Master Lease

A master lease is a structure used in many Delaware Statutory Trust (DST) offerings to comply with the operating constraints that the IRS placed on DSTs in Revenue Ruling 2004-86. Under that ruling, the trustee of a DST holding real estate is sharply limited, often described as the "seven deadly sins," in what it can do: it generally cannot renegotiate leases, refinance debt, make capital improvements beyond routine maintenance, or reinvest sale proceeds. To allow active, day-to-day property management while staying within these limits, the DST often leases the entire property to an affiliate of the sponsor, the master tenant, under a master lease. The master tenant then handles leasing, operations, capital decisions, and management of the property, and pays rent to the DST, which is distributed to the beneficial owners. This separates the passive ownership held by investors, which preserves 1031 eligibility, from the active management functions that the DST itself is prohibited from performing. Investors should understand that the master tenant is typically a sponsor affiliate, that master-lease rent may be structured with base and supplemental components tied to property performance, and that the arrangement is one of the features that makes DST interests qualify as like-kind real property for a 1031 exchange. The specifics are disclosed in the offering's private placement memorandum.