The personal guarantee on this master lease is bigger than the building

$844 a month against a $540k guarantee is the whole post. What does the spread look like at month four, before any turns are done and you still have two vacants? You're paying $9,000 and collecting $8,500 and eating the water bill, so you're negative about $2,500 a month plus turn costs. How many months of that can you fund, and what's in writing about your cure period if you're late?

I'd want three things from that draft before anything else.

One, the word "structural." That word does no work in a contract. Ask for a list. Roof, foundation, boiler, sewer lateral, electrical service, envelope. If the boiler in a 1970s brick building is your problem, your $900 maintenance line is fiction.

Two, what his lender says. A five year lease on the whole building plus a recorded option can run into consent requirements or a due-on clause depending on his loan documents, and if he doesn't tell his lender you may find out at the worst moment. Get him to pull the note and mortgage and read the transfer and leasing sections.

Three, whether you can record a memorandum of the option, which depends on your state's recording practice, and where your $25,000 sits in the meantime. If the fee goes straight into his pocket and he dies in year two, you're a creditor of an estate holding a piece of paper.

Also keep the option as its own contract, separate from the lease, with its own default language. If they're one document, a rent dispute becomes an argument about whether your option survived.

Nine month-to-month tenants under market means nine conversations that could each end in a vacancy. Do you have the applications and screening criteria written down before you start raising, or are you inventing them per unit? That's the part I'd have underestimated.

I'd walk. You're taking on operations, capex ambiguity, and a half million of personal liability for $844 a month and an option struck $100k above your own estimate of value. The upside is real only if rents move the way you guessed and the building doesn't hand you a surprise. There's a boring version of the same money that doesn't have your signature on $540,000.

fathom's estate point is the one I'd chase first. He's in his 70s and the option window opens in year 2. What does the draft say happens if the property passes to heirs, and is the option binding on successors? If it isn't spelled out you're relying on people you've never met being reasonable.

Your maintenance number is wrong and I'd bet money on it. $900 a month across 12 units is $75 a unit. On 1970s brick with original stacks I run $135 to $160 a unit for ordinary repairs, and that's excluding turns and excluding anything on the list fathom wants defined. Call it $1,800. That takes your stabilized spread from $844 to under $50.

House-paid water at $1,100 for 12 units also tells me something. That's about $92 a door, which usually means a leak or two or running toilets. Worth a plumber walking every unit before you sign, because if you can get that to $700 you found more money than the rent raises give you in year one.

One building at a time, every unit teaches you something, and this building is trying to teach you about the boiler.

What's the lot? Twelve units on a 1970s footprint sometimes sits on more land than it needs, and in some zoning that's worth more than the rent roll. Doesn't change your guarantee problem, but it changes what $1.15M is buying.

Can someone explain the master lease part plainly? Cobalt pays the owner one fixed amount and keeps whatever the tenants pay above it, so the owner is basically a landlord with one tenant and cobalt is the landlord to everyone else? And the option is a separate right to buy the whole thing later at a set price? I want to make sure I'm reading it right before I follow the rest.

@juniper that's how I'm reading it too. What I don't understand is why the owner would agree at all if the building is worth more than the strike later.

@rigging because he wants to stop working and he's getting $9,000 a month without answering a phone.

cobalt, before you counter on anything, verify the rent roll independently. Get the actual leases, the deposit ledger, and 12 months of bank deposits, not a spreadsheet he typed. "Average $850" from an owner in his 70s who hasn't raised rents is frequently "$850 on paper, $790 collected, two people who pay when they pay." And find out where the security deposits are and whether they transfer to you at the start of the master lease, because in many states how deposits must be held and transferred is set by statute and you'll be the one holding the obligation.

