Real estate broker Rodrigo Nino has found a tempting way to sell high-end condos to skittish investors—he sells them with a few years worth of rent already in the bank. Nino, the founder of the real estate agency Prodigy Network, calls the arrangements “guaranteed income assets” but they are more commonly known as master leases. They are becoming somewhat more common in markets such as New York and Miami where struggling developers are looking for creative ways to unload condos.
The arrangements work like this. The developer either leases out the condo to a tenant or promises to do so, putting an amount equal to as much as three years worth of rent into an escrow account. The developer then sells the property to an investor who is guaranteed to get some income for as long as there is money left in the escrow account.
Nino is selling units in a building called the William Beaver House in New York’s financial district. The one bedroom condos there sell for $1.4 million. The monthly rent on such a unit is $3,500. So the developer agrees to put $126,000 ($3,500 times 36 months) in escrow so the investor knows he will have income for at least three years. The strategy is really a just a way for the developer to discount the sale price and use the reduced proceeds to pay down his debt on the building. One plus for the developer in this arrangement is that if the unit ends up renting for more than the agreed on amount over the course of the three years, he can keep any upside.
“The investor doesn’t want to take a chance on what the rent could be,” Nino explains. “It’s an interesting mechanism that helps you deal with the uncertainty.”
During the boom Nino sold high end condos in Miami and New York, representing developers. Now that developers are in trouble he’s switched to representing buyers. He says he only works with folks who meet the SEC definition of “accredited investors.” That usually means they have at least one million in cash or marketable securities to invest. Nino says he’s lined up a $500 million pool of foreign investors looking to buy high-end condo properties, only this time at steep discounts.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.