After Bedly: What the demise of a startup says about the health of co-living in NYC

The company closed its doors July 21

New York /
Aug.August 07, 2019 08:30 AM
Bedly CEO Martin Greenberg (Credit: LinkedIn and iStock)

Bedly CEO Martin Greenberg (Credit: LinkedIn and iStock)

The death of a startup last month raises questions about the future of co-living in New York City — and whether such arrangements are putting landlords and tenants at risk.

Bedly, a co-living company that launched in 2015, abruptly shut down July 21, leaving 600-plus tenants with invalid leases and roughly a month’s notice to find somewhere else to live. Though Bedly had raised $7 million since its start, according to its founder, the company struggled to secure additional financing and found itself operating in an increasingly crowded field. More than a dozen co-living companies operate in New York, including more established firms like WeLive and Common.

“It’s a very operationally complex business,” said Bedly founder Martin Greenberg. “And it also requires sizeable capital.”

Over the past few years, communal housing has expanded in New York and other cities, though many still struggle to effectively scale. Companies have started teaming up with developers, and in some cases, acquiring assets in order to have full control over the management of their properties.

Bedly’s model, however, was different. And after its sudden closure — which left some landlords and tenants in a lurch — many have raised questions about whether the company abided by local regulations. Two lease agreements reviewed by The Real Deal show that individual tenants signed subleases for single rooms. Every tenant in an apartment must sign one lease together if living in an actual co-living arrangement, according to the city’s Department of Buildings. Otherwise, the apartment might be operating as an illegal single-room occupancy (SRO). Michelle Itkowitz, a partner and co-founder of Itkowitz PLLC, who represents both landlords and tenants, said co-living apartments are often just SROs wrapped up as new models for millennials, promising “instant friends” and communal living.

“It’s the same thing that people have been doing for years, and getting in trouble for, except with a glossy website,” she said. “They just aren’t saying ‘come live in our SRO.’”

A “turning point”

Five years ago, two friends turned to Craigslist to find a roommate for their Upper East Side apartment. They found that demand was extremely high, especially for an apartment that was already furnished and where the terms were flexible. They decided to expand the idea to other apartments and quickly found themselves with some 40 renters across the city. They joined AngelPad, a startup accelerator, quit their full-time jobs and eventually raised a couple million dollars.

“In New York, it’s so difficult to find something that isn’t a scam,” said Benjamin Chester, who co-founded Bedly with Greenberg. “The whole vision that we had from the early days was to really build what we called housing 2.0, or the future of what housing should be.”

But as they grew, Greenberg and Chester began clashing over certain decisions and in July 2018, according to Chester, Greenberg pushed his co-founder out of the company. Chester said his ouster was “devastating.”

Greenberg didn’t respond to questions about Chester. He said, however, that Bedly set out to help people find better housing options and to educate both landlords and renters about co-living.

“We accomplished that mission for sure,” he said. “If we were just in it for reaping the benefits, we would’ve stopped within the first two or three years when things were really tough.”

Former employees said Chester’s departure seemed to mark a turning point for the company. One person, who was laid off earlier this year when the company let go of all its remote workers, said the company no longer seemed to work as a team, that its operations felt “compartmentalized” after Chester left. One former employee said the company couldn’t seem to strike the right balance between turning a profit and delivering a price point that pleased both renters and landlords. Chester said he and Greenberg focused on different aspects of the company — he on the renters and Greenberg on the investors. While this seemed to work in Bedly’s early days, it became a cause of tension between the two, Chester said.

“The company that I started was to make sure the renters came first,” he said. “It’s sad to see some of the stories coming out … It’s hard to see your baby hurting people.”

Tenants and landlords

Bedly announced last Thursday that it had reached a deal with another co-living startup, Outpost Club, to hand over lease agreements at some of its properties, allowing certain tenants in Manhattan and Jersey City to stay at least through the end of their existing leases. But the unexpected closure of the company has left some renters and landlords confused and angry over how Bedly handled its dissolution.

Brooklyn landlord Sam Herman, who worked with Bedly in at least four of his properties, said the company “basically disappeared” after alerting him that they were closing down. Many tenants found themselves forced to scramble for new living arrangements and, in some cases, took to social media to criticize the company’s actions in its final days.
Daily Dirt

Wookyung Jung — who moved into a Bedly room in Brooklyn from Cleveland, Ohio — only learned of the company’s closure from a July 29 Brick Underground article. She hadn’t been able to get a hold of Bedly after she noticed she wasn’t charged for August’s rent.

“They were not upfront about it at all,” she said.

The company’s fold came a month after Jung says she was forced to sign a “tenant membership extension agreement” with Bedly along with her sublease. The agreement, reviewed by TRD, stipulates that the owner of her building, 771 St. John’s Place in Crown Heights, wasn’t certain that he wanted to continue working with Bedly. But by signing the contract, Jung agreed to rent a “similar Bedly property at a similar monthly rent price” through 2020 even if the landlord decided to boot Bedly — and even though her sublease only went through the end of June 2019. Jung said she felt pressured to renew her lease in July due to the extension agreement, which Bedly said would open her up to a cancellation fee.

