They only "owe" $18b in rent the same way any company leasing office space "owes" their landlord money. The word "owe" is thrown around here in relation (almost exclusively to WeWork) to imply they're in arrears to the landlords to the sum of sum of $18b.
It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.
Over the length of their leases they have an $18b obligation, but that isn't the same as the way "they owe 18b" is used colloquially to mean currently in arrears/default.
It is the same as entering into any agreement - over the agreements length you have an obligation, which if you can't service you're insolvent.
I guess I find the narrative that they "owe" $18b to imply a far greater extent of distress than the reality of their leasing obligations actually entail.
Precisely. They have liabilities of $18b with no profits. In the event of revenue drying up, they are still on the hook for those leases. There is no real difference financially between a lease and a loan in that sense. If I lose my job and can't pay the rent, I don't get to just say to my landlord "Sorry, lease is up!", and move out. I can be sued for that entire value.
If I was an investor in WeWork I'd care 0 about the total amount and almost entirely on what their trajectories look like, and the terms of those leases, etc. The $18B number is a red herring.
But nobody sues when they can just rent to another party.
That's the whole point though.It is lost revenue because in an economic downturn, when no one is trying to rent office space, the landlords will be left with no recourse but sue if the leases aren't paid. There are underlying construction and mortgage loans on the buildings being leased that must be paid regardless of whether the lessees bail out. At a certain point someone is left holding the bag.
The right to use asset is depreciated over the course of the lease whilst the liability is decreased as payments are made.
So it isn't a huge negative equity hole (particularly at present since lease obligations are off balance sheet), but with these changes gross debt will increase substantially, which may trigger covenants with regards to debt ratios (equity will be offset by right to use asset however, so no bit equity hole even with new accounting rules).
A landlord can re-let the space to another tenant, and start earning revenue again.
The money loaned however is gone until it is repaid. The total loss of a loan is the principal remaining unpaid at time of default, since you have permanently parted ways with the money once you transfer the funds to the borrower.
A lease on the other-hand hasn't deprived you of anything. You've still got the asset that can be released.
The losses in this instance are limited to the period of time the premised was vacant and unpaid for, as well as associated other costs such as an amount of any incentives provided as a proportionate to the length of the lease term remaining, legal costs, reletting costs, advertising and renovation costs etc.
You can't simply sue them for the entire value of the lease - especially if someone else moves into it and starts paying rent, you'd be double dipping.
I think it’s fair for their rent obligation to contribute to the concern about their business in this sense.
Yes, it’s not like an immediate obligation of $18 billion. But the effect on a net present value calculation of a company already operating on big losses is still very important.
You can sublease or assign your obligations in a lease, typically you can't assign a loan in the same way.
To clarify, when the average household talks about their family debt, they don't include the future lease payments that they're liable to pay over the remaining term of their family home's lease in their calculation - that is (rightfully) an expense, not a liability.
They do think about their mortgage though in terms of net worth and debt position.
You're right that only WeWork appears in the news in these terms, but WeWork is an unusual case. I would be interested to know if there are other companies in a similar situation.
In the linked article of this thread though, and a few others I've read specifically about WeWork, it feels like it is used to imply a currently due debt that they can't pay, mostly for dramatic effect I imagine.
Someone else had some comments in another part of this thread about other companies with large plant/equipment leases receiving similar commentary, such as expensive data centers.
Of course Uber and Basecamp and Reddit and Dropbox and other unicorns don't have this kind of criticism, because they don't have the same amount of heavy plant capital that WeWork has.
Look at any thread about a company building/buying a datacenter and you'll see the same argument. It's a bad idea because if they shrink in the future they're stuck with capital they can't pay for and now they go out of business. Only in this case, they can't shrink any more because they're already massively unprofitable, PLUS they have ungodly amounts of debt obligations.
A definition of a pyramid scheme
Is that a known fact or just a guess? The prices are low enough that it seems like it could easily appeal to bootstrapped companies or small businesses.
WeWork tracks everything that goes on in its buildings. They're in the business of understanding the quantifiable nuances of human interactions within a workspace. WeWork itself uses that data to "optimize" the coworking experience, but from what I understand, SoftBank has much grander schemes.
Oh wow look what else SoftBank owns:
Soon there will be robots walking around the WeWork offices delivering coffee and monitoring peoples breathing patterns.
