168. Mike Abrams on Management Agreement

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00:00:01 Welcome to the everything Coworking podcast, where you learn, You need to know about how the world wants to work. And now your host coworking space owner and trend expert. Jamie Russo, Welcome to the everything coworking podcast. This is your host, Jamie Russo. I'm glad you're joining me today. I have a special episode. Let me tell you why.

00:00:36 I think this is important for you. If you're starting a coworking space or looking to expand your existing business, you're well-served to think hard about the best structure for the real estate for your space. The most common options are to lease the building own the building or to work with the landlord on a creative deal structure that fits the needs of both parties coming out of COVID.

00:01:02 The lease option is the least attractive option for the operator because we've seen that it bears the operator bears the most risk in that setup. If you are going to lease, I highly encourage you to work with a broker that is very familiar with the coworking model and will help you to negotiate terms that will protect you from a business killing experience. Like the global pandemic that we just experienced the appeal of a management agreement is that it shifts more of the risk to the side of the landlord.

00:01:38 Now the upside is more limited for the operator and they're in lives. The trade off, I get asked very often about how management agreements and other creative deal structures work. There's no easy answer. There are no templates out there that folks are going to offer you to start with. And part of this is because every deal depends so much on the situation of the landlord and the operator and what structured the two parties can come up with.

00:02:07 That works for both. The major factors are capital investment lease structure management fee and profit share. So my guest today is Mike Abrams. He has a real estate background and is one of the few real estate professionals in the U S at least that has worked on multiple management agreement deals in our conversation. He shares his experience and advice for those considering this option for their first or next space.

00:02:34 So in a moment, I'm going to introduce Mike and it's a bit of a long episode today. Hang in there. He has lots of experience to share lots of detail. Um, and if you have questions coming out of this episode, he's happy to answer them. Please shoot us an email@teamateverythingcoworking.com or post to the Facebook group, which you can find at www everything,

00:03:00 coworking club.com or search for everything coworking I'm in Facebook groups, and we'll come up and we're happy to get back to you and answer some questions. I'm tempted to host a Q and a session on this. So if you have some questions that you want to dig into, definitely send us a note. Before I introduced Mike. This episode is brought to you by my masterclass three behind the scenes secrets to opening a coworking space.

00:03:24 If you're working on or starting a coworking space, I want to share three decisions that successful operators make when they're creating their coworking businesses. This masterclass is designed for folks that are creating their first space. It's totally free. It's about an hour, which includes Q and a time. If you'd like to join me, please register for our October session at www dot everything,

00:03:46 coworking.com forward slash masterclass. And if you're listening to us and it's not October check that link and you can find the next upcoming class, I also want to welcome my new community managers to community manager university. We opened the program for registration this month and welcomed lots of new folks and a huge contingency from Canada, Kristin, my community manager, and I were just laughing and loving it.

00:04:17 As we saw all these Canadian folks come join the community. We're thrilled to have you thrilled to have all of you. So we're diving in, in the Slack group tomorrow. We're doing our first, actually Thursday tomorrow for you. When you hear this episode, I'm doing, uh, our monthly training session on using Facebook ads in a strategic way to attract new members.

00:04:39 So if you missed out on getting in this time and would like to know when we open again, please go to www dot everything, coworking.com forward slash community managers and get notified when we open again. Okay. Without further ado, here is Mike Abrams. Welcome. Thank you for joining me today. I have a guest with me that has agreed to dive into one of the hot topics in our industry,

00:05:06 which is management agreements or creative lease structures I have with me today, Mike Abrams. He is in Rockville, Maryland, and he has a deep background in real estate. I'm going to let him walk through a little bit, his background, how he got into coworking. He was the market development leader for launch workplaces, uh, in 2018 through 2020,

00:05:35 and has deep experience working with management agreements and has hung his shingle. And so he and I have been chatting back and forth because I always have lots of questions about how do management agreements work. Who's doing them, how do they get done and picking Mike's brain over email? And so we jumped on zoom a couple of times, and I said, Mike,

00:05:54 will you please come on the podcast and tell us your perspective? Because I think it's so helpful for people to hear from different voices, different experiences, you know, kind of what's happening in the marketplace today and even in, just in different markets period. So Mike's and kind of the Maryland DC area. Mike, thanks for joining me today. Thank you very much,

00:06:17 Jamie. So Mike, tell us about you and your kind of real estate background, pre coworking, kind of how you ended up getting into the coworking world. And then I have a list of questions that I'm going to hit you with after we know who you are and what you're about. Sure. Uh, briefly. So I graduated, uh, university of Pennsylvania back in 1982 Came now,

00:06:45 now we're doing the math Mike. Now we're doing the math now, Uh, with a master's degree in city and regional planning and 82, I graduated and, uh, walked right into a recession. So I learned the ins and outs of real estate through the bottom of the economic cycle and was able to work my way up through the cycle. But I literally started in commercial real estate.

