A master lease with an option is pretty much the same as a Lease/option on a house except the premises leased are an entire apartment building, (for example) and the lease contains language that you have the right to sub-lease the individual apartments.
Usually one uses it to take controll of a property that has been badly managed in one way or another.
Example:
Guy has owned a 40 unit apartment building for many years and has allowed it to fall into some disrepair. Rents reflect its poor condition. Guy would like to sell but wants slightly more than the current cash flow would justify. Helen believes she can raise rents and improve occupancy but doesn't want to take the risk of an actual purchase at Guy's price.
They enter into a master lease where Helen's rent is about equal to the total Guy currently gets and the option to purchase is close to Guy's asking price. Helen takes over operations per her lease and proceeds to raise rents, make repairs and improve occupancy. As her Net Operating Income improves she approaches banks showing that the property is now worth more than the strike price on her option and eventually arranges 100% financing.
Of course, it never works out this smoothly but then again the Dwarfs all had bad breath so Snow white didn't have it that good either.
A master lease with an option is pretty much the same as a Lease/option on a house except the premises leased are an entire apartment building, (for example) and the lease contains language that you have the right to sub-lease the individual apartments.
Usually one uses it to take controll of a property that has been badly managed in one way or another.
Example:
Guy has owned a 40 unit apartment building for many years and has allowed it to fall into some disrepair. Rents reflect its poor condition. Guy would like to sell but wants slightly more than the current cash flow would justify. Helen believes she can raise rents and improve occupancy but doesn't want to take the risk of an actual purchase at Guy's price.
They enter into a master lease where Helen's rent is about equal to the total Guy currently gets and the option to purchase is close to Guy's asking price. Helen takes over operations per her lease and proceeds to raise rents, make repairs and improve occupancy. As her Net Operating Income improves she approaches banks showing that the property is now worth more than the strike price on her option and eventually arranges 100% financing.
Of course, it never works out this smoothly but then again the Dwarfs all had bad breath so Snow white didn't have it that good either.
Hi Commercialking,
What if Helen decides that it's not working for her and wants out? What are the ramifications?
Also what are the risks for the owner and Helen with this lease arrangement?
I understand if an owner defaults on his mortgage and go in foreclosure, or BK then Helen will be left cold with nothing.
Thanks