Submitted my first letter of intent on Master lease with option

[Samson Kay]

I'm excited. The seller has already stated that he would entertain a Master lease.

After walking down the property and neighborhood I decided that this was the perfect storm for this strategy! A subrenting building (23 units) with room for rent increases. A motivated out of country investor. A Negatively cash flowing building. A building with only minor cosmetics needed on the interior.

Here are some of the numbers:

Current NOI/Projected NOI = 55000/108405

Expenses = 95,648

Asking Price = 1.05 Million

Market Cap Rate for the area = 12-14%

The asking price is really high considering the negative NOI. But I believe that the seller was using the building to report a loss on his more profitable investments. Which is why he decided to keep the rents so low.

Wish me luck!

[Shaun Reilly]

Maybe I'm reading something wrong but I can't see how this could work.

If the current NOI is really $55,000 then the guy is looking for like a 5.2% Cap in an area you are saying is 12-14%. First crazy thing!

However if you see that great opportunity to get more value out of it and can get the NOI to that projected $108,405 that is a pretty tremendous turnaround, but you still can't really win.

Unless the Cap rates go way down over that timeframe you are still only looking at like 10.3% which gives you negative equity and you will just let the option expire.

Seems like even if you want to roll the dice on getting the NOI up you still need to get him down to like $900K which is where your projected NOI would get you a ~12% Cap. I mean even that is a zero equity position but at least then if Cap rates do come down for some reason you at least have a shot.

Am I missing something?