Unlocking Capital for Business Growth: A CEO’s Guide to Sale Leasebacks

Industries across the board are evolving rapidly. From the rise of artificial intelligence to advancements in digital transformation and sustainability initiatives, companies face both immense opportunities and significant challenges. For many businesses, seizing these opportunities requires substantial capital investments, but accessing liquidity can be a hurdle, especially in a cautious financial environment.

One less obvious financing tool that senior executives should consider is a sale leaseback. This innovative financing solution offers a strategic way to unlock capital tied up in real estate, providing companies with the flexibility to invest in growth, improve operations, or strengthen their balance sheets.

Understanding Sale Leasebacks  

A sale leaseback involves selling owned properties and simultaneously leasing them back from the buyer under a long-term lease. This allows businesses to retain operational control of their facilities while converting a typically illiquid asset—real estate—into cash. The freed-up capital can then be used for various strategic purposes, including working capital, investments in property, plant, and equipment, or debt reduction.

While many executives may be familiar with sale leasebacks, fewer understand the nuances of these transactions and the advantages they offer across industries.

Case Studies: Successful Sale Leasebacks Across Industries  

Sale leasebacks have been utilized by companies in a variety of industries to unlock capital and fund growth initiatives:

• Manufacturing: In 2024, Douglas Dynamics Inc. (NYSE: PLOW), a manufacturer and upfitter of commercial work truck attachments and equipment, raised $64.2 million through a sale leaseback of seven facilities.  Douglas Dynamics noted: “These long-term lease agreements also reinforce our commitment to the communities in which we have operated for decades . . . [By leveraging our real estate assets], we can optimize our balance sheet and better position ourselves for future investments in the business.”
• Retail/Service: Also in 2024, Red Robin, a full-service restaurant chain, completed a third sale leaseback with buyer Essential Properties Realty Trust, raising $24 million for a portfolio of ten stores which the company used to pay down its debt.
• Technology: In September 2023, Western Digital, manufacturer of computer drives, sold and leased back its office, research and development and manufacturing campus in Milpitas, CA from buyer Blue Owl to reduce the amount of capital invested in their facilities. The company raised $192.5 million in the transaction.

These examples highlight the versatility of sale leasebacks as a financing tool across industries.

Why Sale Leasebacks Make Sense for Businesses Across Sectors  

Regardless of the industry, companies often own valuable real estate that sits on their balance sheet.  Sale leasebacks provide a way to unlock this trapped capital, which can then be redeployed into higher-return business initiatives.

For instance, manufacturers can invest in new technologies or supply chain improvements. Retailers can enhance their digital presence or optimize their product offerings. Even service-based companies can benefit by using the proceeds to fund acquisitions or expand into new markets.

In today’s economic climate, where traditional debt financing may still be comparatively more expensive and real estate trades at a relatively high multiple, sale leasebacks present a compelling alternative. They enable companies to strengthen their liquidity position without increasing their debt load, which can be a critical advantage in managing credit ratings and shareholder expectations.

Key Considerations for C-Suite Executives  

While sale leasebacks are appealing, they are not without complexities. Companies considering this financing strategy should be mindful of several factors:

1. Credit Strength and Business Viability
   Sale leaseback investors prioritize the stability of the tenant. Companies with strong balance sheets, stable earnings and cashflows as well as growth potential are more likely to successfully consummate a sale leaseback transaction. A healthy underlying business is quite helpful in attracting real estate investors who seek long-term, reliable income streams.
2. Lease Structure and Term
   Sale leasebacks typically involve long-term leases ranging from 15 to 20 years, with options for multiple renewals. These agreements provide companies with effective control over their facilities for decades, ensuring business continuity while unlocking capital.
3. Valuation Arbitrage
   Sale leasebacks offer an opportunity to capitalize on the difference between real estate valuation multiples and business valuation multiples. In many industries, real estate assets can be valued at higher multiples than the associated business entities, as sale leaseback investors have a different risk/reward objective than operating businesses in that they are focused on a stable yield from a low-growth asset.  Therefore, in a sale leaseback transaction, companies can capture the higher value real estate commands and redirect it into a faster-growing entity, i.e., the business itself.
4. Location Dynamics
   While location is always a factor in real estate transactions, sale leasebacks are more influenced by tenant creditworthiness than property fundamentals. This means that even properties in secondary or tertiary markets can secure competitive pricing if the underlying business is strong.
5. Addressing Management Concerns
   One common concern among executives is the perceived loss of control over owned properties. However, sale leasebacks are structured to ensure operational continuity. The long-term lease agreements, along with renewal options, provide businesses with stability and control over their critical facilities.

Additionally, sale leasebacks can be customized to meet a company’s specific needs. Lease terms, rent structures, and change-of-control provisions can be tailored to align with long-term business strategies and potential future exit scenarios.

Opportunity for CEOs and CFOs  

For CEOs and CFOs seeking to optimize their capital structure, improve liquidity, and fund growth initiatives, sale leasebacks present a strategic option. They offer a way to access capital without diluting equity or increasing debt.

With the demand for liquidity solutions increasing, sale leasebacks are becoming more popular across industries. In the third quarter of 2024, the sale leaseback market saw an uptick in activity, with 167 discrete sale leaseback transactions, up ~6% vs. Q2’24 and the third quarter of 2023.

In today’s fast-paced and evolving business landscape, companies must remain agile and financially resilient. Sale leasebacks provide a unique opportunity to unlock hidden value in real estate assets, allowing businesses to invest in their future and stay competitive.

Whether your company is focused on manufacturing, retail, technology, or services, sale leasebacks can be a powerful lever to pull for strategic growth and operational efficiency. For senior executives, understanding this financing tool can be a game-changer in navigating today’s economic challenges and opportunities.

Written by David Rosenberg.
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