Master Lease Agreement
Why consider a MLA with Tangodoe Investment Properties
Master Lease Agreements work well for all types of commercial real estate and multi family properties.
Master Lease Agreement for Commercial Real Estate
- Works with all sorts of Real Estate, ie: rental homes, multi-family, commercial, industrial, resorts, RV Parks, etc. If it’s a managed income-producing property, the MLA will work.
- One of the most famous Master Lease Agreements is the “Empire State Building” which is still rumored to be managed under an MLA. The terms are unknown, however For example, Someone offered $2 million a year for a 114 year MLA. Payments today could still be only $2 million a year but now the income is at $6 million or a $4 million dollar profit per year. There are no rules or templates that cover all areas of your negotiated terms and conditions. The best part of an MLA is that it requires a desire by both parties to improve upon the income that the property has, and or the look and feel. Making sure that both parties are represented by an attorney familiar with the process is important.
- We have negotiated mostly all owner contracts since the ’90s and have done so with little to no money down, on one condition. “Please respect our relationship, the history of the building, and our past 50-60 years of ownership”. To this day, Tangodoe prides itself on having a 100% success rate. Adding to that, one of our most iconic buildings in Issaquah is the IOOF building. The offer and terms were negotiated in the owner’s home office where it became obvious we enjoyed each other’s company. The MLA was discussed, but in the end, we agreed to terms of almost no down payment. Small monthly payments and a lunch each month we exchanged stories and he was paid. After almost 25 years, we are still friends. (I’ll never fly with him in his BI-Plane again!)
Here’s How It Works
The lessee (buyer in most cases) agrees to take over the operations of the property and both party’s agree to an amount of deposit money to put down (or in most instances, no payment) on the property, in exchange for all the rights and privileges of owning and operating the property. We will also pay the owner the agreed upon monthly rent for the life of the lease—after which arrangements are commonly made to buy the property. The lessee can improve the property to secure more rent or divide the space into multiple rentable units. The property’s operation is completely the lessee’s responsibility.
The lessee is also held liable for the property taxes, utility bills, insurance and maintenance expenses. But this means they’re entitled to the property’s income revenue, tax benefits and increase in value. The catch? The legal title doesn’t change hands. Instead, the lessee holds equitable title for the duration of the lease or until they exercise any option to buy.
What’s the Difference Between Equitable Title and Legal Title?
In real estate law, equitable title refers to an individual’s right to enjoy the financial benefits while leasing the property. However, equitable title is not “true” ownership and the lessee is not entitled to many of the owner’s legal property rights unless there is a written option to purchase clause included. If the Lessee (buyer) exercises the option to purchase the property at an agreed upon price today. The title then reverts from Equitable to Legal tile holder.
Legal title refers to the actual ownership of the property. The legal title includes all the property rights, such as easement, development, possession and other rights.
The difference between equitable title and legal title is more complex than this brief explanation. Do your research and discuss this with a reputable real estate attorney.
Why Consider a Master Lease Agreement?
The lessee is entitled to any of the property’s revenue (after their monthly rent), any future equity, tax benefits and the day-to-day management. As the net operating income (NOI) increases, so too does the lessee’s revenue. In addition, if an option to buy has been included in the agreement, at the time of sale, any increased property value becomes the lessees.
But master lease agreements don’t only benefit the lessee. The owner receives steady rent income with no effort, as the property’s maintenance responsibilities rest on the lessee. Master lease agreements may be a good option for property owners who are no longer motivated to invest in a given property, but don’t want to, or can’t, sell it. They allow the owner to continue receiving some revenue on the property without any financial or managerial involvement.
The Master Lease Agreement also benefits building/property owners who might not have any idea of what to do with any capital gains the sale might trigger. The Master Lease Agreement gives the owners time to find another 1031 exchange property, or time to work out a family trust where any of the proceeds from the agreed upon sale date to the lessee/buyer might save the taxes, like a REIT mutual fund, or Delaware fund. Thus definitely required thought and an attorney.