Property management is a low-margin and labor-intensive business because it’s difficult to maintain a property and keep tenants happy. It’s why many real estate investors outsource property management so they can focus on scaling acquisitions.
In this article, we will discuss a master lease, how it differs from traditional property management, the benefits of a master lease, and more.
What is a Master Lease?
A master lease is an agreement where a property manager (PM) leases a building from an owner for a negotiated price and then subleases the building to other tenants. This is a strategy used with other real estate assets, such as Airbnb arbitrage, but it can also be used in the commercial sector and elsewhere.
Generally, master leases last for one year, but it varies based on the deal made.
Types of Master Leases
There are generally two types of master leases:
- Fixed Master Lease – the lessee agrees to make monthly payments to the owner regardless of profits or tenancy.
- Performance Master Lease – the lessee agrees to pay a percentage of profit only when rents are received.
A combination of both is called a hybrid master lease and are preferred by many property owners. In a hybrid master lease, there’s a guaranteed monthly payment from the PM, but owners get additional income if the total rents exceed a certain amount. Basically, you can make more profit if the PM can acquire more tenants at higher rent rates.
Master Lease Terms
Typically, a master lease contract lasts for a year. Depending on the market conditions and your property’s current state, the PM may require free rent or concessions to allocate enough time to improve the property and lease-up.
The costs for maintaining the common area need to be negotiated. Typically, the maintenance costs for amenities that the residents regularly use, such as the pool and gym, are covered in the master lease. The owner should cover everything else in the common area not used daily.