00:07:13 I'm advising real estate developers on how to achieve their highest yields through planning and designing, uh, master planning and market studies. And back then we didn't have technology. So we had to do everything by hand Mike, you were like, pre-internet not probably pre-internet, but So this is very interesting. So, um, Gerald Heinz or the Heinz organization, um,

00:07:42 hired the company that I was working with in 1982, and we needed to do a survey of all the buildings in downtown Washington. And while today we have the luxury of working with companies like CoStar. I had to supervise and manage a group of 20 people. We had to go into every single building because back then you didn't, you could gain access,

00:08:07 free access to building. You didn't have security issues. And we literally put together a book for Heinz corporation that we basically use for the entire region and other and other, um, organizations at the time with every tenant, the square footage. And we were through that process. We were able to even find a lead tenant for them, which was their Columbia square project back in 1982.

00:08:36 So like you laced up your tennis shoes and just a major database on paper. It was, it was a cumbersome tenuous process. But I got to tell you, you got more out of it. The only problem was when you had to go back five years after that to update it, you didn't have the technology to update it. You had to do it through the long process,

00:09:01 right? Oh boy. Yeah. So, So that got me really started. Um, I was able to learn the ins and outs of real estate. Um, I worked for several companies, some real estate companies, and then lo and behold came the SNL crisis in the early nineties. And I learned about, um, finance the hard way because small SNL companies were not providing any financing anymore.

00:09:34 And I sat in on a department of commerce seminar. I recall this in 1990, this was the beginnings of what is now termed the<inaudible> program. It was the green card program. If you got a, uh, overseas families, if they invested a half a million to a million dollars. And so I embarked on a process. I work with restaurant companies,

00:10:00 I work with hotel companies and I even worked with senior care companies and grew them, um, by providing them foreign capital for their projects. So that was great. It allowed me to work on different projects. I worked throughout the country. And then, um, later in the late nineties, I started my own development company. Um, in 1998,

00:10:24 uh, one of my first projects was a historic rehab project that I competed, um, for a federal government lease. And I, as I always tell the story, um, I called my, um, architect up after we were w rewarded the project. And I said, I got good news and bad news. He said, well, what's the good news.

00:10:47 He goes, we want to go. So what's the bad news. We actually have to build it out. So that was my, That was my, um, uh, first time, uh, signing the con signing the construction loan, providing the personal guarantees. And if anyone knows, you know, has done this in their past, um, when you sign your life away,

00:11:12 um, you know, the good news is having the federal government as a guarantor, as, uh, as, as your tenant typically means you're not going to have any problems then paying rent. So that was good. It got me started, I did a lot of development throughout the years, up until 2018, 2019, um, retail projects, apartment projects,

00:11:36 historic rehabs office projects and, and all that. And that was great. And then how did you get into coworking? So coming out of the last recession, uh, which was 2009, which, uh, I guess prior to the pandemic, this was labeled the great recession, right? Um, I was, I was heavy all in, on retail world,

00:12:03 uh, working with national retailers. And, um, you know, when, when you're an entrepreneur and you're a small guy, um, as we are learning through this pandemic, uh, the economic hardships, uh, one faces by owning a business, um, it's devastated to lose capital, lose equity projects, go down, you have to give them back,

00:12:31 um, and, you know, basically have to reinvent yourself. So I did become enamored with, um, companies like Regis and we work, and I was watching what they were doing, what, um, what Adam Newman was doing in New York city. And it was, um, it was exciting. It was something new. Um, interesting thing is,

00:12:53 um, I would say we're still developing some smaller apartment projects during that time. And I was fortunate enough that I, um, through a mutual friend and into the, um, the CEO know of launch workplaces, um, I was able to land a job with launch in 2018. Um, ironically enough, prior to 2018, I met with launch on a Monday,

00:13:19 another project, coincidentally, where, um, I had a semester buildings in downtown Baltimore. It would have been great for them. They were all on board, the deal fell through, but it gave me the opportunity to work for a launch, uh, later on be the market development leader and really help provide the strategy for future growth moving forward. And so,

00:13:44 so with launch and with coworking, I've been fascinated with the business plans, um, the financial model, how it works. Um, you know, I guess we all watched the, um, the, we worked at buckle in 2019, and I think, uh, it, it brought to the surface, a lot of the financial projections and the,

00:14:13 uh, financial stress, but own operators today, more so today in the pandemic, what the pandemic has done, um, as we all know is, um, it has accelerated this process with technology G ed, community collaboration, and we're learning how to do everything remotely. Um, you know, the hardest thing that at least I have found is just being able to collaborate with people,

00:14:45 but not be within the physical premise. And that is, that's the true challenge today, as, as we're all trying to figure this out together, um, everybody's been affected by it. And as even today, as I work in the coworking world, um, as a freelancer, as an entrepreneur, uh, there's clearly opportunities out there and it's clear with what the office market is now dealing with with landlords and tenants and trying to come up with,

00:15:17 you know, what do we do in the future? Are we working from home? Are we working from anywhere? Are we going back to the office? Is there a hybrid involved? And so I think we're just all kind of working through this process together So much uncertainty still. Yes. So I'm curious, just real quick to, um, just put a point on your time with launch launch was exclusively management agreements.

