STR Commercial Lease Takeover?

Question

Hi everyone,

I have a bit of a unique situation, and don't think I have seen this sort of investment advice on the boards before. Essentially what is being offered is a lease takeover on a multifamily property (currently being run as an STR) on behalf of the operator that is hoping to use the space also as an STR. Because they are VC backed, they don't have the balance sheet to fund the upfront security deposit, operating reserve, FF&E, etc. required to start operating in the building.

Hence where an Investor/Syndicate (Investor going forward) would come in. Basic structure is the Investor would sign the lease, and then hire the Operator to run the day to day of the STR (for a fee), and in return the Investor would receive the majority of net income to pay back the initial investment. From the research I have done on hotel occupancy in the area, competitor pricing, and the pro-forma shared by the Operator, the return profile appears to be pretty attractive. The rough details are that this would be a 5-year lease, with the Investor's right to renew for an additional 3 years. Upfront financing need would be ~$1M. I'm estimating the property would cashflow ~$3M a year, and after fees/rent/expenses etc, the Investor could take home about ~350-400k/year, concentrated in the summer months. With these assumptions I am seeing a ~30% IRR / 3.1x return of capital (MOIC), which is very high and why I am interested.

The biggest risks I am contemplating are 1) tourism is negatively impacted by US uncertainty on a macro level 2) this specific city has a big year coming up with events, but could underperform inflation / travel tourism in general over the 5/8yr span 3) the operator doesn't effectively manage the space.

Does anyone have any experience with this kind of investment? Am I missing any big risk factors? What do you guys think of this, and would you invest?

For full disclosure - I work at the company that has sourced this opportunity, but I am hoping to invest my own capital in the deal alongside any additional investors.

Priyanka Verma · Answer

Hey Kyle,

This is definitely a unique setup but not unheard of in the STR (Short-Term Rental) space, especially as more investors are trying to find creative entry points without traditional ownership.

Here's my take as someone who’s been around both residential STRs and light commercial assets:

The structure you're describing is essentially a lease arbitrage backed by VC (venture capital) funding but mitigated by bringing in an investor to absorb the lease obligation and front the capital. In exchange, you're being offered the net cash flow and strong upside—assuming the operator executes well.

What I Like:

3x return on capital over 5 years and ~30% IRR is excellent on paper.

You’re avoiding asset depreciation risk—since you’re leasing, not owning.

You’re leveraging a high-demand location with upcoming events (think Super Bowl or F1-type spikes).

I’ve seen a few deals like this in Austin and Miami, especially during peak STR booms where institutional players or operators didn’t want to own but needed the lease secured to scale operations.

What I'd Be Cautious About:

Operator risk is very real. Their execution = your return. If they mess up occupancy, pricing, or guest experience, you’re still liable for that lease.

Tourism swings matter. AirDNA and STR Insights data show that macro demand can fall off quickly in economic downturns. One bad summer can wipe out a year's margins.

You’re on the hook. If for any reason they pull out or underdeliver, you still owe the lease—no matter what. That’s a massive liability if the pro forma doesn’t hold.

Suggestions:

- Ask the operator to put up a performance bond or escrow reserve to help hedge your risk.

- Use a short-term rental profitability calculator (or AirDNA) to validate occupancy and nightly rate assumptions—don’t just rely on their pitch.

- Check what Philadelphia’s STR regulations are like. GetChalet has a decent regulatory overview tool by zip code—super useful.

Would Invest or Not?

Maybe… but only with legal guardrails and a clear operator track record. I’d ask:

Have they managed similar size portfolios before?

Can they survive a 20–30% drop in bookings and still cover rent?

What’s your exit plan if STR laws change or the city cracks down?

Just my two cents but you’re smart to do your homework. This could be a great cashflow play if you’re confident in the operator and market. Keep us posted if you go through with it!

Cheers,

Ronald Rohde · Answer

how can I short this "investment"?

Kyle Visher · Answer

Not an unreasonable assessment, I have balked at Airbnb's because of absurd checkout responsibilities or cleaning fees.

