A note before this hypothetical
This walkthrough is a hypothetical illustration only. "Hypothetical Trust" is not a real Delaware statutory trust, Sponsor, or offering, and no dollar figures or performance outcomes are implied for any actual program. The goal is to make the mechanics of a master lease structure legible.
The starting structure
Hypothetical Trust holds title to a single retail building. Hypothetical Trust leases the entire building to Hypothetical Master Tenant LLC, an affiliate of the offering's sponsor, under one master lease. Hypothetical Master Tenant then subleases individual retail spaces inside the building to several unrelated occupants, each under its own sublease.
Step 1: an occupant stops paying rent under its sublease
One occupant stops paying rent and later vacates. The sublease is a contract between Hypothetical Master Tenant and that occupant, not between the occupant and Hypothetical Trust, so the trust itself has no direct contractual relationship with the vacating occupant to enforce.
Step 2: whether the vacancy reaches Hypothetical Trust depends on the master lease terms
If Hypothetical Master Tenant's obligation to Hypothetical Trust under the master lease is a fixed rent unrelated to occupancy, one occupant's departure does not by itself change what Hypothetical Trust is owed. The exposure sits with Hypothetical Master Tenant, which now collects less sublease rent than the fixed master lease payment it owes. If the master lease rent is instead tied to collections from the building's occupants, the vacancy passes through to Hypothetical Trust more directly.
Step 3: a harder case, Hypothetical Master Tenant itself misses a master lease payment
Separately from any single occupant, Hypothetical Master Tenant could fail to make a master lease payment to Hypothetical Trust on its own, for example following its own financial difficulty. Here, the trustee's options are constrained by the same rules that created the master tenant structure in the first place: a Delaware statutory trust used in a 1031 exchange generally cannot renegotiate a lease once the offering has closed, with a narrow exception permitting the trustee to renegotiate loan terms where a default results from a tenant's bankruptcy or insolvency[1]. Outside that exception, disclosures typically address a master tenant default through a separate guarantee, a security deposit, or a replacement-master-tenant mechanism described in the offering documents.
Step 4: two different kinds of default are not the same fact
An occupant's sublease default and a master tenant's master lease default are two different, independently possible events with different contractual counterparties. A record naming one does not by itself establish whether the other has also happened; each is confirmed separately, in the offering's own disclosures or filings on EDGAR[2].
[1]: https://www.irs.gov/irb/2004-33_IRB
[2]: https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/what-form-d
Frequently asked questions
If a store inside a DST-owned building closes, does that mean the trust missed a payment?
Not necessarily. Where a master tenant structure exists, an individual occupant's sublease sits one contractual layer below the master lease between the master tenant and the trust; whether one event reaches the other depends on how the master lease rent is structured.
Can a DST's trustee renegotiate a lease after the offering closes?
Generally no, that is one of the operating restrictions tied to 1031 exchange treatment, with a narrow exception permitting loan renegotiation following a default caused by a tenant's bankruptcy or insolvency.