What Is a Sale Leaseback? Sonneborn's McDonald's Land

A sale leaseback is two agreements signed at one closing: a business sells the property it occupies to an investor and immediately leases it back, staying on as the tenant. Nothing changes on the shop floor the next morning. What changes is the title deed, the arrival of cash, and a new obligation to pay rent for the right to stay.

The clearest way to see the structure is to look at a company that built its fortune on the other side of it. Harry Sonneborn, the financial mind Ray Kroc brought into McDonald's,¹ argued that the durable asset was not the margin on a hamburger but the dirt under the restaurant. The questions below are the ones owners actually ask when the building is still inside the company and somebody has to decide who should hold it.

What is a sale leaseback?

It is the sale of property a business already occupies, closed together with a lease so the seller remains as the tenant. One document transfers the deed to a buyer — commonly a real estate investor, an insurance company, or a fund that specialises in leased buildings. The second grants the seller the right to keep using the space.

Because the buyer is paying for an occupant already in place, the lease is usually written for a decade or more, often with options to extend, and usually as a "net lease" — meaning the tenant, not the new landlord, keeps paying the property taxes, insurance, and ordinary upkeep. The cash belongs to the seller. The rent, for the life of the lease, is the seller's bill. Nothing in the structure makes that bill a comfortable one; that depends on what the lease says and on whether the business can meet it in a thin year as well as a good one.

What does McDonald's land have to do with it?

Sonneborn's insight was that two businesses sat on top of each other at every restaurant: an operation that lived or died on volume and labour costs, and a piece of property that collected rent regardless. He separated them. A subsidiary, Franchise Realty, took long leases on sites or bought them outright and subleased them to the franchisee at a markup, with rent set at the greater of a fixed minimum or a share of the restaurant's sales.² The operator carried the risk of the hamburgers; the company held the ground and a growing rent stream. Sonneborn went on to become the company's first president.³ (This is history offered as illustration, not a recommendation or a view on any company's shares.)

A sale leaseback creates that same division, seen from the opposite chair. The investor buying a company's premises is taking Sonneborn's seat. The operating business is taking the franchisee's. Neither side is wrong — but the split is a real choice, with a real asset on each side of it.

If nobody moves out of the building, what actually changes?

Three things. Title passes. Cash lands. And a fixed cost appears that must be paid in good years and bad, for the full term, whether or not the company still needs the space.

There is no gap in which the company has surrendered the building and has no right to be in it — the sale and the lease are one transaction at one table. That is precisely why the lease deserves as much attention as the price. It will govern the property for longer than many owners expect to hold the company: the starting rent, how it rises (fixed annual steps or steps tied to a price index are both common), the initial term, the renewal options, who replaces the roof as opposed to who changes the filters, and what it costs to leave early. A strong headline price attached to a rent the operation cannot comfortably carry is not a good trade. It is a worse business wearing a better balance sheet.

Why would an owner sell the building the business sits in?

The usual reason is that capital locked in bricks is capital not working anywhere else. A company that owns its premises outright may have a great deal of money parked in an asset that earns nothing while it borrows to fund inventory or expansion. The sale converts that frozen value into cash without touching operations.

For owners preparing to sell the company, there is a second reason: the two assets often have different natural buyers. Buyers of operating businesses — particularly the financial buyers who price a company on its operating profit — frequently do not want real estate at all, and treat the building as a slower, separate asset that complicates the negotiation. Separating the property beforehand makes the business cleaner to sell and lets the property go to someone who genuinely wants it. Worth noting: some acquirers run the sale leaseback themselves immediately after closing, to recover part of what they just paid. That tells owners something about who is capturing that value and when.

Keep the building and lease it to the buyer instead?

That is the third path, and it is the Sonneborn seat rather than the sale-leaseback seat. The family holds the property, usually in a separate entity; the buyer of the company becomes the tenant; the rent arrives afterwards and any later increase in the land's value stays with the family.

It is a real position, with two cautions attached. A landlord with a single tenant is not diversified — the rent depends entirely on one company continuing to pay, and that company is no longer being run by the family. And the lease has to be one a stranger will sign: a rent a disinterested party would call fair, a term a buyer can live with, plain language on repairs, assignment, and early exit. A sweetheart rent flatters the company's numbers and will be corrected in diligence. An inflated one gets the company's price cut. Owners drawn to this path are really stepping into holding property for the rent it produces, which is a different discipline from owning a building as an operator.

What leaves with the deed?

Three things, and none of them shows up on the closing wire. Control: a landlord — possibly a later one, since investors trade buildings — can refuse alterations or decline to renew, and a business rooted in one location for twenty years can find relocation expensive. The residual: if the land becomes more valuable, that gain now belongs to someone else. Flexibility: the rent is contractual for the full term.

There are tax and accounting consequences too. Selling property held for years typically crystallises a taxable gain, and rent replaces the depreciation the owner had been taking, which changes how income is taxed going forward. Accounting rules in most jurisdictions now put long leases on the balance sheet as liabilities, so the tidier financial statement the structure once promised is less tidy than the old pitch suggested. These are questions for an accountant before the signature, not after.

When is a sale leaseback treated as a loan rather than a sale?

When the buyer never really became the owner. Accountants and tax authorities ask that question separately, and they can reach different answers.

Under lease-accounting rules, the transfer fails to qualify as a sale if the buyer does not obtain genuine control of the asset. The usual culprit is a repurchase arrangement — an obligation to buy the property back, or a right to buy it back at a price fixed in advance rather than at whatever the property is worth on the day. If the sale fails that test, the building stays on the seller's books and the cash is recorded as a financing arrangement instead. Tax law is a cousin, not a copy: in Frank Lyon Co. v. United States, the Supreme Court respected a genuine multi-party sale-leaseback in which the buyer held real attributes of ownership. Where those attributes are absent, the arrangement can be recast as a loan. The clause written to comfort an owner who cannot stand a stranger holding the deed is the clause most likely to undo the sale that owner thought had closed.

Which lease terms decide what the company is worth later?

The ones that travel with it. Can the lease be assigned if the business is sold, without the landlord's fresh consent and a fresh negotiation? Has anyone guaranteed the rent personally, and does that promise survive the sale of the company? How does the rent escalate, and is there a ceiling? What are the renewal options, and at what rent? Who carries structural repairs as against routine maintenance? What is the penalty for leaving early?

A buyer of the operating company reads the lease as a claim the business must meet for its full term, and prices accordingly. A sale leaseback negotiated carelessly can quietly reduce the value of the very business it was meant to free. And the proceeds themselves are a decision, not a windfall — back into the operation, held in reserve, or deployed elsewhere — which makes them one more act of capital allocation to be made on purpose.

Is a sale leaseback the same thing as a ground lease?

Cousins, not twins. A ground lease separates ownership of the land from ownership of the building standing on it, usually for a very long term. A sale leaseback normally transfers land and building together and leases the whole package back for a shorter one.

Sonneborn relied heavily on ground leases for early sites, before the company could afford to buy land outright — which is a reminder that these are variations on one idea rather than rival ones. Both tools split a property into the part that operates and the part that collects rent, and let different owners hold each. The useful principle underneath all of it is that the deed does not decide which seat a family occupies a decade on. The lease does.