Leases – Options – Notes Table Of Contents
These are some Advanced Ideas so if you need a remedial on what a lease is or what an option is or what a note is let me know.
Lease paper is valuable because it is a right to receive an income stream.
Leases are usually secured by furniture and equipment the tenant has in the property and often by the net worth of a substantial corporation or individual.
SALE LEASEBACK:
Facts:
Corporation needs cash for operating capital.
- Corporation sells some of its property to Investor, then leases it back for a long-term on a triple net lease.
- This allows corporation to maintain control of the property and operate it as they wish.
- Investor gets good quality paper with a long-term income stream.
- Investor can also use the lease paper in other transactions.
LEASE FOR EQUITY:
Seller has a property with a small cash flow, and he has management problems he can’t solve. The economy is poor with buyers scarce, but he wants to sell now. Buyer would like to buy, but he doesn’t have enough cash to satisfy the down payment requirements of Seller.
- Buyer offers to assume the first lien, give Seller a second lien for a total loan-to-value ratio of about 80%, 12% of the balance in cash and a 5 year lease on office space in another building for the remaining 8%.
- Seller gets the down payment he wants and office space for 5 years with rent prepaid, plus he gets rid of management problems.
- Buyer gets a positive cash flow property without having a problem making the down payment.
- He uses a vacancy (that is hard to fill now) for part of the down payment.
LEASE RETURNED AS PART PAYMENT:
- Seller wants to sell his office building, but there is a 30% vacancy rate and the income doesn’t justify a good price.
- Seller offers to lease 20% of the space himself for 5 years to give Buyer a good positive cash flow.
- Buyer gets a proper return on his investment.
- In addition to selling his property, Seller gets note payments on the property which he uses to make his lease payments. Seller uses part of the space for his office and sublease the remainder.
LEASE PAYMENTS FOR EQUITY:
Seller has a commercial property with a positive cash flow, but his health is bad and he wants to be relieved of the responsibility of management. Seller will accept paper for 100% of his equity.
- Buyer has a free and clear single tenant commercial building with an AAA-rated corporate tenant, whose triple net lease has 10 years left to run.
- Buyer offers to assume the first lien on seller’s property and pay for seller’s equity with a 10-year lease.
- Lease is of such sterling quality that Buyer could assign the lease to a bank for cash.
- RESULT: Seller gets out of management, giving him peace of mind to ease his health problem, and gets a good 10-year income stream for his equity. Buyer gets a new positive cash flow property without additional cash outlay or new mortgage payments. Buyer also gets to keep his free and clear property and gets additional tax shelter.
Transaction Techniques With Option Paper
The most valuable option paper is a long-term option which has a substantial payment made and has had time to appreciate in value.
This type of option has real equity value, which may be realized by exercising, selling or trading the option.
OPTION FOR DOWN PAYMENT:
- Investor wants shopping center owned by Developer, but Developer does not want to sell because he is satisfied with the income he receives. Investor has a long-term option on choice land which Developer would like to develop.
- Since Developer must continue developing for his business to survive, he accepts option owned by Investor as down payment on his shopping center.
- Each party gets what he most wants.
OPTION BACK BRINGS A BETTER PRICE:
- Seller needs cash fast and offers to sell his positive cash flow triple net leased property at a small discount, even though he would prefer to keep it.
- Buyer doesn’t need tax shelter and doesn’t want to look for a new tenant in 5 years if the present tenant moves.
- Buyer offers cash for 50% of the asking price and an option (paper) for the other 50% of the price.
- This way Seller can buy it back any time after one year and before 3 years for the same cash Buyer paid plus 1 1/2% for each month Buyer has held it.
- Seller gets the cash he desperately needs and an opportunity to buy back his prime asset.
- Buyer gets a good yield on his money for 3 years.
- After 3 years, if Seller has not bought it back, Buyer can quickly sell the property at a discount, while making a good profit on the cash he paid.
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Use your creativity and the assets you have available and you will make some profitable transactions using paper.
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