Sale and leaseback

Key Takeaways

• A sale and leaseback is one transaction with two parts: the owner conveys title to a buyer and the same party signs a lease and stays in the building as the tenant.
• The seller's motive is capital. Money locked up in the real estate becomes cash the business can spend, while the operation keeps the same address and the same space.
• After closing the former owner holds a tenant's rights and obligations, and the buyer is a landlord holding an income-producing asset with a signed lease already in place.
• The sale leg is a taxable transfer for Washington real estate excise tax, because RCW 82.45.010 defines a sale as a transfer of the ownership of or title to real property for a valuable consideration.

What It Means

A sale and leaseback is a financing move dressed as two ordinary documents. An owner who occupies a building sells it and, at the same closing, signs a lease that puts the same party back in the space as the tenant. Title changes hands. Occupancy does not.

Businesses reach for the structure when the real estate is worth more as cash than as an asset on the books. A manufacturer, a grocery chain, or a medical group can have millions of dollars of Equity sitting in a building it uses but has no reason to own. Selling frees that money for equipment, expansion, or paying down debt, and rent becomes a deductible operating expense in place of a mortgage payment and a depreciation schedule. The buyer, usually an investor rather than a user, gets a property with a known tenant already signed and a rent stream that starts the day the deal closes, with no lease-up period and no vacancy to carry.

What the seller gives up is control. The building is no longer an asset the business can borrow against or sell later, the rent will rise on whatever schedule the lease sets, and when the term ends, renewal is the landlord's decision.

How It Works in Washington

Washington has no sale and leaseback statute. The transaction is governed by the two bodies of law it is built from. The sale leg is a conveyance, and RCW 64.04.010 requires that every conveyance of real estate, or any interest in it, be by deed. The leaseback is a lease, and RCW 59.04.010 abolishes tenancies from year to year except when created by express written contract, which is why a multi-year leaseback is always a signed written lease rather than a handshake continuation of occupancy.

The tax point is the one licensees miss. Staying in the building does not make the sale into something less than a sale. RCW 82.45.010 defines sale for real estate excise tax purposes as any conveyance, grant, assignment, quitclaim, or transfer of the ownership of or title to real property for a valuable consideration, and a sale and leaseback meets that definition on its face. Excise tax is due on the sale leg at closing, and the Recording of the deed puts the new owner of record in place while the former owner keeps Possession as tenant.

Example

Cascade Fabrication owns its 46,000-square-foot shop in Kent free and clear and needs $2,400,000 for new equipment. Rather than borrow, the company sells the building to Rainier Income Partners for $6,300,000 and signs a fifteen-year lease at the same closing, starting at $31,500 a month with three percent annual increases and two five-year renewal options. The crew never stops working and the sign on the building never changes. Cascade takes the proceeds, pays the excise tax and closing costs, buys the equipment, and puts the rest in reserves. Rainier now owns a building with a fifteen-year tenant it underwrote before closing, collecting $378,000 in first-year rent on a $6,300,000 purchase, a six percent initial return. By year eleven the escalation clause has pushed the rent to about $42,300 a month, and the decision on renewal in year fifteen belongs to Rainier.

Common Mistakes and Exam Traps

• A sale and leaseback is not a lease with an option to buy. In a sale and leaseback the sale happens first and the seller becomes the tenant. In a lease option the tenant may become the owner later.
• The seller in a sale and leaseback keeps possession, not ownership. An answer saying the seller retains title is describing something else, such as a land contract or a seller-financed sale.
• The structure is taught alongside mortgages because it raises capital, but no mortgage is created. The money comes from a buyer paying a purchase price, not from a lender making a loan.
• Continuing to occupy the property does not exempt the transfer from Washington real estate excise tax. The sale leg is still a sale.