12-9-16

Real Estate Journal — Central PA — December 9 - 22, 2016 — 7C

www.marejournal.com

M id A tlantic

C entral PA

By Daniel J. Alderman, NAI CIR Leased property: An estate for years

usually with the idea of o wn e r s h i p of the prop- erty. When you own the investment property, the o pp o r t un i - ties for prof- W

hen we write or talk about real estate “investments” it is

gal contract and it should not be entered into by either the lessor or lessee without profes- sional assistance. All leases are different and so we cannot cover all of the possible combi- nations of items in a lease in this publication. We can cover just the ele- ments that can result from ne- gotiating leases and subleases for profit. The Original Lease The original lessee may lease a property for a certain speci- fied monthly rental amount. This lease is with the owner of the property.

As an example, what if a commercial building is leased for $10,000.00 a month? If the lessee could sub-lease the same property to another renter- user for a rent of $11,300.00 per month, then the original lessee would have a cash flow of $1,300.00 from this situ- ation which is often called a “sandwich” lease. The original lessee is “sandwiched” between the owner and the user of the property. This original lessee still pays the original specified monthly rental of $10,000.00 to the owner, but since he is collecting

$11,300.00 from the sub-lessee under a separate contract, the difference of $1,300.00 is a monthly profit for him. The Right to Sublease As we pointed out, you need professional assistance to pre- pare the lease. If a “sandwich” situation is contemplated, a provision giving the tenant the right to sublease space is an absolute necessity in the lease agreement. It is customary, in landlord prepared “form” leases, to pre- clude assignment and sublet- ting. The ideal position for an active landlord who intends to

provide competent continuing management to his real estate is to maintain this clause in- tact throughout the lease ne- gotiation and thereby provide himself complete control of all assignments and sublettings, since none can be accomplished without his prior approval. The usual original reason for the lessee to place the provision to sublet into the contract is the question about the future amount of space that the origi- nal tenant will need. If a tenant believes that he will need less space in the future, a sublease continued on page 9C

Daniel Alderman

its and cash flow from it are thought of as rent paid by a tenant to the owner. The owner also has a potential profit that can come from the later gains when the property is sold. Since the emphasis is on own- ership, the average real estate investor might not think about the cash flow and potential profits from a property that is leased rather than owned. However, there are investors who specialize in making prof- its, sometimes big profits from properties that they do not own. This cash flow from a lease can be extremely interest- ing. Often the lessee making a huge profit has a relatively small cash investment in the property. If you were the lessee of a building and wanted to make a profit on a possible sublease of some of it, who would your “customer” be? The Usual Lessee Take the position of the per- son acquiring property for use in a trade or business. For this person, the fundamen- tal advantage of leasing over purchasing is the fact that the entire amount expended for leasing is currently deductible. On the other hand, if the prop- erty were owned, the owner would not be able to deduct any part of the purchase price. His entire cost would have to be capitalized, and could only be recovered through depreciation of the cost of the improvements over their life. The remainder would only be recovered on the disposition of the property. The Estate for Years A lease is defined as a con- tract between the owner of the land or building (landlord or lessor) and a tenant (lessee) in which the lessee agrees to pay a stipulated sum (rent) for the use and enjoyment of the property for a specified period of time. This is, for the lessee, very much like an ownership, and is also called an estate for years. A lease is a complicated le-

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