What rent coverage measures
Rent coverage is the single most important durability test in a sale-leaseback, and it's the one a headline cap rate quietly hides. The cap rate tells you what you're paying. Rent coverage tells you whether you'll actually get paid — not in Year 1 when the deal closes and everyone's optimistic, but in the year the tenant's business softens and the rent check still has to clear.
The math is simple: rent coverage ratio = EBITDAR ÷ annual rent. EBITDAR is the tenant's earnings before interest, taxes, depreciation, amortization, and rent — the pre-rent operating cash flow available to service the lease. A 2.0x ratio means the tenant throws off twice the cash it needs to cover rent. A 1.0x ratio means every dollar of pre-rent earnings goes straight to the landlord, leaving nothing for debt service, capex, working capital, or a bad quarter. Below 1.0x, the tenant is funding your rent out of something other than operations, and that's not a tenant — that's a countdown.
| Coverage (EBITDAR ÷ rent) | Read |
|---|---|
| ≥ 2.0× | Strong — institutional |
| 1.5× – 1.99× | Acceptable floor |
| 1.0× – 1.49× | Thin — below institutional floor |
| < 1.0× | Rent not covered by tenant cash flow |
Why EBITDAR and not EBITDA
When a company reports EBITDA, rent has already been subtracted as an operating expense. To test how well the business can carry a rent obligation, you have to add that rent back — otherwise you're penalizing the tenant for the very expense you're trying to size. That's the "R" in EBITDAR: EBITDAR = EBITDA + rent. This calculator lets you enter EBITDAR directly if you already have it, or enter EBITDA and annual rent and it does the add-back for you. Skipping this step is the most common way an analyst overstates a tenant's weakness — or, worse, compares two deals on inconsistent bases.
The 1.5x–2.0x institutional floor
For a non-rated or below-investment-grade single tenant, the conventional institutional sale-leaseback rent coverage ratio sits in the 1.5x to 2.0x range, and the band is credit-dependent. A genuinely investment-grade credit can be underwritten closer to — sometimes below — 1.5x, because the probability of default is low and the lease is the senior claim on a stable business. A thin, cyclical, or deteriorating credit needs to clear 2.0x or better, because the cushion is the protection. There's no rated balance sheet standing behind the rent, so the coverage ratio is your underwriting. When a deal comes in at exactly 1.5x EBITDAR rent coverage on a non-rated tenant, that's the floor, not the target — and it leaves no room for the business to slip.
Escalators erode the cushion you start with
This is where a lot of sale-leasebacks go quietly wrong. The rent steps up every year — 3%, 3.5%, sometimes more — while the tenant's earnings are flat at best and declining at worst. A deal that pencils at a comfortable 2.0x in Year 1 can grind below the 1.5x floor by Year 7 or 8 purely from escalation, even if the tenant's business holds perfectly steady. If earnings are actually shrinking, the erosion compounds. That's why this calculator projects coverage across the lease term: it holds tenant EBITDAR flat (the conservative read), grows the rent at your escalator, and shows you the Year-1 versus Year-N coverage so you can see where the lease crosses the floor — not just where it starts.
How it should drive the decision
A strong sale-leaseback isn't a high cap rate. It's a rent number the tenant can carry comfortably through a downturn, on a credit that can absorb a bad year without skipping a payment. Run the tenant's real, trailing-twelve-month EBITDAR — not a peak year, not a pro forma — against the rent you're being asked to underwrite. If coverage is thin at the floor, the move isn't to walk away on reflex; it's to reset. Either bring the rent down until coverage clears your threshold with room to spare, or hold the rent and demand structure in exchange: a full corporate or principal guaranty, a rent-coverage covenant, tighter escalators. What you don't do is accept a 1.0x–1.3x coverage deal because the cap rate looked good on the broker's first page. The cap rate is the tenant's best case. Rent coverage is yours.
Enter the tenant's EBITDAR (or EBITDA plus rent), the annual rent, and your escalator and term above. The calculator returns the current sale-leaseback rent coverage ratio, grades it against the 1.5x–2.0x institutional floor, and projects how the cushion erodes over the life of the lease.
Then pressure-test the rest of the deal: analyze the lease in the NNN Lease Analyzer, check your own financing with the DSCR calculator, browse the industrial underwriting hub, and run the whole sale-leaseback in UpsideIQ. See pricing.