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Everything You Need to Know About Master Lease Agreements

By Many real estate investors, along with those who are seeking to invest, understand

Master Lease Agreements

Many real estate investors, along with those who are seeking to invest, understand the potential rewards that accompany owning property. However, there is always the potential for hiccups to occur preventing the completion of an investment.

Perhaps there is a lack of necessary resources for a down payment or you have to wrestle with less than perfect credit. In any case, there are options that open the pathway to property ownership, such as a master lease.

 

Below, we will provide an overview of a master lease agreement and the need-to-know information that will assist you in deciding if this is the right solution for you.

What is a master lease?

From apartment buildings, mobile home parks, office buildings, hotels, and strip malls to other commercial real estate properties, beginners and experts alike may find that a master lease real estate agreement is the best option to acquire income-producing properties of interest.  

 

The master lease definition, in regards to commercial real estate, is the controlling lease that allows the lessee (tenant/buyer) to sublet a property for a period within the master lease’s terms.

 

In essence, a master lease is a creative financing, nontraditional solution to purchase commercial property with less headache. It is very similar to the lease option when referring to the purchase of a single family residence.

What are the pros?

A  master lease option (often referred to as ‘agreement’) is typically quite beneficial for all parties involved.

 

Some of the major advantages to implementing a master lease are as follows:

 

A solution for beginner investors and those with no experience to purchase commercial real estate property

The agreement terms are negotiable and dependent upon both parties

It can be used with properties that are owned “free and clear”, as well as those that have current mortgages

It’s a creative financing option that does not require a bank loan, nor perfect credit

 

This is just scratching the surface, as there are plenty of other advantages.

What are the cons?

Where there are pros, there are cons. Check out a few below:

 

Improper market research may be detrimental to the agreement

Commercial real estate tends to cost more in property taxes and insurance

A master lease agreement contract that is not well defined or clearly written could end up costing more in the long run

The trust factor - the buyer or seller may not hold true to the agreement, which can happen with any type of deal

Real estate law varies by state

 

The key is to conduct thorough research and consult a real estate attorney before making any concrete decisions.

What does the buyer get out of it?

A master lease agreement real estate option is designed to be a win/win for both parties. Below are a few reasons why buyers benefit:

 

Less financial risk

A bank loan is not required, nor is a down payment, credit checks, appraisals, or closing costs

The terms of the master lease agreement can be as creative as the buyer and seller intends

Requires little to no investment experience

Buyer receives all the profits above the master lease option price

Regardless of how much the property gained in value, the buyer has the option to purchase the property at a pre-fixed price, within a set period of time

The property can be controlled without ownership

 

What does the seller get out of it?

Benefits afforded to sellers include:

 

Simplified sales and closing process

Has the ability to step away from the day to day operations of managing the property

Receives monthly lease payments from buyer

Retaining the legal title: If the buyer defaults on the agreed upon master lease, the seller can regain possession of the property

A solution to a distress property, property management concerns, unwanted inherited properties, the exhaustion of tending to day to day operations, low occupancy, etc

 

The legal need-to-know info

Although a master lease agreement contract can be flexible regarding the terms and afford many benefits, as with any contract, in-depth research is a must and should be a top priority.

 

When drafting the terms of any agreement, it is imperative that the agreement is clear, concise, and direct. It is also recommended and advantageous to have the agreement reviewed by a qualified attorney.  

 

Further, while it may be tempting to use a sample commercial master lease agreement and tweak it to fit your needs, it is not advisable.

 

To stress the importance of foregoing the use of a Master lease agreement template, an attorney can ensure the correct language is being used to describe and outline the terms, as well as present them in a clear and succinct way.

 

Whether you are a seasoned real estate investor looking to add commercial properties to your current portfolio or a beginner interested in purchasing your first commercial property for sale, a master lease could be the solution you are looking for.

 

If you would like to receive in-depth insights about this financing option, SF Office Spaces can help. Call 1-415-865-6117 with any questions you may have!