How I Underwrote a $10.8M Industrial Sale-Leaseback — and Why Rent Coverage, Not the 7% Cap, Nearly Killed It

A broker sent me an industrial sale-leaseback recently that looked, on the cover page, like exactly the kind of deal you're supposed to want. Roughly $10.8M. A 7% going-in cap. A single tenant signing a fresh 10-year, triple-net lease with 3.5% annual escalators. One building, one tenant, one rent check a month — the company paying you to keep operating out of the box it just sold you.

I spent two weeks underwriting it and got within a redlined LOI of buying it. Then I nearly walked. The reason isn't on the cover page, and it isn't the cap rate. It's one number that decides whether a deal like this is durable income or a slow-motion vacancy. Here's how I got to it.

(Details below are anonymized and altered. The point is the process, not the property.)

What you're actually buying in a sale-leaseback

In a sale-leaseback, the company that owns and operates out of a building sells it to you and immediately leases it back, usually on a long triple-net lease. The seller gets capital off its balance sheet; you get a tenant in place from day one with no lease-up risk.

The trap is in how clean that looks. You are not really buying a building. You are buying a stream of rent checks backed by one company's ability to write them. The real estate is the collateral; the tenant's business is the cash flow. On a multi-tenant property, one tenant leaving dents your income. On a single-tenant sale-leaseback, one tenant leaving is your income — all of it, at once. So the underwriting question is never just "is this a good building at a good price." It's "how likely is this specific tenant to keep paying for ten years."

Why it screened well — and why that's the danger

The 7% cap is what makes deals like this move. Cap rate is just price expressed as a yield: purchase price divided by in-place net operating income. At 7% on a NNN lease with bumps, the spreadsheet sings. Most buyers stop right here.

But cap rate only tells you what you're paying relative to today's income. It says nothing about whether that income shows up in year three. It's a price tag, not a risk measure. And on a sale-leaseback there's a second wrinkle: the rent you're capitalizing was set by the seller, who is also your new tenant and has every incentive to set it high — a higher rent supports a higher sale price, and they're the one "paying" it. That's why the first thing I do on any of these is run the broker cap against the true, post-reserves cap to see what the yield looks like once you account for the capital the building will actually consume. (You can do that side-by-side in the cap rate calculator — the broker number and the true number are rarely the same.)

A clean cap rate got me to the table. It didn't get me to "yes."

Step one: separate the real estate from the tenant

Before touching the tenant's books, I split the deal into two independent questions:

First, if the tenant disappeared tomorrow, what is this building worth empty, and how fast does it re-lease? Generic warehouse with good clear height, dock doors, and decent access re-leases. Highly specialized, single-purpose space sits. This is your downside floor — the value that survives a tenant default.

Second, how likely is the tenant to disappear? On a single-tenant deal, this is the whole game, because the lease is only as good as the company signing it. A 10-year term from a tenant that can't survive three years is a 3-year deal with seven years of litigation attached.

The cap rate spoke to neither question. So I went to the tenant's financials.

Step two: pull the operating company's numbers

I asked for three years of the operating company's financial statements. This is the request that separates a real underwrite from a broker package, and it's the moment a lot of sale-leasebacks quietly fall apart.

Two things jumped out. Revenue had fallen about 25% off its recent peak. And EBITDA — the operating cash flow that's supposed to pay your rent — had slid from healthy to negative on a trailing-twelve-month basis. The company wasn't growing into the lease. It was shrinking under it.

That reframes the whole deal. The tenant isn't selling the building to redeploy capital into expansion; it's potentially selling to raise cash because the operating business is under pressure. The sale proceeds you're providing might be the very thing keeping the lights on — which means you could be funding your own tenant's runway and calling it a 7% yield.

Step three: the number that actually decides it — rent coverage

Here's the metric that matters on every single-tenant deal, and the one the cover page never shows you: rent coverage.