00:15:46 Is that right? Yes. Okay. So yes. I mean, you're, you have a, you have a very unique, deep experience in real estate, which is not always common in the flex office world. So you come at it from a real estate background, lots of folks get into it because they love something about the model. Um, so I think your experience is extremely valuable and I don't know very many people,

00:16:12 maybe zero people who have worked on a purely management agreement approach with multiple locations. So I think that's another unique perspective. And so I'm looking forward to diving in here. So I'm curious, you, you started to kind of lead into this and there's so much uncertainty and we even started our call. You said, you know, you're sitting on a webinar by JLL and kind of talking about,

00:16:36 you know, what's next and what are the dynamics, what's your macro view without putting sort of time on it since we're having a hard time figuring out when, when things are going to flip more back to normal demand for flex office, commercial vacancy kind of opportunities out there for creative deal structures, what are you seeing? What are you optimistic about? What do you think we'll start to see in the next,

00:17:04 even call it year or two, if we don't want to, we don't want to get the crystal ball out. Well, the interesting thing about office office is starting on this progression, very similar to what we saw with the retail world almost 10 years ago, with the emergence of e-commerce. And so with the office world, at the end of 2019,

00:17:33 we were already seeing overbuilding. We had oversupply. Um, if you look at the last three years and 2017, 18 and 19, all the major coworking brands, we work convene serendipity labs, even Regis with their spaces. Um, they, they were dominating the leasing market for office space. So right away you start looking at what was transpiring. So,

00:18:08 and then all of a sudden we hit this skid in, uh, end of February, early March and the pandemic hit. And all of a sudden everything evaporated, all this hard work, um, the struggles of getting, um, uh, members and the enterprise network, um, they've all, uh, all the operators did such a phenomenal job in creating not only the vision,

00:18:36 the passion, the culture, and now what, what I see, which is so positive is we're starting to see the emergence of technology. And, and, and I use this analogy with retail because the office sector's been like the last sector that has not been touched with technology, landlords have been resistant, landlords have always been resistant to change. And now all of a sudden we are seeing this change of how we're going to conduct work,

00:19:10 how are we going to get work done? So instead of this process that was starting with coworking, uh, that would have taken maybe three to five years now, it's been accelerated like in warp speed to now it's like, okay, prop tech has taken over, um, any coworking group. We're seeing the leaders of the industry rise up. We watched convene do their platform for virtual meetings.

00:19:43 It's fantastic. A couple of weeks ago, we just saw an Alliance with Cushman and Wakefield and industrious. Um, and so we're starting to see things just start, even though workers haven't gone back to the office yet there, while they're, while companies are figuring out people are working, they're working from home, they're working remotely, um, productivity, it may,

00:20:12 and for some companies it has either stayed stable or increased while others have suffered. Um, we've seen where companies that were, um, adaptable by utilizing technology. It's, it's been, it's been very, very simple and easy. Um, and so I see this emergence coming today. I see, unfortunately I see more pain and suffering from landlords and tenants,

00:20:42 at least through the end of 2020. Um, and as we, as we know, uh, the big wall street bank firms, this is when they create debt markets. I think today, I read that Blackstone created an $8 billion debt fund. Um, so they're all preparing for that. So what does this mean for coworking? I think it means there are so many great opportunities because we're now questioning what are we going to do with these office buildings?

00:21:14 Um, what we're finding out is w and this saw a lot of this started in California with the live work and play and creating the flexibility and buildings. We haven't seen this on a large scale, but it's starting to emerge, um, um, developers who also do coworking great example in the Washington DC market is, uh, car properties with car workplaces.

00:21:42 Okay. They're now they announced on the building they're doing in downtown Washington, um, that it will be, um, it will be a market leader, flexibility, wellness, collaboration, um, amenity space. I mean, we, we will get through the pandemic. Um, it's a question of time. We will adapt. We're very resilient people.

00:22:08 Um, what has happened it's, it's opened our mind. And I think, um, for the first time we're seeing, um, a quality of life. I think it's, this is like, I would say, this is when, uh, capitalism meets socialism, and while we need to make money, but at the same time, we're realizing we have a family.

00:22:34 We have children that we have to take care of. Um, I don't know if you've noticed during the pandemic, you, you can find, if you want to buy, if you want to get a pet dog, you can, Right. There's a way there's a, yes, you put down your deposit, you're waiting awhile. You can't buy a bicycle or find one,

00:22:53 even to read. I ordered one, so I have an eight year old and she has a bike. And usually I run with her, but it's not always that easy to keep up at this point, she's getting faster. So I was like, I need a bike. I went in, I don't know, a month ago and ordered one. And it will be here in March.

00:23:12 Is that amazing? It's just a regular, like, track simple, nothing fancy Mark. So some ministries have just, I mean, they're just, the growth is unprecedented. As a matter of fact, being an avid cyclist myself, the supply chain is completely broken down, you know, um, you know, whereas, you know, we look in the office world and all of a sudden,

00:23:38 it's like, you know, I will say the collaboration with, uh, the health safety folks, whether it's compliance, it's almost created a new industry in compliance and cleaning and maintenance, uh, the air filtration systems. Yes. It's, it's really remarkable. And I think there's, while we can talk about the negative, I think you got to bring out the positive too,

00:24:05 because it's so important. And while we know this is so hard on so many people, um, we have to find ways to stay engaged with our employees, with our, with our clients, even with friends and family members. Um, because we're now realizing if we don't have to commute to work, all of a sudden you have free time eligible.

