Introduction
An easy and cheap way to access capital for value-creation, or maybe the first step towards imploding a business that worked for over 50 years? Popularised in the 1980s as an alternative form of financing for corporations amid high interest rates, asset sale-leasebacks have since found applications in a wide range of scenarios, ranging from a solution for distressed homeowners during the COVID pandemic to being a value-creating strategy for private equity (PE) funds looking to raise cheap capital. With companies in capital-intensive sectors often holding large amounts of illiquid property plant & equipment (PPE) on their balance sheets, sale-leasebacks have become an increasingly popular way for companies to claim 100% of the fair value of their assets without losing their operational utility. As we will discuss later, despite their advantages, such as freeing up capital for value-creating initiatives or debt paydowns, in certain scenarios, leasebacks can be a very risky tactic, putting companies’ margins under strain and sometimes even pushing them into bankruptcy. The concept of the modern sale-leasebacks emerged in the 1980s as the interest rates reaching mid-teens pushed companies towards seeking alternative financing methods. At the time, tax benefits ensuing from entering lease agreements and the interest rate environment created perfect conditions for the proliferation of leasebacks: by selling their real estate for cash and leasing it back from the buyers right away, companies could raise capital more cheaply than in the debt or equity markets, while still being able to use their assets. Soon, the appeal of injecting quick money spread beyond commercial real estate, finding applications among house owners. With mentions of leasebacks being used during the Great Financial Crisis of 2008, the strategy regained traction after COVID put many families with mortgages under pressure. While leasebacks are a strategy used in many sectors and settings, we will focus on the applications found in the restaurant sector, drawing from recent cases.
Overview
Sale-leasebacks provide an elegant solution to a common dilemma: investors seeking capital. Typically, large established firms raise capital via either asset-backed or debt financing to not dilute ownership. Debt financing can be untenable in high-interest-rate environments or for distressed businesses. Asset-backed financing may also be unsustainable for corporations that have exhausted expendable valuable assets and are left with either core (large % of revenue dependent on usage) or worthless holdings. A sale-leaseback allows a circumvention to this predicament. An organization will sell core assets to an investor. These holdings ordinarily constitute PPE, although tailored forms of sale-leasebacks do occur with intangible assets. This sale only unfolds with the underlying guarantee that following the transaction, the investor will lease the asset back to the firm for an extended duration. Such an agreement allows for the lessee (firm) to receive a lump sum of capital while maintaining the utility of the fundamental asset in exchange for rental payments to the lessor (investor). Due to its opportunities, sale-leasebacks have served as a key piece of the corporate strategy toolbox. A sale-leaseback can be vital for expansion or survival. Firms such as chain restaurants may invest in technology/automation to increase margins or fund M/A to fuel growth. Sale-leasebacks can serve to increase balance sheet flexibility and reduce leverage by paying down outstanding debt, creating breathing room for distressed firms. Beyond the opportunities provided by the cash infusion, sale-leasebacks function as a pathway to unlocking the fair market value of an asset. Firms typically only receive 50-65% of the fair market value when undergoing traditional mortgage financing (loan on the PPE). However, with sale-leasebacks, firms immediately unlock full value by renouncing ownership. Sale-leasebacks additionally provide various tax shields and balance sheet perks relative to traditional liabilities (expanded upon later in the article). Firms (lessees) are not the only beneficiaries of this arrangement. Investors (lessors) benefit via stable and long-term cash flows coupled with the possibility for capital growth, making it a safe, attractive investment.
Sale-leasebacks carry significant risks for both the firm (lessee) and investor (lessor). If the lessee doesn’t properly account for the ongoing lease payments, profitability might decrease before any real changes occur with the newly acquired capital. On a similar note, the decrease in EBITDA might increase leverage if it overshadows the intended decrease in debt, worsening the lessee’s balance sheet flexibility. Unfavourable lease terms may also hamper long-term flexibility. Additionally, the lessee loses exposure to property appreciation, removing a built-in mechanism for growth. These issues become problematic when capital received in exchange for the PPE is spent fruitlessly. For the lessor, much of the risk is attached to tenant default risk. Any bankruptcy could tie up the PPE, occluding cash flow. Depreciation and illiquidity are real concerns that investors face.
