Many dream of owning multifamily or commercial real estate but feel held back by money, loan requirements, or lack of experience. Master lease agreements offer a proven way to take control of income-producing properties without bank financing, large down payments, or high net worth.
In this video you’ll learn:
- What a master lease agreement is (and how it’s different from a lease option)
- Why sellers agree to MLAs and the five key benefits for them
- Key deal terms found in a well-structured MLA
- How to exit safely and profitably
- Common pitfalls to avoid when using this strategy
- A real-life example of how one investor earned $1.75 million with just 10% down
This strategy is beginner-friendly and lets investors manage and profit from properties before officially owning them. Learn how it works and why it’s changing the game in real estate.
Understanding the Master Lease Agreement (MLA)
Distinguishing Between MLA and MLO
A master lease agreement (MLA) is not the same as a master lease option (MLO). The MLO is typically used for single-family homes and is not suitable for larger commercial properties. In contrast, the MLA is designed for commercial real estate transactions.
A Master Lease Option includes an option clause that allows the buyer to walk away from the deal or choose not to purchase the property. It’s unlikely a property owner with a $2 million asset would accept an option from an unknown buyer. Instead, a formal agreement—specifically, a master lease agreement—is preferred. There is no option fee and no exit clause.
What Is a Master Lease Agreement?
The master lease agreement is a legal contract drafted by attorneys and signed by both parties: the buyer and the seller. This agreement allows control of the property without transferring legal ownership. Instead of legal title, the buyer receives equitable title. Legal title is obtained once the agreement expires and the property is purchased.
Under the MLA, the buyer pays the seller an upfront amount, which is applied to the purchase price, followed by monthly lease payments. The buyer receives all cash flow after rent collection to operate the property, make expense payments, and seller lease payments. Any remaining profit belongs to the buyer.
If the property value increases over time—such as over a five-year period—that appreciation belongs entirely to the buyer. Additionally, the buyer receives tax write-offs, excluding depreciation, which remains with the legal owner until the property is purchased.
Benefits for Beginners
The master lease agreement offers several advantages for those new to real estate investing:
1. Bypassing Bank Financing
- No bank applications
- No credit checks
- No appraisals
- No origination fees
- No need to prove down payment sources
The agreement is strictly between the buyer and the seller, eliminating the need for bank involvement.
2. Low Entry Barrier
A small down payment may be sufficient. One of our students Dean secured a deal with just 10% down, which the seller accepted willingly.
3. No Experience Required
You don’t need to have a proven track record. The key lies in convincing the seller to enter into the agreement.
4. When Sellers Are Not Bankable
Master lease agreements are especially useful when sellers face challenges with traditional financing, such as:
- Properties requiring extensive repairs
- High vacancy rates that prevent adequate cash flow
For example, a 12-unit apartment building with half the units vacant may not qualify for a bank loan. However, a distressed property like this may be ideal for a MLA. This strategy enables you to buy and improve properties that banks reject.
Benefits for Sellers
There are five compelling reasons why sellers may choose this arrangement.
1. Upfront Non-Refundable Payment
At the signing of the lease agreement, the seller receives a substantial non-refundable payment. This amount often resembles a down payment in size—ranging from tens of thousands to hundreds of thousands of dollars—but it is not classified as such. The payment provides immediate financial benefit and security to the seller.
2. Relief from Operational Responsibility
Once the master lease agreement is signed, the buyer assumes full responsibility for property operations. The seller is no longer involved in day-to-day management, maintenance, or tenant issues. This shift allows the seller to enjoy passive income without the burdens of ownership.
3. Monthly Lease Payments
The seller receives consistent monthly lease payments throughout the duration of the agreement. This arrangement creates a reliable stream of passive income. At the end of the lease term, the seller may also receive a lump-sum payment, depending on the structure of the deal.
4. Capital Gains Tax Deferral
Selling a property outright often triggers significant capital gains taxes. A master lease agreement offers a workaround by structuring the transaction as a lease rather than a sale. The seller pays taxes only on the upfront payment and monthly income, deferring the larger tax liability until the property is officially sold.
5. Simplified Exit for Burnt-Out or Aging Sellers
Many sellers are motivated by fatigue from managing repairs, vacancies, or the complexities of listing and selling a property. For those seeking a hassle-free exit from ownership, the MLA is a good solution. It eliminates the need for agents, showings, financial disclosures, and other traditional sale requirements.
Key Terms in a Well-Structured MLA
1. Fixed Purchase Price
The future purchase price of the property is established at the time the agreement is signed. For example, if the property is leased at a value of $1 million and appreciates to $2 million over five years, the buyer retains the $1 million in equity. The seller receives only the agreed-upon $1 million.
2. Down Payment Requirement
A down payment is essential. While some strategies promote no-money-down deals, this approach emphasizes the importance of having skin in the game. A down payment—typically no lower than 10%—shows the buyer is serious and reduces future mortgage obligations, lowering overall risk.