00:24:30 So you can exercise, you can walk, watch a movie, you can take care of the kids, or you can just continue to work all day. So for myself, where I haven't had an office for so many years, and I'm so used to working remotely, you know, I get to teach other people how to do it. So, you know,

00:24:51 it's great, you know, so, you know, yeah. I think getting back to the commercial and the office, uh, industry, I think everyone's trying to figure it out now. I think the hard part is, uh, when you compare this to other recessions, it's not like it's not a light switch where we hit bottom and then<inaudible> risks is,

00:25:19 um, it's health induced and, and it's science-based. And while this, our country has been just split between whether you believe in science or not, um, it, it is a real thing, then that's not the issue of what we're talking about today, but it has the economic impact. So that are significant. Um, and so in terms of,

00:25:44 you know, the opportunities in the future, I think, you know, as we talk about coworking and how it's grown from its infancy days, and it's clearly, I think as, as recently as the end of 2019, I think coworking probably was about 3% or so stocks. So yeah, that was, we were literally at the beginning edge, but I think more importantly,

00:26:15 it's, it's not how, you know coworking is, but how those deals are structured moving forward. So they help with the landlord, they help with the operator. And so it can be a win, win situation for both sides. And I think, um, this is what we're starting to see because of the financial stress that is out there today,

00:26:41 um, from the tenant to the landlord, to the investors, to the, you know, it just, it travels all the way through the system. Um, and so unfortunately it's the operators today that are suffering because if they signed a lease and this has been one of the biggest issues with coworking is, um, and, and this was really brought to light with we work is they sign a longterm lease for 10 years,

00:27:11 but then their members only sign short term leases. So to sign up for a coworking off outfit to sign a lease, that means they have to play that rent arbitrage game. And there's that, um, that spread between what they're paying and the cumulative amount that their members are paying plus all the other operating expenses for the facility, but also for the building.

00:27:39 And that's a huge undertaking considering that when you open your doors from day one, you're already starting below zero. And so, you know, being a developer and being in real estate, I never really understood that dynamic because like, when you hit grant, when you open those doors for business, it's like, it's like a retail. Uh, if I open a pizza store,

00:28:07 you know, there's that honeymoon period in the retail world that can last the first three to six months, but in coworking, it doesn't work that way because you have to leave that space. Yeah. So, you know, you're in that financial stress right from day one, unless you're, unless you're well capitalized, unless you're somebody like we work in industrious and convene where they were able to spend enormous amount of capital upfront on their Google ads so they could generate leads.

00:28:42 Oh, I love to see a new industrious or we work open in yes. When they would open in one of my markets, I'd open Facebook and be like, everybody's seeing ads about coworking and I'm not paying for it. Yeah, for sure. I mean, there's some independent operators I, you know, that have, that can capitalize and get through that opening period.

00:29:03 But I think that's one of the biggest reasons why businesses fail. Right. It's not that they won't eventually make it it's that they can't make it in the right timeframe. And the lease obligation is, is critical. Um, and I know you feel strongly. I know you met Casey, Casey's been on the podcast. He does everything he can to get lease terms that are very favorable upfront.

00:29:27 Of course you're paying for that somewhere. So tell me from your perspective, what are the, um, would you always advise that somebody pursue a management agreement or some sort of incentive with the landlord, or are there times when a lease is better? Well, global pandemic aside. I mean, Now when you compare a lease with a management model, the differences are dramatic.

00:30:05 It's a, um, from a comparison standpoint, risk reward. Yes. When, you know, when you sign that lease, the financial burden is on the tenant, and that is significant. Um, and depending on if that tenant has good representation, he's able to negotiate a great deal where you still have to spend, you have to have a capital investment for the improvements you have FFNE,

00:30:34 and even all the building expenses that one has to pay when they're an office tenant from the utilities, the cleaning, I mean, it just goes on and on. So as, as a coworking operator, I'm looking for ways to potentially, how can I reduce that risk? How can I reduce that exposure of front and still operate on an optimum level?

00:31:03 And at the end of the day, make money. So, you know, it took a while for the industry to come up with this management model, but that, that idea, and that concept has always been here. It's been here in, in, in apartments, ironically, that's how a apart apartments are managed. There's a management model in the apartment industry.

00:31:28 There's a management model and the hotel industry, we just hadn't seen it yet in the yeah. You know, and now that we're going through this pandemic, landlords who now have increased vacancies are now trying to understand what do we do? You know, we had a couple of leases and guess what happened? My tenants disappeared on me and you have to go through that process,

00:31:55 uh, trying to get that old rent back. And what happens if that tenant goes bankrupt, which we're seeing throughout the country tenants go bankrupt. You're not going to get that. You're not going to ever get that, um, that rent back It's all or nothing. Yeah. Right. Yeah. You know, plus the other thing between, between tenant and landlord in an office setting,

00:32:21 there's very little, if any engagement between the two parties and when it is, you're not shooting, shooting the shit, so to speak. Um, it's not really friendly. It's usually confrontational, like, um, where's my rent or the tenant calling up and saying, um, I have a, uh, a leak in my roof. Can I get it fixed?

