Deal Analysis on a Multi-family Master Lease in Massachusetts

5 Replies

Hey BP - I'm in need of some guidance. I'm treading into somewhat uncharted territory here. As a matter of background, I own and self-manage 25 rental units and have been doing this for about 15 years. I'm looking at a six unit property that has been on the market for well over a year. The price has been reduced and the owner lives well out of town. I have no idea if there is any interest in this type of arrangement but I have to start somewhere so I'm looking to offer to master lease the property. He gets a monthly check and has no more headaches. According to the owner, the current annual rents are $56K and the expenses are $28K which is coincidentally 50%. I know that the rents can be higher and the expenses can be much lower. He pays for management (I self-manage) and he pays for snow plowing, landscaping (I do this all myself). I can also lower his insurance costs, waste removal, and other expenses. 

I know he paid $330K for the property about 11 years ago. Based on commercial financing assuming 25% down I'm guessing his debt service is about $16,500. It's not completely a guess as I can see that he has a mortgage for approximately that amount within a couple years of purchasing the property. The current asking price is $280K. I'm guessing I could get down to the $260K range on a purchase.

Income - $56K

Expenses - $28K

NOI - $28K

Less Debt Service $16,500

Cash Flow - $11,500

Can somebody  give me some basics on this deal in terms of where I want to be with a monthly master lease payment? I figure if his cash flow is currently about $1,000/month on the property I would have to at least replace his cash flow, no? I would be responsible for his mortgage payment as well as all expenses and I would collect all rents and I would have to reduce expenses and raise rents in order to increase my cash flow. 

What am I missing with this deal? Any advice is greatly appreciated.

I understand a lot of this depends on the subject property, are rents at or below market rate, how are the mechanicals, etc...

I'm comfortable with the property itself, it's the numbers I'm trying to wrap my head around. 

@Brian Gibbons any insight you can share?

Thanks BP

The 1st thing I would do is I would call him and ask him whether not he would consider seller financing

then try to do some kind of "subject to and a note"

The master lease option is basically taking over the management of the property and guaranteeing him some kind of payment no matter what happens with the tenants paying

If he says no on the seller financing I would just ask him, "what was what I was saying if you consider doing this is what if I could guarantee you one payment and I would take care of managing all the tenants and the payment would be guaranteed to you, would that be something worth talking about or maybe not?"

If this is just a deal that "might happen, "I don't know what to say Rob, but that's what I would do in theory

I learned a long time ago you have to sit down and ask a lot of questions to the seller and find out if 

they don't sell what are they going to do, or 

If they did get all-cash, what would they do it all the cash?

I hope that helps you with Masterleasing

@Bill Gulley

Thanks @Brian Gibbons . This is not theoretical. Im trying to formulate an offer. In terms of a master lease Im trying to figure out how to make the numbers work. Seller financing is my first preference but the master lease is an option I want to offer as well. 

Well I think it takes a conversation face-to-face and I would not try to do it over the phone 

and you need to figure out like I said , what would be best for them and it's not just purchase price

Maybe Im asking the wrong question. Im looking for a financial scenario where I master lease the property, raise the rents, reduce expenses, and I make money every month without coming up w the 25% down. Do I offer 25% less than monthly rents? Do I offer him his current cash flow? How do I make the numbers appealing to the seller while I make money?

This advice is not for new investors! Rob is a seasoned manager/investor.

Rob, I would offer about 10% less than his net cash flow, just as a management fee, that is a set figure over say a 5 year term.

I'd take an option to purchase, this is commercial, finance the option price as this is not under Dodd-Frank.

Finance the option with your increase in revenue, it doesn't have to be financed like a note, simply allow lump sums to be applied toward the purchase over the term. You could agree to a target amount annually.

If this is listed, how do take care of the Realtor? Might be 26K, that comes out of the option price paid and is applied to the purchase. The Realtor might carry back commissions with a note from the seller that you pay under identical terms on the option, be careful too, the Realtor is only entitled to a commission when title is transferred, on a sale, not a lease, so you may negotiate that.

I agree with Brian, this is a face to face conversation. I would go to the seller. I'd make sure the Realtor knew that we would not discuss any business until we had them on the phone on an open call. But, if the Realtor wants to go, fine, if the seller is willing to come, fine. But I would not just present my offer to the Realtor for them to present it without me. If all fails, then use the phone with the Realtor.

I don't mind seeing someone like you doing a master lease, both parties are experienced, just need to come to terms.

Allow yourself 6 months to obtain financing, I'd suggest a minimum period of 3 1/2 years to the pop! This gives you time to show the track record.

Don't forget insurance assignments for losses, the optionor may have performance requirements under an option, the optionee may not be required to perform, so any insurance loss, the seller agrees to assign for repairs as customary in a sale agreement.

I suggest you cover the bases in writing before you present an offer, maintenance requirements, responsible for compliance, codes, leasing, escrows, etc. A brief operations plan.

I would not present two deals or options at the same time, this isn't Harry Homeowner, be more certain of the direction you need to go first, then if that isn't accepted go for the second option. Good luck :)    

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