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.