00:32:44 You know, it's one of those things. So, um, when you go through the management model, it's totally different. Um, the financial burden, we talk about risk reward. It goes on the shoulders of the landlord. So the key for an operator is an and landlords asked this all the time is what's your skin in a game? You know,

00:33:08 um, we've seen like the last few years, I know that industrious was getting out of leases and, um, their take was, I'll put up a certain percentage of the, um, the capital improvements. Um, some groups like car workplaces, but stop a letter of credit for, um, uh, guarantees. You know, you can do capital contributions,

00:33:36 some but up capital contributions. There's so many different options for the operators to provide that skin in the game. And if they can provide that skin in the game, if you think about it, if you're a landlord and you're out there and you're contemplating this, you know, a lot of landlords forget this, but they usually hire a real estate brokers,

00:33:58 whether it's CVRE, Cushman, Wakefield, JLL, and they're all great companies, but there's a cost associated with those leases. Ironically, when we're generating leads for our members and coworking locations, we're not engaging any brokers, we're getting everything analytically. And, you know, it's the new error of getting leads and it's no different in the apartment world too.

00:34:27 It's, it's the same thing. We're generating leads, we're closing deals. Um, and we can do this remotely. We don't even need an office for this. It goes back to working from anywhere. And so, um, all of a sudden this starts this whole paradigm and what we're talking about makes so much sense in today's world. And it's all accelerating because the technology is now coming up to the surface where these operators today,

00:34:58 we, we sit down with landlords, we educate them, we show them how we can achieve, um, uh, we can exceed market rents on the income side. Um, you know, the one thing about an office lease when you, if you have an office lease your rent is set in stone from day one. You know what you're paying the luxury of having members on short term leases and coworking places.

00:35:27 If the market demand is so great, guess what you can do. You can increase, you can increase your membership fees. And the one thing about coworking that is so than the traditional lease is we have several platforms of revenue growth, which I think we're just in the, the cusp of this. It's not just the membership, but there's mail, there's virtual offices,

00:35:54 there's conference facilities. Um, coworking is not just about, um, open desks or private offices, um, meeting rooms. And when you take it, the next step, you can fully integrate a building and utilize those conference centers within the coworking space for the entire building. But when it's all said and done the landlords true, they become the beneficiary of all of these members because they control the space.

00:36:26 It's still their space. And, and that's the really important objective that all these landlords need to understand is they still control the space. And when they go to the lender and they say, Hey, I'm going to do this. The lender's going to look to them. Plus the plus the operator, if he can get any guarantees, anything else out there,

00:36:48 a capital contribution, all of a sudden it strengthens the deal better than just the traditional deal that they've been doing for the last several decades, from the owner's perspective. Yep. From the owner. Tell me since you're, you're kind of, you know, active in the market and talking to landlords, is there, you mentioned one of the times that we chatted that it's an incredible education process sometimes to help landlords understand the opportunity and just even simply the business model.

00:37:26 So it is the appetite for creative agreements growing in your perspective. So they may still not totally understand what the opportunity is, but are they open minded and more interested in having the conversation? Because I think historically, I mean, launch is one of the, an industrious, there are brands that are very focused on management agreements, 25 North. Mara's been on the podcast a few times,

00:37:53 but it feels like the allure to management agreements is certainly there from an operator perspective. And of course the risk reward, you know, depending on what your profile is for risk and reward, but that the sort of, um, supply for those has not been matched by the demand from operators. Do you think that will start to shift? So you and I have had this conversation before,

00:38:21 and I think I posed the question to you, and I asked you, you know, from my observations, I can go on CoStar and I can find the supply. I can see operators, but when I finally find a landlord, that's ready to delve into coworking via a management model where the operators, so that, that dilemma of matchmaking, the matchmaking,

00:38:50 I know, you know, that's one element, but, but I have to tell you the true dilemma and the true challenge in the management model. It's finding those landlords. It's not like you can go to CoStar. It's not on the internet, But the bad Jeff that says I management agreement friendly, knock on my door, Unique. Um, in a lot of cases,

00:39:17 it's not necessarily whether it's a single individual or a company or an institution, um, it's not how large they are. It's typically how that building was acquire. Meaning if somebody's over leveraged and there, they basically have to ask the lender, everything, um, it might be a real challenge and it might not be, and it might be an uphill challenge that will never get satisfied.

00:39:50 Whereas if a company acquires that asset, um, a hundred percent equity, all their capital through investors or private fund, there's so much more flexibility. They have that ability. And it doesn't matter whether it's an individual or a company, uh, that formation, um, really, that's not the determining factor. It's really how it's finance, because it will enable that landlord to provide that flexibility.

00:40:20 Right? Because right now the lenders are the kind of barrier to doing flexibility, because as we talked about earlier, the short term obligation on the side of the, uh, member, the banks don't love that. And they don't, even though that model exists in hotels and in other other industries, it's like they have a hard time making the leap.

00:40:45 Although I've been on some phone calls recently, folks saying, you know, they think that that will just go away in the next few years because everybody will be forced to adapt. And the lenders are going to have to go along with, with the new paradigm. Well, and I think, you know, supporting that notion with what is transpiring today with the pandemic,

00:41:11 it is accelerating this process so much faster. We thought that we knew that the management model and those agreements were just starting to come in light. And now all of a sudden they're being focused even more. And, and I, I truly believe the next level will be coworking is now marrying up to technology. And I think this technology and coworking, when you marry the two together will provide so much more strength to landlords.

