Master Lease Agreements
A Master Lease Agreement provides any income producing property, ie:, landlords/owners, developers of commercial property (commercial buildings, mixed use, shopping centers, warehouse and industrial properties) an opportunity to get out from under the day to day duties of managing their properties.
Here’s How It Works
The lessee (buyer in most cases) agrees to take over the operations of the property and both party’s agree to an amount of deposit money to put down (or in most instances, no payment) on the property, in exchange for all the rights and privileges of owning and operating the property. We will also pay the owner the agreed upon monthly rent for the life of the lease—after which arrangements are commonly made to buy the property. The lessee can improve the property to secure more rent or divide the space into multiple rentable units. The property’s operation is completely the lessee’s responsibility.
The lessee is also held liable for the property taxes, utility bills, insurance and maintenance expenses. But this means they’re entitled to the property’s income revenue, tax benefits and increase in value. The catch? The legal title doesn’t change hands. Instead, the lessee holds equitable title for the duration of the lease or until they exercise any option to buy.
What’s the Difference Between Equitable Title and Legal Title?
In real estate law, equitable title refers to an individual’s right to enjoy the financial benefits while leasing the property. However, equitable title is not “true” ownership and the lessee is not entitled to many of the owner’s legal property rights unless there is a written option to purchase clause included. If the Lessee (buyer) exercises the option to purchase the property at an agreed upon price today. Then upon any work performed by the Lessee, and or restructuring any leases
Legal title refers to the actual ownership of the property. The legal title includes all the property rights, such as easement, development, possession and other rights.
The difference between equitable title and legal title is more complex than this brief explanation. But here’s an article that dives deep into the topic.
Why Consider a Master Lease Agreement?
The lessee is entitled to any of the property’s revenue (after their monthly rent), any future equity, tax benefits and the day-to-day management. As the net operating income (NOI) increases, so too does the lessee’s revenue. In addition, if an option to buy has been included in the agreement, at the time of sale, any increased property value becomes the lessees.
But master lease agreements don’t only benefit the lessee. The owner receives steady rent income with no effort, as the property’s maintenance responsibilities rest on the lessee. Master lease agreements may be a good option for property owners who are no longer motivated to invest in a given property, but don’t want to, or can’t, sell it. They allow the owner to continue receiving some revenue on the property without any financial or managerial involvement.
The Master Lease Agreement also benefits building/property owners who might not have any idea of what to do with any capital gains the sale might trigger. The Master Lease Agreement gives the owners time to find another 1031 exchange property, or time to work out a family trust where any of the proceeds from the agreed upon sale date to the lessee/buyer.
(copy in content)