Master lease (sublease) is a convenient arrangement in which the management company assumes the vacancy risk on behalf of the owner. However, if you sign a contract based only on the image that “stable income is guaranteed,” you may later face unexpected disadvantages. In this article, we explain how master lease works and four key points to watch.
What Is a Master Lease (Sublease)?
A master lease is a structure in which a management company leases the owner’s property in bulk and then subleases it to tenants. Even if vacancies occur or rent payments are delayed, the management company continues paying rent to the owner. The management company pays the owner 80% to 90% of the rent after deducting a 10% to 20% fee. Because the management company also handles tenant recruitment, rent collection, and complaint response, the owner’s management burden is substantially reduced.
Benefits of a Master Lease
- Reduced vacancy and delinquency risk：The management company pays rent even if there is vacancy or delinquency
- Outsourcing of management operations：Well suited to owners with multiple properties or owners who cannot devote much time to management
- Tax filing support：In some cases, support is also available for calculating depreciation
Four Points to Watch in a Master Lease
1. Problems Caused by Rent Revisions
Master lease contracts are typically reviewed every two to ten years for rent and management terms. If rent is reduced due to building or equipment deterioration or an increase in competing properties, the management company may terminate the contract if the owner does not agree. It is risky to build a financing plan on the assumption that the initial new-build rent will continue permanently. A conservative income and expense plan that incorporates rent revision risk is essential.
2. Risk of Declining Rental Income
Rent may be revised even during the contract term. Before signing, it is important to confirm with the management company “how often revisions occur” and “how much the rent could decline at most,” and to have those points clearly stated in writing. Since September 2016, rental management operators have been required to explain important cautionary items.
3. Early Termination Is Difficult
As a rule, early termination for reasons on the owner’s side is difficult because it would infringe on the management company’s legally protected rights created by the lease agreement. You may also face restrictions if you want to sell the property or change management companies. Be sure to check for penalty clauses and termination conditions before signing.
4. Risk of Management Company Bankruptcy
If the management company goes bankrupt, the obligation to refund tenants’ security deposits shifts to the owner. However, because the owner does not contract directly with the tenants, contact information may be unclear, which can lead to disputes. It is important to review the company’s size, financial condition, and operating history in advance and choose a management company with low bankruptcy risk.
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Frequently Asked Questions (FAQ)
- Q. What is a master lease (sublease)?
- A. It is a structure in which a management company leases the owner’s property in bulk and subleases it to tenants. Rent is paid even when there is vacancy or delinquency, but fees are deducted.
- Q. Is rent permanently guaranteed under a master lease?
- A. No. It is not guaranteed permanently. Rent may be reduced through periodic reviews.
- Q. Can a master lease be terminated before the end of the term?
- A. Early termination for reasons on the owner’s side is difficult, and penalties may apply in some cases. It is essential to confirm termination conditions before signing.
- Q. What happens if the management company goes bankrupt?
- A. The obligation to refund tenants’ security deposits shifts to the owner. The risk can be reduced by choosing a financially stable management company.
- Q. Are master lease and sublease the same thing?
- A. Yes. They refer to the same arrangement. Terms such as “sublease,” “master lease,” and “rent-guarantee management” are used, but the substance is the same.
