Master Lease Option

I have a park that I am working through negotiations on.  The details are as follows:80 lots20 Tenant owned homes30 Park owned homes.  (10 occupied and 20 unoccupied)Lot Rent is $185 with the park paying water/sewer.Market rent is $275 with water/sewer billed back.  Demand is very strong in the area and we don’t foresee any problems leasing up the 20 unoccupied homes.  The homes will need about $100,000 in total work to make this possible and the park will likely require another $30,000-$50,000 of work.  We have a value of $300,000-$350,000 for this park.  Our seller is not very excited about this price.  I am continuing to build the relationship with him and I would like to explore what a master lease option has to offer for both of us.  Anyone with experience structuring a MLO, please feel free to use the above example to walk me through how to set up the terms and future purchase option price.  I personally have no experience doing these and I want to get a handle on it before I start throwing it out there to him.

Vacant lots are worth $0.  The value of vacant homes vary widely, but given the amount of work you say they need ($5,000 ea.), I’d guess they are worth between $0 - $2,000 each.So in it’s current condition your park is worth:30 occupied lots x $185 x 60 = $333,000+ value of homes = ???So I think your $300,000 - $350,000 valuation is reasonable, especially with the upside in rents.  (I’d also invest $200/home to install water meters on all the homes.  Does the comparable $275 lot rents other parks charge include water?)As regards an MLO, we’ve never had a seller go for it - despite it being tax-free money for a few years while you work the park.  But we always offer it as a a way to close the deal.  (We also offer a much lower all-cash price, and a slightly-lower price if they’ll carry the mortgage.)I might offer an MLO something like the following:* $35,000 option payment at beginning of contract* $2,500/month continued option payments for next 36 months ($30,000/year. Basically you are taking over the park and continuing to give him his income stream)* At the end of 3 years, your strike price is $300,000.Be sure to let the seller know that all your payments are tax-differed until you exercise the option.  This is a quirk in the tax law.  Option consideration is not taxable until the recipient knows how to classify it (‘exercised’ or ‘abandoned’). If you’ve done your homework correctly, then in 3 years, or sooner, your park will be worth:50 occupied lots x $275 x 70 = $962,500+ value of homes = ???With the park worth nearly $1mm you’ll have no difficulty getting a bank to write you a 30% LTV mortgage and you can pay off the seller in full.  You’d probably actually want to borrow more so you could purchase additional mobile homes to complete the infill (or purchase another MHP).  You’d still have 30 vacant lots, and at, say, $25,000 per home, you’d need an additional $750,000 for complete infill. That might be a bit much for a bank to lend, but ask what they can do.  We’ve done a few round-trips with our banks to get properties mostly full, then re-apraised and re-financed, then fully full and re-appraised and re-financed.  It can be a 2- or even 3-step process.Good luck,-jl-

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Thanks for the input Jefferson.  I may have been a little high on the renovation costs, but I haven’t spent the time to go through all of the homes yet.  Also, the $275 market lot rent does not include water.  In fact, this is pretty much the only park in the area that doesn’t bill back utilities.In any event, since the MLO is as rare as a magical unicorn, I’ll update this thread if we are able to get it done. I’m not holding my breath, but who knows.