Master Lease Option on Apt. Bldg

Can someone explain the technique of using a master lease with option on an apartment complex and how it works. Does it work best with troubled properties?

Edited: 06/26/2010 at 08:01AM

Jon Holdman

Real Estate Investor · Denver, Colorado

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Icon_minipost Apr 23 '09, 01:20 PM

Not an expert, but this is not too complicated. Its a lease option for an apartment building. You lease the whole thing, then sublet the apartments to the tenants. You pocket the difference between the individual payments and your total.

I would think it would NOT work well with a troubled seller. Just like with any lease, you're relying on the seller to actually make their payments. So, you want a strong seller. Or, you want to make the payment directly yourself.

Edited: 06/26/2010 at 08:01AM

Jon Holdman, Flying Phoenix LLC

Charles Lucenay

Commercial Real Estate Agent · Houston, Texas

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Icon_minipost Apr 23 '09, 11:43 PM

I dont know about apartments but I know on shopping centers and office buildings this is generally done so that the seller can artificially inflate the price because he gets to capitalize the income from the master lease even though there likely isnt anyone actually in the space. Developers were bad about doing this a few years ago. They would master lease a center for a year up to 100% occupancy and then the buyer was left holding the bag after the first year. If you are buying the property based on the master lease income I would run away from that deal. If it is a tenant that is coming in and leasing and then sub-leasing the space then I agree with Jon just make sure they are strong enough to make the full payments.

Edited: 06/26/2010 at 08:02AM

John Mich

Real Estate Investor · Holbrook, New York

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Icon_minipost Apr 26 '09, 07:21 AM

A Master Lease could work very well with a troubled property.
You want an apartment building where a hidden value play is evident, i.e. Rents below market, minor rehab to increase property value, sloppy management, delayed maintenance etc.
The seller receives an agreed upon periodic amount while you work to increase the value or cash flow for the duration of the option (typically 1-2 years.)
When the option matures you purchase the property at the original agreed upon price reaping the increase in cash flow or equity or both. :mrgreen:

Edited: 06/26/2010 at 08:03AM

Colleen Sheridan

Real Estate Consultant · Wethersfield, Connecticut

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Icon_minipost Jul 09 '09, 03:44 AM

Master Leases can be used for a variety of reasons, and most are not scams. For instance, an owner may not want continue to operate a building day to day but does not want to pay capital gains on sale if they have low basis, so they lease the entire building to someone who is more willing to operate the building and take on the management. Presumably, the master lease rate will be lower than the market rent so the "operator" can make a profit and justify investment in upgrades and leasing costs for the building. Sometimes a master lease is used when there is a ground lease on the land. This would allow someone other than the fee owner to build a building and "sublease" it to a tenant, a structure frequently used for Fortune 500 clients who have good bankable credit but do not want to build, own or operate their own building. A master lease is just another tool for managing control of real estate. You need to understand the motivation of the seller to determine if the reason is legitimate and make sure the numbers work. Finally, before you enter into a master lease, make sure you have a very good real estate attorney who has experince in structuring these transactions. Let me say that again - experience in doing these specific structures!. You do not...absolutely do NOT want a beginner at this!

Edited: 06/26/2010 at 08:54AM

Gary E. London, CPA

Real Estate Investor · Chicago, Illinois

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Icon_minipost Jul 09 '09, 06:50 AM

I appreciate everyone's input on this topic. The information has been helpful.

Edited: 06/26/2010 at 08:54AM

Tod Radford

Real Estate Investor · Southlake, Texas

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Icon_minipost Jul 09 '09, 07:20 AM

John, Colleen-I think Jon has a good point about the integrity of the owner. Don't you run the risk of losing control of the property if the owner does not perform with his lender? If the goal is to increase value and cash flow, how could you protect yourself?

Edited: 06/26/2010 at 08:54AM

Tod Radford, Thompson Realty Corporation
Telephone: 817-781-1942
Website: http://www.thompson-realty.com
radyakllc@gmail.com http://www.thompson-realty.com

Anthony Garvey

Real Estate Investor · Andover, Minnesota

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Icon_minipost Oct 16 '09, 03:39 AM

Tod,
You set up a trust to put rental income into and pay the mortgage directly from the trust. so you completely run and maintain the property without including the seller in any of the property operations. I hope this helps.

Edited: 06/26/2010 at 10:06AM

John Mich

Real Estate Investor · Holbrook, New York

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Icon_minipost Oct 16 '09, 04:21 AM

My suggestions re Master Leases is:
1) Always take/give an option to buy separate from the lease agreement with a set purchase price for the same period of years..
2) If buying get built-in lease renewals, if selling let them pay all expenses but you get monthly financials to check on them.
In any event keep a close eye on monthly expenses, value created and rental income, also verify RE tax payments and insurance premiums paid.

Edited: 06/26/2010 at 10:06AM by John Mich