What are the benefits for the park owner in a lease/option deal?
Tax advantages from ownership (depreciation, expenses written off)
Appreciation of asset.
Control (He still owns the park)
Nice wad of cash each month with NO work.
Net Worth Increase
Can sleep in every day and watch The Sopranos.
A few of my advantages as Lessee:
Control of a money maker (ATM) with zero basis (or close)
Nice wad of cash each month with very little personal work.
In case of a major infrastructure failure, return the park to Owner.
5-7 years to “test drive” a property before buying.
Must get up early every day and miss The Sopranos.
Can anyone guess the ones I just threw in there? LOL
I’ll make a couple of quick comments to build on Greg’s excellent thoughts:
- Tax advantages from ownership (depreciation, expenses
This can greatly depend on the terms and length of the lease. If the lease is over 30 years the tenant can actually depreciate the parks improvements. If the terms are NNN (triple net) the Lessor will have little to expense except underlying debt.
- Appreciation of asset.
This is a byproduct of negotiation. Some options stay the same price during the term, some have a negotiated appreciation or depreciation/amortization (the strike price may go up or down x% per year), and some have a “equity split” formula tied to a future fair market value.
It should be said to be mindful of IRS guidelines if one is concerned that a lease and option could be construed as a sale: If it quacks like a duck, it’s a duck. A whole course could be written on this - it is smart to get advice in this area: Say you hire someone like me and John Hyre. What we charge you will likely be pennies on the dollar compared to conventional financing closing costs.). I remember Lonnie saying something like, “you can pay now or you can pay later - either way your going to pay.”
- Control (He still owns the park)
The Lessor/Optionor has more control in the sense that he/she only has one tenant and does not need to foreclose in order to get the park back in case of default (better then a mortgage-holder). However, the park owner may or may not need to foreclose on the option in order to clear the cloud on the title.
- Nice wad of cash each month with NO work.
Besides the lease cash flow the Lessor/Optionor could get a bunch of Option Consideration up front which is not taxable until the option expires, is exercised, or is cancelled/foreclosed. Liquid, tax differed consideration is a HUGE benefit - let that money compound before the Option is exercised (or expires/cancels) and the seller is WAY ahead compared to all cash or installment reporting.
- Net Worth Increase
Net worth is still somewhat conditioned by market forces as the Tenant / buyer may not exercise the option. Seller must sell but buyer does not need to buy.
- Can sleep in every day and watch The Sopranos.
The lease grants control of the property to the tenant/optionee in return for a guaranteed rental payment/cash flow to the lessor. The Option controls how the equity of the property may be split between the parties during the option term. The lease term and the option term do not need to be the same. Much of this is a byproduct of negotiation.
One last thought about giving back a property to a Lessor. This can be a very painful option with a properly structured lease. If you are a tenant/optionee in charge of infrastructure (NNN) and you sign a 10 year lease, then you have committed to pay that seller a payment for 10 years no matter what happens unless you have excellent “weasel” clauses (or state statutes) on your side. Smart sellers frequently use the term with an acceleration clause and smart buyers frequently use contingency/weasel clauses in order to cancel. To be a deal maker you must be the author (or know a good author who will write for your benefit).
To get side tracked for a second. I hear landlords lament about tenants moving out or people poaching homes from their parks all the time. These owners/landlords inevitably have one thing in common - they are month to month landlords who could really benefit from understanding and implimenting quality leases into their business practices (there are times when month to month is the place to be - sellers markets and highest and best use plays to name two. Last time I checked, these conditions do not exist right now.) I know the common “yea but” - month to month landlords always say that you can’t get blood from a stone. Friends, you may not be able to control people or their finances, but you should do everything possible to have controls of their collateral; and leases, liens, and promissory notes give these controls. Don’t get me started about acceleration clauses and how they do not stand up in court, blah blah blah - I can show you real copies of checks (or a motorcycle, van, etc.) to prove that they are enforceable, many times without having to see a judge in court… But I’ve digressed
Ernest, Steve, Greg, myself (and I’m sure a handful of others on this forum) have been on both sides of these deals for many years now. One thing I can tell you for sure - deals structured for sellers do not look like deals structured for buyers. There is a lot of art to this business. No matter what side of the desk you are sitting on it is really smart to get some competent help in understanding the pitfalls and benefits of Leases and Options. It’s amazing how opportunities seem to find those who are prepared - some might even call it LUCK!
To your preparedness,
who don’t know, Karl actually wrote the Lease and Option for this deal. I believe he was in Maine at the time enjoying family time and the finished Paperwork crossed my inbox around 5 AM theday after he heard about it and got a frantic email about the raw details!
I stressed about asking Karl to help me nail this deal down…for about 6 seconds. My partner and I both agree that this was the best money we have ever spent, and my attorney formatted and spell checked and printed the finished product for signatures (and of course sent out invoice for $1500).
A shortcoming of mine is I find it very hard to ask others for help. Make no mistake this IS a shortcoming. Hosting MOMs really helped me with this. I watched folks (Lonnie, Steve, Karl, Ryan, Scott, Tony, Lin, Ernest, Jim and Ellen, Fred, Rick, Lin to name just a few) spend countless hours trying to help new folks learn portions of this business. Seminars, books, courses,round tables…the venue is not as important as the willingness. I realized it was impossible to ever look like a fool trying to learn new things with this group…ever!
I would not hesitate to call or contact ANYONE on this forum for a talk or walk thru if it would help me in my business or make life better for my tenants …that was and IS the intent of this forum.
I’m working on a deal and I’d like your help. What is the best way to get ahold of you?
Karl J. Warner, P.A.
Due Diligence and Entrepreneurial Strategist
Florida PH: (386)254-8464 Maine PH: (207) 669-4193
Florida Fax: (386) 254-8465 Maine Fax: (207) 669-4133
You mean if I get a MHP seller that will even “entertain” the idea of a lease option deal, you wouldn’t mind if I called you??
I swear somewhere I saw that you offered due diligence and negotiations. I just can’t find the negotiations part right now.
Anyways, I was wondering what that would entail. Would it be like having you as a buying agent?
I have done my fair share of brokering but nowadays I rarely act as a buyer (or seller) agent.
When I was transitioning from employed to unemployed I made a living as a Merger Acquisition Business Broker. What a learning experience that was!
Anyway, negotiating is simply the pursuit of agreement and compromise; a requirement, not an option, for anyone to survive and thrive.
If I can be of help please let me know,
As lots of folks know, I sometimes have to return call later if I am with tenants or customers, but i am accessible most days.
a few years ago, I got in a bind with the family…had over 90 people over to see my little operation in one year and and it was killing me. To spend 4 pleasurable hours with investors translated into being at the office til 10 PM catching up on work I missed during those visits.
Now, it’s a balancing act!
I have two small MHPs. One of them that has three monbile homes that I own and I would like to sell it to reduce the cost.
Any ideas how to go about?
How to determine how much?
How to dtermine the loan terms, length, etc?
Are mobile homes are personal property that I can just creat a promisory notes? I to pay property taxes on them.
Any suggestions I would really appreciate it.
All your questions and many more (the details you will ultimately need) are in a book called “Deals on Wheels” by Lonnie Scruggs (available here). Many if not most of us got started using this book.