00:41:46 It will almost, it's like the, how can they not do this? Because it's going to be, it's going to increase operating efficiencies for their buildings, for the assets, which basically means it's going to lower costs. It's going to increase margins. Um, and the true benefit of coworking, and we've not discussed, this is after several years and you get a members that start growing their platform and their own businesses.

00:42:18 And they want to stay in, they want to stay in that building because they love the building. They love the coworking, but they need to grow you there's organic growth. And when organic growth occurs within a building asset, it's, you know, it, it's, that's a, that's a great day for the landlord. It's a great day for the operator.

00:42:39 That's really when, uh, this management partnership, this is when it works. This is when it's at its best. It's working on all cylinders. Um, I've seen buildings where, uh, conference facilities are used for programming events for evening social gatherings. I mean, granted today, um, we can't do it because of the pandemic, but you can do it with thinner crowds.

00:43:07 Um, and it, it still, it still can be done. I mean, I'm seeing so many coworking places that are now utilizing their outdoor venues. Um, there aren't many, but where they are, they can clearly utilize them and try to bring people back in. So I, you know, to me, the future is very bright, but I think it's going to just take a lot of time to work its way through,

00:43:34 um, landlords. I think, you know, we've seen, um, some major companies starting to do it themselves. Um, Tishman Spire has done it. Also, the properties, uh, Heinz is doing their version. Ironically, they've, they've engaged, um, industrious or the first two locations. So I think we're starting to see this emerge.

00:43:58 We've seen companies like CVRE with Ana, um, you know, doing their own version. I think everybody's kind of testing it. I think they're, they're testing not only, um, the facility, but how to structure these deals. Should it be a management? Should it be a partnership because the one thing about the coworking and, and we didn't touch on this yet,

00:44:21 but when you achieve market rents and you're making so much money for that landlord, there is a way for the operator to benefit as well with some profit sharing on the backend. And I think that's really, really important. It's important for the operator. It, you know, the deal upfront with the landlord, it's always about protecting his downside. So he always wants a skin in the game,

00:44:50 but when you finally achieve your numbers and you finally satisfy those objectives, the operators should be rewarded Well, and this is the incentive alignment, and this is no, you know, people always want to know what a management agreement looks like. And, you know, there's, there's no right answer for that because it depends on what's important to each party and trying to find a match there,

00:45:15 but to your point, the landlord's paying for the improvement, right? So they're looking at worst case, you know, how do I get that back? How do I cover that? And then, you know, get into sort of profitability on the project. And that's what the operator is trying to avoid is that outlay, because the outlay comes before any shot at revenue,

00:45:38 right? So the timing piece is important, but then the incentives need to be aligned for, okay. Once the business is up and running, what keeps that operator, you know, up at night, thinking about the business and how to make it better, add the profit share in there. Yeah. I mean, do you want to walk through kind of,

00:45:57 what are the typical sort of like check boxes that go into a deal? What are what's typically up for negotiation? Um, well, as we know, as, as I would say, everything is up because every lender, you know, every landlord has their, their issues. Right. Um, great. Like they've got their own stuff. This is the challenge with negotiation,

00:46:23 right? You don't know like, well, what's their financial situation, how much access to capital do they have? What, like one is going to have their own situation. They are. But the good news is with technology and the resources we have with the internet today. Um, we can find out what a landlord's financial situation. Um, so that gives the operator a clear leg up.

00:46:52 Um, and when we get into the capital investment, which is clearly the number one investment, um, there's benefits to the landlord, not necessarily to the operator because they're all depreciable, so he can depreciate them. And so there is, there is benefits to the landlord, as we all know. The other thing is if it's designed properly, even if something happened because the landlord still controls the space,

00:47:20 let's say the landlord gets a, um, uh, a full lease opportunity. Um, and once they get rid of the, um, operator, there's a potential for that too. But more importantly, that space more than likely it's going to be, um, designed in a manner that it could be used in a future for a future tenant. And that's really,

00:47:44 really important. Um, um, getting back to starting off with a deal, um, one might ask, so what's this, what's this going to cost the landlord? Well, depending on the state of the floor, let's say the floor size is a landlord has a vacant space of 12,000 square feet, a prior tenant left. Uh, but there's,

00:48:06 demising walls and there's offices and there's some, and there's some work already has already been done. And it's still in place. If that operator can utilize some of that and retrofit and renovate it, it's, it's possible that they might only need to spend $50 a square foot. Whereas if it's a cold dark shell and nothing is in there and it's just completely vacant it,

00:48:33 it might run them 80, 90, a hundred dollars depending on the quality of finishes. So yes, it can be expensive, but I have to tell you most landlords, even if they were doing a lease transaction, they are prepared to make that investment. They might not tell you that, but they are prepared to make that investment because if I'm signing a lease today,

00:48:59 not only am I going to require the landlord to provide a turnkey space, I'm also going to ask them for free rent, especially if I'm a coworking operator, I better get at least one year free rent. So you're front loading, the whole thing to kind of protect yourself on the, on the leasing side. This is why we work with brokers.

00:49:21 By the way, I run into a lot of folks. I mean, this is the first one of the first things we get into with my coworking startup school program is you have to have the right people on your team, because if you don't have that runway, what are you going to do? Yup, yup. For so many years, I worked with retail and restaurant clients who had no idea how to negotiate these leases were they were behind the eight ball from day one because they didn't negotiate properly.

