There’s a lot of capital on corporate balance sheets that isn’t working. A lot. If you own your facilities, then about 30-40% of your total assets are tied up in buildings and land. Those are physical assets that don’t produce any revenue.

In fact, the direct cost of owning buildings and land is often substantially lower than the price you pay through property taxes, utility expenses, insurance costs, and the occasional new roof or HVAC system component. It isn’t the cost of capital that you’ve allocated to that building.

The Opportunity Cost Problem

When a company owns property outright, the equity in that building isn’t free. It has a cost, specifically, the return that capital could be generating if it were deployed somewhere else in the business.

Compare that against your WACC. If your weighted average cost of capital is 8% and your real estate equity is sitting static, not contributing to earnings, you’re not breaking even. You’re falling behind. The drag shows up in ROIC, return on invested capital, which gets diluted every time low-yield fixed assets occupy a larger share of the capital base. A business with a strong operating margin can still post a weak ROIC if too much of its invested capital is locked in bricks.

This is the core issue: owning property feels like stability, but it often functions as a slow-moving drain on valuation.

Why Sale-Leaseback is More Efficient Than Refinancing

The usual answer to a liquidity requirement is more debt, be it a new credit facility or a mortgage refinance. The problem with refinancing real estate is that lenders are only willing to provide between 65 and 75% loan-to-value. So you’re only able to tap into a fraction of your equity, while simultaneously putting yourself further in debt and locking up the remaining.

A sale-leaseback functions differently. The company sells its property for the full fair market value, receiving 100% of its equity in the form of cash. In return, the company makes a contractual commitment to a long-term lease, typically structured as a triple-net (NNN) lease, with the seller and now lessee remaining in the same building and operating business as usual. In other words, the business maintains full control of the entire space. The only thing that changes is the balance sheet.

Companies seeking liquidity would be better served looking to access your capital tied up in real estate, rather than taking on burdensome new corporate obligation that compounds at floating rates in a rising rate environment.

Structuring the Transaction to Protect the Balance Sheet

The accounting treatment prescribed under ASC 842, the current lease accounting standard, states that leases must be classified as either operating or finance leases, and this classification has direct impacts to the business. With finance lease treatment, the lease liability is added back onto the balance sheet in a manner that can violate debt covenants, trigger default provisions in credit agreements, and increase leverage ratios.

You do not want the tail of the acquisition to wag the dog on your debt structure, so this classification is really important. Lease term length, renewal options, and even present value calculations all factor into how operating leases should be classified as they appear on the balance sheet in clear ways. An oftentimes tricky element in this classification that should not be overlooked is the new right-of-use asset that must appear as well.

Most companies are pursuing the goal of keeping the liability off the balance sheet, so targeting an operating lease treatment is most common, but it is not automatic. This is a case in which the business and the accounting teams should engage in further dialogue that typically only strengthens their relationship.

In fact, your debt-to-equity ratio can be further improved through a sale-leaseback if you use the proceeds to pay down some of that floating-rate debt, which is a prudent target in this rising rate environment. Expensive debt goes away which is then replaced by a much more favorable operating lease and you have kept the financing liability off the balance sheet to the extent possible.

Redeploying Capital Where it Generates Returns

Taking “dead” real estate equity and using it to invest in capabilities, employees, markets, or products that yield returns well above WACC is a winning strategy. Substantially value-accretive acquisitions certainly qualify, but those can be tough to find and execute. If a suitable target isn’t available, self-funding with intellectual knowledge, technology, or geographic expansion might be much easier to implement to generate even higher-than-WACC returns.

The Decision Framework

It doesn’t make sense to consider every property though. You first need to determine which are core assets, in essence, are there reasons other than sheer inertia that you own them? Physical presence in a particular town or country, specialized infrastructure, future development plans that require the site in question, etc. Then there are the non-core assets that you own because you happen to be the occupier, the category that effectively has the decision made for them. This is the category where discussions should start. The opportunity cost of keeping a non-core asset is always heavily in favor of monetization. If after this first step you still have properties that you genuinely must own to meet your business objectives, proceed to the other steps for the assets that are left.