A master lease option is where you are creating a lease on the entire property for its current Net Operating Income (NOI) and have one master tenant.
The master lease allows the master lease tenant to sublease each of the individual units to new tenants and the owner agrees on a price up front for which the master tenant can purchase the property at any point in time over the lease period. While this powerful method isn’t for every commercial property, its best suited for properties with increasing vacancy, declining lease rental rates, or rising expenses. Why? Because that’s how the master lease tenant is compensated.
How is the master lease tenant compensated if they’re leasing for its current Net Operating Income?
Here’s an example, let’s say you have a 50 unit building renting for $700 per unit and it’s currently 50% occupied. By utilizing their marketing and management expertise, the master tenant comes in and fills vacancies, decrease expenses and increase the net operating income by raising rents on the remaining vacant units. That profit is now the master tenant’s. (50%) 25 units x $700 = $17,500 or more.
How would a commercial owner benefit from this method?
The benefit to the owner of doing a master lease option is:
- The owner still receives the same net income they’re currently receiving without the marketing and management expenses. No longer is he going to have to deal with any of the management responsibilities, the master lease tenant is agreeing to take care of the day-to-day and any other maintenance on the property.
- Repairs. The owner no longer has to worry what it’s going to cost when repairs come up. The master lease tenant is going to handle it. And because tenant is paying for all these repairs and taking care of the headaches and hassles, the owner doesn’t have to.
- Property management company nightmares. Even if the owner works with a property management company, those “Unaccountable Repair Bills and Fees” still are sent over to him, but not anymore, when he starts working with the master lease tenant.
- Property is more valuable. We all know what happens when the NOI goes up on commercial property.
- Huge tax savings. When you use the master lease option technique, because the owner is still on title to the property, he still gets to claim all the tax benefits, the depreciation, and so forth, of that property on his own tax return. Also, selling a property usually results in a gain for which you have to pay a capital gains tax. Recognizing the gain over time can be more preferable, because if all gain is recognized in a single year, the seller usually has a very heavy tax burden.This is where the master lease option technique comes in. Instead of listing your property, waiting for the market to bring a buyer to collect all the income now and being taxed on it at a high bracket, you decide to setup an master lease option so you can collect lease payments until you’re at a lower tax liability which means you’ll end up saving more money over time and avoid the additional taxes.
*Everyone’s tax situation is different, and this information should not substitute professional advice. Taxpayers should always consult with their tax advisors to consider specific factors that might affect their situation.*Immobilienmakler Heidelberg Makler Heidelberg
Source by Prestigious Investments LLC