the tenant from walking away from weaker sites while keeping stronger ones.
A typical transaction
Bob Evans Farms is a typical example. In 2016 it agreed to sell 145 restaurant properties to National Retail Properties and Mesirow for about $200 million in total, leasing them back under absolute net master leases with an initial term of 20 years and five renewal options of five years each, and said it would use the proceeds to pay down debt and repurchase shares, according to FSR Magazine. How the real estate side of these deals is structured and marketed to investors is covered in the Real Estate guide's sale-leaseback advisory for corporate real estate.
Why Consumer Deals Use Them
The appeal is a valuation gap. Real estate investors value a long lease to a solid tenant at a capitalization rate, which often implies a higher multiple of rent than the market pays for the operating business's EBITDA. Selling the property at the real estate multiple and keeping the operations at the operating multiple can appear to create value.
Sponsors use the proceeds to reduce the equity needed for a buyout or to repay acquisition debt quickly. Public companies use them to fund buybacks, repay debt or reinvest in the business. In each case, the company is choosing rent over ownership: a lower upfront capital base in exchange for a long, fixed claim on its cash flow.
Accounting and credit treatment
The accounting follows the substance. Under US lease accounting, a sale-leaseback that qualifies as a sale removes the property from the balance sheet and records a lease liability for the new rent; one that does not qualify, for example because the seller keeps an option to buy the property back, is treated as a financing, with the cash recorded as borrowing. The mechanics are covered in the Accounting guide's sale-leaseback accounting. Either way, lenders and rating agencies treat the rent as a debt-like obligation, so the transaction changes the form of the company's leverage more than its amount.
The Rent Burden After the Deal
The cost of a sale-leaseback shows up in every year that follows. Rent becomes a fixed charge that ranks alongside debt service, and lenders and rating agencies add it to the company's obligations when measuring leverage, as explained in lease-adjusted leverage and fixed-charge coverage. A company that sells its real estate to repay debt may therefore find that its lease-adjusted leverage barely changes.
- Rent Coverage
The ratio of a store's or company's earnings before rent (EBITDAR) to the rent it pays. Low rent coverage means a small fall in sales can leave the business unable to pay its landlords, while high coverage leaves room for a downturn.
Rent escalators compound the burden. Rent that rises 1.5% to 2% a year adds up over a 20-year lease, and if sales stall, the share of revenue going to rent climbs year after year. Rent that looked comfortable at signing, when it was set against the company's best recent results, can become unaffordable within a few years.
When the Structure Backfires
Sale-leasebacks tend to fail in a recognizable pattern:
- Declining traffic that pushes rent coverage toward one times
- Above-market rent, set to maximize proceeds rather than to fit the business
- Rising escalators that outpace sales growth
- Master leases that bundle strong and weak sites so neither can be dropped
- Underinvestment, as cash goes to rent and debt instead of remodels and menus
When the rent becomes unsustainable, the usual outcome is a restructuring in which weak leases are rejected or renegotiated, as Red Lobster sought to do with 108 leases. By then the real estate, which once gave the company flexibility and collateral, belongs to someone else.
Ownership as a strategic choice
Some retailers keep their real estate deliberately. Home Depot, for example, owned 90% of its stores at the end of fiscal 2025, including stores on ground leases, according to its Form 10-K. Ownership gives a chain flexibility to remodel, relocate or redevelop sites, a source of collateral in hard times and protection from rent increases. It also ties up capital that could fund growth. The choice depends on the company's returns on new units, its access to capital and how confident it is in each location over the long term.
How Bankers Assess a Sale-Leaseback
The question is never only whether the price is attractive. Bankers compare the proceeds with the cost of the rent over the lease life, and ask whether the use of proceeds will earn more than the rent costs.
| Factor | Favors a sale-leaseback | Favors keeping the real estate |
|---|---|---|
| Use of proceeds | High-return growth or expensive debt | A dividend or buyback with no return |
| Rent coverage after the deal | Comfortable even in a downturn | Thin, with little room for a sales decline |
| Site quality | Strong, long-term locations | Uncertain trade areas likely to change |
| Lease structure | Individual leases or flexible terms | Long master lease with steep escalators |
| Real estate pricing | Buyers paying well for the sites | Weak demand for the property type |
Structuring a better lease
Bankers on the seller's side can reduce the risk through the lease terms themselves. Setting rent below the maximum the market would pay, capping escalators, splitting a portfolio into several smaller master leases and keeping substitution rights to swap weak sites for stronger ones all leave the tenant more room in a downturn, at the cost of lower proceeds today.
The analysis also feeds into buyout structuring, where real estate proceeds can be tempting as a source of equity, a trade-off discussed in consumer LBOs: which brands and retailers fit. For a coverage banker, a sale-leaseback is a financing decision dressed as a real estate sale. Done well, it turns idle capital into growth; done to maximize proceeds, it trades a company's resilience for cash it may later wish it had kept.
