Tuesday, November 04, 2008

Master Lease Mess
Master leases were common structures for tenant in common programs. The structure was the only way certain property types - hotels, retirement homes - worked in a securitized TIC transaction. (I am not going to go into the whys here.) Master leases, like any lease provided investors a stated stream of income over a set period of time. Many of these leases are now in trouble. DBSI, the Idaho-based TIC sponsor that did most of its TIC deals in the master lease structure, is likely going to cancel the leases at it cannot support the lease payments. I heard yesterday that another large TIC sponsor is going to follow suit. One of the problems with master leases was that they were only as good as the credit of the master lessee. The master lessees are going to prove lousy credits.

Investors, in their anger over defaulting master lease payments, need to be careful. Rash decision can have big impacts - i.e. canceling property management agreements that leave no property management, or lead to technical mortgage defaults - that may be worse, much worse, than canceling the master lease and converting to a traditional property management structure.

4 comments:

Anonymous said...

Can you specify which company you heard was going to follow suit?

Rational Realist said...

The person who told me asked me not to reveal the name, but I think the company's situation is open knowledge. I don't have any direct relationship so I can't call to inquire. After today, "follow suit" does not mean bankruptcy. It means converting master leased deals to property management deals. If I were an investor, DBSI's actions would spur me to accept a property management deal even if I had to accept lower lease rates.

Rational Realist said...

In the last sentence in the post above, where I wrote "lease," I meant "distribution."

Anonymous said...

Thank you for your response!!!