When a sale-leaseback strategy is presented with investors, a question that sometimes comes up is: “Should I put this investment in my credit allocation or my real estate allocation?”

One can easily categorize sale-leasebacks as credit investments. Investors provide capital to a company and in return receive a series of fixed payments per the lease contract. The certainty of those payments relies on the company’s financial strength. Accordingly, prior to entering into a sale-leaseback transaction, investors underwrite the company from a credit perspective and negotiate financial covenants, just as a lender would.

Yet, sale-leasebacks are also real estate investments because the investors purchase and own property. The investors underwrite the property as a real estate investor, evaluating the market, comparable rents, industry trends and alternative uses. And, like real estate, the return on the investment comes from the property’s cash flow and sale price.