An operator of care homes, hotels, clinics or warehouses owns two things that do not need the same owner: a business and the buildings it runs in. A sale and leaseback separates them. The operator sells the real estate to an investor and signs, at the same moment, a long lease that lets it keep running exactly where it was. It receives the capital value of its buildings today; the investor receives twenty or more years of rent from a tenant who cannot easily leave. The deal looks simple and is not: the price is a multiple of the rent, the rent is set by the operator’s own earnings, and every lever in the contract moves another.
How the mechanics fit together
Three numbers define the deal. The first is the rent, usually expressed as a share of the operator’s earnings before interest, tax, depreciation, amortization and rent, known as EBITDAR. The second is the yield at which the investor capitalizes that rent, which gives the price: one unit of rent at six per cent is roughly sixteen and a half units of price, at five per cent twenty. The third is the term, firm period and extension options. The operator wants a high rent because it raises the price; the investor wants one the operator can pay for the whole term.
The lease is nearly always triple net, with the tenant paying repairs, insurance and property taxes, and indexed to a consumer price index. Institutional buyers price the result as a long-dated credit secured on a building, as described in how a European asset is actually valued.
The asset class sets the detail: a care home carries a licence and residents who cannot be moved, so its lease is very long; a hotel can be re-let to another brand, so its lease is shorter and often partly variable; a warehouse is the most fungible.
Why the operator sells
The reason is almost always capital. A building earns the yield of real estate, lower than the return the operator earns by opening more beds or acquiring a competitor, so selling the walls converts a low-return asset into cash for the high-return business. The second is debt: a group under covenant pressure repays senior debt from the proceeds and replaces it with a rent obligation in a lease rather than a loan.
The cost is the loss of the asset and of its optionality. An owner can close an unprofitable home and sell it, or refinance against it; a tenant can do neither without consent, and carries a fixed, indexed cost for decades while fees and occupancy are not fixed. If the rent is six per cent of the price and rises with inflation, the operator has in effect borrowed at that rate, without amortization or exit, for twenty-five years: expensive against bank debt, cheap against equity or against growth that would otherwise not happen.
Why the investor buys
The investor is buying a long, indexed, single-tenant income with almost no landlord cost, the closest real estate comes to a bond, and pension funds, insurers, listed healthcare and logistics vehicles and French retail funds hold mandates that reward it.
The price of that comfort is concentration: one tenant, one lease and, in a care home, one regulator whose tariff decisions flow straight through the tenant’s ability to pay. The investor is doing credit analysis as much as property analysis: audited accounts, a parent guarantee, the mix of public and private fees, the capital expenditure needed to keep the licence, and what the building is worth without this tenant. That is why the business plan behind a managed asset is read before the valuation.
Setting a rent the business can carry
The decisive number is rent cover, EBITDAR divided by rent: how far earnings can fall before the operator cannot pay. A high cover means the lease survives a bad year or a tariff freeze; a thin one means the first shock becomes a default. Lenders to the investor read this ratio before the yield.
The temptation to set the rent too high is structural: the seller is the operator, the price is a multiple of the rent, and those negotiating the rent receive the proceeds. A rent ten per cent too high raises the price ten per cent today and is paid over twenty-five years by a business that cannot afford it. Investors who accept it for a higher yield are lending against a cash flow that does not exist.
Europe has seen where this ends. In June 2011 the largest care home operator in the United Kingdom, Southern Cross, announced a cut in rent payments to its landlords averaging 30 per cent over four months, having sold its homes and leased them back under long indexed leases. It then ran 752 homes against an annual rent bill of about GBP 202 million, according to Channel 4 News on 16 June 2011, and was broken up among its landlords within months. A careful buyer therefore builds the rent home by home from each building’s EBITDAR, and in hospitality often adds a variable element tied to revenue or gross operating profit, as in hospitality and hotel groups owning and financing European assets.
Accounting: the building leaves, the right of use comes back
Under IFRS the leaseback is first tested as a sale. IFRS 16 sends the seller-lessee to IFRS 15 to decide whether control of the asset has passed to the buyer. If it has not, for instance because the seller keeps a fixed-price repurchase option, there is no sale: the asset stays on the balance sheet and the proceeds are a financial liability. If it has, the seller derecognizes the building, recognizes a right-of-use asset for the portion it keeps using and a lease liability for the rent promised, and the gain is limited to the share of value actually transferred.
