The Master Lease: An Umbrella of Protection

In a sluggish economy, you must fortify your interests and properties so you come out on top once the economy rebounds. A master lease not only can help you protect your properties, but also can lessen the possibility of rent defaults. Sound interesting?

What It Is And How It Works

A master lease covers a multitude of properties or units, with a single party assuming the role of master tenant and guaranteeing the rent for all the units or properties for the lease period. The master tenant should, of course, be a creditworthy party. Often, he or she is a close business associate, giving the owner assurance that rental dollars are in good hands.

The master tenant rent guarantee protects the owner against rental market hazards such as vacancies and lease expirations, ensuring a consistent rental stream for the lease period.

Why It A Safer Bet

Lenders like master leases because they offer an extra layer of protection against loan default. A master tenant is typically chosen for his or her pristine credit, making the person a safer bet than tenants whose credit may be less than perfect.

Lenders sometimes require a master lease as additional loan collateral. Master leases are especially common during the rent-up phase of a large commercial property or when an owner lacks sufficient collateral or operating track record to qualify for debt financing. If an owner defaults on a loan, the lender looks to the master tenant as a secondary source of recovery after it foreclosed on the property. The new landlord can then seek to collect rent payments due under the master lease.

Adding Up The Pluses

Why would anyone cast him- or herself as a master tenant, considering the responsibilities of the role? It simple: profit. The master tenant, in effect, sublets the units the lease encompasses and becomes a stand-in landlord or property manager. He or she collects rent from subtenants and, after paying the master rent to the owner, retains all additional sums.

In addition, his or her liability is limited to the amount of the rent under the master lease, rather than the entire debt burden the property owner assumes.

Why Lease Structure Is Critical

You can structure a master lease such that you're ensured a guaranteed stream of master lease payments. Under a classic master lease structure, for example, the entire project is leased by the master tenant, who then subleases units to subtenants.

Alternatively, you can limit the space covered by a master lease to only specific vacant space, or you may float the space to coincide with the spaces that actually become vacant during the master lease term. Some master leases terminate when space is leased to other tenants. Others cover units during a rent abatement period, when the occupying tenant pays no rent. Finally, a master lease might take effect only when a lease nearing expiration isn't renewed or the space is re-leased.

The Master Of Leases

As a property owner, you must protect your interests and properties from whatever life, or the real estate market, throws at you. A master lease can help you not only decrease the risk of individual tenant defaults, but also build a steady rental stream.