272. The Coworking Real Estate Model - Lease, Buy or Management Agreement
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TRANSCRIPTION
272. The Coworking Real Estate Model - Lease, Buy or Management Agreement
00:00:02 Welcome to the Everything Coworking podcast, where every week I keep you updated on the latest trends and how-tos in Coworking. I owned and operated Coworking spaces for eight years and then served as the executive director of the Global Workspace Association for five years. And today I work with hundreds of operators and community managers every month, allowing me to bring you thought provoking operator,
00:00:29 case studies and inspirational interviews with industry thought leaders to help you confidently stay on top of what's important and what you can apply to your own role in the Coworking industry. Welcome to the Everything Coworking Podcast. This is your host, Jamie Russo. Thank you for joining me. So I am recording this after returning from the Global Workspace Association Flex Forward Conference. And it was so fantastic to see many of you in person,
00:01:04 most of you not in person, but some of you in person I like am so grateful when I get to meet you in person and spend a little bit of time. Although I, the conference always goes so quickly. Even So, I used to run the conference and this is my first year of us hosting the conference. The GWA hasn't hosted the conference in two years since 2019.
00:01:27 But I was not in charge of anything except for participating in a panel and moderating a panel. And we hosted an Everything Coworking happy hour at 25 North thank you to the team at 25 North Coworking in Frisco, Texas. If you're listening, you guys are amazing, such fantastic hospitality and of course a beautiful space. Shout out to Casey for giving us a tour of the space with all of the Mara Hauser voiceover.
00:01:54 Thank you to Mara for hosting. And what else did we do? We did a workout. I volunteered Schlomo, who is the founder of Bond Collective, that we would co-host a workout, but when it came down to it, he really was in charge of figuring out what the workout was. And if you're watching on YouTube, I'm wearing my Dallas Cowboys t-shirt,
00:02:14 which I picked up at the the Pro shop, the Omni in Frisco is right next to the Cowboys Stadium. It was super fun. I worked out twice at the Cowboy Fit. We got to see the, oh my gosh, I'm gonna blank on the name formation I think it's called. Is the Coworking space there? Gorgeous. So beautiful, so beautiful.
00:02:35 Jerry Jones went high end on the finishes and the furniture and all the things at formation. But the manager there was lovely and very patient cuz I think he toured individually every attendee from the GWA event. So anyway, super, super fun to see some folks in person that I'd not seen before and reconnect with folks if you can work it into the budget and work it into the schedule.
00:03:02 It's so rewarding to go to these events. One of our team members messaged me this morning and said she was like super energized by going and sometimes you just need to refresh your passion for your work. And being with others who are kind of doing the same thing can be really helpful. We're gonna weave in some of the nuggets from the conference today. First we have to congratulate our newly certified community managers,
00:03:31 Marlena Chapman from Pillar Coworking in Lafayette, California. They have been on the podcast, really great episode. They have full-time childcare. That episode goes back ways, but if you Google Pillar and then Kirsten Yael from Thrive Coworking in St. Louis. Huge congrats to both of you. Speaking of Googling, I have a small confession that I thought I would mention because I think is probably helpful to you.
00:04:00 I feel like when I do something that feels not so smart, there are probably other people that have the same challenge. So someone joined our Community Manager University this morning, but it came through on an old registration form and so they got access to the old product. We made a huge update to Community Manager University this year we changed it to a new platform that is gorgeous and really easy to navigate and allows us to really organize our certification versus our elective courses and our call recordings and whatnot.
00:04:36 So I could tell that this person came in through the old system and I was like, Oh my gosh, how could we have old links out there? Like how is this happening? So I had to email the person because I had no idea how to figure out how did they get this link? Like where is it, how did we miss it?
00:04:52 Cha like updating all the registration links to go to the new platform. So I said, Huge favor, can you just tell me how you got to this link? And it took a couple of emails and a huge thank you, I'm not gonna mention names, but thank you for doing this for us. And he, he was like, Yeah, I just googled.
00:05:10 That's what he said. I just Googled and he showed me the screenshot, not to me to to Google it because the platform that we use for registration pages, I thought I had everything set to being not searchable by Google because sometimes we didn't want them to be, if we were doing like not open enrollment, we didn't want them to be visible. We do do open enrollment now.
