As a millennial, there are certain phenomena that I am inexplicably drawn to like a moth to a flame, one of which is this utopian vision of an office space, with an open concept design, that promotes collaboration within and between different functional teams and the cross-seeding of ideas (no mom, we do not play ping pong at work). In addition, the ever-evolving digital economy has empowered a burgeoning class of entrepreneurs that are eagerly looking for office spaces in urban centres, with smaller floor plates than what would typically be offered in commercial leases. These dynamics have contributed to the significant growth in coworking over the past few years, particularly with respect to providers that cater to entrepreneurs. A case in point, the New York based WeWork’s valuation is reported to be at $10 billion in a recent round of capital raising by Fidelity Management & Research Co. and existing investors and has recently replaced Google as the building’s anchor tenant at 20 W. Kinzie St. in Chicago.
Coworking providers deliver this utopian vision and, in addition, offers tenants low overhead costs and scalability, without binding them to long-term liabilities of a typical commercial lease. Conversely, the landlords benefit in this symbiotic relationship with coworking providers from the “buzz” that the entrepreneurs bring to the building, without taking on the counterparty risk of leasing directly to less financially mature start-ups.
What are some key negotiation points in commercial leases between landlords and coworking providers? First, given that coworking spaces tend to offer more diverse uses than what are traditionally contemplated in a conventional office, the permitted use clause should be broadened to capture the space’s current intended and future potential uses (for instance, there may be plans to build specialized event spaces and/or a gym with associated amenities to increase future income stream). Second, the lease should allow the coworking provider to license and/or sublease the premises or parts thereof to third parties, in consideration of the prevailing membership model used by most, if not all, coworking providers. Third, the initial capital expenses to the coworking providers for fixturing, furnishing, etc. can be quite significant and an impediment to growth, particularly for new entrants in the coworking provider market. Negotiating the appropriate rent free period and tenant inducement allowance can ease the cost of these initial capital expenses. Fourth, as coworking providers’ tenants and/or licensees scale, providers may desire more space to scale along with their customers. Negotiating a right of first refusal to lease additional space may offer the coworking providers’ the opportunity to capture their customers growing needs. These key terms are fundamental to the symbiotic relationship between coworking providers and their landlords.