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Each WeWork office has an SPE that's just for that lease. Every landload wants WeWork on the lease, but won't get it, as WeWork tends to have significant lever

Each WeWork office has an SPE that's just for that lease. Every landload wants WeWork on the lease, but won't get it, as WeWork tends to have significant leverage with either the space that they're going after or the desire to have WeWork on the rent roll. When things are booming, WeWork is advantageous for landlords, and appraisers/the market/potential buyers will underwrite that space positively. However, there's minimal guarantees that WeWork will actually pay long term, or that you'll have any legal recourse. On top of that there are significant capital costs to a WeWork lease that landlords have to shell out up front. Their leases are typically structured with a lot of free rent up front, so the break even point for a landlord may be many months or years farther out than a typical tenant leasing comparable space. The losers in the WeWork deal are the landlords, as they're bearing a lot of the risk, and get minimal upside. I'd expect to see a high degree of correlation between WeWork's IPO/stock price and REIT valuations. Underwriting will push the value of a WeWork lease if they can, which will only give more momentum to the bubble. Source: Worked at a nationally invested REIT that had several WeWork leases in our portfolio

secabeen 7y ago
Are those SPEs durable against legal challenges that pierce the veil and eliminate the protections for We?
- polygotdomain 7y ago
  It's not an uncommon business practice to have SPEs for ventures like this. In fact, nearly each of our investments were backed by SPEs that held the property. If you had some sort of evidence to WeWork was trying to defraud or break the lease in some substantial way, then I guess you'd have some legal recourse, but the whole purpose for the SPE is to limit legal exposure (which is exactly why we did it). The thing is that the SPE is absolute requirement for WeWork. They will walk away if you try to challenge them on it. It's ultimately not an issue unless shit hits the fan. Smart underwriters will recognize that and price it accordingly. Unfortunately, there will be many that don't and execs that are trying to push value, so won't want a conservative view on those leases. The biggest risk (outside of WeWork itself) is bullish investors buying properties at inflated values due to WeWork being on the rent roll, not doing their due diligence on the WeWork lease, and the bottom dropping out.
- bradleyjg 7y ago
  Generally speaking courts are much more reluctant to look behind special purpose vehicles in contract than they are in tort, especially so when dealing with sophisticated parties. As polygotdomain wrote landlords know that want We on the lease, ask for it, don't get it, and sign anyway. Short of a smoking gun showing outright fraud courts are unlikely to disregard that bargain.
chiefalchemist 7y ago
> The losers in the WeWork deal are the landlords, as they're bearing a lot of the risk, and get minimal upside. Couldn't this be interpreted differently? That is, landlords are having less and less choice. Something from WW is better than an empty building. Is WW a canary of sorts? It tells us about changes in the economy (less growing small to mid-size companies in major metro area?), as well as the health and strength there of? And if building owners are own details space their choices are less robust. WW might not pay out well, but it's better than nothing.
- tehwebguy 7y ago
  Yeah like is it even really downside? Tenant defaults on their lease? OK, kick them out and get someone else in. What's the big deal?
  - sverhagen 7y ago
    If they've discounted upfront there going down overall...?
  - rbg246 7y ago
    Well, you have forgone rent you could have collected from a different tenant and reduced the quality of the tenant you have accepted. So for an investor who looks at your rent roll, they will see that you have an increased rent arrears and they will value your asset at a reduced rate. And as the sibling comment has mentioned, if you discount up front you haven't received any money. Or worse still you provide a rent incentive in the case of a capex fitout and are now left with an office fit out a future tenant may or may not want but you have spent significant amounts of money on.
- rbg246 7y ago
  Yes and No. Part of the No answer is that as an real estate investment company your building's worth is effectively present value of future rent, so sometimes it's better to preserve the valuation of your building rather than set a new market rent which will negatively affect your building valuation which in turn affects the cost of financing your building etc etc etc So you get an extra $1m in rent but it now costs you an additional $2m in interest costs financing your building and your share price (or the building capital valuation) has now dropped 15%. Sorry totally simplified example...
rossdavidh 7y ago
I believe you, but in markets like Austin, TX (where I live) it seems odd that a landlord would not just hold out for a more orthodox lease, since there is some shortage of retail space and rental rates are high. What am I missing as to why they would lease to such an SPE?
- milquetoastaf 7y ago
  The branding. You can hold out for a high "orthodox" lease like storefronts in the West Village in NYC are doing (lots of famously ritzy streets dotted with vacancies) or you can hand the problem to We and use their network effect as leadgen.
- toomuchtodo 7y ago
  Confidence of rapid re-leasing in the event of WeWork default (which makes sense in a high demand area like Austin). Disclaimer: Landlord
- polygotdomain 7y ago
  I agree with both the other answers (reletting space and branding), but there's another one that's just as important; increasing rent. If there's a shortage of space, having WeWork take a chunk of it off the market is only going to move rents higher. Also, whatever you sign WeWork at is going to set a significant comp in the market, which can again push rents. Businesses do like the idea of being close to a WeWork, so that's going to put more pressure on rents. There are tenants that are great in bull markets, some that are great in bear markets, and others that are great in both. I would very much describe WeWork as a tenant that is a great bull market tenant, but that's about it.

