Master Lease Option on Apartments? Who pays for..
Hi, newbie investor here. I want to control some distressed apartment buildings with a Master Lease Option. I know the method is truly a no-money down strategy but my question is:

1. How can I get the seller to pay for the renovations I want to do? Let's say the utility meters are inefficient and I need $20k to fix it, and get a new management company in to cut costs. Who will front this bill (not me). 

2. Where does the actual cash come from? Am I going to be controlling the bank account to ensure that rents are being deposited, bills being paid, etc. If I need to make an emergency repair and the PM charges me for it, how is that taken care of? 


[{"id": "cvyscov", "text": "What market are you in? In my experience you won't find a seller who will let you have all the upside, have the cash or willingness to put in renovation costs, and have you take over for no money. Maybe your market is different, but just keep that in mind.", "replies": [], "depth": 1}, {"id": "cw3fm4v", "text": "When we have structured these deals, the basic setup was as follows:\n\n1. Lessee will pay Lessor $X per month as a lease payment\n2. Lessee gives Lessor $Y as a security deposit, usually to be applied towards the purchase price if the call option is executed\n3. Lessee is responsible for and has the full authority to perform all duties necessary to run the building \n\n\nYou would then collect the rent, pay the neccesary bills (other than the mortgage, which the Lessor pays with the money from the payment you make), improve the building and then typically have an option to purchase the building at a specific strike price for a specific term.\n\n\nThere is obviously way more legal clauses, details and structure needed, but that are the basics on how I have done it in the past.", "replies": [{"id": "cw3rxha", "text": "Well said.\nSo then who's bank is account is used for all these? I assume going in the Lessor (owner) has all the services linked to their account and may even have a reserve set aside for emergencies? \n\nAlso would you bring in a money partner for the renovation needed ", "replies": [{"id": "cw4wzkx", "text": "It would all be part of the negotiation.  I would want everything running through my own bank account.  Things like security deposits would most likely be credited towards the Lessee.  However, reserves in my opinion would probably stay with the Lessor.  All a negotiation though.  We wouldn't be bringing in a money partner because we have the capital needed ourselves.  If you don't have any funds yourself then that would have to be your strategy.  It really all depends what you can negotiate with the current owner.", "replies": [{"id": "cw4x40i", "text": "Makes sense. Well sounds like any other business, it's all about the value add and the negotiation . I've actually asked a few sellers and they've considered it, as not all need cash but they just want to be done with the property. \n\n\nI found a money partner yesterday actually. But if I have one who can say just purchase the entire property, and then negotiate a deal where I manage it for her, then what are the pros or cons of that arrangement vs the MLO ?", "replies": [{"id": "cw4xa4e", "text": "It depends on the motivations/needs of each party.  A master lease may provide tax advantages for the seller.  It allows you to take advantage of their in place financing if its good.  You get to take over the property with most likely less money down which improves your short term cash on cash returns.  You get to improve the property prior to obtaining financing which should increase the valuation for your take out financing when you execute an option to purchase the property.  \n\nDoes the current owner have debt on the property?  An easier structure may just be a seller carry back.  The master lease option is definitely more complicated and more risky to both parties if you don't know what you're doing when you document the setup of it.  \n\nIf you are in a position to purchase the property outright and the numbers make sense that would be a simpler method.", "replies": [{"id": "cw4xnbb", "text": "Right like less capital gains, or no loan pre-payment penalties. \n\nI found a property where the seller would carry the loan since it's a pretty good deal, he just wants a down payment (no problem). \n\nAt the same time my partner could easily buy it outright too. I'm just wondering how we would structure that deal, being that she is a Canadian citizen. Can I form a Limited Partnership with a foreign investor? She fronts the cash, buys it in her name, and puts me on there as a non-majority owner (to manager and improve it for the next few years)\n\n\nThanks for all your great advice!!!", "replies": [{"id": "cw58yu1", "text": "Depends on the terms that the seller will carry at.  If they'll carry at 1 % interest only payments? I'd much prefer that than putting more of my capital in the deal.  \n\nOn a basic level, yes, you can form a LLC or LP and you could both be members or partners.  If she is sophisticated she may have her own lawyer/CPA who can help her with the tax implications of the foreign investment.  That is something you  would want professional help with.\n\nFrom your perspective, you probably want to argue for X % of the total deal for finding the deal and some type of property management fee.  It also depends on your investor's needs and wants.  Does she just want a preferred return of Y % on her money and then you get everything after that?  Or maybe a preferred return and then you split 50/50?  Lot's of different ways of going about it.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]