Things to Know About Commercial Leasing Agreements

Things to Know About Commercial Leasing Agreements

One of the famous lease deals you will ever come across of is New York’s Empire State Building. That particular building has a current lease which is over 100 years old. The original owner sold it to Prudential Insurance Company. In 1961, it was leased out for 114 years where they offered to pay Prudential $2 million per year. At that time, it was a lot of money and so Prudential agreed. Fast forward to today the payments are still $2 million, but the income is $6 million. You do the math.

You would probably think you can’t put a lease on a building of that size, you are probably right. But what’s stopping you from putting a lease on a 12 unit apartment building. So here is how the master lease agreement works.

You either buy the property from the owner, with a small or zero down payment, and at closing what you will get is what is called equitable title. Not legal title, but equitable title, which entitles you to do all the cash flow, all the tax benefits, you have to take care of the day to day operations of the property and pay all the bills. The best part is, when you sell the property, you get all the profits at the sell price. Basically the terms of the lease are set in stone. Whatever value you can increase on the property during the lease, is yours to keep. What the seller gets is a monthly lease payment from you and even that’s negotiable. This would be ideal for an individual investor who is new, has no credit, maybe a small amount for down payment and does not want to deal with banks.

Playing it smart!

There are two things you must do to make your first commercial lease deal. Firstly, get the seller motivation. Secondly, you construct the offer and the agreement around the seller motivation. In simple terms, here is what happens. The seller gets an easy sale of the property. The seller also gets lease payments, this is the monthly payment agreed upon. He also gets freedom from involvement in the day to day operations of the property. Most importantly, the seller also gets rescued from any personal or financial issues of the property.

The buyer, that’s you. You get to purchase a commercial property with no banks, with no experience, with no credit and possibly a very little amount of money from your own pocket.  The buyer also gets less risk. You know why it’s less risk? Because the loan is still under the seller’s name. The buyer also gets cash flow. Any money made after the lease payment is yours to keep, that’s your cash flow. This motivates you to be a better property owner and increase rent. You also get an option to buy, after a certain number of years. The most important thing is that the buyer gets all profits.

You purchase the lease agreement and over time you increase the property value, that increased value and the added profit is yours.

To make a successful lease agreement, firstly you need to unwind your mind of what a typical deal looks like. There is no standard commercial lease deal, they are all different. However, there is one thing that holds it all together, this one thing is considered the glue of the all the deals together, and that is the and that is the actual master lease agreement document.

What type of seller or property is ideal for the lease agreement?

We will look at six signs and you can be sure that one of these signs will probably match up with the property you are currently looking at.

• Look for the seller who is tired and burnt out. There are literally tens of thousands of sellers that fit this scenario today. You can find them, they are tired, they are burnt out, they are broke, they bought a bad property and they are kind of just burnt out of the business, they are vulnerable. These are probably the most motivated sellers that you are going to find. Since you are the problem solver, the tool that you are going to use is the master lease, you are going to come along and buy the property from them. You are going to fix it up, you are going to stabilize it, you are going to cash flow it, you are going to regain the equity of the property over time and you are going to make big profits.
   
• A seller that lives out of state. What is the positive thing about these sellers is that they are not emotionally tied to their properties, when they start experiencing problems; they are more apt to sell than a property owner who lives closer to his commercial property.
   
• Look for seller who is either sick or have some personal circumstances. There are actually more of these than you could actually imagine. The thing with these sellers is that they want a quick sale, they want to get out. Most likely since the person has.
   
• Find the seller who wants to avoid capital gains tax. Lease agreement is ideal for this. Remember, you are not buying the property. You are putting a loan on the property. You are leasing it from him, so he can defer his capital gain tax after you take it over. You can actually defer his capital gains tax by buying the property incrementally. If you were to buy a property on lease, the owner can differ his capital gains tax over, let’s say three years. Year one he can sell half the property to you, year two he can sell a third and year three he can sell the rest of the property. So three years he has spread out hos capital gains tax. The beauty of the lease agreement is in its flexibility.
   
• Look for a seller who has a large pre-paid penalty on his loan. Most commercial loans go out for five to seven years. While in the first five years, there is a penalty for selling the property or putting a new loan on the property before it matures, and sometimes that penalty can be up to 5% of the loan balance, that is a lot of money. So what does the seller do? He needs the sale, but he can’t sell because there is a large penalty to pay. So what he does is he draws a lease.
   
• Lastly, look for a seller who has property management issues. Hear what you have to look for - any problems with the property. Two problems. Physical problems and financial problems.

You would ask why focus on problem properties? Let me tell you this, nearly all commercial real estate investors should be good at solving problems, other people’s problems for profit, and a successful leasing document is going to help you do that.

Author Info Manish Khanna

Manish is founder of Business2sell Group of Websites. 

Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities. 

With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent. 

I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.