A sale and leaseback (often shortened to SLB) is one of the more elegant ideas in commercial property, and one of the more misunderstood. A business that owns the premises it trades from sells the freehold to an investor and, on the same day, signs a long lease back over the same building. The occupier keeps operating without moving a box, and the investor acquires a tenanted asset with income from day one. On paper it is tidy. In practice, the structure hands the seller a powerful set of levers, and the buyer's job is to work out whether those levers have been pulled too hard.
What the investor is really buying in an SLB is not just a building. It is a lease the vendor wrote, a rent the vendor set, and a covenant that belongs to the very party who had every incentive to dress the deal up before going to market. That does not make sale and leasebacks bad investments. Many of the most sought-after net-lease assets in Australia, from supermarkets to logistics sheds to childcare centres, began life as a sale and leaseback. It simply means the analysis runs in a particular direction, and the central question is always the same: is the rent real?
This guide explains how sale and leasebacks work, why owner-occupiers pursue them, why they can create genuinely attractive investments, and the specific points an independent buyer must test before committing. It is general information and not financial, legal or tax advice; figures move with the cycle and should be benchmarked against current published series.
In a sale and leaseback the vendor is also the tenant, the rent on the contract is a figure they chose, and the yield you see is only as good as the lease you can defend. Test the rent against the market before you fall in love with the income.
What a sale and leaseback actually is
The mechanics are straightforward. An operating business, say a manufacturer, a logistics group, a medical practice or a retailer, owns the property it occupies. It sells that property to an investor and simultaneously enters into a lease as the tenant, typically on a long initial term with options to renew. Two contracts settle together: the contract of sale and the new lease. From settlement, the former owner pays rent to the new owner, and the new owner holds a tenanted commercial asset.
The lease is usually structured to be attractive to a buyer, because the vendor is selling the income stream as much as the bricks. That commonly means a long WALE, fixed or CPI-linked rent reviews, and net or close-to-net outgoings recovery, sometimes a full triple net (NNN) structure where the tenant carries almost all property costs. The result presents to the market as a clean, passive, long-leased investment. The catch is that every one of those terms was negotiated by the seller with itself.
1 Why owner-occupiers do it
Understanding the vendor's motivation is the first step in pricing the risk, because the reason a business sells and leases back tells you a great deal about the quality of the deal.
- Unlock trapped capital. Property tied up on the balance sheet earns the business nothing operationally. Selling the freehold releases capital that can fund expansion, pay down debt, acquire a competitor, or be returned to shareholders, often at a higher return on capital than the building itself produces.
- Balance-sheet and focus reasons. Many operators would rather deploy capital into their core trade than have it parked in real estate. A sale and leaseback lets them keep using the premises while converting an illiquid asset into cash, and it can suit private-equity owners preparing a business for sale.
- Certainty of tenure. Because the vendor writes the lease, they secure a long term and renewal options on terms that protect their operation, which matters for purpose-built or fitted-out sites that would be costly to replicate.
- Tax and structuring. Depending on circumstances, there can be capital gains, GST and depreciation consequences for both sides, which is why the seller's tax position often shapes the deal. These are matters for a specialist adviser.
The benign version of this is a healthy, profitable business recycling capital. The version to watch for is a stretched business raising cash because it has run out of other options, the distressed sale and leaseback, where a high rent is being used to prop up a high sale price for a tenant who may struggle to pay it.
2 Why sale and leasebacks make attractive investments
For all the cautions, there are good structural reasons buyers actively seek SLB stock.
Income from day one
There is no leasing void and no incentive bill to fill the building, because the occupier is already in place and committed for the long term. For a passive investor that certainty is worth a great deal, and it is part of why long-leased net assets often trade at the tighter end of the commercial yield spectrum.
A motivated, known counterparty
Unlike buying a tenanted building blind, in an SLB the tenant is the seller, so their operating history at that exact site is knowable. The business has often traded there for years, which gives a real read on whether the location works for that use, something you rarely get with a standard acquisition.
A lease tailored to be investable
Because the vendor wants a clean sale, SLB leases tend to be long, with structured rent reviews and broad outgoings recovery. A well-constructed SLB on a strong covenant can be one of the more defensive holdings available, suitable for income-focused buyers and, where the rules are satisfied, for an SMSF.
3 The central tension: is the rent real?
This is the point that separates a good sale and leaseback from a trap. In an ordinary purchase, the passing rent was set by an arm's-length negotiation between an unrelated landlord and tenant. In a sale and leaseback, the rent was set by the seller, who has an obvious interest in making it as high as the market will tolerate, because a higher rent at a given yield produces a higher sale price.
Consider the arithmetic. A property let at $300,000 per annum sold on a 6 per cent yield is worth $5 million. Lift the rent to $360,000 and, on the same yield, the price becomes $6 million. The vendor has every reason to push the rent up, knowing they will be the one paying it back. The danger is over-renting: a passing rent set materially above what the premises would fetch from a new tenant on the open market.
| Scenario | Passing rent (set by vendor) | True market rent | What the buyer faces |
|---|---|---|---|
| Fairly priced SLB | At or near market | Similar to passing | Income is sustainable; value holds on review or re-letting |
| Over-rented SLB | Above market | Below passing | Reversion risk: rent may fall at market review or on a new lease, eroding value |
Over-renting matters because the inflated rent will not last forever. When the lease reaches a market rent review, or when the tenant eventually vacates and the space must be re-let, the rent reverts toward genuine market levels. A buyer who paid a full price on an inflated rent then suffers a double hit: lower income and a lower capital value. The defence is simple to state and essential to do: have the market rent independently assessed and compare it to the passing rent before agreeing a price.