So unless WeWork can use that data to be a better real estate company, it doesn't much matter.
And I have a hard time believing that WeWork needs all that data to create their coworking spaces these days, especially since lots of competitors come real close without the data.
They'd get data on how they don't have enough bathrooms for their capacity, there are often broken items in these bathrooms, and more.
They'd have data on how there's never enough mugs and how they're at <60% capacity in one building, yet opening up 2 more in a city :).
I'm thinking of it as a lab for quantitatively studying human behavior in a candid setting. When you go into a WeWork space, you're a specimen.
- A fresh presentation on small suite / desk rental + some trendy common area space (vs legacy players like Regus which had gotten very tired)
- Having space that's largely built out. Companies can spend $50 - $100+/ft getting space ready for their use
- Bridging the mismatched term expectation between landlords (desiring 5-10 year terms) and smaller tenants (desiring 0-3 year terms).
What frictions do you think gives WeWork essentially what you describe as a lease arbitrage opportunity?
Also, due to protracted lease negotiations and brokerage model (both tenant and landlord brokers get paid based on the total lease payments), there isn't motivation for shorter term leases. Just ask anyone who has a small lease requirement that is in a stable, non-VC backed company -- no tenant rep broker wants to take this work on because there is no money in that transaction, there's not that much less work than required vs a larger lease requirement, and no promise of a bigger deal with that company down the road in case they become the next Dropbox....
So 3 out of the 4 involved parties are not motivated to shorten lease term. The only one who wants shorter leases are the tenant.
Where is the WeWork moat? Buildout? Reception clerk? Meeting room reservation software? Demand forecast?
At some point the VCs will stop pouring money into it, WeWork will have to charge the full price, and then any old group of people with money can build a local WeWork clone. And unlike WeWork they won't be saddled with expectations of paying a return on the multi-billion investment spent on subsidies.
Croissant is an interesting aggregator that does this across smaller coworking spaces, but does require you spend some time getting set up each time you use a new space.
Having worked in a company fully based in a WeWork location in Boston, I can tell you WeWork basically is a complete stereotype of precisely all of the miserable, distraction-focused problems with open plan offices in general.
For fun meetups and goofing around, they are nice spaces.
For getting work done, it’s horrible, universally. People on my team would actively leave the WeWork office and walk to Starbucks to get work done, or more often just constantly work from home.
Whatever VC <-> founder winking social signaling and sort of cookie cutter “look at how start-uppy and innovative we are” status signaling must be the driver of locating in WeWork and coworking spaces generally.
It is clearly not related to productivity, quiet or private conditions conducive to engineering work, or basic workplace ergonomy or cognitive health.
That aside, percentage of WeWork tenants that ha e to travel is what? 2%?
The coworking industry, a novelty in US, was alive and kicking everywhere else before becoming a hipster trend in US.
I'd say, WeWork, with all its colossality, is still only managed to secure single digits of the market share. In the future, it has no chances to approach even, say, 10% as competition is cut throat.
Theranos had a valuation of $9 billion not too long ago. Did we forget about Pets.com and all the "valuable" properties during the dotcom boom that became worthless in a manner of months? Or the shacks worth hundreds of thousands during the 2000 housing bubble?
> I'd consider the lemonade stand on the corner to be more of a business than WeWork in the true sense of the word.
You should. There is so much money out there looking for assets that you could start a lemonade franchise business and you are sure to get investors bidding up your property even if it makes no money.
The current economic environment is dotcom bubble + housing bubble combined on steroids. There is lots of money to be made if you are willing to suppress your morals and just take the money.
That's a sub 3% dilution on their valuation. Laughable with the capital that is freely flowing right now.
It only matters if the music stops at a time when their finances are in very bad shape. If you had polled HN about that, you would have gotten four years ago as the popular answer to when the music was going to stop.
Amazon took the exact same risk, bleeding vast red ink to expand aggressively, financing itself with free flowing capital during a bubble. So is this comparable to 1996, 1998, 2000, 2005, 2007, none of those? Who knows, especially given the behavior of central banks is aggressively interventionalist post 2007.
What recent technological advance made WeWork possible in a way that was not viable 10 years ago? Cash burning VCs' pockets that lets them underbid the competition?