Master Lease Agreement for Commercial Real Estate

hi everyone this is Peter Harris from commercial property advisors comm and co-author of this book commercial real estate investing for dummies as well as coach and mentor to many commercial investors all across America the subject and title of today's video is called the master lease agreement for commercial real estate so let's get started the master lease agreement is probably my one of my most favorite ways to buy commercial real estate especially if you have no experience you have no credit you have a very small down payment but most of all you don't want to do banks and it works with apartments with office buildings with with strip centers with mobile home parks it was sub storage so pretty much anything commercial where is income involved the master lease agreement will most likely work one of the most famous master lease deals you ever come across is New York's Empire State Building now that building that particular building has a current master leases over a hundred years old and here's how it happened the original owner sold it to Prudential Insurance Company person came along in 1961 and offered Prudential a one hundred and fourteen year master lease agreement where they will pay Prudential two million dollars per year back then else a lot of money so Prudential signed off on it and they went into agreement with this new investor fast forward till today the payments are still two million dollars but the income is six million dollars so do the math six million dollars in income every year with two million dollars in payments that's a four million dollar profit per year so that is still ongoing today all right so that's probably the most famous mass release agreement deal you're probably ever going to hear us all right and I know what you're thinking you're thinking Peter I can't myself put a national base on a building that size and you probably right but what's stopping you from using the mass release on your first 12 unit apartment building or a small strip center or even a mobile home park or how about my produce a joke who use a mass release to secure his first deal which was a 168 unit apartment deal and I'll get to that shortly so here's how the mass lease agreement works you would buy the property from the owner and with a small or zero down payment and at closing what you would get is what we call equitable title not legal title equitable title which entitles you to all the cash flow all the tax benefits you have to take care to day-to-day operations of the property and pay all the bills and the best part is when you sell the property you get all the profits at the set price so basically when you set the terms well basically the terms of the mass release are are set in stone so whatever value you can increase with them on their property with during the mass release is yours to keep for example do you raise your rents and raising cash flow that's yours if you increase the property value by doing improvements and increase the value of sell the property all the profits are yours what the seller gets is a monthly lease payment from you and even that's negotiable so the mastoid spirit is ideal for the individual investor who has maybe perhaps no experience trouble credit very small down payment and does not want to deal with banks that's ideal for that person alright so let me go with you my protegees dealers name is Joe Joe found a 168 unit apartment building for sale and the owner of the property bought the property for two sons and they're in their mid-20s and and most mid-20s do not do are not interested in becoming property owners and they surely weren't so the property went into disrepair and it had I vacancy so when Joe went to do his research on the property he found two problems the first problem was that the property was in disrepair meaning that you cannot put a new loan or property a lender just wasn't willing to loan in a property secondly he couldn't put a loan under property anyway because there was a large prepay penalty about eight hundred thousand dollars penalty if the seller paid off the loan early play paid off the loan early so there was two big obstacles there however the seller still wanted to sell the property and he needed money to he needed to sell the property so you can get money for his neck development deal so here are two things you must do in order to do your first master lease commercial deal number one is get the seller motivation that's what you have to do and number two is you as you construct the offer and the agreement around the seller motivation okay let me repeat that get the seller motivation and you structure a deal and the terms around the seller motivation those are two most important things you have to do all right so what Joe did to make a long story short was Joe cash structured a four year master lease agreement deal where he brought in investors he paid them in eight percent return and after four years he's going to sell the property and split their profits fifty-fifty with the seller for me with the with this investors and just end up being a win-win for everyone the seller was able to get his down payment money for his new development deal he was able to get out of a problem property and Joe was able to get his first deal done as well as leave his first time his up his full-time job but my opinion the best thing the best part about Joe steel was that every year because Joe made a payment to the seller at least payments a seller every month the seller the intern paid the mortgage all right so every time did the mortgage the principal balance of the mortgage dropped by $200,000 per year Joel's deals for four years so 200,000 times four years is $800,000 so Joel created $800,000 in equity on this deal at the end of four years so all because of one deal that's the power of the master leaks all right now in simple terms here's what happens okay the the summer gets an easy sell their property all right a master lease deal can close in seven days all right the seller also gets lease payments every month you have to pay the seller a lease payment that covers the mortgage at least the seller also gets freedom he gets freedom from involvement in the day-to-day operations of the property and probably the most important thing the seller gets rescued from any personal issues of