PE has adopted sale-leasebacks wholeheartedly due to the stated benefits and for more personal reasons. PE is infamous for dividend recaps and share buybacks. They increase leverage, cut costs, and exercise the most amount of capital they can, leaving a previously healthy company in ruin. Sale-leasebacks are a tool that may aid in this cycle. A PE firm can free up capital from organizations typically incompatible with this parasitism due to a mix of low cash flows, high borrowing costs, and a lack of expendable assets. This allows regular operations to proceed. Afterward, however, the firm is left in a precarious financial state due to recurring lease expenses, loss of core assets, and higher leverage. The risks stemming from sale-leasebacks coupled with the risks from PE involvement become apparent in the case studies below.
Accounting Treatment of Sale-Leasebacks Under Different Standards
IFRS (International Financial Reporting Standards) and ASC 842 (the updated U.S. GAAP for leases) set the rules for how companies report leases on their financial statements. Both IFRS and US GAAP overhauled lease accounting in recent years, dramatically changing how sale-leaseback deals appear on financial statements. Under IFRS 16 (effective 2019), virtually all leases go on the balance sheet as a “right-of-use” asset with an offsetting lease liability. This ended the era of treating sale-leasebacks as off-balance-sheet financing tricks – IFRS 16 effectively closed the loophole that once kept lease obligations hidden from view. US GAAP’s ASC 842 (effective for most public companies in 2019) also made a similar leap. It eliminated off-balance-sheet sale-leaseback accounting by requiring a right-of-use asset and a lease liability for nearly all leasebacks. In other words, both standards now demand that companies bring those future rent commitments out of the footnotes and onto the balance sheet, boosting transparency. The accounting logic is simple: if you sell an asset and lease it back, you’ve incurred a liability akin to debt, and investors deserve to see it.
A critical first step is determining whether the “sale” in a sale-leaseback is genuine. IFRS 16 defers to IFRS 15 (the revenue recognition standard) to judge if control of the asset has passed to the buyer-lessor. In practice, this means if the contract gives the seller-lessee a repurchase option or other continued control, the transfer fails the sale test and is not treated as a real sale. US GAAP’s ASC 842 follows the same principle via ASC 606: the sale-leaseback won’t be accounted for as a sale if it doesn’t meet the normal revenue recognition criteria (for example, if there’s a guaranteed repurchase or if the leaseback is essentially a purchase in disguise). Both standards converge on this point – no true sale, no sale accounting. If the sale criteria are met, the seller-lessee removes the asset from the books and recognizes any gain or loss on the sale, then accounts for the leaseback separately. However, here IFRS and GAAP diverge on how much gain you can book upfront. Under ASC 842, a seller-lessee who qualifies for sale accounting can recognize the full gain on the asset’s sale immediately (assuming the sale price is at fair market value). IFRS 16 is more conservative: even when a genuine sale has occurred, IFRS limits profit recognition to the portion of the asset effectively “sold” to the buyer. The part of the gain related to the leaseback portion is not immediately recognized as income – instead, it’s offset against the right-of-use asset (in essence, deferred). This nuance was introduced to prevent companies from over-inflating income by selling assets at a profit only to remain using them under lease. The upshot is that IFRS 16 often yields a smaller immediate gain on sale-leaseback transactions compared to US GAAP. If the sale criteria are not met under either standard, the accounting is straightforward: the purported “sale” is instead treated as financing. The asset remains on the seller’s balance sheet, and any proceeds received are recorded as a financial liability (like a loan secured by the asset).
One of the biggest distinctions between IFRS 16 and ASC 842 lies in the lease classification for the lessee. IFRS 16 does not distinguish between operating and finance leases for lessees – every lease ends up on the balance sheet and is treated similarly to finance leases of old. All leaseback agreements under IFRS thus create a right-of-use asset and lease liability and result in depreciation and interest expense going forward. US GAAP’s ASC 842, by contrast, retains a dual model: a leaseback can be classified as either an operating lease or a finance lease (similar to the old capital lease) depending on criteria like asset ownership transfer, lease term, etc.). Why does this matter? Under GAAP, if the leaseback is classified as an operating lease, the lessee will report a single straight-line lease expense in operating costs, whereas a finance lease produces depreciation and interest expense separately. The economics are the same, but the presentation differs. An operating leaseback keeps the expense above the EBIT/EBITDA line (as “rent”), while a finance leaseback pushes expenses below EBITDA (interest and amortization). IFRS 16, having eliminated the operating lease category, effectively treats all leasebacks like finance leases – meaning no “rent” expense hits the operating line. This leads to some important impacts on financial metrics.
