Sale-leaseback deals aren't merely for funding growth these days; capital from the sale of restaurants can be put to other crucial uses, explains real-estate-financing expert Jeff Fleischer of Spirit Finance, in Scottsdale, Ariz.

When does a sale-leaseback transaction make the most sense?

Sale leaseback makes more sense for some operators than for others. People who have been growing rapidly or consolidating industry or undergoing merger and acquisition or a recapitalization. In those scenarios it makes sense to look at sale leaseback as part of other alternatives, which can include high-yield financing, senior debt, preferred equity—the whole capital stack, in other words.

That's a lot of ground. Can you narrow it down to a model or two?

In the private market on the franchise side and in public markets, we have a lot of different models. Some work, some don't. I'm not sure you can draw a straight line through them and correlate real-estate ownership to whether [the models] succeed or not. If somebody were to lease all their real estate and do a good job, put value on the plate and not put too much leverage on the balance sheet, over long periods of time that capital structure works very well.

Luby's board recently argued that rent could be excessive after a sale-leaseback deal. True from your standpoint?

The ceiling on how much you want to finance on a lease, in our view, is the amount it would cost to build a restaurant new. If the operating margins or cash flow of the business are not sufficient to support that level of rent, then the real estate is probably not worth that much. The [segment] that Luby's is in is not going to be as strong as others. I am not surprised at their response.

What do rent bumps look like these days?

Rent bumps tend to be 10 percent every five years or 2 percent a year, and they tend to be inflation-based. Real core inflation is probably double that number. Restaurant operating companies, given the competitive environment, often have a difficult time passing through commodity price increases in terms of menu increases. They don't want to tie themselves to a fully indexed inflation lease adjuster. So what you find is that inflation adjusters are roughly half of what real inflation is.

Is that half you are talking about a general rule of thumb, or do some restaurant companies hold your feet even closer to the fire?

There are enough [sale-leaseback] deals going on that people think it is just market [price] or not. The underlying core inflation is a lot higher than what is reflected in current rent bumps.

Finally, how important are buyback clauses these days?

The way to think about it is: How do you structure a flexible lease that allows someone to run the business without impairing the business? Buybacks are part of it—the ability to substitute assets, the ability to go to investors for remodeling capital, the ability to close stores if [the lessees] wish. So all of those kinds of things, in addition to the return-on-equity discussion, are really important.