Industrial Sale-Leaseback: Owner-User Unlocks $4.2M in Equity Without Leaving the Building

The Situation

A mid-size precision manufacturing company had occupied the same 95,000 square foot industrial building in San Bernardino County for over a decade. The building was owned free and clear, carried no debt, and had been appraised at $7.1 million. On paper, the owner had significant wealth. In practice, that wealth was locked inside four walls the company could not afford to leave.

The facility was not generic warehouse space. The owner had invested heavily in tenant improvements over the years: a custom heavy-power electrical system rated at 4,000 amps, specialized industrial HVAC serving temperature-sensitive manufacturing zones, and a loading dock configuration with twelve grade-level doors and three dock-high positions engineered for their logistics workflow. Relocating would have required rebuilding years of infrastructure investment and disrupting active production lines.

The company had a real capital need: funding a business expansion that required approximately $4 million to $4.5 million in fresh capital. Their bank offered a business line of credit secured by accounts receivable, but the terms were tight and the capacity was insufficient. A traditional commercial real estate mortgage on a building the company already owned free and clear was another option, but it came with a constraint: most conventional lenders would underwrite to roughly 65% LTV on an owner-occupied industrial building, which would have produced a loan of approximately $4.6 million -- serviceable but not ideal given the company's preference to keep debt service low relative to operating cash flow.

The Challenge

The fundamental problem with a conventional cash-out refinance was lender category. Most banks and credit unions underwrite owner-occupied industrial loans on the creditworthiness of the operating business, not the real estate. That means full personal guarantees, business financials scrutinized to DSCR on operating income, and loan structures tied to the business cycle rather than the real estate cycle. For a manufacturing company with year-to-year revenue variability, that model introduced risk the owner did not want -- and the loan size and terms would reflect it.

A sale-leaseback introduced a fundamentally different structure, but it came with its own complexity. The transaction required executing two deals simultaneously: the sale to an investor and the investor's financing. The investor needed to close on the purchase while simultaneously securing a loan, and the company needed certainty that the lease terms would protect their long-term occupancy before they signed away title. Any breakdown in the investor's financing would unwind the entire transaction. CLS CRE needed to identify the right buyer profile, structure a lease that would satisfy life company underwriting, and sequence the process so all three parties -- seller, buyer, and lender -- reached closing on the same timeline.

Our Approach

CLS CRE positioned this transaction not as an industrial sale but as a net lease investment acquisition backed by a credit tenant on a long-term lease. That reframing determined everything: which buyers we contacted, which lenders we brought in, and how we structured the lease itself.

The first step was structuring the lease correctly. We set the initial rent at $9.50 per square foot gross annually, applied to 95,000 square feet, producing base rent of $902,500 per year. The lease term was 15 years, NNN, with 2% annual rent escalators and two five-year renewal options at fair market rent. Critically, we structured the NNN provisions to be clean: tenant responsible for taxes, insurance, and maintenance, with a landlord cap on structural obligations that would satisfy institutional buyers. The long term and credit tenant profile made this an ideal life company candidate from the start.

For the buyer financing, we targeted life company lenders. Life companies are the preferred capital source for stabilized NNN assets with investment-grade or near-investment-grade tenancy and long lease terms because they match long-duration liabilities with long-duration assets. The math supported a strong execution:

Metric	Value	Notes
Purchase Price / Appraised Value	$7,100,000	Arms-length transaction, market cap rate
Cap Rate (Going-In)	12.7%	$902,500 NOI / $7,100,000
Loan Amount (60% LTV)	$4,260,000	Life company senior loan
Estimated Interest Rate	6.25% fixed	15-year term, matching lease duration
Annual Debt Service (P+I, 30-yr am)	$315,480	Monthly payment approximately $26,290
DSCR	2.86x	$902,500 NOI / $315,480 debt service
Investor Equity Required	$2,840,000	$7.1M purchase minus $4.26M loan
Year 1 Cash-on-Cash Return (Investor)	20.7%	$587,020 net cash flow / $2,840,000 equity

A DSCR of 2.86x on a 15-year NNN lease with a company that had operated in the same building for over a decade is precisely the profile life companies underwrite for. No vacancy risk during the lease term, predictable escalating income, and an asset with functional industrial utility if the tenant ever vacates. We also structured the loan term to match the lease term exactly -- 15 years -- which eliminated refinancing risk for the buyer and aligned the amortization schedule with the guaranteed income stream. The lender's exposure at loan maturity, assuming full amortization over 30 years, would be approximately $3.2 million against a building that would be worth conservatively $8 million to $9 million given 15 years of 2% annual NOI growth compounding through cap rate.

The Outcome

The transaction closed in 68 days from the signed letter of intent. The seller received gross proceeds of $7,100,000. After paying off a small equipment lien of approximately $480,000 that had been cross-collateralized against the real estate, the company netted $6,620,000 in cash. Approximately $4.2 million was deployed into the business expansion immediately. The remainder was retained as liquidity. The company's new annual occupancy cost, the NNN lease obligation, is $902,500 -- which their CFO noted was actually lower than the fully-loaded cost of ownership when factoring in the opportunity cost of the equity that had been sitting idle in the building.

The buyer closed with a life company loan at 6.25% fixed for 15 years, fully amortizing on a 30-year schedule. Day-one cash-on-cash return on equity was 20.7%, with contractual 2% annual rent bumps compounding that return through the hold period. From the investor's perspective, they acquired a stabilized industrial asset with a below-market cap rate relative to the income stream, a creditworthy tenant with significant switching costs, and financing that matched their hold period with no refinancing risk. The transaction worked for both parties precisely because it was structured as a net lease acquisition from the first conversation, not as a conventional industrial sale.

Key Takeaway

Owner-occupied industrial buildings with specialized improvements are frequently the worst candidates for conventional cash-out refinancing and the best candidates for sale-leaseback. The same features that make the building hard to leave -- custom power, specialized infrastructure, long operating history -- are exactly the features that make the tenancy creditworthy and the lease durable in the eyes of a life company lender. When the lease is structured correctly, a 15-year NNN obligation on a purpose-built facility can produce DSCR north of 2.5x and attract fixed-rate institutional financing at terms that make the investor's returns compelling without requiring the seller to give up a dollar of rent concession. If you own industrial real estate free and clear and need capital for your business, the question is not whether you can afford to do a sale-leaseback. The question is whether you can afford not to.