There are now 10,000 coworking spaces around the world and landlords and building owners are taking an interest in the industry. With this, there are huge opportunities for operators with the right experience to enter into landlord partnerships. This strategy is how WeWork have built their empire, they call it an “asset light” approach. In this post, we take a short look at the pros & cons for all concerned and also how an operator might approach a landlord.
The format of these arrangements can vary but typically the parties will enter a management agreement or joint venture whereby profits of the venture are split between operator and property owner.
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Advantages for the Operator:-
- The capital required to launch the space can be shared.
- With the absence of residual rental obligations or personal guarantees, the impact of a failed operation is minimized.
- With less risk, the operator will find it easier to obtain finance which can be diverted into better fit out and enhanced operations.
Advantages for The Owner:-
- If the operation is a success, the owner will see a much higher return than a market rent.
- Avoiding the renal and commercial lease process means that the business can get off the ground faster, revenues are accelerated and a cash flow positive position coming sooner rather than later.
- The Owner can build in flexibility which will allow for a change to the property at short notice should an alternative opportunity arise.
- There can be tax benefits in terms of the tax treatment of the revenue from the venture.
- For larger landlords successful relationships can grow to other locations.
- As well as having their buildings occupied, Landlords can boost the profile for their location and leverage this to find other tenants.
Approaching a Landlord
Step 1: Find an outstanding location that is on the market. Even better, find a location that is off-market and find out who owns it. If the owner is not readily apparent, then you can usually find out through local land registry searches
Step 2: Make it as easy as possible for the landlord to understand your proposal. A real estate agent may not be expecting this type of offer but they are obliged to pass on any offers to their client so get your paperwork ready. Prepare a simple yet comprehensive spreadsheet setting out set-up costs along with cash flow and profit and loss projections for the first 3 years. If you want a template spreadsheet or template management agreement these guys can help.
If you’ve chosen the right location and your numbers stack up then you should be able to offer a landlord between 25% and 50% of your profits and still come out on top. The benefits for you…no lease commitment, minimum start up risk and little or no capital expenditure. From the owners view point, the right arrangement can see him doubling his return in comparison to a market rent.
Step 3: Identify the capital expenditure that’s going to be required to fit out the space. Based on the returns that you’re showing, you’ll be asking the landlord to pay for all or most of this or if that’s too much to ask, you can mix this with reduced rent or payment free periods. Depending on the condition of the space, you may need an architect or a quantity surveyor to get the numbers right. As well as the fit out and furnishings, pay particular attention to the comms infrastructure (cabling conduits, raised floors, suspended ceilings, power sockets) and overall internal condition (internal walls, lighting, air conditioning, windows and doors etc).
Step 4: Do your best to set up a meeting with the Landlord to go through your proposal. At the meeting, make sure that the Landlord understands that this is a long term play. The landlord might be turned off by being asked to pay for the fit out so counter this with detail of the long term gains and also point out her or she will be improving their building so if things don’t work out, their investment will still see returns.
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