Implications for Financial Statements and Key Ratios
The accounting changes have a direct effect on profitability metrics like EBITDA. Under IFRS 16, companies no longer deduct lease payments as an operating expense; instead, they record depreciation of the right-of-use asset and interest on the lease liability. Since EBITDA (earnings before interest, taxes, depreciation, and amortization) excludes those latter costs, the result is mechanically higher EBITDA for IFRS-reporting companies post-IFRS 16. In plain terms, a sale-leaseback that would have previously created a rent expense now generates depreciation and interest—which aren’t subtracted from EBITDA—so operating profit and EBITDA look better (even though cash outflows haven’t changed). For example, the IASB noted that bringing leases on balance sheets tends to increase EBITDA because what was once rent is now split into depreciation and interest below the EBITDA lines.
Under US GAAP, the effect on EBITDA depends on the lease classification. If the leaseback is classified as a finance lease, the outcome is similar to IFRS: rent expense disappears, replaced by depreciation and interest, thus boosting EBITDA. But if it’s an operating lease (and many real-estate leasebacks are structured to be operating leases), the company will continue to record a lease expense in operating costs each period, just like in the old days. That means EBITDA under GAAP still reflects that rent expense and remains lower than an IFRS peer with identical economics. In practice, GAAP firms got the balance sheet on-balance, but they didn’t get the big bump in EBITDA that IFRS firms did for operating-type leases. This “operating lease flexibility” in GAAP lets companies preserve a more even expense profile in the income statement. However, it also means investors must be careful when comparing an IFRS reporter’s EBITDA to a US GAAP peer – the IFRS company could look artificially more profitable at the EBITDA level simply due to accounting presentation. Analysts often must adjust for lease expenses to make an apples-to-apples comparison of operating performance.
Both IFRS 16 and ASC 842 bluntly force companies to acknowledge lease obligations as liabilities, which can significantly affect leverage ratios. Selling real estate and leasing it back no longer “hides” financing; instead, the present value of future lease payments shows up as debt on the balance sheet (often labeled as lease liabilities). This inflates total liabilities and, in many cases, will increase reported net debt. For instance, studies of IFRS 16 adoption showed that in many companies, the recognized lease liability was larger than the associated right-of-use asset, resulting in a higher debt-to-asset ratio post-implementation. In other words, leverage went up on paper because the balance sheet “grew” on both sides – assets and liabilities – but often liabilities more so. Under both accounting regimes, key ratios like Debt/EBITDA, Debt/Equity, and leverage covenants may deteriorate when a big sale-leaseback is put on the books). This has real implications: companies had to communicate these changes to lenders and investors, and in some cases, debt covenants needed recalibration to exclude or adjust for the newly recognized lease liabilities.
On the flip side, EBITDA-based interest coverage ratios might improve for IFRS reporters (since EBITDA rises when rent is excluded), though they’ll then have higher interest expenses to cover going forward. Meanwhile, measures like EBIT or net income can be impacted by the front-loaded expense pattern of finance leases. Under IFRS/finance lease accounting, expenses are higher in the early years of a lease (interest is higher at the beginning), which can slightly reduce early-period earnings compared to the old straight-line rent. US GAAP operating lease treatment avoids that front-loading – the total expense is spread evenly – so GAAP companies might report more consistent earnings from sale-leaseback leases over time, whereas IFRS companies see a bit more expense early and less later. These subtleties mean that the timing of reported profits can differ, even if the cash payments are identical.
For businesses, the new standards were a double-edged sword. The obvious downside is the loss of off-balance-sheet financing. In the past, a retailer or restaurant chain could do a sale-leaseback and keep the lease obligation hidden, making its balance sheet look less levered. That cosmetic benefit is gone – IFRS 16 and ASC 842 ensure leaseback deals must be shown as liabilities. This increase in transparency was exactly the point: standard-setters wanted to shine a light on lease commitments that were always there economically but not in the books. Companies also lost a bit of flexibility in managing earnings – IFRS especially. Under old rules (IAS 17), if you structured the leaseback as an “operating lease,” you might recognize any gain on the sale immediately and then just book rent expenses going forward (keeping debt off the books). Now, IFRS 16 severely limits the gain you can immediately recognize on sale (only the portion not leased back) and forces the liability out in the open. So, there’s less room to use sale-leasebacks to give earnings a quick boost or to spruce up the balance sheet. US GAAP still allows a full gain at the time of sale (if it qualifies), which can pad one quarter’s income, but you can’t hide the resulting lease obligation.
