Sale-Leasebacks Are Becoming a Capital Allocation Strategy

By Randy Blankstein, President, The Boulder Group

For years, sale-leasebacks were often viewed primarily as real estate transactions. A company owned a property, sold it to an investor and leased it back for continued occupancy.

That description is technically accurate, but it misses the more important point.

A sale-leaseback is increasingly a corporate capital allocation decision.

Companies are looking more closely at the capital tied up in owned real estate and asking a different question: Is owning this property really the highest and best use of our capital?

In many cases, the answer is no.

Rather than keeping millions of dollars invested in buildings and land, companies can monetize those assets, retain long-term operational control through a lease and redeploy the proceeds into acquisitions, new locations, equipment, technology, debt reduction or other investments that potentially generate higher returns.

The growth in the market reflects that shift. Sale-leaseback transaction volume increased approximately 19% from 2024 to 2025, according to CoStar data cited in recent market research.

More importantly, some of the largest investment managers in the world are positioning themselves around the strategy.

In May, TPG reported that it had closed on $1 billion for its fifth net lease fund, which focuses on opportunities including sale-leasebacks.

Then, on August 18, Goldman Sachs announced an agreement to acquire LCN Capital Partners for as much as $410 million. LCN manages approximately $3 billion and specializes in sale-leaseback and triple-net-lease investments. Goldman said the acquisition would expand its ability to offer real estate investments to institutional, insurance and wealth-management clients.

These developments tell us something important.

Sale-leasebacks are moving further into the mainstream of corporate finance and institutional investment.

The Real Question Is Return on Capital

Consider a company that owns a $20 million distribution facility.

That $20 million of real estate may be critical to the company’s operation, but the company does not necessarily need to own it to operate from it.

If the company can sell the property, enter into a long-term lease and redeploy the proceeds into its operating business at an attractive return, ownership of the real estate may actually be limiting the company’s growth.

That creates a simple capital-allocation comparison:

What return is the company earning by keeping capital invested in its real estate versus what return could that same capital generate elsewhere?

A retailer capable of earning attractive returns by opening additional locations may prefer growth capital.

A manufacturer may need new equipment or additional production capacity.

A private-equity-backed company may want capital for acquisitions.

Another company may choose to reduce expensive debt and strengthen its balance sheet.

The underlying real estate hasn’t become less valuable. The company has simply determined that the capital embedded in that real estate may be more valuable somewhere else.

That is a fundamentally different way of thinking about sale-leasebacks.

A Sale-Leaseback Isn’t Free Capital

There is an important counterpoint.

Selling the real estate creates liquidity, but it also creates a long-term rent obligation.

The company gives up ownership and some of the future appreciation of the property. Depending upon how the lease is structured, it may also reduce future flexibility.

This means the highest sale price is not necessarily the best sale-leaseback transaction.

That distinction is frequently overlooked.

Investors typically place greater value on longer lease terms, strong tenant credit and predictable rent growth. Those characteristics can produce attractive pricing for the seller.

But maximizing the real estate value by agreeing to aggressive rent or overly restrictive lease provisions can create an operating burden years later.

The objective should therefore be:

Maximize the value of the real estate without compromising the operating company.

That requires evaluating the sale and the lease simultaneously.

Lease Structure Can Be as Important as Sale Price

In traditional investment sales, owners naturally focus heavily on price and cap rate.

In a sale-leaseback, companies should pay just as much attention to the lease they are creating.

Several variables can have significant long-term consequences:

• Initial rent
• Annual rent increases
• Lease term
• Renewal options
• Assignment and subletting rights
• Expansion or contraction flexibility
• Maintenance and capital expenditure responsibilities
• Purchase options or rights of first refusal
• Corporate versus subsidiary guarantees

A 20-year lease may generate a higher property valuation than a 10-year lease, for example, but management needs to consider whether it wants to make a 20-year commitment.

Similarly, higher initial rent can support a higher sale price. But that additional proceeds comes with a corresponding long-term occupancy cost.

Companies should not engineer the lease solely to maximize today’s sale price.

The better approach is to structure the lease around the long-term requirements of the business and then allow the investment market to price that income stream.

The Company’s Credit Becomes Part of the Real Estate

Sale-leasebacks are also unusual because the value of the property and the financial strength of the tenant become closely connected.

A net lease investor isn’t simply buying a building.

The investor is acquiring:

Real estate + lease economics + tenant credit.

Two otherwise similar industrial buildings can trade at significantly different valuations because one is leased to a financially strong company under a long-term lease and the other is occupied by a weaker business.

This creates an interesting opportunity for healthy operating companies.

A company may have spent decades building its business and improving its financial position without realizing that the strength of its credit can help unlock additional value from its real estate.

That is why the sale-leaseback process should include both real estate underwriting and corporate-credit analysis.

Higher Capital Costs Have Made the Comparison More Relevant

The financing environment has also contributed to greater interest in sale-leasebacks.

When debt was exceptionally inexpensive, companies had fewer reasons to look beyond conventional borrowing.

Today’s environment requires a more careful comparison of financing alternatives.

A sale-leaseback does not replace debt in every situation, nor should it. But companies increasingly should evaluate real estate monetization alongside traditional bank financing, private credit and other sources of capital.

The correct question isn’t:

“Is a sale-leaseback cheaper than debt?”

It is:

“Which capital structure creates the best risk-adjusted outcome for the company?”

The answer will depend on the company’s leverage, borrowing costs, growth prospects, tax circumstances, expected returns on reinvested capital and long-term need for the property.

Investors Are Recognizing the Opportunity

The other side of the transaction is equally important.

Sale-leasebacks can create precisely the type of assets many net lease investors want: mission-critical real estate, long initial lease terms and contractual rent increases.

Unlike an existing net lease property that may have changed hands several times, a sale-leaseback also allows an investor to participate when the lease is originally structured.

That creates opportunities for institutional funds, private investors, family offices and other long-term capital seeking predictable income.

The growing amount of institutional capital focused on the strategy is therefore not surprising.

But it is also likely to make the market increasingly sophisticated.

Investors will differentiate more aggressively between strong and weak credits, sustainable and unsustainable rents, mission-critical and nonessential locations, and real estate with strong residual value versus properties whose investment thesis depends almost entirely on the lease.

The Next Phase of the Sale-Leaseback Market

I expect sale-leasebacks to become an increasingly important part of the net lease market.

But the most important shift isn’t simply increased transaction volume.

It is who is thinking about them and why.

Corporate executives, private equity sponsors, business owners and institutional investors are increasingly looking at owned real estate as another component of the capital structure.

For an operating company, that means the decision to own or lease real estate should be evaluated alongside decisions involving debt, equity, acquisitions and capital expenditures.

For investors, it means a potentially growing pipeline of long-duration net lease opportunities created directly with corporate users.

And for advisors, it means a sale-leaseback should no longer begin with one question:

“What is the real estate worth?”

It should begin with a much broader one:

“What is the best use of the capital trapped inside the real estate?”

That is why the modern sale-leaseback is increasingly not just a real estate transaction.

It is a capital allocation strategy.

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