The role of sale leasebacks in modern dealership capital strategy

Rising real estate costs, shifting market dynamics and tightening margins are reshaping how dealership groups think about capital, growth and long-term strategy. In recent years, the buy-sell market has seen transaction prices climb steadily, driven by elevated blue sky multiples, larger multi-store packages and increasingly expensive dealership facilities. As a result, even well-capitalized groups are reassessing how they deploy cash and how they can unlock liquidity without compromising operational control.

One approach gaining traction across North America is the strategic use of sale leasebacks. While not new, sale leasebacks have evolved into a sophisticated capital solution aligned with the needs of modern dealership groups, particularly those looking to expand, recapitalize or strengthen their balance sheets.

On this month’s episode of Up to Speed, Mike Mader, Principal with Baker Tilly’s dealership advisory services team, is joined by Ned Hennessey, Vice President of Dealership Investments at Surmount, to discuss why dealers should explore sale leasebacks as an option to combat increasing costs of real estate, construction and acquisitions, and use these transactions as a strategic tool for funding growth, strengthening balance sheets and managing large M&A opportunities in an increasingly competitive market.

The pressure points: Why capital is tightening

Dealers today face a convergence of financial pressures. Real estate values have reached historic highs, and construction costs continue to rise due to manufacturer image programs, facility upgrades and market expansion. At the same time, dealership profitability has normalized from the extraordinary highs of the COVID era. Cash reserves that once felt abundant are now being deployed more cautiously.

Traditional financing structures also present limitations. Blue sky financing is typically capped around 50%, leaving dealers to fund the remainder with cash. Real estate debt often tops out at 70-75% loan-to-value, requiring significant equity injections. For groups pursuing aggressive growth or large multi-store acquisitions, these constraints can slow momentum or limit strategic opportunities.

Sale leasebacks as a strategic capital tool

A sale leaseback allows a dealer to sell the real estate associated with a store (or an entire portfolio) to a third party investor while simultaneously entering into a long-term lease to continue operating the dealership. The dealer retains full operational control of the business while unlocking the equity tied up in the property. These transactions typically fall into three categories:

• Unlocking equity from owned real estate: Dealers with multiple rooftops can evaluate the market value of their real estate and selectively monetize properties to generate liquidity for growth, debt reduction or diversification.
• Supporting merger and acquisition (M&A) activity: When acquiring stores with owned real estate, a sale leaseback can fund 100% of the real estate value, and often generate additional cash that can be used as equity for the business acquisition.
• Reverse build-to-suit structures: For new points or relocations, investors can fund land and construction costs upfront, allowing dealers to avoid large capital outlays and assume a lease only once the facility is complete.

In many cases, sale leasebacks can generate proceeds exceeding what traditional debt would provide (sometimes 20-40%) while preserving long-term control through well-structured, tenant-friendly leases.

Addressing common misconceptions

One of the biggest misconceptions is that a sale leaseback means giving up control. In reality, a properly negotiated lease can secure long-term operational stability, including renewal options that extend control for 20-50 years or more. Dealers often maintain rights related to selling the business, relocating or even repurchasing the property under certain conditions.

Another misconception is that investor and dealer interests are misaligned. In practice, investors want strong, stable tenants and long-term relationships. When a competitive process is run, lease terms tend to be balanced, market-driven and supportive of the dealership’s ongoing success.

Dealers also sometimes overestimate the intrinsic value of their real estate outside of dealership use. In most markets, these properties are highly specialized and difficult to repurpose without significant redevelopment. Their value is closely tied to the performance of the dealership itself, making liquidity extraction through a sale leaseback an appealing de-risking strategy.

What high-performing groups are doing differently

Leader dealer groups are taking a proactive, data-driven approach to real estate strategy. They regularly evaluate the market value of their properties, assess capital allocation options and stay informed about investor appetite and cap rate trends. Even groups that have historically avoided sale leasebacks are now exploring them as part of broader capital planning.

Curiosity and optionality are becoming competitive advantages. Dealers want to understand their real estate’s value, how it compares to market benchmarks and how it can support future growth, whether they choose to transact immediately or not.

A market with growing momentum

Investor interest in dealership real estate continues to expand, fueled by the sector’s strong performance, low historical default rates and resilient business model. Cap rates generally range from the low-to-mid 6% range for high-quality assets to 8% or more for smaller or riskier locations. As interest rates shift, investors are increasingly competitive, creating favorable conditions for dealers considering a sale leaseback.

A strategic lever for the future

As the dealership industry evolves, capital flexibility is becoming essential. Sale leasebacks offer a powerful way for dealers to unlock liquidity, fund expansion, reduce leverage or diversify holdings, without sacrificing operational control. For groups navigating rising costs and ambitious growth plans, this tool is emerging as a strategic lever than strengthen both balance sheets and long-term competitiveness.