Firms like WeWork are embracing the Blackstone model

A growing number of co-working companies have figured out a new way to diversify revenue and boost profits: emulating the private equity model in real estate. But it’s not without risks.

Using a private equity playbook, the co-working companies set up real estate funds, using very little of their own money, if at all, to purchase property. They then collect management fees generated from the investments or acquire a stake in the building.

Bond Collective, a New York-based firm led by Shlomo Silber with eight locations, has stakes in properties in New York, Chicago, Miami and Nashville. Silber told the Wall Street Journal he decided to take the private-equity investment approach after one of his landlords flipped a property for a 40 percent profit.

WeWork, which recently rebranded as the We Company, manages what appears to be the biggest of these funds — having raised $745 million from investors as of March 8. That fund, through an investment vehicle WeWork Property Advisors, closed on the Lord & Taylor building at 424 Fifth Avenue in February. But they struggled to find another equity partner alongside Rhone Capital and instead picked up $950 million in debt to acquire the building. As part of the operating agreement, the seller Hudson’s Bay Company retained a $125 million stake and WeWork had to chip in its own money, too.

According to the Journal, WeWork agreed to lease the entire property at a much higher clip than it normally pays landlords — $105 a square foot for 20 years, with a guarantee of 15 years of rent payments.

The model has also created complex ownership arrangements for the co-working companies who effectively sit on both sides of the table, as the tenant and the property owner.

“This could, in a period of economic stress on that company, create difficult conflicts to deal with,” Minta Kay, who oversees the real estate arm at Goodwin Procter LLP law firm, told the Journal.
[WSJ] — David Jeans