Mastering Commercial Real Estate: A Comprehensive Guide to Master Lease Agreements

Rosemarie Tucker May 5, 2023

A Master Lease Agreement (MLA) is a powerful tool that can be utilized in commercial real estate transactions. It allows an investor to take control of a property and receive its cash flow and tax benefits without the need for a large down payment or financing. The terms of the MLA are set in stone, so any increase in property value belongs to the investor. This method is particularly effective when dealing with properties that have issues or sellers who are motivated for various reasons.

Famous Example: Empire State Building

One of the most well-known examples of a Master Lease Agreement was with the Empire State Building. An investor offered $2 million per year for a 114-year master lease, which has remained the same despite the building's income increasing to $6 million per year. This results in a $4 million profit annually for the investor.

How the Master Lease Agreement Works

An investor acquires a property from the owner with a small or no deposit. At closing, they receive "equitable title," which entitles them to all cash flow, tax benefits, and profits at the set price. The seller receives a monthly lease payment from the investor.

Case Study: Distressed 75-unit Apartment Complex

A 75-unit apartment complex was facing numerous challenges, including high vacancy rates, deferred maintenance, and outdated amenities. The property's owner, Susan, was struggling to manage the complex effectively, and her efforts to refinance were hindered by the property's poor condition and a substantial prepayment penalty on the existing mortgage.

Master Lease Solution: An investor named John saw the potential in the distressed property and approached Susan with a proposal for a 5-year master lease agreement. Under the terms of the agreement, John would take over the management and operation of the property, making necessary repairs and improvements to attract new tenants and increase the property's value. Susan would continue to receive monthly lease payments from John, which would be used to cover the mortgage and other expenses.

Implementation: With the master lease agreement in place, John immediately began addressing the property's issues. He invested in necessary repairs, such as fixing leaky roofs and broken windows, and updated the units with modern fixtures and appliances. He also hired a professional property management company to handle the day-to-day operations and fill the vacancies.

Results: Over the 5-year term of the master lease agreement, John successfully turned the property around. The vacancy rate dropped from 40% to 5%, and rental income increased by 60% due to higher occupancy and rent increases. By the end of the master lease term, the property's value had increased from $3 million to $4.5 million, resulting in $1.5 million in equity growth. Susan benefited from a steady stream of lease payments, which allowed her to pay off her existing mortgage without incurring the prepayment penalty. John, meanwhile, profited from the increased cash flow and equity growth in the property.

This case study illustrates how a master lease agreement can provide a win-win solution for both the property owner and the investor. The owner, Susan, was relieved of the burden of managing a struggling property and could meet her financial obligations, while the investor, John, was able to turn the property around and profit from its increased value and cash flow. This arrangement demonstrates the power of master lease agreements in addressing complex challenges in commercial real estate.

Landing Your First Master Lease

To successfully land a Master Lease Agreement, you need to identify seller motivation and construct a deal based on that motivation.

In simpler terms, benefits for the seller include:

  1. Lease payments that cover the mortgage
  2. An easy sale
  3. Freedom from involvement
  4. Rescue from personal or financial issues related to the property

Benefits for the buyer include:

  1. Purchase with little to no money down, no banks, or credit checks
  2. Less risk because the loan remains in the seller's name
  3. Cash flow (any money left after lease payments is yours)
  4. Option to buy after the agreed-upon term
  5. All profits

Three Nuggets for a Successful Commercial Master Lease Deal

  1. Identify seller motivation and construct the deal based on that motivation
  2. Be flexible in your thinking about what a typical deal looks like
  3. Obtain a Master Lease Agreement document

Ideal Property/Seller for a Master Lease Deal

A Master Lease Agreement is well-suited for properties or sellers who:

  1. Are tired or burnt out
  2. Live out of state
  3. Are facing personal issues, such as illness
  4. Want to avoid capital gains tax
  5. Face a large prepayment penalty on their loan
  6. Have property management problems
  7. Have vacancies over 90 days old

Master Lease Agreements offer a unique opportunity for investors to acquire commercial real estate properties with little to no money down, while solving problems for motivated sellers. By understanding seller motivation and constructing deals accordingly, investors can capitalize on these opportunities and create substantial equity and cash flow.

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