That said, companies didn’t walk away empty-handed. A sale-leaseback still provides a very real cash infusion. Restaurants and retailers value that liquidity to invest in growth, pay down debt, or return capital to shareholders. Those fundamental benefits remain unchanged – the accounting rules didn’t make the cash any less green. Additionally, IFRS 16’s boost to EBITDA can help companies that are valued on an EBITDA multiple or have EBITDA-based bonuses and covenants. Some management teams noted that after adopting IFRS 16 their EBITDA increased purely due to accounting, which could make leverage ratios (Debt/EBITDA) look a bit more favorable than they would have otherwise However, sophisticated investors usually see through this and adjust for lease liabilities regardless of presentation. Under US GAAP, the flexibility to keep a leaseback as an operating lease might help avoid violating certain debt definitions or covenants. For example, if a “debt” covenant is written narrowly, a lease liability classified as an operating lease might not count as “debt” in the covenant calculation (since GAAP categorizes it separately). This kind of nuance could provide a bit of wiggle room for companies trying to manage leverage limits – but it’s a temporary and technical reprieve at best. In substance, rating agencies and banks will usually factor in lease obligations no matter how they’re labeled. Importantly, neither IFRS 16 nor ASC 842 eliminated the fundamental appeal of sale-leasebacks as a financing strategy. Firms can and do still use sale-leasebacks to “monetize” assets – unlocking capital tied up in real estate – it’s just that everyone can now clearly see the resulting lease liabilities.
Case Studies: Restaurant Sector
The restaurant industry has long been a focus for private equity investment due to the brand value and scalability associated with chain stores. Moreover, the industry’s in-person nature requires these chains to invest significantly in real estate to open new stores. This makes the industry prime for sale-leasebacks, allowing chains to convert illiquid property holdings into immediate capital, which can be used for expansion, debt reduction, or operational improvements. These deals are particularly appealing when interest rates are high, as struggling brands can offload hefty mortgage payments to the buyer of their real estate. However, these transactions create long-term lease obligations, which can strain cash flow, especially in an industry known for low-profit margins and high operating costs. If sales decline, the fixed lease payments remain, potentially leading to financial distress.
Given this possibility, particularly driven by changing consumer preferences and labor costs, why do PE firms continue to invest in restaurant chains? From a general business model perspective, they carry significant value in their brand name – known chains such as McDonalds [NYSE: MCD] and Dunkin Donuts maintain stable levels of customer loyalty given their scale. In addition, PE firms often see opportunities arising from active management, specifically around cost-cutting and turnaround. This can involve better supply chain management, pricing strategies, menu innovations, and labor optimization amongst other strategies.
Case Study A: Red Lobster
In 2014, Darden Restaurants [NYSE: DRI] sold its subsidiary Red Lobster for $2.1 billion to Golden Gate Capital (GGC) to focus on its core Olive Garden brand. As part of the transaction, GGC executed a sale-leaseback campaign worth $1.5 billion across 500 properties. This allowed GGC to partly fund the transaction while reinvesting in Reb Lobster through menu changes and store remodels. Despite the initial promise of enhanced liquidity, the sale-leaseback soon proved harmful. By locking the company into long-term lease obligations with high annual rental payments, Red Lobster struggled to meet its fixed costs. When consumer traffic began to decline, it undermined the anticipated revenue streams that were supposed to support the lease expenses. The lease structure also failed to provide flexibility during downturns, simply adding to Red Lobster’s existing problems around consumer sentiment. Ultimately, despite being initially attractive, the sale-leaseback deal was predicated on continued revenue growth that did not materialize, leaving the company with escalating lease payments that quickly outpaced its cash flow. The Red Lobster case serves as a cautionary tale: while sale-leasebacks can provide an important source of capital, over-leveraging real estate assets carries significant risks. Fixed lease obligations constrain financial flexibility, which can cause severe problems, especially in industries with low margins and unpredictable revenue patterns. For companies considering sale-leasebacks, the short-term cash infusion must be followed by an actionable plan to improve business operations; otherwise, the business model becomes arguably riskier. Moreover, lease structures should be scrutinized to protect sellers in downside scenarios. With this said, it should be noted that the Red Lobster case is unique in its position as a former subsidiary of Darden, as opposed to being its own entity with full decision-making powers.
