Most sale-leaseback transactions involve a triple-net operating lease. A triple-net lease is where the tenant agrees to pay all costs associated with the property use and occupancy, including real estate taxes, insurance and maintenance. The tenant also has full operational control of the property.
The investor provides the seller with a triple-net operating lease for a period of 10 to 25 years plus options so that the seller can continue to occupy the property. Initially, the seller/tenant usually pays the investor a negotiated annual rent equal to 6% to 12% of the contracted sale price. Most often, the rate is credit-driven and the real estate is considered to be additional collateral.
Furthermore, a leasehold obligation resulting from an operating lease qualifies under the criteria set by the Financial Accounting Standards Board (FASB) will not appear on the seller/tenant’s balance sheet as either debt or a long-term lease obligation. Therefore, after paying off mortgage obligations and receiving unlocked cash from the sale of the seller’s depreciated property, the seller doesn’t add a new leasehold debt to their balance sheet. The seller’s improved debt-to-equity ratio can make his/her company much more attractive to banks and other lenders.