Manufacturers may face more expensive bank debt if an expansion or shareholder buyout is already underway. Right now, you might be asking whether to pause the project. Instead, I’d reframe your concern around how you should fund it.
On September 16, 2026, the Fed raised its target range by a quarter point to 3.75% to 4%, the first increase since 2023. With higher borrowing costs, a sale-leaseback is one funding option worth comparing, but it’s not automatically better for every manufacturer. We’ve outlined what these changes mean for your business.
What is a Sale-Leaseback?
You’re exploring options to free up capital as you plan an upcoming project. Reinvesting the equity tied up in real estate in your core operations could earn a higher return. A traditional loan adds debt to your balance sheet. But you need immediate cash for growth. Is there a better answer?
This is where manufacturers could turn to a sale-leaseback. This financial transaction allows a company to sell an asset, in this case, your facility, and lease it back from the buyer. Your day-to-day operations can stay largely the same; you sell your facility to an investor, sign a long-term lease, and keep operating in the same building. This can be a compelling reason for manufacturers to choose a sale-leaseback over selling and relocating.
A commercial real estate leaseback isn’t a loan. While you don’t have a principal to repay, you do have a long-term, fixed commitment to rent. Leases typically run 10 to 15 years or longer and are usually triple net. You keep paying taxes, insurance, and maintenance as you do now, and your employees and equipment can stay where they are.
Something to keep in mind: Under current lease accounting rules (ASC 842), a long-term lease also appears on your balance sheet as a lease liability. This way, lenders and buyers will still see the commitment.
So why is this option getting more attention right now?
Why the Conversation Changed in September
The short answer is interest rates. When debt costs more, your building’s equity can look like an alternative source of capital. For some manufacturers, a sale-leaseback may be a practical business liquidity strategy to raise capital right now.
On September 16, the FOMC raised the federal funds target range by a quarter percentage point, to 3.75% to 4%. Long-term rates also rose, with the 10-year Treasury yield near 24-year highs as it rose above 5.35% in early October. This rate hike and long-term rates near multi-year highs have increased the cost of bank financing for expansions and buyouts.
Sale-leasebacks are not unusual and are being used more often again. For context, U.S. sale-leaseback volume rose 18% in 2025, to about $14.4 billion. Industrial middle-market deals drove much of 2025’s growth, and W.P. Carey expected activity to stay strong in 2026.
The Fed’s median projection puts rates slightly higher by year-end. Even still, growing popularity doesn’t make a sale-leaseback the right fit for every business.
What Makes a Sale-Leaseback a Good Fit
Do you have a clear, productive use for the cash you could free up? Here are a few situations where businesses may choose a sale-leaseback:
- Funding a major investment: If a new production line is expected to earn more than the cost of your lease.
- Buying out shareholders: May reduce the need for acquisition debt by using building equity to fund part of buying out shareholders.
- Redeploying building equity: Invest in equipment, people, and inventory instead of a building.
- A “general-purpose” facility: A general-purpose industrial building may be easier to sell than a highly specialized plant that would require reconfigurations.
- Operational Expansion: Operating businesses rates of return aren’t guaranteed, but they are often expected to be higher than that of real estate.
- Risk management: Selling your building may allow you to significantly diversify your investment portfolio, which takes much of the concentration risk out of your nest egg.
If you’re also planning an eventual business sale, selling the building and the business separately can sometimes produce a higher combined value. Keep in mind that the new rent reduces EBITDA, which can also lower the operating business’s value. For more on how buyers and lenders value a manufacturer, see what your manufacturing business is worth this year.
Consider all factors, not just the potential benefits, by understanding what you’d be giving up with this decision.
The Downside of a Sale-Leaseback
The same rate environment that makes bank debt more expensive might also reduce the value of a sale-leaseback. But that’s not all.
Every owner should consider these trade-offs before moving forward with a sale-leaseback:
- Rent becomes a fixed cost that can rise over time.
- Future appreciation of the property is lost, along with the ability to borrow against it later.
- You have less control, so any modifications and expansions may need landlord approval.
- You take on risk at the end of the lease, such as renewal terms, relocation, and how much negotiating power you’ll have.
- Higher rates can push cap rates up and potentially lower what an investor will pay for the building.
- There are often significant tax consequences related to the sale which reduces your cash flow to invest in other avenues.
The last point is relevant with the ongoing changes in September. Think about a building that has $500,000 in annual rent. An investor might value the facility at about $7.14 million at a 7% cap rate, but about $6.67 million at 7.5%. That small rate change produced a difference in proceeds of roughly half a million.
While this is only a hypothetical example, it could apply to your facility. For manufacturers that recently built or expanded, new IRS guidance issued this year adds one more factor.
What is the New Section 168(n)?
One more thing to look at before you sign. The OBBBA added Section 168(n), which lets manufacturers elect to deduct 100% of the cost of certain qualified production property (QPP). Generally, this is factory space where construction began after January 19, 2025, and before January 1, 2029. The property must also be placed in service after July 4, 2025, and before January 1, 2031.
Independent third-party lessors generally cannot claim the 100% deduction. However, under the IRS’s interim guidance, a lessor that is commonly controlled (generally 50% common ownership) may still qualify.
Picture a 40,000-square-foot addition to a manufacturing property. Under the OBBBA, manufacturers can elect under Section 168(n) to deduct up to 100% of the cost of QPP in the year it’s placed in service. If the owner sells the building to an investor, two issues may come up:
- The deduction may be recaptured. The rules include a 10-year recapture provision if the property stops being used in a qualified production activity. Because QPP is treated as Section 1245 property, ordinary income rules apply on a sale.
- The deduction generally doesn’t transfer to the buyer. An unrelated investor that leases the building back to you typically can’t claim Section 168(n). If your real estate is already held in a separate entity that leases to your company, that structure may affect your options.
The main takeaway is to run the after-tax numbers before you talk to buyers to see how a sale could affect the plan you already have in motion. The IRS has said proposed regulations are still coming, so confirm the current rules with your advisor before you act.
If a sale-leaseback is part of a larger ownership change, learn more about who you need on your team when buying or selling a business.
Questions to Ask Before You Make a Sale-Leaseback
Section 168(n) is one of several questions worth answering early. It’s a good idea to work through the rest of these with your advisor in advance:
- Did you take 168(n) or bonus depreciation on this building, and when was it placed in service?
- What are your after-tax proceeds at a realistic cap rate?
- Can your operations comfortably support rent during a downturn?
- How long do you expect to need this facility?
- How will the lease affect your existing loan covenants?
- Is your building in the condition investors look for, or is there deferred maintenance that would lower offers?
Depending on your situation, these answers can help show whether a sale-leaseback belongs in your options comparison.
How MBE CPAs Can Help Compare Your Options
Rising rates change the comparison, but you still decide which option best suits your business.
These options may be worth considering based on:
- A bank term loan: You want to keep owning your building to potentially benefit from any future appreciation or refinancing with lower rates.
- SBA 504 financing: The project involves real estate or major equipment, such as expansion or new product lines.
- Sale-leaseback: A large share of your company’s value is tied up in a building that isn’t producing a return.
- Delaying your project: The expected return on the expansion doesn’t clearly exceed today’s costs.
Some companies combine strategies, choosing one for funding the buyout and another for equipment. At MBE CPAs, we can help model these options before you commit by comparing the after-tax cost of each.
Whichever path you choose, look beyond the purchase price. As things change, work with a team that can help you explore a new direction for your business.