At some point a multi-location, multi-unit SFR operator turns into a specialty hotel operator... which might be where we are here.  "Hotel Amenities" is a selling point on their website. Not to say this changes your overall view.

Kyle Visher · Answer

@Henry Clark - thanks for the follow ups!

1. Capex is an ongoing concern. Since the building is already operating as an STR, the upfront "refresh" costs (new linens, fix a TV or two, etc) are low, approximately $20k. Opex after this will be funded either by the Opex reserve, or by operational cashflows.

2. I think a point to clarify here is that the pro forma mentioned was not from the building owner, but from the Operator who expects to use the space. They get paid the most if they do a good job (as does the investor) so incentives are aligned. Our base case is slightly lower than the provided pro forma too, so we baked in some downside to get to 30%.

3. 30% assumes $1mm of cash upfront with no financing. As @Simon W. acutely mentioned, the cashflows are pretty seasonal/volatile, so adding consistent debt payments to that feels extremely levered. Income tax impossible to blanked model as it is 100% dependent on the unique investor. The 30% is return pre tax.

4. Yes, very specific single city risk. PA seems to be growing and has a big year ahead with hosting 6 world cup matches, the MLB All-Star game, 250-year USA celebration etc. But 100% you are right, it will be city dependent

5. Let me try to rephrase my initial statement that I think is causing the confusion. This is a privately held company that is in this situation because they are adverse to signing a master lease, not because a VC won't fund them, or because there was a operational lapse. The master lease aversion is actually a common problem, and we have seen multiple inquiries of similar fashion. This is non-debt growth financing for the operator to expand their business, not a "VC capital ran out and we don't have any money what do we do" situation.

All very helpful comments and appreciate the reply!

Cheers,

Kyle

Kyle Visher · Answer

Thanks for the thoughts @Melanie P. - it's clear I left a few key items unstated that perhaps make this less "crap". I'll try to address your points in order, but let me know if there were other items you would like to discuss! @Ronald Rohde - happy to chat in more depth so I can understand your perspective, I appreciate all sides!

I think the purpose/need/use case of this opportunity was unclear - thanks for hanging with me, I have not typed it out before.

There are 4 key parties in this transaction:
Building Owner: Owns the building itself, looking for a tenant to sign a master lease
Investor (SPV): Funds the upfront costs to take over the space, signs master lease
Operator: Will be hired by the SPV to manage the space (
My Company: VC backed marketplace that pairs building owners with investors

Because the SPV is signing the Master Lease, the Investors can remove the operator if they are underperforming in any capacity.

This opportunity exists because our Operator identified an already operating STR building where the current management team was struggling. This Operator thinks they can run the STR building more efficiently / profitably. They have done an operational takeover before with a smaller location from the same struggling management (same city and previous operator as this opportunity), and think this is another prime takeover target. Unlike the previous takeover, this landlord requires a master lease rather than a management agreement, which is where the need for an Investor/SPV situation arises. Without a takeover, the Operator will have to bow out, and let another operator use the space (there was another bid, and this Operator won on experience and reputation). Said another way, this is not the landlord asking for someone to assume a lease because they didn't get their financing in line and are desperate, but a tenant/Operator who cannot sign the lease, and instead are looking for a way to have access to manage the building. Their fees and the Investor returns are mutually aligned to the profitability of the business.

