No guaranty on the master lease, then 14 months of paying for empty furniture

The 30 day termination for convenience with no reciprocal right is the clause I see people sign every time and it's the one that ends these arrangements. On the management side we treat any agreement without a matching out as a month to month, and we underwrite it as a month to month, meaning we assume it ends at the worst possible time.

What surprises me is the eleven weeks. Three bedroom furnished near a hospital campus should fill faster than that even at a discount. Were you holding out for the $3,400 for part of it?

@trellis he says he was calling relocation firms from a standing start, which sounds like most of the eleven weeks was building a pipeline he didn't have yet, not holding out on price.

The subsidiary versus parent thing is what I'd flag for anyone reading. A regional subsidiary with no guaranty is a counterparty whose entire downside is losing your unit. They have nothing at risk. You had a 24 month lease at risk. That's not a deal between two parties who can hurt each other equally.

The structural failure here is the term mismatch, and it's worth being precise about what created it. A 24 month obligation to the owner funded by a 12 month agreement that terminates on 30 days notice means your revenue side was effectively month to month and your cost side was fixed for two years. Any model built on that has to survive the revenue going to zero in month one, because contractually it could.

The assumption that decided the outcome was that hospital demand and intermediary demand were the same thing. They aren't. Demand at the campus was real and continued. Access to that demand ran through a vendor contract you had no visibility into and no standing to inspect. When the vendor changed, the demand stayed and your access to it ended.

There are three normal ways operators reduce this exposure, and they're all price concessions. A minimum committed months clause, where the client pays for a floor number of months whether occupied or not. A parent guaranty, or a deposit or prepaid months from a thinly capitalized signing entity. A matching termination right on your master lease, or a shorter initial term with renewal options, so your obligation can shrink when your revenue does. Each of those costs you rate. Whether the rate you gave up was worth the risk you kept is the underwriting question.

On the direct client point others are making: relationships with employers and relocation firms take months to build and are the actual asset in this niche. Building them after your single client leaves is the expensive order.

Anything involving guaranties and lease cross-terms needs a lawyer licensed in the state where the property sits, since enforceability and remedies differ by state.

$14,200 of furniture recovering $3,900 is the part that stings most to me. Roughly 27 cents on the dollar after two years. I've always assumed furnished exits were bad and that's worse than I'd have guessed.

Let me check the numbers because I think the loss is understated.

Rent to owner over 24 months is $44,400. Furniture $14,200 net of $3,900 recovery is $10,300. Utilities at, say, $280 a month for 24 months is $6,720. Total cost roughly $61,400.

Revenue: 7 months at $3,400 is $23,800. Then 11 weeks empty. Then about 14 months at $2,600, call it $36,400. Total $60,200.

So you're roughly $1,200 underwater on cash before counting your time, which reads better than $10,000. Unless the $2,600 tenants had their own vacancy gaps, which I'd bet they did on mid-term turnover. @fathom what was actual occupancy in that back half?

@ledger you've left out turn costs and the labor of running a series of mid-term tenants for fourteen months. Four or five turns at a couple hundred each plus listing time is not nothing, and neither is being the person who answers the phone.

I'd disagree slightly with the framing that the term mismatch was the error. The mismatch is normal in this business, almost every master lease operator runs a longer obligation than their client commitment. The error was concentration. One client, one unit, one demand source. Three units with three different corporate clients and the same 30 day clauses would have been a survivable quarter.

@fathom would you do it again with the same structure at four units instead of one?

The line I'm taking from this for my own planning is that the client relationship is the asset and the furniture is the liability. Eleven weeks of cold calling is the cost of not having built the pipeline before you needed it.

Naive question, but if the signing entity had no guaranty and no deposit, what would you actually have done if they'd stopped paying instead of giving notice? Sue a subsidiary with no assets?