00:05:33 So if you have a Community Manager that you want to join, you can do that anytime. And it's as simple as googling Coworking Community Manager University in this gentleman found our registration page on Google. And so I, anyway, the lesson is Google yourself, not just your name. We all do that sometimes. Google your business, Google anything, like any programs that you have or event,
00:05:55 it might surprise you at what comes up because I was quite surprised by the screenshot that he gave me. So anyway, so many things to work on in terms of our online presence, it's never over. That was kind of our series last month and this month we're talking about the Coworking business model. So today we're gonna talk about the Coworking real estate model and I've tried to include a few little nuggets for those of you who are not new.
00:06:20 If you're new, it's always good to be kind of just thinking like broadly about what's possible. What are the potential approaches to take in your business if you are not a new operator. Hopefully we're sprinkling in a couple of nuggets that might still be new. So we're just gonna go simple here. Oh, really quick. Well, yeah, we'll talk about that in a minute.
00:06:42 Okay, so the three approaches to your real estate model. Your real estate model is super, super important because it is your business, and I talk about this all the time, but it's a weird business because it essentially, you know, it's, it's so correlated to your lease and your Startup costs. You're not like making a widget and you need a place to make the widget and you need to pay rent in order to make the widget.
00:07:09 You are selling the space. You have some other services like mail or events, things that are, well even those like you're really selling the real estate. So maybe you're offering like virtual assistant services that would be kind of unrelated to your real estate, but mostly we're selling the real estate and there's lots of value that we wrap around that. But essentially the lease is really,
00:07:36 really, really important. So our real estate, sorry, not just your lease, your real estate model is really, really, really important because it's really the foundation of your business, unlike most other businesses that you might start. Hey, we'll be right back. I just wanna share a couple of opportunities from our show sponsors. As a Coworking space owner,
00:08:05 you are always looking to provide more resources and programming for your members, right? How about access to financial education and even investment opportunities? While Newa is the number one community for freelancers and founders looking to grow their businesses. So new mana and Coworking spaces go together like you know, butter and Jelly, we found that over 75% of our community already work in or are seeking out a Coworking space.
00:08:37 We'd like to help our members connect with you and find your space anywhere in the world. So join our Coworking space directory to be featured in our community and give your members access to a whole library of entrepreneurial resources and financial education programming all at no cost to you, by the way, visita slash Coworking to fill out an interest form, that's N O U M E a.pro/
00:09:13 Coworking. We will include that link in the show notes for anybody who's walking around and doesn't have time to write it down. You can find it in the show notes for this episode at Everything Coworking dot com. Noumena financing the Future of work, The amount of opportunity in the Coworking industry is absolutely mind blowing. It's projected to grow by 13 billion in the next five years.
00:09:41 Just staggering numbers now you've probably seen Success Magazine, it's hugely popular and focuses on professional development, personal development and business coaching while they're branching out with their own franchised Coworking business called Success Space. It's actually a brilliant franchise model with three revenue streams recurring and on demand revenue from Coworking memberships, a full service cafe and success certified business coaching for small business owners to executives.
00:10:17 To learn more about this exciting new Coworking business opportunity, check it out@successcowork.space, that's success cowork.space, we will link that up in the show notes as well. So you can lease, you can buy or you can do a creative partnership. So we're just gonna hit some highlights around each of those options. So the lease first, if you are new to Coworking,
00:10:46 you must not negotiate your lease without a broker. I get a lot of folks in the Startup school who are negotiating things with no broker and this is like a very dangerous path to go down. You also need to have a broker that understands the model and that is ethical and is very committed to making sure that you sign a lease that supports your business that you are presumably putting a lot of your life savings into.
00:11:14 So the broker again is hard for people to wrap their heads around the idea that you don't make money from another aspect of your business. Again, you're not selling a widget or a service, you're not like an attorney who needs a place to meet clients and therefore has to pay for real estate. You're selling the real estate. So the deal is a very,
00:11:34 very big deal. You need the right size space, you need the right build out, you need the right lease length, you need the right free rent length. All of those things are so, so super critical. So you need your broker to understand the Coworking model and there are folks you can work with like Casey Godwin, he gave us our wonderful tour at 25 North in Frisco.
