Audio Of The Week: Flip's Susannah Vila

.This is a funny business. I’ve owned tens of thousands of apartments and have dealt with this for decades.Most leases are for a year, so the necessity to break a lease and to subrent it is a function of the time remaining on the lease. If you have three months left on the lease, no bueno.Most landlords collect the first month’s rent, the last month’s rent, and a security deposit equal to a month’s rent. So, a LL has 3 months of 12 months at the beginning of the transaction.Urban markets like NYC can be a little different, but in large institutional complexes, 300-400 units minimum, this is the way the game is played.In a rising market, a LL is more than willing to cancel a lease because they can reap the benefit of a rising rental rate. They are absolutely not going to allow a tenant to turn an apartment into a profit center.Even in a hot market, a complex is only 98% leased because you are “making ready” a unit — paint, carpet cleaning, refurbishing appliances, changing locks. This usually takes 2 days per apartment if you are adequately staffed.A LL will not be receptive if they have a high vacancy.Even now, landlords are forbidding AirBnB type arrangements, but are in the AirBnB business themselves with say ten units in a 400 unit complex.Normally, if a tenant would come in and say they want to leave, you would figure out what your leasing velocity is — how quickly you are turning vacant apartments and renting them — and charge the tenant some multiple of that amount.A LL also has to make a thorough inspection as to damage.LLs hate subletting because it sets up a “privity” issue. A LL does not have a legal relationship with a sub-tenant and has to work through the tenant to enforce the original lease.Most well drafted leases forbid subletting with less than six months left on a lease, do not allow the tenant to make a profit on the lease, do not release the prior tenant, require LL approval which approval may be withheld in the discretion of the LL, and reserve the right for a LL to enter into a new lease with the subtenant.When you ignore any of these things and gloss over them, the subrenting tenant may be guilty of “fraud in the inducement” if something goes wrong.Theoretically, a LL could get 2 months rent from a departing tenant and then capture all the remaining term from the new tenant. This results in a LL receiving 14 months rent over a year. Many times, the new tenant wants a new longer lease term.So, the universal appeal of such an arrangement is not as broad as one might think. I think it is a very good idea, but professional apartment companies — guys who own thousands of units — are not going to be wild or accommodating about it.The other issue has to do with legal and real estate licensing issues. A lot of companies think they can get into the tenant rep (new and old tenants) business without being a licensed real estate broker in that state. No bueno. That is a huge problem.There was some company who was peddling excess high tech space in ATX and they got their ass in a crack over licensing.Another consideration is the unlawful practice of law. One cannot be peddling deal specific, deal tailored legal docs without a law license. Many jurisdictions — Texas as an example — allow a licensed lawyer to also act as a real estate broker.Having said all of the above, I do think a marketplace for leases will work as long as nobody thinks it is a way to make money from the underlying lease. If that is the focus, the LLs are going to pitch a fight.JLMwww.themusingsofthebigredca…

Comments (Archived):

JamesHRH Jan 5, 2019

Is Flip the only GG then USV portfolio company?
1. fredwilson Jan 6, 2019
  
  No. Kitchensurfing (failed), Shippo, Flip, Clue
  1. Susan Rubinsky Jan 7, 2019
    
    I LOVE Clue!
awaldstein Jan 5, 2019

Agree, listened to it when GG’s podcast when it came out.
Richard Jan 5, 2019

FLIP and Wilson, Flip WilsonWYSIWYG*Flip did it all – risk taker and comedic innovator. America has always embraced talenthttps://youtu.be/VBiQf_Eblyk
1. fredwilson Jan 6, 2019
  
  Loved him. Howard Lindzon calls me Flip
JLM Jan 6, 2019

.This is a funny business. I’ve owned tens of thousands of apartments and have dealt with this for decades.Most leases are for a year, so the necessity to break a lease and to subrent it is a function of the time remaining on the lease. If you have three months left on the lease, no bueno.Most landlords collect the first month’s rent, the last month’s rent, and a security deposit equal to a month’s rent. So, a LL has 3 months of 12 months at the beginning of the transaction.Urban markets like NYC can be a little different, but in large institutional complexes, 300-400 units minimum, this is the way the game is played.In a rising market, a LL is more than willing to cancel a lease because they can reap the benefit of a rising rental rate. They are absolutely not going to allow a tenant to turn an apartment into a profit center.Even in a hot market, a complex is only 98% leased because you are “making ready” a unit — paint, carpet cleaning, refurbishing appliances, changing locks. This usually takes 2 days per apartment if you are adequately staffed.A LL will not be receptive if they have a high vacancy.Even now, landlords are forbidding AirBnB type arrangements, but are in the AirBnB business themselves with say ten units in a 400 unit complex.Normally, if a tenant would come in and say they want to leave, you would figure out what your leasing velocity is — how quickly you are turning vacant apartments and renting them — and charge the tenant some multiple of that amount.A LL also has to make a thorough inspection as to damage.LLs hate subletting because it sets up a “privity” issue. A LL does not have a legal relationship with a sub-tenant and has to work through the tenant to enforce the original lease.Most well drafted leases forbid subletting with less than six months left on a lease, do not allow the tenant to make a profit on the lease, do not release the prior tenant, require LL approval which approval may be withheld in the discretion of the LL, and reserve the right for a LL to enter into a new lease with the subtenant.When you ignore any of these things and gloss over them, the subrenting tenant may be guilty of “fraud in the inducement” if something goes wrong.Theoretically, a LL could get 2 months rent from a departing tenant and then capture all the remaining term from the new tenant. This results in a LL receiving 14 months rent over a year. Many times, the new tenant wants a new longer lease term.So, the universal appeal of such an arrangement is not as broad as one might think. I think it is a very good idea, but professional apartment companies — guys who own thousands of units — are not going to be wild or accommodating about it.The other issue has to do with legal and real estate licensing issues. A lot of companies think they can get into the tenant rep (new and old tenants) business without being a licensed real estate broker in that state. No bueno. That is a huge problem.There was some company who was peddling excess high tech space in ATX and they got their ass in a crack over licensing.Another consideration is the unlawful practice of law. One cannot be peddling deal specific, deal tailored legal docs without a law license. Many jurisdictions — Texas as an example — allow a licensed lawyer to also act as a real estate broker.Having said all of the above, I do think a marketplace for leases will work as long as nobody thinks it is a way to make money from the underlying lease. If that is the focus, the LLs are going to pitch a fight.JLMwww.themusingsofthebigredca…
1. fredwilson Jan 6, 2019
  
  Landlords will like this which is the newest service they offerflip.lease/instant
  1. Richard Jan 6, 2019
    
    Many states have early lease opt-out for women who are in a threatening situation. Please forward to flip. It would be nice for people to see this who are in danger and not eligible for Flip’s service.https://uploads.disquscdn.c…
Gayatri Sarkar Jan 7, 2019

The interview is very insightful. I think the real estate tech is the next big thing. Real estate is the largest owned asset class and has been traditional for a very long time. There is a huge opportunity both in US and asia market and the social impact is huge. It can change the way we do rent, mortgage or own home.