How a Master Lease Can Earn You Millions

A master lease is a valuable tool for an investor that could allow an investor to demonstrate increased income and obtain optimal financing. A master lease is a single lease that covers multiple properties leased from a landlord to a tenant. Because a master lease is a single lease, it will not break out rents for individual units, and instead have one master monthly rent payment.

To exemplify this, let’s use an example of an investor that owns a 50-unit apartment complex in an entity entitled Landlord LLC. That investor’s goal was to turn all the units, increase rents, thus increasing the net operating income, and then refinancing. The process of possibly vacating every unit, turning every unit, and getting each unit up to market rent could take months, or more than a year. However, the investor can increase the velocity of the capital in the deal by using a master lease.

To do so, the investor can create a second entity, let’s say Tenant LLC. Tenant LLC will owe one rent payment to Landlord LLC. Because both of these entities are owned by the investor, the investor can set the rent amount! The investor can calculate the market rent for each of the 50 units, and then simply add them together to obtain the desired monthly rent amount. The investor then enters a lease between Landlord LLC and Tenant LLC for that monthly amount. Moving forward, Tenant LLC will enter into a sublease with prospective tenants for individual units.

Now that Landlord LLC leased the 50 units at market rent to Tenant LLC, Landlord LLC’s income increased and the net operating income increased as a result. Landlord LLC is now able to refinance much quicker than it otherwise would have been able to, as it does not need to turn each unit and lease each individual unit at market rent. This can have a huge impact on the investor’s velocity of capital. Or, it can allow the investor to refinance at a time convenient for the project, and when market conditions dictate, rather than being beholden to a 1-3 year time period.

The same strategy holds true short term rental communities. Short term rental income can be seasonal and lenders sometimes have tighter restrictions when lending on short term rental communities. A master lease, however, solves many of these problems, as the short term rent community is collecting one uniform monthly lease amount every month.

There are a few pitfalls to be aware of when utilizing this strategy. First, Tenant LLC needs to have the funds to actually pay Landlord LLC. That is, the investor cannot simply state that income is XYZ, the investor must actually show it. Tenant LLC should therefore pay its monthly rent to Landlord LLC.

Next, the investor should be aware that not every lender will finance transactions with a master lease. Or, if they are willing to do so, the lender may pass through the master lease and analyze the subleases from Tenant LLC to individual tenants, defeating the purpose of the sublease. Consequently, it is vital to speak with your lender, or a lender, about this strategy and ensure it is worthwhile for your project.

What other benefits have you derived from a master lease?