4 Covenant analysis: the tenant is the seller
In a sale and leaseback the security of the income rests entirely on one tenant, the business that just sold you the building. Single-tenant risk is concentrated risk, so the covenant, the financial strength and reliability of that tenant, deserves more scrutiny here than in almost any other commercial purchase.
Robust tenant due diligence should establish who is actually on the lease and how strong they are:
- The exact legal entity. Is the lessee the trading company, a guarantor-backed subsidiary, or a thin special-purpose entity? A lease to a $2 shelf company with no guarantee is worth far less than the same lease to a substantial corporate.
- Financial position. Review trading history, profitability, gearing and the rent-to-turnover or rent-cover ratio. If the new rent consumes an uncomfortable share of the operation's earnings, the income is fragile no matter how long the lease.
- Guarantees and security. Personal or parent-company guarantees, bank guarantees or security deposits, and how many months they cover.
- Strategic fit of the site. A purpose-built facility central to the tenant's operations is stickier than a generic site they could readily leave.
A strong corporate sale and leaseback, where a well-capitalised, profitable business takes a long lease at a fair rent on a site it genuinely needs, is a very different proposition from a distressed one, where a struggling operator inflates both rent and price to extract maximum cash on the way down. The two can look identical on a one-page summary. They are not.
5 Lease structure red flags
Because the vendor drafted the lease, read it adversarially and treat the income assumptions with suspicion. Watch for:
- An above-market starting rent dressed up with strong-looking fixed reviews, which only compound the over-renting over time.
- Fixed annual increases well above likely market rent growth, which widen the gap between passing and market rent each year and magnify reversion risk.
- No market rent review, ever, so an inflated rent is locked in and the buyer never gets an independent reset, only a falling one when the tenant leaves.
- Weak make-good and repair obligations that leave the landlord exposed to capital costs the headline yield never accounted for.
- Outgoings recovery that is narrower than it appears, turning an apparent net lease into something closer to semi-gross. Check exactly which costs are recoverable.
- A short tail behind a long headline. A 15-year WALE built on options the tenant can decline is weaker than a 15-year firm term.
None of these is automatically fatal, but each should be priced. The right response to an over-rented SLB is not necessarily to walk away; it is to value the asset on sustainable market rent rather than the vendor's number, and to negotiate the price accordingly. Thorough commercial property due diligence is what turns a glossy income figure into a defensible one.
6 Due diligence checklist for a sale and leaseback
Beyond the lease and the covenant, the ordinary commercial checks still apply, plus a few specific to the structure:
- Independent market rent assessment from a registered valuer, compared line by line against passing rent.
- Comparable evidence for both rents and yields in the relevant market and asset class, recognising figures shift through the cycle.
- Tenant financials and covenant verification, including the precise lessee entity and all guarantees.
- The contract and the lease read together, since the deal lives in the interaction of the two documents. A solicitor's review of the contract of sale should run alongside the lease review.
- Outgoings, land tax recovery and reconciliation history, to confirm the net income is genuinely net.
- Building condition, environmental and title checks appropriate to the use, because a long lease does not cure a contaminated industrial site or a structural defect.
- GST and tax treatment of the sale (for example, whether it qualifies as the supply of a going concern), confirmed with a specialist.
An independent buyer's advocate adds value here precisely because they have no stake in the sale completing. The selling agent and the vendor share an interest in a high price on a high rent; the buyer's side interest is in paying a fair price on a rent that will still be there in ten years.
Frequently Asked Questions
Are sale and leasebacks a good investment?
They can be excellent, and many of Australia's most prized net-lease assets started as sale and leasebacks. The key is that the rent and lease were set by the seller, so the income must be tested against genuine market levels and the tenant's covenant scrutinised. A fairly priced SLB on a strong tenant is defensive; an over-rented one on a weak tenant is a trap.
What is over-renting in a sale and leaseback?
Over-renting means the passing rent the vendor set is materially higher than what the premises would actually fetch from a new tenant on the open market. It inflates the sale price, but the rent tends to fall back toward market at a rent review or when the tenant eventually vacates, hitting both income and capital value. An independent market rent assessment is the standard defence.
Why do businesses sell and lease back their property?
Most do it to unlock capital tied up in real estate so it can be redeployed into their core operations, used to pay down debt, or returned to owners, while keeping use of the premises on a long lease. Some do it for balance-sheet or pre-sale reasons. A minority do it under financial pressure, which is the version a buyer should identify and price carefully.
How is a sale and leaseback different from buying a normal tenanted property?
In a normal purchase the passing rent was negotiated at arm's length between unrelated parties, whereas in a sale and leaseback the tenant is the seller, who set the rent and wrote the lease. This makes the income inherently less reliable as a benchmark and puts more weight on independent rent assessment and detailed covenant analysis of the single tenant.