The leaseback therefore no longer takes the asset off the balance sheet: a right-of-use asset and a lease liability replace the building and the mortgage. The amendment to IFRS 16 adopted in the European Union by Commission Regulation 2023/2579, applicable to financial years beginning on or after 1 January 2024, fixes how the seller-lessee measures that liability afterwards so that no gain is recognized on the right of use it retains. What the operator calls a disposal, its auditor calls a financing.
Tax: four taxes meet at the signing
The sale realizes a capital gain in the operator’s hands, taxed as business income in most European systems unless a rollover relief applies; for a group that built its homes years ago it is often the largest cost of the deal. The transfer attracts transfer tax at rates that vary by country and use: in the Netherlands the Belastingdienst applies 10.4 per cent to non-residential property in 2026, and the choice between an asset and a share deal is largely driven by that charge.
Value added tax is the third. Under Council Directive 2006/112/EC the supply of an existing building and the letting of immovable property are exempt under article 135, and article 137 leaves each member state free to grant, and to restrict, an option to tax both. Where the option exists it is tied to the tenant’s use of the building: a logistics or hotel company with a full right of deduction lets both parties opt and the VAT washes through; a tenant making exempt healthcare supplies usually fails that use condition, and VAT on the sale or on later works becomes a cost priced into the rent. The fourth is the rent itself: deductible for the tenant within each country’s interest and base-erosion limits, taxable income for the landlord, and subject to transfer pricing where the two remain in one group.
Lease law in four markets
In the Netherlands a care home or warehouse is let as other business space under article 7:230a of the Civil Code, where the parties are largely free on term, indexation and termination, on the ROZ model lease and its general conditions. A hotel falls under article 7:290, the regime for retail and hospitality premises, with mandatory tenant protection a leaseback has to be drafted around.
Germany distinguishes the Mietvertrag, a lease of space, from the Pachtvertrag, defined in section 581 of the Civil Code as a lease granting both the use of the object and the enjoyment of its fruits. Operating real estate let with its licence is often a Pacht, which matters for termination and handback. Section 544 adds a limit: a lease concluded for more than 30 years can be terminated by either party after 30 years from handover, so a forty-year term is not what it seems.
France applies the bail commercial. Article L145-4 of the Code de commerce fixes a minimum term of nine years and lets the tenant leave at the end of each three-year period on six months’ notice, which is incompatible with a twenty-five-year leaseback. The same article allows leases of more than nine years, and leases of premises built for a single use, to exclude that break; a care home or hotel is such a building, so the long firm term is lawful but must be written in.
Spain applies the Ley de Arrendamientos Urbanos to leases for a use other than housing. Article 4.3 of Ley 29/1994 governs these first by the will of the parties, then by Title III of the law and only then by the Civil Code, which leaves term, indexation and triple net terms to the contract. Article 3 excludes contracts for lodging people, so a hotel lease must remain a lease of the building, not of the guests.
Buy-back rights, pre-emption and who ends up holding the risk
The end of the lease is negotiated at the start. Operators ask for a repurchase option and a right of first refusal if the landlord sells; investors resist a fixed-price repurchase, because under IFRS 15 it can stop the transaction being a sale, and pre-emption because it thins bidders at exit. The usual compromise is a right of first offer, a market-value option at the end of the firm term and no assignment without consent.
The risk map is then clear. The operator carries a fixed, indexed cost it cannot escape and exposes its whole network to one lease portfolio. The investor carries the credit of one tenant, that tenant’s regulator and the cost of re-letting a specialized building. Both share the risk that the rent was set wrong at signing.
Take a Southern European operator that sells several completed homes to a continental institutional buyer. The deal holds when the rent is built home by home from audited EBITDAR, the leases carry a firm term the buyer’s lender accepts, and the proceeds repay construction debt and fund new openings. The same discipline serves a logistics group selling its warehouses, covered in logistics and industrial assets in Europe. The sale and leaseback works when the operator treats the rent as the debt it is and the investor treats the tenant as the credit it is. It fails when either treats the price as the point.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.