Looking at just the $25,000. If you exercise at $1.15M and the building is worth $1.25M by year three, the fee bought you $100k of spread, and the fee itself gets credited. That's a strong return on the fee in isolation. The guarantee is what makes it not an isolated bet. I'd try to buy the option separately from the operating lease if he'll do it, smaller fee, longer window, no obligation to run the building.

meridian's version is cleaner but he won't do it, the whole reason he's offering is to hand off the work. cobalt, counter the term. Three years, option live from day one, and you'll take the guarantee. $324k of obligation instead of $540k, and you'd know by month 18 whether the rents are there. Five years is you funding his retirement while you find out.

On a building that vintage, ask what's serving domestic hot water and whether the supply lines are galvanized. If the answer is one central boiler from the original build, you're looking at $18k to $30k on a replacement and it will fail in February. Get the model number and the date plate before you argue about the strike price.

Something on the service side to check: when you collect rent for a building you don't own and sublet units, whether that trips a real estate broker or property manager licensing requirement depends entirely on your state, and a master lease with your name as the lessee is often treated differently from a management agreement. That's a question for an attorney licensed where the building is, and it's cheap to ask now.

Five years into running a service business, the thing I'd flag is that your crew isn't free just because you already pay them. Twelve units of turns, after-hours calls, and nine rent-increase conversations pulls capacity off billable work. Cost the labor at what you'd bill it, see what the spread looks like, and then decide whether you're being paid for it. cairn's $1,800 is probably closer than your $900 for parts alone.

Who do the tenants think they're paying? If they've been writing checks to the owner for a decade and suddenly a company name shows up on the notice, expect a month of confusion and some withheld rent. I'd want that letter drafted and reviewed before day one.

Reading this whole thread I still can't tell if cobalt would be an owner or a very exposed manager. Feels like the answer is manager for three years with a lottery ticket attached, and the ticket is only worth something if rents cooperate.

Redoing it with cairn's maintenance and holding your other assumptions:

$11,844 collected, less $1,100 water, less $1,800 maintenance, less $9,000 rent = negative $56 a month stabilized. Add anything for insurance on your leasehold interest, which you'll need and he won't be carrying for you, and you're clearly negative. Your spread was living entirely inside a $900 maintenance line.

So the trade isn't the spread, and I'd stop calling it one. You'd be paying roughly nothing a month plus the $25,000 fee plus about $9,000 in turn costs on the two vacants, to hold a right to buy at $1.15M. Value that as an option and ask whether $34,000 and three years of operating labor is a fair price for a call on a building you think is worth $1.05M today. It needs about 3% a year of value growth just to reach the strike.

Then run the downside honestly. If two of the month-to-month tenants leave rather than accept market rent, you're carrying $9,000 a month against maybe $9,400 of collections with turns in front of you. That's the scenario the guarantee exists for. flint's three year counter is the right instinct, and I'd add a cap on your aggregate exposure if he'll take one.

Adding to lantern, if you ever want to sell or assign the option itself rather than exercise it, whether that's a licensed activity and whether the contract permits assignment are two separate questions, and the second one is in the draft in front of you. Read the assignment clause now. A lot of these are drafted to prohibit it.

The documents I'd insist on, and I'd rather have these than a better price.

Separate option agreement with its own consideration recited, its own term, its own notice-of-exercise mechanics, and express language that it survives a dispute under the lease. Practitioners keep the option out of the lease for exactly this reason.

Notice and cure. If you're a day late on $9,000 he should not be able to terminate the option. Ask for a 10 day cure on money and 30 on everything else, and a requirement that any notice of default be written and specific.

Successors and assigns bound, which covers quill's estate point, plus a covenant that he won't encumber the property further during the option period without your consent.

An estoppel or at minimum a written certification of the rent roll and deposits as of the start date, so canton's verification becomes his representation rather than your guess.

A defined capex schedule replacing "structural," with a dollar cap on what you carry in any 12 months.

And get his lender's consent in writing if the loan documents require it. Everything above is state-specific in how it's enforced, so it goes to an attorney licensed where the building is before you sign anything.