00:11:56 The group at ay, you know I co-host a podcast with Giovanni Pei. So there are folks who really, really understand the model and you want to at least have a conversation with those folks. They are very busy and cannot work with everybody, so they are gonna have some parameters around who they can work with or not. Feel free to ping me.
00:12:16 I always, you know, kinda help prep folks in my Startup school to have those conversations and you can work with a local broker but you have to quarterback that process. So, but please have a broker. You do not want to be negotiating with a landlord on your own. Especially unfortunately if you are a female brokers or even not landlords know that you have never negotiated a commercial lease before.
00:12:40 They know a lot about negotiating commercial leases and you know, presumably nothing and it's a very, very, very big financial transaction and so you want to get professional support. Okay, a couple of other things happening in the marketplace that I've probably mentioned here, here and there. Look for opportunities to get a turnkey build out and as much free rent as you can get.
00:13:04 Anchor on one year of free rent with your deal. So you probably have to sign a 10 year lease to get that. A 10 year lease is great for this model. As long as your deal is good and your rent doesn't escalate too much, you might end up paying for this turnkey buildout and your free rent over time in your rent rate. So the landlord might say,
00:13:24 Sure, we'll pay for the buildout and we'll give you free rent and that rate is this much or your rent rate is this much. Or you can pay for the buildout and not get free rent and your rent is much less. So sometimes it's about who's financing this, but if you don't have the access to capital to get into your first location, then it might work fine for you.
00:13:47 Just make sure that the deal still works, right? You have to do your proforma, you have to look at your Startup costs, you have to run them through a model and make sure that you're not spending more on your build out than you can make over the lifetime of the project. I feel like I'm beating a dead horse on this, but I see it happen.
00:14:05 It's always a big concern and why we run lots of numbers when we're looking at options, but I'm seeing folks get really great deals in great markets. They're getting turnkey buildouts and they're getting several months of rent free rent and again, sometimes that's a trade off around monthly rent rate. So you just have to look at your proforma and you have to plug in the numbers and make sure that they work.
00:14:28 But some really good deals happening out there. And on a related note, we talk a lot about creative partnerships and the idea that leases are risky. There's still lots of folks out there who love to do a lease because they get all the upside. So if you are a new operator, you probably have to lease or buy, which we'll talk about next.
00:14:50 You're not gonna get a management agreement or some other partnership. You have to take all the risk because you're brand new and nobody can can figure out your risk profile because you don't have a track record in this business. But over time your decision about your Coworking real estate model is really about the risk profile of a particular deal or your risk tolerance at a particular point in time.
00:15:15 So Giovanni and I interviewed Flip Powered who's the CEO of Work Suites. He has 23 locations I think on the Flex Uncensored podcast. He's also been on this podcast, great, both are great interviews and with Gio and I, he talks about why he mostly likes to lease. He's got a couple of exceptions and he talks about why that is. But he wants the upside,
00:15:37 he wants the profit. So he just does really good deals and those deals look like getting plenty of ti and lots of free rent to allow for ramp up. Scott Chambers will be on the Flex Uncensored podcast, I think he's been on our podcast, I should double check. He is the COO of Pacific Workplaces. He was at the GWA conference on a panel about agreement structures and he also likes the lease.
00:16:04 They have some management agreements in place but they don't do creative partnerships all the time. And actually I'm guessing some of his management agreements have different profiles. Maybe they're a base rent with shared upside versus a fully managed model. The fully managed model just has a lot less upside, which we'll talk when we about when we get to that. So that was part of the discussion at the conference is what kind of model do you like and when?
00:16:28 And there's a of course a lot of options in between a lease and a creative Coworking partnership. Lots of ways to blend that. Kiln is a brand that I really enjoyed getting to know a little bit. They got to chat with their team a little bit and they were on stage on the, I can't remember what the panel was called, something about deal structures.
00:16:48 Schlomo was the moderator, he's the founder of Bond Collective I mentioned earlier and did an awesome job. I will say by the way, sometimes I don't like to sit through live content mostly that's when it's boring. But the thing about live content is it's better, it's just can be really more engaging, right? I mean you're listening to me now because we talk every week and we can't get together every week even though that might be super fun.
