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Lease Strategies

Product Overview

This LARG contains the following items:

Anatomy of the Marketing Master Lease, and the Lease Clause Critique: A Sampler from the Marketing Master Lease.

Number of Single Spaced Pages: 12





This LARG looks at the marketing master lease--a deal where the tenant leases an entire complex or building with the intention of subleasing it at a profit. The first section looks at the characteristics of master marketing leases in general, and focuses upon recognition and subleasing issues in particular. The Lease Clause Critique contains a sampler of several clauses from a marketing master lease with extensive comment.

Anatomy of the Marketing Master Lease

In a marketing master lease, the tenant leases an entire property (which is often empty or nearly empty) with the express intention of making sublease deals for the space. The transaction is an entrepreneurial deal for the tenant, since it hopes to sublease the space at a profit. The tenant is usually a broker or developer who knows the market well, with a proven track record in leasing the type of space involved.

For the landlord, the marketing master lease can provide quick relief from a problem it wishes would just go away--having excess space to lease in a weak market. In many cases, the landlord is a corporate user with surplus space on its hands and a disinclination to assume the marketing and administrative burden inherent in leasing the space to numerous small users.

Not a Financing Tool

The marketing master lease is similar in some respects to a master lease which serves as security for the financing of a development deal. For example, in both cases an entire parcel or complex is subject to one lease with one tenant, and substantial subleasing is anticipated by the parties. However, master leases negotiated with pension funds and financial institutions are designed to provide predictable financial returns on investments for such parties, and high percentages of preleasing is nearly always part of such packages. By contrast, the marketing master lease is designed to lease space in troubled developments or weak markets, or both. And it is the marketing expertise of the tenant that motivates the landlord rather than the tenant's financial strength.

Marketing Master Lease Ingredients

Frequently, one or more of the following factors are present in a marketing master lease deal:

  • The landlord has a strong desire to make one deal for the entire facility or property.
  • The landlord is anxious to avoid further cash outlays for the property.
  • The property is sometimes a corporate office or industrial facility that has become redundant due to a merger, a change in corporate strategies or markets, a change in technology, corporate downsizing, etc.
  • The tenant master leasing the building is usually an entrepreneurial brokerage or development firm with a good feel for the market; the principals in the firm believe they can sublease the building at a substantial premium in excess of the rent and other master lease charges.
  • The tenant may take a substantial amount of space in the building itself, and may have a major expansion planned during the term of the master lease. The master lease gives the tenant control over lots of space at bargain rentals.
  • In some cases, the landlord participates in the "excess" subrentals (i.e., subrentals in excess of the minimum rent per square foot rent paid by the tenant) in consideration for granting a bargain minimum rent in the master lease, or for generous abatements of the minimum rent under the master lease.
  • The tenant anticipates a major improvement in the market (i.e., a substantial drop in vacancy rates) for the type of space subject to the master lease during its term.

Recognition Issues

Of course, the subleases under a master lease terminate if the master lease is terminated, no matter what the reason for such termination. This means that it is critical for the subtenant to obtain a recognition (or non-disturbance) agreement executed by the master landlord. Such an agreement typically provides that, if the master lease terminates, the subtenant will attorn to (i.e., render performance to) the master landlord, and that the master landlord will recognize the sublease (i.e., not disturb its possession of the premises) so long as the subtenant is not in default under the sublease.

If the subtenant fails to obtain such a recognition agreement, it will lose its leasehold improvements in the premises if the master lease is terminated since the sublease will also terminate. This means that the tenant will not be able to finance such improvements with third party lenders, because if the sublease is terminated, the security for such financing evaporates. As a result, well represented tenants will not sublease space without the benefit of a recognition agreement, unless the sublease has a very short term, or unless no improvements are contemplated for the space.


End of Excerpt