Who holds title to the furniture when the money is somebody else's

Question

I am looking at a small joint venture on four furnished units, roughly $38,000 of furniture and housewares across the four, against about $1.1 million of real property. The operator's draft has the furniture bought by a separate entity he controls, which then rents the packages to the property LLC for a fixed monthly amount per unit. His argument is that the furniture is portable, so it should not be entangled with a building it might leave.

My problem is that the rental fee he wrote comes to about $640 a unit a month, which pays back the whole $38,000 in fifteen months and then keeps running for as long as the deal exists. The capital is mine and the residual asset is his. He says that is fair because he sources, replaces and stores it, and he is the one on the hook when a tenant destroys a mattress.

The other structures I can see are the property LLC just buying the furniture outright and owning it, or renting packages from an actual third party furniture rental company at a market rate with an invoice I can verify.

The depreciation and cost recovery treatment differs by entity and that is a CPA question, so set that aside. I am asking about the economics and the control. Where does the furniture belong in a deal where the operator runs it and the passive money buys it, and what does the operator actually deserve to be paid for handling it?

kevin_lombard · Answer

The fifteen month payback line is the one I keep coming back to. So after month fifteen the payments are pure margin to him, on furniture your money bought, and if the venture ends he keeps the couches too? That is the part I would want written differently, even if the monthly number itself is reasonable.

diane_kowalski · Answer

Ask him what happens to the packages if you two part ways in year three. If the answer is he takes them and you keep an empty building, that tells you what the structure is for. Fixed monthly rent to an affiliate is not automatically wrong, plenty of operators run it that way, but the exit language is where you find out whether it was a service arrangement or a way to move an asset from your side of the table to his.

wendy_park48 · Answer

Read whether the affiliate rental agreement survives a change of manager, and whether it is terminable by you. I have seen a version where the furniture lease ran ten years, was not terminable by the property entity, and had an assignment clause that let the operator sell the receivable stream to a third party. At that point you are not renting furniture from your partner, you are servicing a fixed obligation held by a stranger against a building you own. Also check the casualty and insurance language. If the property policy covers contents you do not own, ask who receives the loss payment, because that clause is usually copied in without anyone thinking about it.

paulgrant17 · Answer

Naive question from the tenant screening side. If a corporate tenant damages a $2,200 furniture package, who files that claim and who collects the security deposit, the property entity or the furniture entity? Because if the deposit sits with one and the loss sits with the other, somebody is going to be arguing about a mattress at exactly the moment you want to be re-renting the unit.

bmoreno23 · Answer

$640 a month for furniture on a unit renting for what, $2,800 or $3,000, is about a fifth of the rent going to something that cost $9,500 once. I keep coming back to that ratio.

angela_burke · Answer

I run the furnished side as a service for owners and I charge for the work, not for the asset. Owner buys the package, owner owns it, I bill sourcing at cost plus a setup fee per unit and then a monthly management number that covers inspection, linen rotation and replacement coordination. Replacement items get approved and invoiced. That keeps the argument narrow, because when the owner asks what he is paying for I can point at hours and receipts. The structure you were sent bundles the asset and the labor into one number and then never separates them again, which is why the payback math looks strange to you. Split them and price the labor honestly and I bet the operator's income barely changes.

joe_delgado5 · Answer

Third party furniture rental is worth pricing even if you do not use it, purely as a benchmark. In my market a two bedroom package runs somewhere around $300 to $450 a month on a twelve month term with delivery and swap out included, and the rental company eats the damage risk and the storage. If his affiliate is charging $640 for the same thing, you have a number to negotiate against and you do not have to make it personal. Get two real quotes in writing before your next call with him.

Who holds title to the furniture when the money is somebody else's

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