00:17:15 But we're all from, you know, different parts of the world and we cannot hang out in person every week. But when you have a good moderator that you know, really captures the energy of the panel, there is just like a different vibe when people are in person. And Schmos panel was one of those, it was just like people were just being super authentic and it was like they were having a conversation.
00:17:37 It probably would not have been anywhere near as entertaining if it was a Zoom panel. So just another plus one for going to stuff live. Okay, so kiln was on stage and they mentioned that they, they raise a lot of money to pay for their build outs. They do large spaces like 50,000 feet. I've been to their space in Salt Lake.
00:17:57 It's beautiful, but they like a below market lower risk lease. So they'll raise money to pay for their build out, but then over time they want the predictability of a manageable lease. So kind of a little bit of a blend there or they're doing, you know, maybe some upside share with the landlord. I don't remember all of the details, I just remember like their sort of risk management was like,
00:18:23 look, we'll do a base lease so that the landlord has that to go to their lender. But they want that to be really super manageable in case they, you know, global pandemic and they need to manage their risk that way they don't have as much downside cuz they're partnered with a landlord and have probably kind of managed the floor of how lo how bad things can get.
00:18:46 But they have investors who invest in their build out. So interesting way to kind of approach the lease. Hey, I just wanted to jump in really quickly before we continue with our discussion. If you're working on opening a Coworking space, I wanna invite you to join me for my free masterclass. Three behind the scene Secrets to opening a Coworking space. If you're working on opening a Coworking space,
00:19:10 I wanna share the three decisions that I've seen successful operators make when they're creating their Coworking business. The masterclass is totally free, it's about an hour and includes some q and a. If you'd like to join me, you can register at Everything Coworking dot com slash masterclass. If you already have a Coworking space, I wanna make sure you know about Community Manager University Community Manager University is a training and development platform for community managers and it can be for owner operators.
00:19:42 It has content training resources, templates from day one to general manager. The platform includes many courses that cover the major buckets of the Community Manager role from community management operations, sales and marketing, finance and leadership. The content is laid out in a graduated learning path so the Community Manager can identify what content is most relevant to them depending on their experience and kind of jump in from there.
00:20:11 We provide a live brand new training every single month for the Community Manager group. We also host a live q and a call every single month so that the community managers can work through any challenges that they're having or opportunities get ideas from other community managers, build their own peer network. We also have a private Slack group for the group. So if you're interested in learning more,
00:20:36 you can go to Everything Coworking dot com slash Community. Manager buying a building is another potential approach to your Coworking real estate model. If you're not in a major market, this is the first thing I ask my Startup school students that I work with on a one-on-one basis. Check to see if you can buy the building, is it for sale or what does it look like if you buy it?
00:20:58 Because sometimes the mortgage payment might not be any bigger than your rent payment. It depends, right? But if you're buying, if you're looking to rent the bulk of the building, it may be likely that you could just about cover the mortgage. So you wanna look at those numbers and when you buy, it can be easier to finance the remodel of the space much easier than if you are trying to lease and you are a new operator and you are trying to get a bank loan.
00:21:28 That can be really challenging depending on like what kind of collateral you have and what you're willing to put up. So super important to you. Keep in mind, the other thing about buying is you could make a smaller space profitable if you own the building. So again, if you're in a smaller market, you wanna do a smaller space, buying the building can make the whole project more profitable than if you're leasing a smaller space.
00:21:51 We talked about the challenges of smaller spaces on a recent episode or trade offs I should say. But buying the building can help make smaller space work. We did how I did this session on buying a building and if you're an Everything Coworking Academy member, you have the recording to that. If you are not, you should join us Everything Coworking dot com slash academy for all the details.
00:22:17 And we had several folks who have bought buildings and run their Coworking operation out of those buildings, talk about that process and kinda what the economics look like and at least one of those operators had a smaller space because they owned the building. The other upside to buying is you have full control over design. You can leverage the outdoor space if you want, whereas if you're in a building that's shared with other tenants,
00:22:42 you don't control the outdoor space. Maybe you can use it but you don't control it. You have full control over building use. Can you, you know, using it for events again like, like indoor outdoor event options, which usually are not an option if you're leasing door access seems like a little thing, but it can be really challenging to manage electronic door access if you don't own the building.
