Owning and renting commercial property can be a great way to build passive income, but it can also be a very complex exercise. So many variables affect the experience yet offer opportunities for gain. It’s not uncommon for a commercial landlord to have multiple spaces available in the same building or even spread across several different buildings.
At the same time, commercial tenants can have a variety of different needs depending on the nature of their business. For example, a commercial tenant who manufactures and sells its own products might need a space for fabrication and another space for the retail operation. In cases such as these, a master lease can make life easier for both the landlord and the prospective tenant.
What Is a Master Lease?
A master lease is a specialized type of lease contract between a landlord and a tenant that covers multiple properties under a single contract. They are most commonly used in commercial leasing where tenants are leasing more than 1 space in a single building or development from a landlord. However, it is also possible for landlords and tenants to sign a master lease for multiple properties in different locations.
Who Should Use a Master Lease?
Commercial landlords or management companies renting more than 1 property to the same tenant might be inclined to use a master lease. However, smaller independent property owners can also employ master leases. For example, a property owner with several garage spaces for rent might use a master lease to rent them all to a single tenant who needs parking or storage for multiple cars.
Benefits of a Master Lease
A well-conceived master lease can offer a number of significant benefits to commercial landlords. Chief among these benefits is convenience. The very nature of being a commercial landlord or management company requires it to generate an incredible amount of paperwork.
Every commercial tenancy demands that management companies create account ledgers, process rental applications, draft work orders and make deposit slips for bank deposits. By using a master lease and linking several properties to just 1 document, commercial landlords can unify a tenant’s entire file under a single umbrella.
This action makes life easier for both the tenant and the landlord. For their part, tenants under a master lease only have to make 1 monthly payment to the landlord as opposed to cutting multiple checks for several different properties. So, when it comes to convenience and ease of operation, a master lease can be beneficial to both parties.
Additionally, landlords renting to tenants under a master lease only have to meet and greet with potential tenants 1 time for 1 lease signing. Landlords who do master leases also benefit from only having to vet 1 client, which is a marked contrast to having 4 or 5 tenants whose financial bonafides all must be individually verified. So, a master lease can also save landlords a lot of grunt work above and beyond file maintenance and accounting.
Finally, landlords can choose to offer potential tenants a discount to do a master lease because the tenant is basically buying (or in this case leasing) in bulk. In much the same way that a grocery store might offer shoppers a better price per pound on ground beef if they buy 5 pounds instead of 1 pound, landlords can incentivize tenants to take multiple spaces under a master lease by slightly discounting the rent on all of the available spaces.
Why Choose a Master Lease?
From a tenant’s perspective, a master lease makes perfect sense because it allows them to stop shopping around and get a deal done. There is also the possibility that a landlord may offer them reduced rent on all the properties covered under the master lease. Individually, either of these possibilities makes signing a master lease a logical decision.
As discussed in the section above, master leases offer enough benefits to landlords that they might seek master leases for multiple properties as opposed to leasing them out individually. Because of this, many landlords who have more than 1 space available may choose to advertise them as part of a package deal under a master lease. After all, if the properties don’t rent, the landlord can always rent one, or more, of them out individually.
Although it’s not as common in residential properties, it’s not inconceivable that a residential landlord may want a master lease. If it’s possible to rent out the entire top floor of a fourplex to 1 family or a freestanding house and multiple storage units on the property to the same tenant, the landlord’s life is made that much easier by a master lease.
Potential Drawbacks of a Master Lease
Master leases offer a number of potential advantages to both landlords and tenants, but they are not without risk. A landlord who signs a master lease is putting a lot of eggs into 1 basket when it comes to their property’s revenue. That’s all well and good as long as the tenant is paying on time; however, if they don’t, landlords can easily find themselves in a situation where they have multiple delinquencies and a tenant who can’t pay on any of them.
Tenant delinquencies are not the only risk. Finding the right tenant for master leases is not always easy, and if the master lease tenant decides not to renew at the end of the lease term, the landlord is looking at the prospect of an extended vacancy (meaning no revenue) across their entire portfolio.
Another important consideration is negotiating lease terms or lease extensions on master leases. Basically, whatever concession the landlord makes on 1 property will have to be made on all of them. So, if the tenant asks for a deeper discount on 1 space in exchange for a lease renewal, they will want that discount across the board.
Maintenance is another concern with a master lease. Tenants under master leases usually have very specific needs for each property covered under the lease, meaning a major maintenance issue with one property could easily lead to issues for the rest of the tenant’s operations. For example, a tenant renting an industrial space and a retail space under a master lease could be unable to function on both sides of their operation if there is a major repair needed in either space.
After all, if the tenant can’t open their shop because of a leaking roof, there really is no point in them continuing to produce products in the factory. What that means for the landlord is that they need to be prepared with sizable capex and maintenance reserves if they plan on signing master leases.
For all these reasons, the risks associated with master leases are usually better absorbed by high-functioning commercial landlords. That’s why it’s very rare to find residential landlords or management companies that offer master leases on residential properties.
Benzinga’s Best Real Estate Investment Platforms
If signing master leases sounds like a good idea but you don’t have the infrastructure to maintain them or the capital to buy multiple properties, there is still a way to reap the benefits of a master lease. You can always buy into a real estate investment trust (REIT) or commercial offering on a real estate investment platform. That’s why it might be a good idea to check out this list of Benzinga’s top real estate investment platforms instead.
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Master Leases: a Good Idea or Not?
Master leases are a great real estate concept that can generate a lot of revenue for sharp, experienced landlords. A properly constructed master lease allows landlords to put a large chunk of their portfolio under 1 umbrella and reap the benefits for a long time. However, master leases are not without risk.
Master lease tenants can be hard to find, and they require landlords to place an enormous amount of trust into a single tenant. In other words, if it works, it’s a great idea, but when a master lease goes south, it can easily take down a significant chunk of the landlord’s portfolio with it.
Frequently Asked Questions
How do you make a master lease?
Drafting master leases is not too different from drafting a lease for a single property. A master lease includes all the same information as a standard lease (e.g., start date, rent amount, end date, rent due date, tenant’s name, landlord’s name). However, in drafting a master lease, you include separate address entries and the specific rent amount due for each property covered under the lease. It’s a good idea to have master leases drawn up by an experienced commercial real estate professional or an attorney who works in the field.
How long is a master lease?
The length of a master lease is something determined by mutual consent between the landlord and the tenant. They can be as short as 1 year, or they can cover multiple years. Aside from any pre-existing legal statutes on the maximum length of contracts in the state where the lease is signed, there is no specific standard length of a master lease.
What is a master lessor?
A master lessor is the person or entity that holds the interest in a master lease.
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