A.CRE

Master Tenant

A tenant who leases directly from the property owner and subsequently subleases all (or portion of) the property to other tenants.

Putting “Master Tenant” in Context

Mayday DST Solutions, a Delaware Statutory Trust (DST) sponsor, recently acquired a single-tenant office building in suburban Dallas, Texas, leased to Samsung North America. The property, known as Samsung North America Office, spans 150,000 square feet and is strategically located near major highways and Samsung’s regional supply chain operations. The acquisition is structured under a DST, allowing multiple investors to own fractional interests in the property while maintaining passive ownership.

The Role of the Master Tenant

To streamline the DST structure, Mayday DST Solutions established a Master Lease Agreement with a separate entity, Mayday Master Lease Co., designated as the Master Tenant. This Master Tenant entity leases the entire building directly from the DST and assumes responsibility for subleasing the space to Samsung, the single tenant in the property.

Why Use a Master Lease Agreement in This Context?

The Master Lease Agreement ensures a predictable income stream to the DST investors while simplifying the management structure. Rather than DST investors directly managing the lease and operational responsibilities associated with the Samsung tenancy, these duties are delegated to the Master Tenant entity. This arrangement is particularly beneficial for passive investors, as it provides consistent distributions while insulating them from the day-to-day management and lease negotiations.

Financial Example

The single-tenant lease with Samsung has a remaining term of 10 years, with a base rent of $30 per square foot annually, generating $4.5 million in gross rent. Under the Master Lease Agreement, Mayday Master Lease Co. pays a fixed rent of $4.2 million per year to the DST, keeping a $300,000 spread to cover operating expenses and administrative fees associated with managing the lease. This structure aligns the Master Tenant’s interests with those of the DST investors while offering an efficient operating model.

Benefits of the Structure

  • For the Investors: A fixed annual rent of $4.2 million reduces income volatility and provides stable returns. Investors in the DST can expect consistent cash flows without exposure to property management challenges.
  • For the Sponsor: Mayday DST Solutions ensures compliance with DST guidelines by using the Master Lease structure, preserving the passive nature of the investment.
  • For the Tenant: Samsung continues to operate under its original lease terms, unaffected by the existence of the Master Lease Agreement.

This hypothetical scenario illustrates how the Master Tenant structure serves as an integral part of a DST arrangement, creating operational efficiency and enhancing the appeal of passive real estate investments.

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