00:49:55 Even though the landlord was willing to do it. They never asked the question And the landlord's not going to offer. Right. Yeah. Yeah. So yes. Get the professionals involved, especially those that know the model really well. And, um, so okay. Up for discussion up, everything's up for negotiation. Tell me what I'm missing. Capital investment,

00:50:19 the build out, um, funding, operations, FFNE, investment furniture, fixtures. Um, there's usually usually a fixed monthly management fee in there and then potentially some profit sharing, um, around some upside. What else is on the table that I'm missing? So, um, you're not missing much, but second to the capital investment, um, which is always up for discussion is the FFA.

00:50:47 And so the FFNE can cost in a neighborhood of anywhere from 10 to 15, 10 to $16 a square foot. I usually say 25. Yep. Contract furniture all in, you know, that's like toaster in the kitchen. Yeah. Yep. Yep. I mean it, you know, and, and again, it's, it's about the quality think in today's market.

00:51:12 I think all desks need to be able to convert from sitting to standing. I think it, to me, it's like, it's not even an option anymore. Um, you know, you have to have ergonomic chairs. I mean, you really have to do it, you have to do it right. And so with that said, you know, you can,

00:51:34 uh, buy it upfront. Uh, sometimes the landlord will insist the, um, the operator to absorb those costs. Yeah. And that would be an example of some skin in the game. Like you come to the, you do this. Right, right. And also sometimes the landlords don't have sort of a budget for that. Right. Like that's not something they usually finance,

00:51:56 they finance construction, but not fixtures in furniture. I mean, you know, it's very similar in the, in the restaurant world, you've financed your FFNE over five years. Um, you can do the same thing here in the coworking world with your FFNE and finance it, whether it's negotiate it where one party absorbs it or it stays in on the operating budget and it's,

00:52:24 and it's taken out, it's really a foreign negotiation. Um, but over a five year period, it's a lot less, you don't have to, um, put out any money up front. So, you know, if you think about it from an operator standpoint, that's great to finance it in today's world, that the, you know, the interest rate that you're paying on that is nominal.

00:52:47 Um, you know, it's a great time to be able to do that. So, you know, then it's just a question of, you know, when you look at all these various aspects, what makes sense, what works for the landlord? What works for the operator? Uh, the operators looking at his revenue charts and how he's going to make money and he clearly need,

00:53:10 you know, it's, uh, one thing that I always say to operators is make sure your financial projections are conservative because especially, you know, we look at here, we are today to get member that's willing and able and ready to pay. You want to get them in there. You're going to have to give him a carrot. You're going to have to throw him something,

00:53:35 uh, maybe two months free something to get him in there, uh, get them situated because you know that once you get them in the door, you will satisfy them because you're just, you're going to provide him with the hospitality, um, the culture, the community, um, you let your, your, let your own staff, um, work and do their magic.

00:53:59 Absolutely. So that brings up a question for me. What do you think is the risk just in general of a landlord doing an operating agreement and then saying, Oh, it looks easy. Maybe I'll just take it over. Um, it has strong possibilities how lever the operator would provide for some provisions within the management agreement to not to have a termination fee.

00:54:31 And that's, that's really, really critical, you know, as a developer, everyone's looking at the going in costs and revenue side, right? Just like an operator you need to be, you need to think from day one, where do I want to be in five years? Where do I want to be in 10 years, there has to be an exit strategy as it end.

00:54:53 Yes. Or what if we want to break up? What if the building sold, what, this is the thing about the operating agreements that I think gets challenging is you have to think of all the, what ifs to make sure there's some right. And each party is comfortable with the what ifs. Yep. Well, you know, let, let's step back and look at how does the operator make his money on a management agreement as compared to the traditional Linux?

00:55:20 And so on the management side, you you've taken this conservative approach. Whereas now the financial stress is not on you. It's on the landlord. And the landlord saying, boy, I don't like this game at all. Um, I need you mr. Operator to put some skin in the game. So you negotiate whatever that is, whether it's a guarantee,

00:55:45 um, whether it's paying for capital improvements or the FFNE, but there's something there's something there, but nevertheless, you're more than likely not having to come out of pocket right away. Um, you know that, um, um, you will have to do it sometime in the near future. So with that said, then it's, how do I make my revenue?

00:56:08 Well, if you're not taking that risk and you're not playing that rent arbitrage game, you're basically getting a management fee. So one says, so what is that management fee? Well, like everything else, it is negotiable. Um, in some cases it could be a flat fee. Um, some landlords would say, well, why should I pay you X if you haven't had it fully leased yet.

00:56:36 So then you start backing off of that and you say, okay, I'll take, and I'm just going to throw a number out there. I'll take 10% of the collected monthly rent. And then, then you know, the landlord, um, that to him, that sounds great. But then the landlord has to remember you better cap it or else the operator's going to be making too much money.