financial financial issues of the property because you take them over all right the buyer that's you you get to purchase a commercial property with no banks with no experience with no credit and possibly a very little amount of money out of your own pocket the buyer also gets less risk and you want to know eyes less risk is because that the loan is still in the sellers name the buyer also gets cash flow any money you made after the lease payment is yours to keep that's your cash flow so as you increase the rents and make more money and and become a better property owner increase the cash flow that's yours to keep next is the buyer gets an option to buy after a few years in Joe's case it was four years and probably the most important thing that buyer gets all profits let me explain this to you the the terms and the price and the match leaves are set for those let's say four years for example in Joe's kicks alright so if your if your price is set at a million dollars and you purchase a property of the match the lease and you go in and do improvements after four in four years and increase it probably by two by two million dollars so you bought in a million now you increase the value to 3 million that - Wayne dollar profit is 100% yours ok so that's the power of the master lease agreement all right I'm going to leave you with three Nuggets on you doing a successful commercial master lease deal the first nugget is when I mentioned before get the seller motivation and structure the deal around is motivation that's number one number two is I want you to unwind your mind of what a typical deal looks like all right there is no standard commercial master lease deal they're all different however there is one thing that holds it all together there's one thing I consider the glue of any master lease deal and that is the actual master lease agreement document the one that we our company uses is rock-solid attorney approved what type of seller or properties ideal for the master lease agreement and I'm going to go with you six signs and and I'm sure that one of these signs will probably match up with the property that you're currently looking at all right you'll see my mean all right now I want you to look for the seller that is tired and burnt out it's number one there are literally tens of thousands of sellers that fit this scenario today and you can find them they're tired they're burnt out they're broke they bought of that property and they were just kind of just burnt out of of the business and these are probably the most motivated sellers that you're going to find and since you are the problem solver and the tool that you're going to use is the master lease you're going to come along and you're going to buy their property from them from this tired and burnt out seller you're going to fix up your property you're going to stabilize it you're going to cash flowing you're going to regain to equity over time and you're going to sell out and cash out big time that's your goal here alright and also a target Brenta owner he probably hasn't operate their property optimally all right so it's probably has some issues with it therefore a loan can't probably go into property therefore you probably can't sell it for what do you want to sell it for and that's where you come along and that's why we use the master lease agreement all right the second type of seller and what you look for is a seller that lives out of state all right meaning he bought their property one state believe lives in another and what I like about these sellers is they are not emotionally tied to their properties so once they start experiencing problems they're more apt to sell than a property owner who lives you know close to his his commercial property and what I want you to do to realize is is back in the day when real estate was was booming a lot of people because property is in their own area have the prices skyrocketed they went outside of their area and they bought these properties on paper look great but Asha Audi what most of times that happened was they hired bad practic property managers and their proper managers are ruling their properties and they want to get rid of them and the reason why they're so motivated is again they are not emotionally a tied to the property they don't see it every day all they do is think about what a problem property they bought and you're going to come along again with the mast we submit and buy this property from them you're going to inject some capital into it some fix up into it you're going to stabilize it cash Floyd in years down the road you're going to cash out big all right next is let's look for the seller and property type that there's the seller of sick or have sir personal circumstances going on and there are actually more of these than you actually imagine and the thing with these sellers is that well let me just say this this what happens every day in life you have sickness you have divorce you have people getting new jobs yet people moving overseas you have partnership breakups you have family trucks work situation that olds properties and the person has passed away and that is time to sell the property those are the categories you're going to find this under and it happens more often than you think and these guys want a quick sale so they want to get up and most likely since the person has their attention it has not been on a property because of the situation the property is not in ideal shape meaning they probably couldn't sell it and get the highest price so you're going to come along you're going to offer an aggressive price you're going to remove this situation from their life and be the problem solver that way so the master lease agreement is ideal in this situation okay next is I want you to find a seller who wants to avoid capital gains tax and the the master lease is ideal for this scenario it really is because remember you're not buying their property from him you're not putting a new loan on their property you are actually leasing it from him so it's not really a sale and so he can he can avoid or defer his capital gains tax after you take it over here's another benefit to to number four avoiding capital gains tax is that you can actually help the seller out by by deferring his capital gains tax by buying his property Erica Mitchell II here's what me by that if you were to buys