MASTER LEASING: Creating Cash-Flow Without Capital

www.BusinessDictionary.com defines a master lease as a “controlling lease under which a lessee can sub-lease a property for a period not extending the term of the master lease.

Never have I seen a better time to master lease houses. Owners can’t sell and buyers can’t buy; landlords rule. Now is the time you can become a landlord without taking on a debt or investing a lot of money. Owners who have moved and needed to sell must now lease their mortgaged homes if they hope to avoid foreclosure. This is an opportunity for entrepreneurs who know how to manage and maximize bottom line rental income.

I can’t think of any other situation where you can produce a good income stream without a capital investment. Sure you can work for income, but jobs are not plentiful these days and if you’re not working, the income stops. Not so with master leasing where the sub-tenant must make payments whether you are unemployed, hospitalized, on vacation or sleeping.

There are two types of master leases with as many hybrids as there are owners with different needs. A performance master lease requires the master tenant to pay a percentage of the funds he receives from his sub-tenant only when he receives those funds. A fixed lease, on the other hand, generally requires the master tenant to make payments even if he does not have a sub-tenant. In the first scenario the owner takes the risk of only receiving rent when the master tenant receives rent from his sub-tenant and the owner also agrees to pick up most expenses associated with the property. In the second scenario the master tenant takes on more of the owner’s responsibilities and risks thereby entitling him to a greater profit (or loss) depending upon his success of maximizing net income from the sub-tenant.

Many people are more fearful of executing a long-term lease as a master tenant than they are of buying an investment property. I think this is an irrational fear since it is easier to terminate a lease than it is to get out of title, especially when you are the one who has created the documents. People also think that they may have to be licensed under their state’s real estate brokerage law to engage in master leasing. Usually this is not true. Licensing is generally required for property managers (with few state exceptions) because managers have a fiduciary relationship with their principal. This is not the case for master tenants who are not agents of the owner, but entrepreneurs working in their own self interest and are principals in the transaction.

Generally managers can only compete on price, personality and scope of service when competing to pick up business. As an entrepreneur you can negotiate any and all aspects of your master lease – the variable or fixed rent amount, the term, the liability for expenses, escape clauses, etc. The key is to draft your documents by design based upon your negotiations with the owner rather than by default (i.e. using a dime store contract). In your sandwich position between the owner and your sub-tenant you seem a little like Dr. Jekyll and Mr. Hyde. Your lease with the owner is pro-tenant since you are a tenant, but your lease with your sub-tenants is pro-landlord since you are their landlord. In today’s marketplace you cannot always generate positive cash flow for owners, but you can lose them less than they are currently losing with a vacant, unsalable house.

It makes good sense to secure an option to buy the property at the same time that you sign your master lease as long as it does not change your cash flow. I have found that a long-term secured lease without an option often acts as a stealth option, since the owner must negotiate with you to remove your lease from the property when refinancing or selling. A master lease in many ways allows you to test drive a property before deciding whether or not you might want to buy. I have found that if you “under promise and over perform” in meeting the terms of your lease with the owner, you will become the person that he or she wants to do business with if the property becomes available for sale. The master lease is the way to get your foot in the door for future negotiations; it is rarely the final negotiation. Real estate is a business built on relationships. A master lease gives you the opportunity to build the relationship that leads to future purchases and often owner financing. Don’t make the mistake of thinking that your master lease is the final negotiation. It should be the first negotiation that can lead to one or more future negotiations.

If you are looking for a way to build cash flow today with little risk….look no further. Master Leasing is it!

David Tilney