Creative Deal Structure Game – Time to Retire


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  • An 82-year-old real estate investor has 24 rental properties. They were paid for long ago. Each property is worth $200,000 to $250,000.

    Twenty properties are occupied by long-term tenants (7-10 years) who are paying way below-market rents.

    Four of the properties are vacant and need to be fixed up before they are ready to rent again. Estimate $15,000 per property to bring it up to current standards.

    The landlord has run out of energy to manage the property. He has always done everything himself and never hired a property manager.

    He contacts you saying he is “thinking” about selling. It’s not that he needs the cash, he just does not want to deal with the tenants or properties anymore. He’s worried about the tax consequences if he sells them all.

    He has no children but does have a younger sister who lives in a different state.

    What would you do?

    Remember, there is no one right answer

    • This topic was modified 2 weeks, 3 days ago by Jackie Lange.

    How about to structure a Master Lease on those 20 occupied properties. That way he doesn’t have to sell and get a large tax bill and still keeps most the cash flow. I can take over and raise the rents. Also, I would wholesale those other 4 properties to either landlords or fix and flip depending on how low I can get the seller to sell them to me. What do you think?

    Easy said then done? lol.

    I would also approach this with a master lease arrangement, but I would add an option to buy down the road on everything except the 4 that needs some rehab. I would structure the options so I could purchase on seller financing to him and/or his sister. For the 4 that need rehab, I would see if he would just sell those outright to me on seller financing. That would mitigate his taxes on those 4.

    Next, I would begin raising rents to get them back towards market rent.

    Jackie,

    Thanks for these practice sessions. Practice makes perfect!

    I’d do as Aristides and Michael suggested.

    I would get as long a master lease as I could. 50 to 100 years. No kidding.
    If I could get an option, great. If not, the lease itself would have significant value.

    In fact, I had a similar deal in Florida some years ago.

    3 single family houses on adjacent lots on the Intra-coastal. Each worth over $300k at the time.
    I would lease all three at just over break-even.

    The plan was to hold the lease long enough (2-3 years) until developers came knocking. There was significant building activity along the streets near the homes. High-rise condos.

    My mistake was not providing insurance for the inevitable storms/hurricanes that come through the area. My houses were not damaged directly, but the seawall was. And I didn’t have the capital to repair them. So, I lost my lease b/c the tenants were unable to stay in flooded homes. Without rent coming in, I was unable to meet my lease obligations and the properties reverted to the 75 y/o owner.

    The following year – developers DID come knocking and the owner sold out handsomely and the properties and now the ground floor of high-rise condos.

    If I had known how to get the capital to fix the seawall, I would have shared in some of the profits.

    Thanks for listening,

    Mike Weiss

    Mike,

    You said some stuff in your post that was intriguing, but I am not sure I follow. If you had a master lease how would you benefit if the developer had come through and offered a huge increase on the property values? Wouldn’t the owner selling the properties just terminate your lease agreement with none of the upside going to you other than maybe a fee for breaking the lease early?

    Michael,

    Thanks for reading. Allow me to clarify.

    I recorded the lease with the owners permission. Since recording clouds the title, I would enjoy another payday. Yes, it’s negotiable, but I’m not looking to disrupt the sale, just another fee to clear title.

    Since I was unable to meet the terms of the lease, I did release it back to the seller.

    There’s another topic we’re missing. A lease itself (with cash flow) is a valuable asset. Similar to a mortgage.

    Lookup the Empire State building lease. The master lease was more valuable than the title to the land underneath. Its public record.

    I love leases!

    Hope this helps,

    Mike

    Mike,

    Very interesting, thank you. I had never heard of recording a lease and seeing how that might put you in a leveraged negotiating position. So if I understand correctly your recording the lease didn’t give you any type of “fixed” position per se, but because the lease (now recorded) would need to be cleared off the title for the developer to get a clean title you would approach the owner and essentially agree to give up your lease and clear that off for some type of payment, which would be negotiated at that time since he was selling out to a developer for a nice profit, correct?

    If I am grasping this that gives an entirely new twist to master leasing in high growth markets or master leases of properties in the path of development as you mentioned. Fascinating. That is the type of stuff I love about this business!

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