property with a master lease he can defer his capital gains tax over let's say three years year one he could sell their property to you outright he could sell one-third of property right year two he could sell the next third of the property to you outright in year three the third part of the third gigas LT outright so three years he has spread out his capital gains tax so the beauty of the master lease agreement is in his flexibility okay next time for the seller I wants you to look for is a seller that's willing to that has a large prepay penalty on his loan most commercial loans today that are on commercial properties go out for maybe let's say goes out for five to seven years well the first five years there is a penalty for selling a property or putting new owner property before it matures and sometimes that penalty can be up to five percent of the loan balance that's a lot of money so let's say the seller needs to sell his property let's say he's experiencing one of these these top threes but he has a large prepay penalty what does he do he needs to sell but what does he do he can't sell because there's a large penalty to pay what he does is he you buy it with a master lease agreement because remember with a mass release there was no new loaner property you pretty much take over the loan and you continue making the payments as if it is a new loan all right so this is a so the master screaming is ideal for a property where a seller has a large prepay penalty alright and the last seller or the property type of what you look for is a seller that has property management problems and you know that the key to making money with the commercial property is to have really really good property management and if you don't you're going to suffer unfortunately a lot of people a lot of investors don't know how to manage the manager and if you don't have known to do that you're going to suffer unfortunately a lot of people are like that the other thing is let's face it there are a lot of good proper managers out there so there are a ton I'd say a ton of sellers that have that property management and they have problem answer problems and they want to get up they try three two or three proper managers and still no results they figure this game is not for me and they want out so what I want you to look for here are what we call hair on the property what I mean by hair in the property are problems with the property two problems actually I want you to look for physical problems and I want you to look for financial problems alright the physical problems could be for example it could be properties let's say an apartment building an apartment building that has over 20 percent vacancy there that's a physical problem that's a physical occupancy problem a property that has overgrown landscaping is a physical problem a property that has boarded up windows on one side of the property is a physical problem those are those all of those are are telltale signs that this this owner is having some management issues and he needs the solution he needs you alright the next set of problems homes you look for that go under proper management problems are financial problems now the first financial problem is to look for a property that has a vacancies that are over 90 days old alright so for an apartment building to have a vacancy that's over 90 days oh that tells you that they do not have the resources or the funds or the finances to fix the property up and get it leased up or rent it out okay the next financier problem are if the seller is has mixed mortgage payments or is delinquent on his property taxes that is a sure sign of distress right there and also if the property is in foreclosure or it has a notice of default on it and you can actually search for those so you can see those two things most likely the owner is in trouble and he needs you he needs you to come with a mass release and save him okay and lastly you're going to see this quite a bit with properties online and when you see a property that had a major price reduction that tells you that he is motive it usually a to move he wants the solution he has to sell the property I want you to look for that as well alright so these six signs are something I know that you can find on a commercial property and when you find them remember what I taught you in the first in part one in the video that the key to doing a mass release deal a successful master lease deal is first give the seller motivation and secondly use a seller motivation to structure a deal for a commitment a master lease deal okay so number one get the seller motivation number two structuring a deal around the seller motivation right now you have six ways of finding seller motivation okay okay so the last thing I want to share with you today is some of you are wondering Peter why are we focusing on problem properties other people's problems with their properties well let me tell you this nearly all successful commercial estate investors that I know like I said this all real estate investors should be good at solving problems other people's problems and that's what I want for you today is to learn how to solve other people's problems there's a book with my favorite books is authors T Harv Eker the name of the book is called the secrets of the millionaire merit of mine and he defines an entrepreneur as a person who solves people person's problems for profit right that's what I want you to do and you see the mass release agree is it always about making money alright it's about helping people all right and the more people you help the more successful you become and the more money you make so that's how it works all right the more people you help the more success you have and the more money you make and now you have the tool to do all three all right so if you want more videos like this gold please go to our website commercial property advisors comm or simply subscribe to this YouTube channel okay everyone so that ends part 2 of the master lease agreement for commercial real estate I'll see you on the next video

Channel: Commercial Property Advisors

Views: 282,805

Rating: 4.9125814 out of 5

Keywords: Master Lease Agreement, Commercial Real Estate, Commercial Real Estate Investing, Commercial Property Advisors, Peter Harris

Id: yLgtOk48vkQ

Length: 22min 13sec (1333 seconds)

Published: Fri Apr 18 2014