secabeen 7y ago

Are those SPEs durable against legal challenges that pierce the veil and eliminate the protections for We?

polygotdomain 7y ago
It's not an uncommon business practice to have SPEs for ventures like this. In fact, nearly each of our investments were backed by SPEs that held the property. If you had some sort of evidence to WeWork was trying to defraud or break the lease in some substantial way, then I guess you'd have some legal recourse, but the whole purpose for the SPE is to limit legal exposure (which is exactly why we did it). The thing is that the SPE is absolute requirement for WeWork. They will walk away if you try to challenge them on it. It's ultimately not an issue unless shit hits the fan. Smart underwriters will recognize that and price it accordingly. Unfortunately, there will be many that don't and execs that are trying to push value, so won't want a conservative view on those leases. The biggest risk (outside of WeWork itself) is bullish investors buying properties at inflated values due to WeWork being on the rent roll, not doing their due diligence on the WeWork lease, and the bottom dropping out.
bradleyjg 7y ago
Generally speaking courts are much more reluctant to look behind special purpose vehicles in contract than they are in tort, especially so when dealing with sophisticated parties. As polygotdomain wrote landlords know that want We on the lease, ask for it, don't get it, and sign anyway. Short of a smoking gun showing outright fraud courts are unlikely to disregard that bargain.

chiefalchemist 7y ago

> The losers in the WeWork deal are the landlords, as they're bearing a lot of the risk, and get minimal upside. Couldn't this be interpreted differently? That is, landlords are having less and less choice. Something from WW is better than an empty building. Is WW a canary of sorts? It tells us about changes in the economy (less growing small to mid-size companies in major metro area?), as well as the health and strength there of? And if building owners are own details space their choices are less robust. WW might not pay out well, but it's better than nothing.

tehwebguy 7y ago
Yeah like is it even really downside? Tenant defaults on their lease? OK, kick them out and get someone else in. What's the big deal?
- sverhagen 7y ago
  If they've discounted upfront there going down overall...?
- rbg246 7y ago
  Well, you have forgone rent you could have collected from a different tenant and reduced the quality of the tenant you have accepted. So for an investor who looks at your rent roll, they will see that you have an increased rent arrears and they will value your asset at a reduced rate. And as the sibling comment has mentioned, if you discount up front you haven't received any money. Or worse still you provide a rent incentive in the case of a capex fitout and are now left with an office fit out a future tenant may or may not want but you have spent significant amounts of money on.
rbg246 7y ago
Yes and No. Part of the No answer is that as an real estate investment company your building's worth is effectively present value of future rent, so sometimes it's better to preserve the valuation of your building rather than set a new market rent which will negatively affect your building valuation which in turn affects the cost of financing your building etc etc etc So you get an extra $1m in rent but it now costs you an additional $2m in interest costs financing your building and your share price (or the building capital valuation) has now dropped 15%. Sorry totally simplified example...

rossdavidh 7y ago

I believe you, but in markets like Austin, TX (where I live) it seems odd that a landlord would not just hold out for a more orthodox lease, since there is some shortage of retail space and rental rates are high. What am I missing as to why they would lease to such an SPE?

milquetoastaf 7y ago
The branding. You can hold out for a high "orthodox" lease like storefronts in the West Village in NYC are doing (lots of famously ritzy streets dotted with vacancies) or you can hand the problem to We and use their network effect as leadgen.
toomuchtodo 7y ago
Confidence of rapid re-leasing in the event of WeWork default (which makes sense in a high demand area like Austin). Disclaimer: Landlord
polygotdomain 7y ago
I agree with both the other answers (reletting space and branding), but there's another one that's just as important; increasing rent. If there's a shortage of space, having WeWork take a chunk of it off the market is only going to move rents higher. Also, whatever you sign WeWork at is going to set a significant comp in the market, which can again push rents. Businesses do like the idea of being close to a WeWork, so that's going to put more pressure on rents. There are tenants that are great in bull markets, some that are great in bear markets, and others that are great in both. I would very much describe WeWork as a tenant that is a great bull market tenant, but that's about it.