In this episode, Erik shares what is corporate leases and how they will affect your real estate deals.
Erik J. Olson (00:01):
What the hell is a corporate rental. What is happening? I am Erik J. Olson. I am continuing down the path of my real estate investor journey. So if you’re not familiar with what I’m doing, I am actively looking for apartment buildings to purchase. So the, the units that I’m looking for between 10 and 50 units, class B or a probably B is more realistic. And the reason that I’ve targeted that is because like, I, I only have so much financial wherewithal. Certainly the 50 units is beyond my financial means, but it’s within my confidence level to go raise funds from people that I know very closely who believe in me enough to invest with me. So I’m looking at a whole bunch of deals now, like I’ve looked at more deals in the last month than I have probably in my entire life. And it’s because I joined a real estate investment club.
We meet twice a week and I’m just like, I’m just in it, man. And so I’ve been looking at these deals and one of the deals that I came across in Norfolk, which is the, the area that I live in, I’m familiar with Norfolk very, very well, very much. I’ve lived here for 25 years. So when I came across this deal, I was like, Ooh, that looks really nice. And so I contacted the listing agent and I got more information. And during the first call, he was like, oh, Hey, Erik, by the way, you’re gonna see like two sets of numbers. One’s like your traditional rent. And one’s your corporate leases. Do you know about corporate leases, Erik? And I’m like no. And basically what it turns out it is, is a corporate lease is it’s like an Airbnb short term rental, but with a 30 day minimum, right?
So you can do like, say like an Airbnb or, you know, with short term rentals in general, you can have like a one day lease. You can, you can have a requirement where you will only lease it for say two days, right over the weekend or three days or a week or a month. So I, I don’t even know if a, if a corporate lease falls into the short term rental definition. Technically I, I, I think, I think technically it does not. And maybe that’s why they call something specific, like a corporate lease, but with a corporate lease, it’s at least 30 days. And it could be as long as say six months. So when I found out through digging, digging, asking questions of the listing agent and whatnot is this particular apartment building. It’s 12 units. And in January of 2022, they completely cut over to corporate leases, meaning they will only lease it as a corporate lease. So they don’t have a traditional 12 month lease. And the reason that they’ve done that is because it brings in a lot more revenue. Now, as I keep looking at deals, I keep coming across these deals that have like these exceptions to what I’m looking for. One is a
Master lease. I talk about that in another episode, this one is a corporate lease now with a corporate lease, it sounds great because you’re just gonna Airbnb it, right. Or you’re gonna put it on V B R O. I think that’s what it’s called. There’s a whole bunch of other ones. The problem is that it’s not guaranteed, right? If someone signs a 12 month lease, like it, it’s a contract for them to pay you for 12 months. Like that’s like now of course they can break the lease, but there’s provisions and there’s the legal ramifications and financial ramifications to break in a lease. But you, you basically got people locked in and committed for a year, but the corporate lease, there’s very little lock in besides 30 days. And so when that 30 days is up, you gotta go find another person. Now, what you’re relying on is hopefully the strength of the platforms, the short term rental platforms, like Airbnb to do enough marketing and create enough interest to fill your place up forever.
Right? That’s really what you’re hoping for. Looking at the financials for this building. It looks like they’ve been able to increase their NOI, their net operating income by about 20% after going full time into corporate leases, smart, I guess, but it’s gonna be a problem now for the bank. So when I, as a potential owner, bring this to the bank, they’re gonna realize that. And, and I I’m gonna have a conversation today with my banker to confirm this, but it appears like the bank is not going to look at the short term rental or corporate rental amounts. They’re gonna wanna know what traditional rents are, right? And, and, and there’s a, there’s a big risk here. And this is why the banks are like, they’re not gonna like necessarily lend you the money based on the corporate leases, as far as I understand it. And again, like, Hey, I’m, I’m still learning all this stuff.
So I’m sharing with you. Like in real time, before I have all the answers, this is what I understand. They’re not gonna, they’re not gonna lend you the money based on the amount of revenue that comes in from the corporate leases, only the equivalent long term 12 month lease. Now here’s why, and this is a concern for you. Anyways, has a potential buyer or an operator of a corporate lease, kind of a building. The city can change their laws on short-term rentals without consulting. You basically, this happens all over the place. So in my geographic area, Virginia Beach does not allow short term rentals. So if you own a place and you wanna put it on Airbnb and you’re in Virginia Beach, ain’t gonna happen. And if it does, they’re gonna come after you, you’re gonna be breaking the law. They’re gonna find you of the ying yang, and they’re gonna shut you down.
So in Virginia Beach, not allowed right down the street from us, another city, Newport news, they just within like the last month or two voted to not allow short term rentals. And then Norfolk is putting more restrictions on it. So if you buy a place with any kind of short term rental, or like maybe corporate rentals, a little bit different, again, I need to like look into this and make sure everything is kosher. But the thing is like, the city may not allow it right now. If you buy something based on the revenue of short term rentals or corporate rentals or weekly rentals, and the city comes around and says, thou shall not do this. Then you’ve already committed through a loan and a purchase expecting a much higher revenue than what you’re gonna actually get in the future because they basically make it impossible or outlawed.
So it’s concern, right? There’s a movement actually. Like I just told you, like Virginia Beach, shut it down. Newport news, shut it down. Those are two really big cities around here. Chesapeake still allows it. Norfolk still allows it with restrictions, so it could happen. It does happen. You need to be aware of it. So be wary of getting into a situation where you’re paying full price based on like short term rental revenue, when in reality, or not in reality in the future, maybe that could go away. Right. And the banks, it appears aren’t gonna honor it anyways, which means you gotta come up with cash. Right. And potentially a lot of it, that’s a lot of money at stake, hoping for the best. I don’t wanna hope for the best when it comes to investing. I, I want to know what I’m doing. So I’m gonna walk away from that deal.
Right. So as, as I’m looking at at more and more deals, I’m starting to see like all like, not a lot, but every once in a while I’m coming across, one’s like, oh, well we do it a little bit different here because of this right. Corporate leases or, well, we do it a little bit different on this other deal because of a master release. And so I’m, I’m finding out about like these outliers and I’m trying to steer clear of them at this point. I just want a normal deal. <Laugh> I just want a normal deal. Now, maybe later I’ll buy something as a normal deal and convert it to a short term rental, but that’s my choice. Right? And that’ll be, you know, I’ll benefit from the upside. I’ll take the risk as well, but I’ll take the risk and benefit from the upside versus buying into it with that risk already built in. And that upside potentially becoming less of an upside. So something to think about corporate leases and how they will affect your real estate deals.