Master Lease
Definition
A master lease is an agreement where a coliving operator rents an entire property from its owner, then subleases individual rooms to residents. The operator carries the occupancy risk and keeps the margin between the head rent and room revenue, without needing to own the building.
The formula
Monthly spread = (Beds × Rate × Occupancy) − Head rent − Operating costs
- Head rent
- the fixed rent owed to the owner, payable whether the rooms fill or not
- Occupancy
- physical occupancy for the month, not a stabilised assumption
- Operating costs
- utilities, cleaning, maintenance, staff, marketing and furniture amortisation
Worked example
Our worked example: a 12-bed house on a five-year master lease. Head rent £4,200 a month. Rooms at £950. Operating costs £2,300 a month at full occupancy.
- 01At 100%: revenue 12 × £950 = £11,400. Spread = £11,400 − £4,200 − £2,300 = £4,900.
- 02At 85%: revenue = £9,690. Variable costs fall slightly, say £2,150. Spread = £3,340.
- 03At 70%: revenue = £7,980. Costs £2,000. Spread = £1,780.
- 04At 55%: revenue = £6,270. Costs £1,850. Spread = £220 — effectively break-even.
The head rent does not move across any of those rows. That is the whole model in one observation: revenue is variable, the largest cost is not, and every point of occupancy below plan comes straight out of the operator's margin rather than the owner's.
A master lease is the operator renting the whole property from the owner on a single agreement, then letting it room by room. The operator keeps everything above the head rent and absorbs everything below it. Owners like it because it converts an operating asset into a fixed income stream; operators like it because it needs no purchase and, unlike a management agreement, has no ceiling on the upside.
The number that decides whether a master lease is worth signing is not the head rent in isolation but the head rent as a proportion of achievable room revenue at a realistic occupancy. A deal that works at 95% and fails at 80% is not a deal, it is a bet. Underwrite it at the occupancy you would be embarrassed to admit to, then check the spread is still positive.
Three clauses carry most of the risk. First, who pays for what: a repairing lease that makes the operator responsible for the boiler changes the economics of an old building materially. Second, rent review: an index-linked uplift on a fixed head rent compounds against you in exactly the years rents are flat. Third, permitted use and compliance — if the building needs an HMO licence or a planning change to be lettable room-by-room, that condition belongs in the lease, not in your assumptions.
The common mistake
Signing a five-year term with no break and a one-year plan
The common failure is not overpaying on head rent — it is agreeing to a term longer than the market visibility that justified it. A five-year master lease with no break clause is a five-year obligation to pay rent on a building you may not be able to fill in year three. The negotiable version is a break at 24 or 36 months, or a rent-free ramp period that matches the real lease-up curve rather than a hopeful one.
Frequently asked
What discount to market rent should a master lease carry?+
There is no universal figure, and anyone quoting one is describing their own last deal. The logic to apply: the owner is trading rental upside and management effort for certainty, so the head rent should sit below what the building would produce under direct letting by enough to pay the operator for carrying vacancy, arrears and operations. Price it from your break-even, not from a percentage someone told you.
Is a master lease the same as rent-to-rent?+
The structure is the same — rent the whole, sublet the parts — but the terms usually differ in scale and formality. Rent-to-rent commonly describes short, lightly documented arrangements on single houses; master lease describes longer, institutionally documented agreements on larger buildings. The risk profile is identical: fixed cost, variable revenue.
What happens if the operator cannot pay the head rent?+
The owner enforces the lease, which is the point of the structure from the owner's side. This is why deposits, personal guarantees and parent-company guarantees appear in master leases, and why an operator should treat a personal guarantee as a real liability rather than a formality when modelling the downside.
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Break-even occupancy calculator
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