• I work for a company that is sourcing capital for the lease takeover, not the STR operating company. We are a marketplace for connecting operators like this with investors (maybe not you for this one, haha)
• This Operator runs a series of multifamily STR locations but does not own the buildings - only paying rent, no real estate debt. As a business model they will not sign a master lease, even on properties that they think could be operated profitably. This gap between the desire to operate in a building and the ability to sign the master lease is why an opportunity like this exists. If the Landlord (not the Operator) was open to a management agreement, they would likely utilize that instead of this financing/takeover scenario. If an investor does not perform the lease takeover, they will pass on the location, and it will go to another competitor who has also submitted interest in the location.
• The location itself is currently operated as an STR building (already permitted / retrofitted / FF&E set up etc.) under different management. While we can't see the financials from this location (not a shock the competitor was not willing to open their books), we have the ADR/RevPar from the takeover Operator's other locations (same city) - which they run profitably.
• I think I must have been unclear around the timing / use of proceeds / returns. First, let’s assume it is $300k (not $350-400k from the Operator pro forma, or lower as you would see it) - the term is 5 years, so you would receive $1.5M back. Second, ~75% of the initial financing amount goes into rent/operating reserves and security deposit. Assuming the math above holds (I get it, big IF for you), you get $1.5M back from operating revenue, but then an additional $750k back from your original deposits/reserves.
• Very fair point. If this was secured by the underlying property I think this is a very different profile/investment opportunity. Unfortunately, not the situation, which is why this is a higher return/risk investment. If you can find a multifamily unit paying 100k+ in rent each month for $1M upfront, please let me know as I am interested!

Thanks for reading that wall of text, hopefully it helps explain some of the nuances to this situation, and happy to chat more on it. My hope is not to convince you, but to understand any risk factors I haven’t realized since I am newer to this.

Thanks!

Simon W. · Answer

Interesting setup — I’ve come across a few lease arbitrage/STR hybrids, but this one stands out because of the scale and the way you're structuring it around investor capital rather than an operator-led guarantee.

You're right to highlight the operator risk. Since the lease is under the investor’s name, the downside lands heavily on whoever signs. If the operator underperforms or, worse, walks away, the investor is stuck holding a liability without boots on the ground — especially risky in hospitality where margins evaporate fast if occupancy dips.

A few angles I’d look deeper into:

• Exit Optionality & Lease Flexibility
Is there a clause in the lease for early termination or assignment/subletting if the numbers don’t work out? Most commercial leases can be brutal if the operation fails.
• Legal Liability / STR Regulation Risk
In many municipalities, STR laws are tightening — and enforcement is ramping up, even in historically lenient markets. Make sure the lease explicitly permits STR use and that zoning/local ordinances back that up. A change in the law mid-lease could wipe you out.
• Operator Incentive Alignment
Is their fee structure flat or performance-based? Ideally, some sort of revenue share kicks in only after a certain hurdle rate is met. Otherwise, they get paid while you carry all the risk.
• CapEx and Maintenance
Who’s responsible for wear and tear, replacements, repairs? STR units take a beating. The pro forma might assume steady-state costs, but real-life FF&E refreshes and maintenance can eat into margins quickly.
• Reputation Risk
If this ends up in your name (or your LLC), and the operator under-delivers or creates noise complaints, bad reviews, etc., that can follow you — especially if you're looking to raise funds or do more deals down the line.

Exit Optionality & Lease Flexibility
Is there a clause in the lease for early termination or assignment/subletting if the numbers don’t work out? Most commercial leases can be brutal if the operation fails.

Legal Liability / STR Regulation Risk
In many municipalities, STR laws are tightening — and enforcement is ramping up, even in historically lenient markets. Make sure the lease explicitly permits STR use and that zoning/local ordinances back that up. A change in the law mid-lease could wipe you out.

Operator Incentive Alignment
Is their fee structure flat or performance-based? Ideally, some sort of revenue share kicks in only after a certain hurdle rate is met. Otherwise, they get paid while you carry all the risk.

CapEx and Maintenance
Who’s responsible for wear and tear, replacements, repairs? STR units take a beating. The pro forma might assume steady-state costs, but real-life FF&E refreshes and maintenance can eat into margins quickly.

Reputation Risk
If this ends up in your name (or your LLC), and the operator under-delivers or creates noise complaints, bad reviews, etc., that can follow you — especially if you're looking to raise funds or do more deals down the line.

The return profile is attractive on paper, but I’d run downside scenarios too — like 25–35% drop in occupancy or average daily rate, or a 6-month period of sub-30% occupancy. STR income can look amazing in peak season but quickly evaporates off-season or during regulatory shifts.

Also, I’ve been involved in similar financial modeling and risk forecasting for real estate funds and operators — happy to share insights or help stress-test your model if you're refining numbers. Always open to collaborating with folks thinking creatively like this.

