Master Leases Frequently Asked Questions Answered
We created Master Funding Solutionssm in order to enhance the benefits of a traditional real estate lease solutions. Master Funding Solutionssm, when optimized, entail the use of master lease structures. Below are responses to the most frequent questions we receive concerning master lease structures.
What exactly is a master lease?
- A master lease is a single lease that covers multiple properties leased from a landlord to a tenant. As a single lease, a master lease will not break out rents ascribed to individual properties. All properties within a master lease are bound by a single payment, lease escalation and lease renewal schedule.
Why does S|T|O|R|E like master leases?
- Master leases are typically employed by larger scale institutional landlords and have been in use since about 1990 when the securitization of commercial real estate loans began. A master lease transforms a landlord’s investment risks into an aggregate portfolio investment risk. Long-term holders of real estate value spreading investment risks across multiple properties. Conventional commercial real estate lenders achieve similar diversity through loan cross-collateralizations. At the same time, risk aggregation enables S|T|O|R|E to offer greater lease flexibility to our customers, which can materially improve their shareholder wealth potential.
Are there drawbacks to having a master lease?
- For successful companies, there are no drawbacks to using master lease structures. On the contrary, there are material benefits, some of which are discussed below. S|T|O|R|E master leases are always tailored with the needs of the business in mind. For insolvent companies, master leases do have an impact that arises from tenant accept/reject provisions on multiple unit master leases, opposed to individual leases.
Are there benefits to tenants for a master lease?
- Yes, there are. Here are five main benefits:
1. Landlords can take a portfolio approach to ownership. It is ordinary for real estate-intensive businesses to have a variety of location performance not necessarily correlated to their real estate investments. In the case of individual leases when a landlord is being asked to own a single location, property value can be harmed by altering location dynamics or property performance. On the other hand, the real estate for outperforming locations may not realize commensurate valuation increases because valuations are mainly tied to local market real estate comparables and construction costs. Landlords that utilize master leases have the ability to provide asset for values that correspond more closely with tenant valuation expectations and actual corporate outlays due to the investment diversity provided by the master lease structure.
2. Funding for new projects becomes simpler. Providing capital for new projects tends to be more difficult than funding existing, proven locations for landlords and conventional lenders. This is substantially valid with individual leases or loans that don’t benefit from cross-collateralization. Master leases at S|T|O|R|E are able to fully fund land and building costs with the new project rolled into an existing master lease. This way new locations profit from the existing proven locations in our master lease.
3. Funding for location enhancements becomes easier.Similar to new construction, having investment diversity makes it easier to fund improvements to existing assets, rolling the added improvement rents into a master lease. The key to harnessing opportunities for business expansion is having a landlord like S|T|O|R|E who is there to fund the improvements and raise your shareholder wealth. Look at this as opportunity value capture.
4. Enables location closures and substitutions. Individual leases tend to limit a tenant’s ability to close a property and virtually never permit property substitutions. S|T|O|R|E master leases allow for both, which can limit company exposure to underperforming assets. Consider this opportunity cost containment.
5. Master leases ensure institutional landlord profiles. There are an abundance of small landlords who own individual assets leased to tenants. These landlords cannot typically offer opportunity cost containment, opportunity value capture or development funding. Such landlords are also often less responsive to everyday occurrences, such as property casualty or easement manners. Working with unresponsive individual landlords can impose frictional business costs. Since master leases encompass multiple assets and involve larger investment commitments, they tend to assure preferred institutional landlords who are longer term, relationship-oriented holders.