Rent coverage is the tenant's operating cash flow (EBITDA, or EBITDAR if you add rent back) divided by the annual rent they owe you. It is the single-tenant cousin of DSCR. Where DSCR asks "does the property's NOI cover the mortgage," rent coverage asks "does the tenant's business cover the rent it owes me." Institutional buyers of net-lease assets generally want to see coverage of 1.5x to 2.0x — meaning the tenant earns one and a half to two dollars of operating profit for every dollar of rent. That cushion is what lets a tenant absorb a bad year and still pay you.

This tenant came in below 1.0x on a trailing basis.

Sub-1.0x coverage is the whole story in one number. It means the tenant is not paying rent out of operating profit — there isn't enough operating profit. They're paying it out of something else: a credit line, the owner's pocket, or the proceeds of the sale you're about to fund. None of those are durable for ten years. A long lease term is worthless if the tenant can't fund year three.

If you want to feel how unforgiving this math is, run a tenant's EBITDA against a proposed rent in the NNN Lease Analyzer — it shows broker cap, true cap, and rent coverage together — and then run the debt side of your own acquisition through the DSCR calculator. When both the tenant's coverage and your DSCR are thin, you're not buying income. You're buying two stacked fragilities.

Step four: the line item hiding in plain sight

One more thing I'd flag for anyone doing this, because it nearly fooled my coverage math. Buried in the operating statement was a large "warehouse expense" line that was ambiguously classified — it could plausibly be reclassified between operating and non-operating, and depending on how you treated it, the coverage ratio moved materially.

The lesson: before you trust any coverage or NOI number, reconcile the expense classifications. A single mislabeled line can flatter a deal by a turn of coverage, and the broker package will always present the version that looks best. If a number swings your decision and you can't explain exactly what's in it, that's not a number yet — it's a question.

Step five: two ways to make a shaky deal work

A bad coverage ratio doesn't automatically kill a deal. It tells you the price or the structure is wrong for the risk. There were two honest paths forward:

Path A — reprice to the risk. Reset the rent down to a level the tenant's actual cash flow can cover — enough to push coverage back toward a defensible ratio — and bring the purchase price down with it. Less headline yield, but a rent the tenant can actually pay is worth more than a high rent they can't.

Path B — hold the rent, but buy down the risk with structure. Keep the rent where it is and demand protections that change your position if the tenant stumbles: a full corporate guaranty (and a personal one where there's a principal worth guaranteeing), a meaningful security deposit measured in months not weeks, an ongoing financial-reporting and coverage covenant so you see trouble coming, the escalators locked in, and possibly a shorter initial term so you're not married to a deteriorating credit for a decade.

What you can't do is take Path A's price with Path B's structure — a high rent, a thin tenant, and no protections. That's the deal as it arrives. Your job is to move it onto one of the two real paths or walk.

The decision, and why walking is a result

I was lukewarm on this one, and I made my peace early with the idea that a clean walk during diligence is a perfectly good outcome. That mindset is the actual edge. Most buyers fall in love with the cap rate on the cover page and then spend diligence looking for reasons to confirm the "yes" they already gave. Discipline is the opposite: you make the deal earn the yes, and you treat "no" as a free option you're holding right up until you sign.

A pretty cap rate should never be allowed to buy you a tenant who can't pay. Underwriting exists to make sure it doesn't.

The takeaway

Cap rate is where underwriting starts, not where it ends. It's a price. On any single-tenant or sale-leaseback deal, the question that decides the outcome is whether the tenant's business can cover the rent — through a bad year, not just a good one. Rent coverage answers that. Pull the financials, compute the coverage, reconcile the expense lines, and let the number tell you which of the two paths the deal belongs on.

If you're sizing one of these up, run the same checks I did: the NNN Lease Analyzer for rent coverage and broker-vs-true cap, the cap rate calculator to pressure-test the price, and the DSCR calculator for the debt side of your own acquisition. When you want the full two-NOI sale-leaseback underwriting — a complete 10-year model, deal score, and an investor-ready report — that's exactly what UpsideIQ was built to run.

Written by Michael Laudino, founder of LFO Capital LLC, who underwrites industrial and multifamily acquisitions across the Southeast. UpsideIQ is LFO Capital's institutional-grade underwriting platform. This article is for informational purposes only and is not investment advice.