Case Study B: Chili’s
Chili’s, owned by Brinker International [NYSE: EAT] (with several smaller chains in its portfolio), has also used sale-leasebacks to enhance financial flexibility and support growth. In 2018, Brinker agreed to sell and lease back up 98 Chili’s locations, generating approximately 314.3mn $. This capital infusion was intended to fund strategic growth opportunities, including marketing initiatives and restaurant enhancements. Brinker later doubled down by engaging in a sale-leaseback of 48 Chili’s properties in 2020, amounting to 155.7mn $. This transaction aimed to optimize the company’s capital structure by reducing debt levels and supporting operational enhancements. Over the past two years, Brinker has been focused on rebranding Chili’s to maintain customer interest. This was done through multiple strategies; first, Chili’s has effectively engaged younger demographics through targeted marketing campaigns, including a notable social media presence on Instagram and TikTok that resonates with Gen Z consumers. Second, Chili’s introduced new value-oriented promotions such as the “3 for Me” entrée combo, which has attracted cost-conscious diners looking for an affordable sit-down experience. Finally, investments in restaurant upgrades – including simplified menus and improved kitchen technology like TurboChef ovens – have streamlined operations and reduced table turnaround times while enhancing the dining experience for customers. These combined efforts have resulted in a 31% increase in comparable sales during the quarter ending December 25, 2024, marking Chili’s best performance since the post-pandemic recovery period. Chili’s turnaround success demonstrates how given strategic management, sale-leasebacks can serve as the capital infusion required to drive meaningful change.
Case Study C: Red Robin
In 2020, casual dining chain Red Robin [NASDAQ: RRGB] completed a sale-leaseback transaction involving nine stores, generating 30mn $ in proceeds. This move was intended to inject capital to mitigate financial stress caused by the COVID-19 pandemic, during which the company faced reduced customer traffic, store closures, and rising operational costs. Red Robin has continued to navigate financial challenges post-pandemic, with mixed results. The company reported that the capital raised from the sale-leaseback transaction was utilized to pay down debt and reinvest in its digital and off-premises dining capabilities. Red Robin also noted improvements in its quarterly financial performance, largely due to increased digital sales and operational efficiencies. However, Red Robin has also faced significant challenges. The chain highlighted ongoing store closures due to underperformance in certain locations, indicating that the infusion of capital may not have been sufficient to offset the long-term financial strain from new lease obligations. Moreover, with consumer confidence dropping, spending may be unpredictable, leading to profitability challenges for the chain. Comparable to Red Lobster, Red Robin’s experience illustrates the risks of sale-leaseback transactions, particularly in a volatile industry like casual dining. While the capital infusion provided short-term relief and enabled operational improvements, the long-term burden of lease payments has constrained profitability. This case demonstrates the importance of a long-term plan when executing sale-leasebacks, while also highlighting the element of luck in transaction timing. Given the restaurant industry’s volatile nature, chains must consider broader factors such as consumer confidence when making such decisions. Red Robin’s ongoing struggles with store closures and lease obligations serve as a warning sign that such transactions can create financial challenges if not managed and timed carefully.
Conclusion
As shown throughout this article, sale-leasebacks have emerged as an attractive financing strategy, finding surprisingly widespread adoption in the restaurant sector. By unlocking the value of real estate assets, leasebacks allow businesses to reinvest in expansion, pay down debt, or return capital to investors. However, as demonstrated through the case studies, this strategy is not risk-free. These transactions introduce long-term lease obligations that can constrain financial flexibility and increase fixed costs, exposing companies to downturns in operating performance. Therefore, companies with volatile cash flows and thin margins may make risky candidates for this strategy. When managed prudently and for value-creating purposes—like in the case of Chili’s—sale-leasebacks can prove to be a great strategy, but over-reliance, particularly in the hands of private equity firms seeking short-term gains, can lead to significant financial distress of otherwise stable businesses.
Looking ahead, several factors will shape the viability and appeal of sale-leasebacks in the restaurant sector and beyond. Firstly, if higher rates stay for longer, leasebacks will continue to be an attractive tool for decreasing the cost of capital. Moreover, if consumers continue to shift away from in-person dining to delivery, the need for fixed locations (and hence PPE) will make leasebacks an attractive tool for increasing operational flexibility. The financial engineering angle on the balance sheet (hiding debt) is now gone, but sale-leasebacks can still dress up the Return on Assets (ROA). Selling a property will lighten the asset base, and leases don’t increase assets by the full sale amount, propping up ROA. The new rules push companies toward more transparent reporting, but there is still some manoeuvring room in how leasebacks are structured (e.g. lease term, variable rent, etc.). While sale-leasebacks remain a powerful financial lever, their strategic execution must be carefully considered. Companies that align these transactions with long-term operational goals rather than short-term liquidity needs will be better positioned to sustain growth and profitability in an evolving market landscape.
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