A master lease is an agreement by which a Tenant leases a property a period of time from an Owner of a commercial property who may be inclined to relinquish control of the asset. The agreement provides the Tenant with the ability to then sub-lease portions of the property to other individual tenants.
The agreement between the master Tenant and the Owner may take also take the form of an option contract that provides the Tenant the right to buy or sell the property once the leasing term has expired.
The length of individual leases entered into by the master Tenant for space within the property may not exceed the length of the master lease.
The most famous master lease transaction still on-going today is The Empire State Building. Sold to Prudential Insurance Company by its original owner in 1961, an investor approached Prudential, offering a 114 year master lease agreement. A $2 million per year lease payment was agreed to be paid to Prudential.
The master lease agreement remains in place to this day with the Empire State Building annual revenue being $6 million dollars per year. From this revenue, Prudential then receives $2 Million dollars from the Master Lease resulting in a $4 Million profit to the Master Tenant.
How it Works: The first step of a master lease agreement is to find a property owner who either may be looking to sale the asset or relinquish day-to-operations. Reasons for an owner to walk away from or relinquish day-to-day operations of a property could be that the owners are motivated by:
- A large pre-pay penalty on an existing loan which would prevent a new loan or an early payoff of an existing loan as result of a sale,
- Property management issues which includes high vacancy or disrepairs,
- Avoiding and differing capital gains taxes,
- Personal Circumstance, i.e. burnt out owner or out of state owner.
The master lease agreement is a great solution because the property owner is able to be freed from day-to-day operations and relinquishes the owner from capital improvement, repair and maintenance financial obligations and receive lease payments. For the investor, a master lease reduces the risk factor as relates equity for bank financing, entitles the investor to cash flow and appreciation of profits above the master lease rate, as well as negotiating the ability to buy after the asset as a part of the Master lease agreement.