00:23:05 You know, there's some system on the front door, but then when you get to your suite there's another system and it impedes the user experience. So lots of reasons to buy and again, we have that how I did this session, which I thought was fantastic. So then the third real estate model for your Coworking business is a creative Coworking partnership or a management agreement.
00:23:29 This is generally not for first time operators. We had or the GWA had a panel on landlords getting involved in Flex and HDS was on the panel and bridge. These are larger, more institutional, you know, size owners. They own a lot of real estate and they partner with operators and or you know, do it themselves When they partner, they're looking for operators with a track record of profitability.
00:23:56 They definitely said that on stage. So they're not looking for first time operators in their buildings. So you have to lease or buy your first location in order to get that track record down, which is why it can be super important to look for those turnkey deals with longer rent that can help you be successful. If you start with a lease that is really challenging,
00:24:18 the rent's too high, you don't have enough time to ramp up and you don't have the capital to get through the ramp up time, you can not be set up for success, which will not help you get the track record you're looking for to do that second location with less risk. Although I will say related to the risk profile, make sure the deal terms have enough upside.
00:24:40 This is kind of a topic I've been working through with some of our academy members is, you know, what's, what are good deal terms for a creative deal structure. And thank you to a couple of folks out there who helped me work through this a little bit and kind of double check my thinking on this. But you know, you're sharing the bulk of the profit with the landlord because the landlord's paying for the entire build out.
00:25:04 And so you know, generally there's some sort of monthly management fee and then you know, there's some sort of like profit share. So if there's, there might be a base rent and then you're sharing upside or maybe there's no base rent, but the landlord gets the bulk of the profit in that scenario and so you have to do many more creative deal locations to get the same cash flow as you do if you have a lease that's really successful.
00:25:30 So it's really just kind of managing the upside versus the risk. There's a lot more upside if you sign a lease and the business does really well than in a creative deal structure, but less downside in the creative deal structure. So all about kind of trade offs and risk profile. It is usually very difficult to make small spaces work with a creative deal structure,
00:25:53 but not impossible. Craig Bty is, he loves to send me emails and tell me I'm wrong about things or challenge something. He was at the conference, it was awesome to see him. Craig owns D Swap and is doing some creative, either he is or he's working with some folks who are doing some creative deal structures in the Denver market and he,
00:26:12 you know, kind of shared the framework and said they're doing smaller spaces and the way they have the deal structured, the operator is doing just fine. Craig and I for the record also share a birthday trade offs doing management agreements. This came up, someone shared, I will not name names, but I like to, to share things so that you kind of get the same perspective.
00:26:35 The, it could be challenging to work with a landlord, right? So that you think they're partnering with you because they wanna give you all the control and decision making because it's not their forte, right? But someone shared that their landlord had kind of hired somebody to manage this project and this person kind of wanted to put their stamp on it and got another architect involved and like totally changed the layout.
00:26:57 And we know that Coworking especially to really optimize and be efficient with our layouts, like there are a lot of specific approaches to optimizing, especially when you're optimizing for revenue hallway, you know, with office sizes, all sorts of things. And you know, this person like was super, super frustrated with this relationship when this happened. So you can put a lot of time and investment into a partnership and then have some surprises because humans are unpredictable.
00:27:27 So when you sign a lease, you're in charge and when you do a partnership, you're not in charge and you have to know that things can happen that don't go your way. So trade offs. So that's it. That's kinda what I wanted to cover today. Just kinda some nuggets around leasing or buying or doing a creative Coworking partnership. So thank you for being with me today.
00:27:49 We have some exciting interviews coming up that are continuing with our Coworking business model theme. So we'll see you same time, same place next week. Thank you for listening to today's episode. If you like what you heard, tell a friend, hit that subscribe button and leave us a rating and review. It makes a huge difference in helping others like you find us.
00:28:15 If you like to learn more about our education and coaching programs, head over to Everything Coworking dot com. We'll see you next week.
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