00:57:00 So there's that, that give and take play where it starts getting favorable to both sides. So usually that management fee can potentially go up as income is collected and therefore, and at some point it gets capped. But as a bonus, there should be a profit sharing percentage. And again, that's negotiated, it can be 50 50, um, depending on the size of the facility and the risk factors involved,

00:57:33 it could be more, it could be less, or, you know, it could be a balance out of the management fee because the landlord's clearly looking at how much the management company is making. He's looking at how much the operator's making and what is his benefit to the building and how much value are they bringing? Because clearly if, if a building is a class B building,

00:57:57 but in an a market, you can really, you know, look for that upside. Look for the opportunity. Um, a lot of the national brand guys went to the eight locations in a markets and downtown, and, you know, you could be in Washington DC or Pedesta Maryland, and they're paying $50, a square foot, $80 a square foot.

00:58:23 I mean, in New York, those numbers, you just have to add a digit. Um, and then you start trying you then as an operator, you try to figure out how is this going to work? You know? And so, you know, we see, we see it unraveling today. We see some bankruptcy filings with some of the region Regis,

00:58:42 um, entities. Um, I think, um, you know, everyone talks about the, we work debacle, but they've been, um, they're still operating there. They've been negotiating out leases and locations, which has been phenomenal. I think that is a true, um, it, it speaks volumes for the coworking industry, um, more so than we even realized today because,

00:59:09 you know, it's not like we have to deal with another Lehmann brothers because we worked, we know occupy so much office space. Um, and throughout the world, Largest commercial office occupier in what New York, San Francisco, I think they were London. Hong Kong. Yeah. Yeah. Yup. So, you know, while everyone was enamored with the, with the concept,

00:59:37 I think landlords and operators and everyone are starting to realize more so today than every ever before the value of coworking and working from anywhere. And you know what, we're starting to hear more as the hub and spoke model, especially in the suburbs, uh, to have suburban locations where it's convenient to where staff and workers and clients live, all of a sudden makes the most sense more so than ever before.

01:00:08 So that way you can reduce your expenses downtown, you can still maintain an office, but you have one in the suburbs and you can increase people's quality of life. I mean, we, you know, we, we can have it every way, you know, it's just, again, it's really about, and as you and I both know in the coworking world,

01:00:31 it's, it's about the community and it's, you know, that's the value that unfortunately we can't put a number on it, but for landlords when, when they've experienced it and they see it. And I think that's, what's, I think that's, what's really attracted them, you know, because you can place a value on it. And that's part of the problem with lenders and underwriters is They don't yeah.

01:00:58 You don't recognize it or can't right. Quantitatively value it. That makes complete sense. Look. Yep. I truly believe we are going to see this emergence of fully vertically integration of buildings, where we have apartments and opposites together, you know, and we're going to where you are going to see this more and more, because now over the last several years,

01:01:25 we've seen the oversupply of class say apartments throughout the country. I mean, New York city classic example of the pandemic is there's 15,000 vacant buildings. Look at our vacant apartment units, look in San Francisco today. I mean, people are For the first time I had a friend who was looking for an apartment and she got a month or two of free rent,

01:01:50 and I almost fell over. I mean, because before the pandemic, you were taking a room in somebody's living room because there's no space and it's so expensive. And now we've flipped over to, you got a couple of months free rent and move into the space. Yep. Yeah, for sure. I just see it. I see a lot of opportunity.

01:02:10 I see this evolution occurring where we S we start bringing in the mixed uses. I think, you know, seeing this wish, the shopping malls that are just dying, um, some, um, coworking outfits that have looked at, um, retail spaces to try to integrate, um, where we have second floor retail turning into coworking spaces. I mean,

01:02:38 it makes so much sense because it's a captive market and it also helps the retailers and the restaurants and to, you know, wherever there's mixed use projects to integrate, um, the homework and play environment. It's, it's ideal. It's critical. And I think that's going to explain, expand the platform either even further. Mike, I think we might wrap with that,

01:03:05 and I appreciate all of your kind of detail and experience. You have such a unique perspective on the market, given your varied real estate background and your very specific coworking and management agreement background, thank you for sharing your perspective and your experience. And, um, I know you're out there kind of active in the market. And so I look forward to ongoing conversations that we can share.

01:03:31 We'd love to share again on the podcast, um, as things evolve. Thank you, Jamie. And I appreciate the opportunity, Mike, so real quick, before we go, though, um, if people want to chat with you, you've got the shingle out, you do management agreements. Tell me like, who, who do you work with today?

01:03:48 And how can they find you? Well, I'm working with numerous landlords mainly to promote the management agreement model. And you know, that, that takes me actually throughout the country. So I'm working with them. I work with other, um, providers that I know in the market, um, and really, you know, I'm on LinkedIn. Um,

01:04:13 I'm very, I'm very active on that. No, I think that the little bit, how you and I sort of in quotes, got to know each other with LinkedIn combos, and then we we've graduated to zoom. I think the community on LinkedIn, it's, uh, it's very strong. It's very vocal. It's very active and we share a lot and we actually collaborate.

01:04:36 Um, first we collaborate as individuals and strangers. And before, you know, we start doing podcasts together Exactly near we are. So is LinkedIn the best place for folks to find you if they want to chat? Yeah. Perfect. Good. Good. So feel free to reach out. I will put Mike's LinkedIn note, a link in the show notes so that you can easily find him.

01:04:59 And I know Mike's happy to chat and see if he can help, Mike. Thanks again. And we'll catch up again soon. Thank you.

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