Jung’s lease, like another lease reviewed by TRD, was for a single room at 771 St. John’s Place. When asked about these lease formats, a spokesperson for Outpost indicated that tenants who remain in co-living units that are being taken over from Bedly will need to sign a single lease with the company in order to meet city regulations.

Herman, the building’s owner, said Bedly told him the leases in his building were legal. Joel Rolnitsky, who owns 230 Hart Street, which also had listings with Bedly, said he knew the company was going to rent out apartments to a group of people but he “didn’t know the details.” (Back in 2012, the DOB issued violations for illegal SROs on the first and second floor of the property, but the agency hasn’t received any complaints at the building since.) According to a DOB representative, the agency has received several 311 complaints about possible illegal SROs at a number of Bedly properties, but no violations were issued in a majority of cases. At 619 Hancock Street, DOB issued multiple enforcement actions for illegal residential occupancy of the building before it was converted from commercial use in 2018.

In addition to incorrect leases, Itkowitz noted that if any apartments are rent stabilized, landlords could be vulnerable to legal penalties — especially with recent changes to the rent law, which extended the statute of limitations for tenants to file rent overcharge complaints.

“If any of those [tenants] start to figure out that they have rights and stick around, I doubt Bedly’s going to indemnify the landlords,” she said.

Chester said Bedly was careful not to list rent-stabilized apartments. (Herman last registered rent-stabilized units at 771 St. John’s Place in 2013. He said the apartments were deregulated after a gut renovation of the building that year).

Another tenant, who has subleased a room on the Upper East Side for nearly two years, said she started renting with Bedly when she became sick. She wasn’t working fulltime and was receiving chemotherapy treatments nearby. She liked the flexibility of the lease and the fact that she paid a lump sum for utilities, so she could leave the air conditioning running all day for her dog. But when she tried to report a mice problem in the apartment, she said, Bedly didn’t respond. It was only when she called one of the company’s biggest investors, Accomplice, that she received a call from Greenberg, she said.

“You had to go to an extreme to get their attention,” she said.

Since Bedly’s demise became public, several competitors, including Stoop and Bungalow, have taken to Twitter in an attempt to lure tenants displaced by the startup.

Hing Potter, who planned to move from one Bed-Stuy Bedly property to another this month, said he was contacted by a few Bedly competitors on Twitter. He said he’s not ready to jump into another co-living arrangement: “I was like, ‘sorry you all turned me off on the idea.’”

Co-living growing pains

Bedly isn’t the only co-living company that couldn’t make it in New York. In 2015, Campus announced it was dissolving, closing down 34 homes it managed in New York and the San Francisco Bay area. Roomi laid off a majority of its staff after failing to secure more funding. Greenberg said he thinks some other co-living companies will soon meet the same fate.

“New York is a very challenging market. You have some landlords who still see things through an old-school lens,” He said. He added that in a lot of cases, it’s really banks “who are calling the shots.” He said Bedly had helped increase banks and landlords’ comfort level with co-living.

Back in April 2017, Cambridge-based Accomplice led a $2.7 million seed round. T.J. Mahony, a partner at Accomplice, said Bedly’s vision was “intriguing and well timed with the fluid nature of the millennial generation.”

“To their credit, the Bedly team built one of, if not the largest, flexible housing networks in the country but struggled to attract additional financing,” he said. “They are working hard to transition all renters to new platforms or directly to the landlord.”

The success of co-living companies largely depends on the types of agreements they are able to make with property owners, said Brad Hargreaves, founder and CEO of Common. He noted that his company has moved toward management agreements and larger apartment buildings to have more control over the renting experience. In March, Common teamed up with Tishman Speyer to launch Kin, a shared living space for families in the city.

“Leasing single units within an entire building that a co-living firm doesn’t control, that’s hard. It’s really hard,” he said. “You’re reliant on someone else’s property services, and end up with scattered inventory.”

Common and other firms have delved into ground-up development. In March, the Collective purchased the Paper Factory Hotel in Long Island City in order to convert it for short-term co-living use.

Bungalow CEO and co-founder Andrew Collins said Bedly’s closure “doesn’t necessarily speak to the health of the industry as a whole.”

“We’ve been able to expand so quickly because our model — reallocating underutilized homes and large apartments — allows us to bring units to the market faster and with far less capital,” he said. “For other co-living companies who are developing or taking on large scale renovations, it’s a much longer road and takes much more capital and time to bring new units to market.”

But the future of co-living in the city will also likely require a rethinking of restrictions surrounding SROs or a change in the model to make it more appealing to landlords and renters. In New York, rooms in a co-living scenario can’t have external locks on doors, nor can apartments be occupied by more than three people who aren’t related.

In the meantime, Itkowitz said companies may continue operating SROs in plain sight.

“It’s really a pernicious thing because it makes the tenants and landlords think they are getting this great thing,” she said. “If someone’s turning your building into an SRO, that’s crazy town.”

David Jeans contributed reporting.

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