A master lease in a Delaware Statutory Trust (DST) is a lease agreement between the DST and a master tenant. The master tenant is responsible for managing and operating the property, and the master tenant also sublets the property to individual tenants. This arrangement allows the Delaware Statutory Trust to avoid the hassles of having to directly manage properties held under trust.
In a DST, the Trustee is prohibited from entering into new lease agreements or renegotiating existing lease terms. Oftentimes, when the DST is formed, the trust enters into a master lease agreement. Under a master lease agreement, the entire property is leased to one master tenant, which may be a subsidiary of the DST Sponsor.
Delaware Statutory Trust master leases are typically structured for longer terms – 10 to 15 years – and may contain multiple options for lease extensions. A master lease in a DST typically requires the master tenant to assume responsibility for all property operating expenses and capital expenditures. Most importantly, though, the master lease arrangement allows the master tenant to sublease space to additional end-user tenants of the property. The master tenant also is free to enter into property management contracts and sub-management arrangements.
This agreement precludes the DST Trustee from having to make operating decisions for the property, since doing so could jeopardize the tax-deferred status of the trust’s beneficiaries. A master lease agreement is deemed to be a true lease rather than a form of financing or a partnership. The master tenant must make lease payments to the DST. Lease payments are typically structured to equal the required debt service payments, plus a stated return for trust beneficiaries.
Master lease arrangements are quite familiar to many DST Sponsors. They allow the master tenant to engage in leasing activity for properties held under trust and also to manage those properties while ensuring the DST remains in compliance with strict tax regulations.