Keep us posted on how it pans out.

Melanie P. · Answer

How will the operator pay the debt on the real estate if they only have de minimus management fee income coming in?

You work for this company? Please tell me more. Especially the part about this company already being partnered up with a VC who has presumably already invested in the company and, by  extension, this project AND thinking the best course of action is to do this lease deal. The professionals believe they are on the right side of the transaction and want you to find someone to take the lease side.

And this is all ribald speculation, right? None of these apartments has any history of being a STR where you can see actual financials? It's all just assumptions based on anecdotal information of what you think other units are doing in the market which may or may not be accurate. My experience says if you have a million dollars gross rents, you'll average out to around $400-500k per year net on STRs BEFORE servicing any debt or paying toward this lease agreement.

This sounds like a big risk for a crap return. $300k per year (which I do not find likely at all, keep in mind you're relying on the financial projections of the same people who bought the building without plans or finances in place to get it open and operating -- put another way you're working from the revised version of the offeror's failed projections) you get back $1.2M on your $1M. What's attractive about that? If you buy a zero risk 10 year treasury bond today with $1M, you will collect $217k in interest over five years - no risk, no funny operators, deal structures, etc. The worst part of this deal is you take all the risk and do all the work but do not get to participate in the appreciation of the underlying real estate. Appreciation can be half or more of your total return and when you screw up and don't make money it can be a life preserver that gets you out with a small profit or at least most of your skin intact.

Good luck.

Don Konipol · Answer

“This is a privately held company that is in this situation because they are adverse to signing a master lease, not because a VC won't fund them, or because there was a operational lapse. The master lease aversion is actually a common problem, and we have seen multiple inquiries of similar fashion. This is non-debt growth financing for the operator to expand their business, not a "VC capital ran out and we don't have any money what do we do" situation.”

Operator can’t, or doesn’t want to risk $1,000,000 or take the risk of 5 years tie up in a losing deal.  If it doesn’t pan out they want to “cut and run”, hence the management contract.

I don’t think there’s any way to really align the interests of the operator with the interests of the investor in this deal.

Kyle Visher · Answer

@Simon W. - thank you for the thoughtful reply! Exactly right, this is a lease arbitrage model, similar to what InstantGroup / Convene do with co-working spaces. Would love to collaborate or chat more offline if you were open to it.

I'll respond to a few points, but all valuable insights & concerns and appreciate the comment!

1. A BK remote SPV is signing the lease - so in the Operator downside I think there are two main options. Option one is to replace the Operator with a competitor (we know there was at least one other company looking to acquire) and let them run the space for a similar fee incentive structure. Option two would be to re-sell the lease to another party and get some recovery there - although this likely requires a workout with the landlord, so it gets complex. Or you could do nothing and let it dissolve, but that guarantees no future CFs.

2. As mentioned in my long response to @Melanie P., the building is currently operated as an STR facility, and the owner is explicitly allowing this new Operator to continue that function. No need for additional permitting etc. currently, but good flag on future legal risk, which I hadn't contemplated.

3. Incentive structure is a mix of both a flat fee off the top and a much larger weight on performance based metrics. There is some appetite to pay the Operator before the Investor since without some incentives the building would just sit vacant in down months. So not a complete lockout (which would be safest, agree), but definite incentive alignment via fee structure.

4. Capex or maintenance would come from operational cashflows or the operating reserve (funded upfront) as needed. We have used their historical financials for modeling purposes, but good to bake in some downside here as well.

5. Reputation risk is a good call out. In this situation I think it will largely remain on the operator since they have a series of STR properties in the same city that they would not want to impact and would have all of the active branding of the location/booking/etc. As envisioned, there is no mention of the SPV/LLC besides with the landlord.

We have run some COVID / GFC -esque occupancy curves. Not a bad idea to shock occupancy with some custom curves to check weird edge case downsides as well.

Thanks again for the thoughtful response and questions - would love to connect!

STR Commercial Lease Takeover?

Most Popular Reply