Posted on April 23, 2020
A master lease agreement provides an avenue to invest in commercial real estate without tens of thousands in the bank for a down payment or millions in net worth. These agreements allow a lessee to rent a property and sublease it for profit. Essentially, master lease agreements allow a lessee to act as a proxy owner.
The lessee pays the property owner a small amount down (or in some instances no payment) in exchange for all the rights and privileges of owning and operating the property. They will also pay the owner the agreed upon monthly rent for the life of the lease—after which arrangements are commonly made to buy the property. The lessee can improve the property to fetch more rent or divide the space into multiple rentable units. The property’s operation is completely the lessee’s responsibility.
The lessee is also held liable for the property taxes, utility bills, insurance and maintenance expenses. But this means they’re entitled to the property’s income revenue, tax benefits and increase in value. The catch? The legal title doesn’t change hands. Instead, the lessee holds equitable title for the duration of the lease.
In real estate law, equitable title refers to an individual’s right to enjoy the financial benefits while leasing the property. However, equitable title is not “true” ownership and the lessee is not entitled to many of the owner’s legal property rights.
Legal title refers to the actual ownership of the property. The legal title includes all the property rights, such as easement, development, possession and other rights.
The difference between equitable title and legal title is more complex than this brief explanation. But here’s an article that dives deep into the topic.
The lessee is entitled to any of the property’s revenue (after their monthly rent), any future equity, tax benefits and the day-to-day management. As the net operating income (NOI) increases, so too does the lessee’s revenue. In addition, if an option to buy has been included in the agreement, at the time of sale, any increased property value becomes the lessees.
But master lease agreements don’t only benefit the lessee. The owner receives steady rent income with minimal effort, as the property’s maintenance responsibilities rest on the lessee. Master lease agreements may be a good option for property owners who are no longer motivated to invest in a given property, but don’t want to, or can’t, sell it. They allow the owner to continue receiving some revenue on the property without any financial or managerial involvement.
Master lease agreements are creative financing options that enable investors who don’t have substantial capital for a down payment to invest in large, commercial real estate. And they’re a great option for owners who wish to maintain some monthly revenue, without the stress and responsibilities of day-to-day property management.
When considering a master lease, it may be best to consult legal counsel to review the agreement, as they are typically complex and vary from lease to lease. And, while we’ve outlined some common advantages and disadvantages of master lease agreements, know that others may exist.
Chris Falk has extensive experience in commercial real estate. Contact him at (801) 416-1024 with questions about common commercial real estate leases, or with any other questions about master lease agreements.