How do you buy your first commercial property even if you don’t have 35% down payment money, perfect credit, and millions in net worth? You have to get creative. One way to do it is with a master lease.
Master lease agreements have been around for centuries. Think of a master lease as the “lease with an option to buy” but over a property. The term lease option is used when referring to single family homes, but for apartments and commercial property, it is typically called a master lease agreement.
In simple terms…
You will buy the seller’s property by giving him a small (or none) down payment in exchange for all rights and privileges of owning and operating the property without legal title changing hands. At close, you get equitable title, not legal title. You are entitled to the property’s cash flow above the master lease payment, all future equity, tax benefits, and day-to-day management.
Because your price and terms are set, all of the upside is yours to keep. The more efficient you are, the more you make. As you increase the Net Operating Income (NOI), the property’s increase in value becomes yours. All the seller gets is a monthly payment from you on the interest of the difference between the lease agreement price and what he owes. Once you sell the property, every dollar over the lease agreement price is your profit.
In simpler terms…
The Seller gets:
- easy sale of the property
- lease payments on the equity of the property paid every month
- freedom from involvement in the operation of the property
The Buyer gets:
- a purchase involving no banks or lenders or appraisal
- all cash flow above the lease payment
- an option to buy at a pre-fixed price within a set period of time no matter how much the property value has increased
- all profits above the master lease agreement price
Master lease advantages:
- no banks required
- you and seller can get as creative as you want on the deal terms
- quick closing, low closing costs, closing as quickly as 7 days
- seller can generate good interest income per month
- buyer can create a good amount of cash flow and equity build-up
Master lease disadvantages:
- foreclosure by seller is easy if buyer does not perform per lease agreement
- it may trigger a due-on-sale clause on the seller’s existing mortgage
- seller may not perform his end of the agreement
Master lease must haves:
- have an attorney create the master lease agreement. Real estate law and contract law differ by state. Do not use master lease agreements purchased online or from office supply stores
- perform a title search to make sure the title is clear and there are no liens or understand what liens do exist
- engage the services of a holding company to retain possession of an executed deed and the original documents
- record the master lease agreement against the property
- get an appraisal
- have a razor-sharp exit strategy thought out well in advanced. It should be conservative with minimal to no speculation based on sound research and counsel
- to ensure that the mortgage and taxes are paid on time, have a third party pay them (e.g. title company or another type of disbursement company)
When you see these words, jump on the opportunity quickly…
Here are key words and phrases to watch out for when looking for properties primed for the master lease technique: owner motivated, seller financing, owner will carry, master lease option, creative offers welcome, bring all offers, JV partner wanted, investor wanted.
Finally, here is the secret to doing creatively financed deals, no matter how large or small…ask!
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