When you're evaluating a sale-leaseback, most operators spend the most time on two things: the cap rate and the lease term. Those matter. But they're not the number that determines whether the deal will work for you 15 years from now.
Operators spend a lot of time negotiating the cap rate. A 7-cap versus a 7.5-cap on a $4 million property is $20,000 a year in rent. Over 20 years, that's $400,000 — real money. I understand the focus.
They also spend a lot of time on lease term. Twenty years feels like a long time. Fifteen feels better. "What if the business changes?" Fair question.
But in 500 deals underwritten at STORE Capital over eight years — more than $6 billion in transaction volume — the cap rate and the lease term were not the variables that separated the transactions that performed from the ones that didn't.
Rent coverage was.
What rent coverage is
Rent coverage is the ratio of your business's earnings to the rent you'll be paying under the lease.
The cleanest version: take your store-level EBITDA (earnings before interest, taxes, depreciation, and amortization) and divide it by the annual rent. If your store earns $600,000 and the rent is $300,000, your rent coverage is 2.0x.
That number tells the capital partner something that the cap rate and lease term don't: whether your business can actually sustain the rent obligation, in bad years and good ones, for the full length of the lease.
A 7-cap deal with a 25-year lease and 1.2x rent coverage is a worse deal for both sides than a 7.5-cap deal with a 20-year lease and 2.5x coverage. Every time.
What 500 deals taught me
When you underwrite enough transactions — and 500+ is enough to see the patterns — you learn to sort deals by how they performed, not how they looked at signing.
The deals that looked best at signing often had the tightest coverage ratios. The operator had been doing well, the lease looked clean, the cap rate was attractive. Then something happened: a bad quarter, a new competitor, a year when the brand struggled. The business with 2.5x coverage absorbed it. The business with 1.3x coverage did not.
I'm not saying a 1.3x coverage deal is automatically bad. Some asset classes are so predictable, so tied to essential human behavior, that we accept lower coverage floors. But most operators assume their rent coverage is fine because the business has been profitable. Profitable and adequately covered are not the same thing.
Here's what I learned from the deals that went wrong:
The rent obligation is fixed. Your revenue isn't. When you sign a 20-year lease, you're not making a bet on this year. You're making a bet on 20 years of business performance — through recessions, through competitor entry, through whatever brand or regulatory change hits your category in year 11. Your rent coverage is the cushion between your business and the lease that can't be renegotiated.
The minimums by sector
These floors are where we start the conversation, not end it. They're derived from years of watching which deals needed the cushion and how much.
QSR and full-service restaurants: 1.5x to 1.7x minimum. Restaurants run thin margins. Sales are volatile. Labor costs move. A restaurant that clears 2x in a good year might clear 1.4x in a hard one. We want to see the cushion, because we know the floor will get tested.
Industrial and distribution: 3x to 4x minimum. The floor is higher here because the asset itself is more specialized. If a tenant vacates an industrial building, re-leasing it takes time and money. Higher coverage compensates for that asset-level risk.
Most other categories (fitness, healthcare, business services, specialty retail): 2x as the default floor. This is where most deals live. A business that clears 2x in its trailing 12 months has shown it can sustain the rent obligation with some margin to absorb a difficult period.
Deals below these floors aren't automatically declined. Sometimes there's a strong corporate guarantee. Sometimes the franchisee's track record is exceptional. Sometimes the site is irreplaceable and the business's performance, while thin, is unusually predictable. We look at the whole picture. But we start with the floor, and we always explain what we're doing and why.
When coverage looks fine and isn't
The most dangerous rent coverage situation I've seen isn't a deal with obviously thin coverage. It's a deal where the coverage looks adequate at the unit level but is actually being held up by one or two strong locations.
Consider an eight-store operator with a 2.1x average coverage ratio. That looks fine. But if two of the eight stores are running 3.5x and four stores are running 1.6x, the aggregate number is misleading. The real portfolio has four stores with a coverage problem — and those are the four stores most likely to cause trouble.
We look at coverage by unit, not just in aggregate. A deal with strong average coverage and weak unit-level coverage is a deal with concentration risk we haven't priced yet.
I'll give you an anonymized version of a deal we declined. The operator had seven stores, all in the same regional market, with $2.3M in total EBITDA and $900K in annual rent obligation — roughly 2.5x aggregate coverage. Looked fine.
When we dug into the unit economics, two stores generated $1.4M of that EBITDA combined. The other five averaged $180K per location. Those five stores were paying $600K of the $900K in total rent. Their actual coverage: 1.5x on an asset that was more volatile than the aggregate suggested.
We declined. Not because the operator wasn't profitable — they clearly were. But because the risk we were pricing was the five weak stores, and the five weak stores didn't have 2.5x coverage. They had 1.5x, and that wasn't enough given the volatility.
The operator was frustrated with us, which I understand. They had a good business and thought they'd done something wrong. They hadn't. The structure just wasn't right for what the underlying coverage actually showed.
What adequate coverage actually looks like
Before you call a sale-leaseback partner, run this calculation on your own business.
Take your trailing 12-month EBITDA at the unit level — not the enterprise level, the unit level. Subtract any one-time items that inflated or depressed that number. Divide it by the annual rent you'd be paying under the proposed lease.
If the number is above 2x and the business has been consistent over 36 months, you're in reasonable territory for most asset classes. If it's between 1.5x and 2x, the conversation is more nuanced — we'd want to understand what's driving the thinner margin and whether it's structural or cyclical.
If it's below 1.5x, a sale-leaseback probably isn't the right structure right now. Not because you don't have a good business, but because a 20-year rent obligation needs more cushion than that, and signing one without the cushion is a risk to you as much as it is to the investor.
Why this matters more than the cap rate
The cap rate negotiation is about price. Rent coverage is about structure.
You can win the cap rate negotiation by 50 basis points and sign a deal with 1.3x coverage and create a constraint that will limit your business for 20 years. Or you can pay 50 basis points more on the cap rate, sign at 2.4x coverage, and have the flexibility to grow through bad quarters without the rent becoming an existential issue.
The most favorable deals we've done for operators weren't the ones with the lowest cap rates. They were the ones where the business had real, durable coverage — where the rent was a fixed cost the business could carry without compromising anything else.
That coverage is the foundation everything else is built on. The cap rate and the lease term are the walls. They matter. But without a solid foundation, the walls don't stand.
Want to run your own coverage calculation? We're happy to look at the numbers with you — no pitch, no obligation. If the coverage is there, the conversation goes from there. If it's not, we'll tell you what needs to change before it makes sense.