Sale-Leasebacks for Franchisees: Unlocking the Equity in Your Real Estate
Franchisees who own the land and building where their business operates often have significant value tied up in that property. When they want capital to open new units, buy existing ones, complete a remodel or reduce debt, the real estate is an obvious place to look.
One option is a sale-leaseback. In a franchise sale-leaseback, the franchisee sells the property to an investor and simultaneously signs a long-term lease to keep operating in the same location. This guide explains how sale-leasebacks work for franchisees, when they can make sense, and how they compare with refinancing or simply keeping the property.
This is general information only. Sale-leasebacks have tax, legal and accounting implications that should be reviewed with qualified advisors.
How a Franchise Sale-Leaseback Works
- The franchisee owns the property where the franchise operates
- An investor agrees to buy the property
- At closing, the franchisee receives the sale proceeds
- The franchisee and investor sign a lease, and the franchisee continues operating as a tenant
The franchisee converts real estate equity into cash but takes on rent payments for the lease term.
Why Franchisees Consider Sale-Leasebacks
- Funding growth: Proceeds can support new units, acquisitions or development commitments
- Paying off debt: Proceeds can reduce existing obligations
- Funding remodels: Proceeds can pay for required upgrades
- Focusing capital on operations: Some operators prefer to invest in running franchises rather than owning real estate
- Accessing more of the property’s value: Depending on the transaction, a sale may provide more cash than a loan against the property
The Trade-Offs
- You no longer own the property: Future appreciation belongs to the buyer
- Rent replaces ownership costs: Rent payments continue for the lease term and often include increases
- Lease terms matter a great deal: Responsibilities for taxes, insurance and maintenance are commonly placed on the tenant in these leases
- Control changes: Future changes to the property may require landlord approval
- The decision is difficult to reverse
- Tax consequences: A sale may trigger taxable gain
Aligning the Lease With Your Franchise Agreement
A franchise location depends on both the franchise agreement and the right to occupy the site. When negotiating a sale-leaseback lease, consider:
- Whether the lease term and renewal options extend at least as long as your franchise rights and renewal plans
- Whether the lease allows remodels your franchisor may require
- Whether the lease can be assigned if you sell the franchise
- Whether your franchisor has requirements about leases, such as specific lease provisions
A lease that ends before your franchise term, or blocks a transfer, can reduce the value of your franchise and make future financing harder. Our guide to franchise valuation explains how lease terms affect value.
Sale-Leaseback vs. Refinancing vs. Keeping the Property
Sale-Leaseback
- Cash access: Sale proceeds, less existing mortgage payoff and costs
- Ownership: Transferred to the buyer
- Ongoing cost: Rent for the lease term
- Future value: Belongs to the buyer
Cash-Out Refinance
- Cash access: Loan proceeds based on the lender’s loan amount and underwriting, less payoff and costs
- Ownership: Retained
- Ongoing cost: Loan payments
- Future value: Retained by the owner
Keeping the Property As-Is
- Cash access: None now
- Ownership: Retained
- Ongoing cost: Existing debt, if any, plus ownership costs
- Future value: Retained
Refinancing through conventional real estate loans or SBA programs may provide capital while keeping ownership. Learn more about conventional real estate loans and the SBA 504 program. Our guide to refinancing franchise debt covers refinancing more broadly.
Using Sale-Leaseback Proceeds for Growth
If you are considering a sale-leaseback to fund expansion, compare it with financing the expansion directly. Some operators use proceeds as equity for new units, then finance the rest. Others finance growth without selling property.
Our guides to multi-unit franchise financing and area development agreement financing discuss how growth is commonly funded.
How a Sale-Leaseback Affects Your Cash Flow and Future Borrowing
Rent from a sale-leaseback becomes a fixed operating cost. Lenders evaluating future loans will consider that rent when analyzing cash flow. Before agreeing to a sale-leaseback, model how the new rent affects each location’s cash flow, and how that could affect your ability to finance future projects.
Use our Conventional Loan Calculator to estimate payments on a refinance, then compare them with the proposed rent and the cash each option would provide.
Questions to Ask Before a Sale-Leaseback
- How much cash will I receive after paying off existing debt and costs?
- What will rent be, and how will it change over time?
- Who pays taxes, insurance and maintenance?
- Does the lease term support my franchise plans?
- Can the lease be assigned if I sell the franchise?
- What are the tax consequences of selling?
- What would a refinance provide instead?
Frequently Asked Questions
What is a franchise sale-leaseback?
It is a transaction in which a franchisee sells the property where the franchise operates and leases it back to continue operating.
Is a sale-leaseback better than refinancing?
It depends on your goals. A sale-leaseback can provide cash without adding debt, but you give up ownership and take on rent. Refinancing keeps ownership but adds loan payments.
Will my franchisor need to approve a sale-leaseback?
Some franchise agreements have requirements about leases or site control. Review your agreement and consult your franchisor.
Does a sale-leaseback affect my ability to get future loans?
Rent becomes part of your fixed costs, which lenders consider when evaluating cash flow for future financing.
Final Thoughts
A franchise sale-leaseback can turn real estate equity into growth capital, but it is a long-term trade-off between ownership and flexibility. Compare it carefully with refinancing, align the lease with your franchise agreement, and model the effect on cash flow before you decide.
US Professional Funding provides franchise real estate financing and refinancing options for franchise owners. We can help you compare a sale-leaseback with financing alternatives.
