What is a Master Lease?
A master lease is an agreement where one party (the master tenant, typically an investor) leases an entire property or portfolio from the owner, then subleases individual units or the whole property to end tenants. The master tenant controls the property's operation and income, paying a fixed amount to the owner regardless of occupancy.
How master leases work in investing
Master leases are commonly used with multifamily properties, commercial buildings, and sometimes single-family rentals. The structure gives the investor control without ownership, allowing them to improve operations, raise rents, reduce vacancy, and increase net income. The master lease often includes a purchase option.
For example, an investor master-leases a 20-unit apartment building with 50% occupancy from a tired landlord for $8,000/month. The investor fills vacancies and brings total rental income to $20,000/month. After paying the $8,000 lease and $4,000 in expenses, the investor nets $8,000/month. If the lease includes a purchase option based on the original low-occupancy cap rate, the investor has created significant equity through improved operations.
Advantages
No capital required for acquisition. Control without ownership risk. Ability to test an investment before committing. Proof of concept for lenders if you later want to finance the acquisition. Works particularly well with distressed or mismanaged properties where operational improvement can significantly increase value.
Risks
The owner could default on their mortgage, triggering foreclosure that terminates the master lease. The property might have hidden issues. If the master tenant cannot fill units or collect rent, they are still obligated to pay the owner the agreed amount. Due diligence on the property and the owner's financial situation is critical.
Master lease vs sandwich lease
A sandwich lease is a specific type of master lease where the investor also grants a lease option to the end tenant. A standard master lease focuses on rental income spread; a sandwich lease adds an eventual sale component.