Magazine article Journal of Property Management

The Master Lease: The Master Lease Is Quickly Becoming the Preferred Model for Residential Housing in Japan. Although It Involves More Risk, a Management Company Taking on a Master Lease Also Increases Its Potential for Profitability. Here, Teruo Suenaga, CPM, Explains How the Master Lease Model Works

Magazine article Journal of Property Management

The Master Lease: The Master Lease Is Quickly Becoming the Preferred Model for Residential Housing in Japan. Although It Involves More Risk, a Management Company Taking on a Master Lease Also Increases Its Potential for Profitability. Here, Teruo Suenaga, CPM, Explains How the Master Lease Model Works

Article excerpt

The master lease model--known in Japan as the sublease model--is an arrangement in which a management company leases an entire rental property from the owner and then subleases it to third parties. The management company becomes the sole tenant, providing income to the owner. Master lease management consists of two types of contracts: master leases and subleases. The management company is the responsible party on the contracts with the lessor (the owner) and sublessees (the tenants). While master leases exist in the U.S., they are mainly used for office and not residential properties.

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The master lease model is beneficial for the owner because it guarantees a steady rental income, while providing full leasing and management services to the property. With this lease model, owners receive a level of monthly income from rent as stipulated in the contract, regardless of vacancies and tenant delinquencies. As the sublessor, the management company takes on the duties usually assumed by the owner such as marketing, screening, rent collection, tenant service and repairs.

A HISTORY OF GROWTH IN THE CITY

Master lease management began in Japan around 1970 as a way to mitigate risk in apartment construction. When owners received loans from banks, management companies guaranteed rental income through master leases, assuring the owner of income to make monthly loan payments.

Due to the large number of smaller individual owners and the lack of REIT's and specialized property management companies in Japan, master lease management spread largely in metropolitan areas. At present, some banks even require master lease contracts with a conglomerate management company as a condition for apartment loans.

Among the 48 million residences in Japan, 13.4 million, or 28 percent, are located in privately-owned rental buildings. Among the top 800 residential rental management companies, roughly 60 percent of them engage in master lease managements with about 30 percent of the total managed units are done through master lease. Since larger management companies are aggressively engaged in master leasing, it is estimated that 2 to 2.7 million units (15-20 percent of the entire rental housing market) are managed using this model.

A GOLDEN STANDARD PRACTICE

In 2001, the Japanese government came out with a standard master lease contract to encourage master lease management. …

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