Information on Master Lease Options

[Mack Roberts]

Greetings Everyone,

I recently heard about Master Lease Options (MLO). Which allows you to purchase commercial real estate. Is anyone here on Bigger Pockets familiar with Master Lease Options?

Any input about the pro's and con's of master lease options would be great. Thanks in advance. Have a successful day.

Mack

[Bill Walston]

Hi Mack! To say I'm a big fan of MLOs would be an understatement. In the last 9 months I've closed 7 deals using the MLO strategy. Some pros: no large cash down payment; no bank/lender qualifying in order to control the property; ability to walk away from the deal at the end of the lease if things are not working out, and minimal risk. The biggest challenge, I would say, is locating the targeted properties. But then, my philosophy is MLO deals are not found, they are made :-)

[Bill C.]

Bill Walston,

I'm curious... is that 7 deals in the last 9 months with commercial or single family?

Thanks,
Bill Champlin

[Account Closed]

A "master lease option" for a single family residence is more properly called a "sandwich lease", not MLO. The "master tenant" is simply exercising his right to sublet to a sub-tenant. The MLO terminology generally applies to a property with multiple tenants, like an office building or an apartment building.

An office building would have an MLO probably with net lease terms to the tenants. The tenants pay rent plus taxes, insurance, and maintenance. (Btw, many of those gigantic skyscrapers in New York city are actually under a master lease option with delegation to a property management company.)

An apartment building MLO would have gross lease terms to the tenants. The tenants generally pay only rent, and the owner pays the taxes, insurance, and maintenance.

In either case, the "master tenant" also has a purchase option on the property and a recorded Memorandum of Option to cloud the title to prevent the owner from selling the property.

Payments to the owner include the master lease payment and incremental option consideration that extends the option period and applies towards the purchase price.

Also get a title insurance policy with option endorsement to protect the right to exercise the option.

Also, the sub-tenants do not have an option to buy, because the "master tenant" cannot offer an option contract without being an owner of record on the title.

[Bill Walston]

Originally posted by Bill C.:

Bill Walston,

I'm curious... is that 7 deals in the last 9 months with commercial or single family?

Thanks,
Bill Champlin

Sorry Bill, I missed this earlier. All 7 deals were 10+ units, closed using a master lease option.

[Niranyan Figueroa]

Account Closed,

would the owner or the master tenant pay the taxes, insurance and maintenance? And can this be negotiated in the contract? Thank you.

[Steve Babiak]

Niranyan Figueroa - "Account Closed" has left the BP membership ...

[Bill Gulley]

Wow, I'd say much is portrayed with a high degree of over simplification.

Consider when someone sells a business, say a toy store, that new buyer may be in a master lease arrangement, keeping the old owner responsible on the lease.

MLOs can be seen as a financing arrangemet, tons of risks to consider in resdential, commercial, many laws like the SAFE Act don't apply, doesn't mean you have license to do whatever you can dream up.

A seller can always hold the middle man responsible, it may not just be, "oh well, it didn't work out, sorry" and walk away.

Depends alot on your ability to qualify the guy on the end who can actually perform and the representations you make.

In some areas it is seen as acting as a leasing/sale broker to facilitate a sale, mainly if you are in the business of doing these over and over, that is not a sub-letting issue of a lease you may have entered into but a business operation with a strategy to circumvent RE licens laws.

The are tons of issues, especially for new investors, beware of the gurus and mentors, to date I've never seen them address all the issues that may apply.

Just IMO. :)

[Michael Wagner]

While I agree with Bill G. that Master Lease Options do not eliminate risk, I find them to be an EXCELLENT way to mitigate risk. They also do significantly lower the barrier to entry for commercial properties. They work particularly well for properties that are under-performing in that they give you time to turn the property around, stabilize income, increase value and refinance with permanent financing when you purchase. Highly recommend getting smart on this technique!

[Dylan Tettemer]

Would you be able to negotiate that the master tenant pays the maintenance, taxes, and insurance?

[Danny Plueddemann]

Mack, I know this is an old post now, but how did it go rolling out the master leasing?  I'm a big fan and am rolling this out in Charlotte, NC.