3. Monthly Lease Payments
The seller receives monthly payments as outlined in the agreement. These payments are negotiated between both parties and provide the seller with consistent income throughout the lease term.
4. Defined Lease Period
Every master lease agreement includes a clearly defined lease term, similar to any standard lease. This period usually ranges from three to five years, depending on the specifics of the deal.
5. Operational Responsibilities
The buyer assumes full operational control of the property. This includes:
- Rent collection
- Property management (either self-managed or through a hired manager)
- Payment of all expenses and bills
The seller’s role is limited to receiving monthly payments, with no involvement in day-to-day operations.
End of a Lease Agreement Options
At the end of a master lease agreement (typically after three to five years) there are three primary exit strategies. It is important to note that this is not a master lease option; there is no option clause, but rather a contractual obligation to pay off the seller.
Option 1: Pay Off the Seller and Acquire Legal Title
The most direct path is to pay the remaining balance owed to the seller. For example, if the property was valued at $1 million and $100,000 was paid upfront, the remaining $900,000 must be paid at the end of the lease term.
This is typically done by securing a bank loan. Once the loan is used to pay off the seller, legal ownership of the property transfers to the buyer. At this point, the transaction is considered a sale, and the seller becomes liable for capital gains taxes. Ideally, during the lease period, the property has been improved and rents increased, resulting in higher equity and a stronger position to obtain financing without additional out-of-pocket investment.
Option 2: Sell the Property for Profit
Another strategy is to sell the property at a profit. The proceeds from the sale are used to pay off the seller, and the buyer gets to keep the remaining profit. This approach allows you to reinvest in another property or project.
Option 3: Refinance and Cash Out
If the property has significantly appreciated due to increased rents, renovations, or improved net operating income (NOI), it may be possible to secure a loan large enough to:
- Pay off the seller
- Recover the initial down payment
- Retain ownership of the property
Potential Pitfalls of Master Lease Agreements
While master lease agreements offer powerful advantages, it is just as important to understand the potential risks. As a mentor, I have a responsibility to inform you of these challenges to ensure a safe and successful exit.
1. Seller’s Loan Maturity Timeline
If the seller has an existing loan on the property, the maturity date of that loan can impact the master lease agreement. For example, attempting a five-year lease when the seller’s loan matures in one to two years creates a conflict. A shorter timeline may not provide enough time to stabilize the property, increase rents, and build equity. Ideally, the lease term should align with the time needed to execute a proper exit strategy.
2. Lack of a Conservative Exit Strategy
Before entering into any seller-financed deal, a well-defined and conservative exit strategy must be in place. Without a clear plan to exit the property—whether through refinancing, resale, or another method—the risk increases significantly.
3. Seller’s Age or Health Condition
A master lease agreement with an elderly or seriously ill seller introduces complications. For instance, if you sign a five-year lease with a seller in poor health, you may end up involved with heirs or estate planners if the seller passes away during the term. While legal agreements can include successor or heir clauses to maintain continuity, the emotional and logistical challenges of dealing with grieving family members needs to be considered. In many cases, it’s best to avoid these situations.
Real-Life Success Story: Dean’s Million-Dollar Deal
Our student Dean, executed a life-changing deal using a Master Lease Agreement.
The Property and Deal Structure
Dean acquired an off-market property—a 117,000 square foot mixed-use industrial warehouse and self-storage facility—using a five-year master lease agreement. The purchase price was $2.2 million.
- Down Payment: 10% ($220,000)
- Monthly Lease Payment: $8,250 (interest-only at 5%)
- Lease Term: Five years
The sellers, ready to step away from the responsibilities of managing a large facility, welcomed the arrangement. They received consistent monthly income without the burden of property management.
Initial Performance and Strategy
At the start, the property was breaking even. The initial income was approximately $21,250, though slightly reduced when Dean took over the property due to tenant evictions. Recognizing the value-add potential, Dean focused on improving operations and increasing rents.
Over the course of three years, strategic guidance through our mentorship program and consistent effort led to significant improvements. Rental income was increased from $21,250 to $41,420, effectively doubling the income.
The Outcome
Three and a half years after initiating the master lease agreement, Dean sold the property for $3.95 million. With only a 10% initial investment, the deal yielded a profit of $1.75 million.
Keys to Success
Dean’s success was driven by three critical actions:
- Identifying a Motivated Seller—The older owners were ready to relinquish control and appreciated the consistent income and reduced responsibilities.
- Building Trust Through Relationships—Trust was established through consistent communication and relationship-building.
- Diligent Income Growth Strategy—Steady efforts to increase rental income and improve property performance positioned the property for a profitable sale.
You can learn more about Dean’s deals and his experience with Commercial Property Advisors here:
Building a Self-Storage Business in Today’s Market
Real World Commercial Deal without a Bank Loan
Self-Storage Millionaires Part 2: Escaping the Corporate Rat Race
Master lease agreements offer a powerful and flexible path into commercial real estate. With the right structure, a motivated seller, and a clear exit strategy, this approach can unlock opportunities and long-term wealth.
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