A guide to master leasing: the pros and cons you need to know

Posted on: 24 July, 2024

Master leasing has emerged as a new strategy to combat the global housing crisis and rising homelessness. Here’s how it works.

The supply of new housing is falling behind demand. In the UK, housebuilding fell to 120,000 new homes a year in 2023 – less than half the government’s target of 300,000 and the lowest levels seen since the Second World War.

These numbers aren’t enough to support either a rapidly growing population or the number of houses being taken out of social housing stock. As a result, housing prices are climbing to the point where they’re simply unaffordable for most families, leading to what has been dubbed an ‘affordable housing crisis’.

The UK isn’t alone: the World Green Building Council (WGBC) estimates that 80% of cities worldwide aren’t able to provide affordable housing for the majority of their population. In China, the liquidation of property giant Evergrande set off a crisis in the country’s property sector in 2020 that is still continuing to this day. What’s more, homelessness is on the rise in America in the aftermath of the pandemic, growing by 12% in 2023.

One solution that has been proposed to address the housing crisis and fears of rising homelessness is master leasing. But what exactly is it, and how does it work?

What is master leasing?

In a master lease, a lessee has the ability to control and sublease a property to other tenants to gain rental income. In this type of lease, the lessee has the equitable title while the property owner retains the legal title, but the latter has no additional responsibilities for it. For example, a housing association that agrees a master lease with a real estate investor would then be able to sublease a property to their clients.

Master leases are known for their flexibility whereby further schedules or addendums can be attached to them, each with their own specific terms. These agreements also don’t specify details for individual assets or properties, such as duration or price, allowing further assets to be added or removed as and when needed.

How does a master lease work?

There are three different types of master lease agreements that you’re most likely to encounter in the real estate industry, each of which work slightly differently:

• Performance master lease: In this type of master lease, the lessee pays a percentage of the profit they receive from their sub-resident to the property owner. If they don’t have a sub-resident, they don’t have to pay.
• Fixed master lease: Unlike a performance master lease, in this agreement the lessee has to pay a percentage of profits, regardless of whether they have a sub-resident.
• Hybrid lease: In this form of lease, the tenant will pay a guaranteed minimum rent alongside a percentage of any rent they receive from a sub-resident.

The benefits of master leasing

1. Low barrier for entry (and low risk)

From the perspective of the lessee, master leasing is an attractive opportunity. As they don’t need to put any money down (or take out a loan) to start leasing the property, they’ll quickly be able to receive any profit from a sub-resident’s rent directly. What’s more, not needing to involve banks or lenders also means that there’s minimal risk to the master lease strategy.

2. Creates more opportunities for “high risk” renters

The lower barrier for entry offered by master leasing means that tenants deemed high risk, whether that’s because they have no previous rental history, no reliable income or previous evictions, have the opportunity to access housing.

3. Convenience

Traditional tenancies require a significant amount of paperwork and agreements, which can be streamlined and consolidated into one via the master leasing agreement. This can be beneficial to both the property owner and the master tenant, and can even be expanded to include other locations, with the added benefit that the landlord won’t have to screen multiple tenants for multiple properties.

4. Cost savings through consolidating assets under one agreement

Consolidating multiple different leases into one agreement also presents cost saving opportunities alongside convenience, thanks to the reduced amount of paperwork and administration required.

5. Cash flow boost

Property owners stand to retain all surplus monthly cash flows through the master leasing model. If it’s managed effectively, this can create a healthy flow of cash and enhance net operating income.

The cons of master leasing

While there are a wide range of benefits of this approach, the master lease strategy isn’t without its potential drawbacks:

• Financial risk: While there is low risk to this approach, this doesn’t mean there’s no risk altogether. In a master lease agreement, the master tenant is responsible for collecting rent from subtenants. If they’re unable to collect this, or fail to pay their own rent, this puts the owner at significant risk.
• Tenant reliability: The master tenant ultimately has control over the screening of tenants in this agreement, and as they may be less experienced than a seasoned property owner in knowing the warning signs or conducting effective screenings, this could create problems for both parties.
• Legal complications: With more parties involved and the lines more blurred in terms of control of the property, the master lease agreement can present legal complications if the master tenant and property owner were to get into a dispute. In the case of a master lease agreement that spans multiple properties, this could be a particularly difficult situation.
• Maintenance: If a master tenant neglects their duties to maintain and repair the property, property owners may be forced to step in, leading to added expense.

Master leasing could help address the affordable housing crisis

Along with investors and businesses, people with low incomes and those experiencing homelessness could be well-placed to benefit from the master leasing approach. In the eyes of many it’s a game changer in the current international housing shortage, and while these agreements require collaboration and long-term commitment, they offer significant benefits for all parties involved.