How do management agreements work and why are they becoming more common?

The coworking industry and the commercial real estate industry were hit particularly hard in 2020. Across the country, there have been hundreds of space closures, and vacancy rates for commercial office buildings reached 17% at year-end. It’s still an open question as to when employees will return to work at their traditional offices and when members will return to coworking spaces in larger numbers. However, we can expect the demand for flexible workspace to increase as companies seek to reduce overhead costs and employees demand greater location flexibility.

Organizations that plan to adopt long-term flexible and remote work policies are evaluating the need to retain all of the leased space and building assets that are currently part of their portfolios. As the workforce trends toward more flexible workspace and fewer days at a fixed location, long-term leases have quickly become less favorable and less realistic for employers.

At a time of increased vacancies for traditionally-leased offices and decreased member capacity and revenue opportunities for coworking spaces, there’s growing adoption of a different operating model that benefits both landlords and flex spaces. Management agreements, also called operating agreements, are gaining popularity because they can help provide greater resiliency for building owners and coworking space owners.

What is a management agreement for coworking spaces and landlords?

In its simplest form, a management agreement is a partnership between a landlord and a coworking or flex space operator. The property owner is incentivized to fill vacant space, and the space operator is seeking reduced risk of starting or managing a coworking space. In a management or operating agreement, both parties agree to share revenue generated from the coworking space.

How is a management agreement different from a traditional lease?

The coworking business model requires upfront capital to get started. It can also require additional capital if you’re making modifications to a space that’s already operating, such as building out more private offices in favor of fewer open coworking seats. Once a space is up and running or when a space is operating at full capacity, expenses remain relatively flat. Other than lease payments and employee expenses, most costs at this point are variable and include consumables such as paper, printer ink, coffee, snacks and cleaning supplies. As a space operator, the goal is to sell and retain enough memberships, plus earn revenue from events and amenities, to cover the costs of all expenses. The biggest expense to cover is typically a lease payment.

Under a management agreement, rather than accept a fixed lease payment each month, the landlord takes a percentage of revenue or profit the coworking space generates. A management agreement is beneficial because it eliminates or reduces lease expense from the coworking business model.

COVID-19 has put limitations on member capacity, events and amenities and significantly decreased revenue opportunities at coworking spaces. These conditions make it difficult for operators with large lease obligations to cover expenses and has forced many to permanently close their doors. When a coworking space closes, the landlord loses future revenue from the coworking tenant.

However, a management agreement allows total monthly expenses to be much lower for the coworking or flex space operator. This shift supports more resilience for both the landlord and the coworking space, as both parties work together to increase the chances of long-term success and profitability for the coworking business.

What are the major considerations for setting up a management agreement?

There are numerous pros to management agreements, but most notably is the ability to reduce risk to the coworking business by eliminating or reducing the lease expense. Another major benefit is that a management agreement allows for faster cash flow generation, and that cash can be reinvested back into the business or shared between the landlord and operator.

One challenge to consider with management agreements is that coworking operators should be prepared to educate both landlords and financiers on how the arrangement works and what it will entail. There are also three major considerations for operating agreements that may not fit with all business plans or management styles:

• In order to compensate the landlord for taking more downside risk, the space operator shares a portion of monthly revenue. This means the ongoing earning potential for the space operator is lower, and likely 10-15% less than with a traditional lease.
• Under a management agreement, the landlord has a direct financial interest in the success of the coworking space. They’ll expect to be more involved in the business than they would with a traditional tenant, so it’s important to consider how to manage the relationship in a manner that works for both parties.
  
• Not every landlord is in a position to take on a management agreement, particularly if the landlord is financially extended with other vacant properties. Vacancy rates are currently much higher than normal, and if the landlord is not in a strong cash position, he or she may be unable or unwilling to support additional risk.

Talking to landlords about management agreements

If you’re a coworking or flex operator approaching discussions with your current landlord or a potential landlord, it’s important to remember that they’re business owners just like you. They’re not invested in a coworking space, they’re invested in a commercial property that needs to produce a return. To successfully negotiate a management agreement, you’ll need to clearly articulate the business model and demonstrate why a management agreement is an advantageous option for both parties. Come prepared with a few different scenarios for the landlord. Propose at least two calculations: a straight percentage revenue share and a revenue share with a specific floor and ceiling. This increases the chances of coming to an agreement that works for both parties.

Prove your knowledge, experience and competence as an operator

Property management and coworking may be related, but they are two very different specialties. Coworking is heavily geared toward hospitality and requires a lot more work, consistency and engagement than many landlords may be accustomed to or interested in providing. If you are a professional coworking or flex space operator, this is a huge benefit for you. Work with your landlord to explain the value you add as an operator and be clear about the responsibilities you’ll carry. If you have prior experience, have already built a reputable brand or are approaching your landlord with an existing base of members, communicate these points clearly to your landlord. He or she wants assurance that you are a professional who will establish a successful business and reliably pass along revenue each month.

Demonstrate you have skin in the game

In a traditional lease, the business owner is often required to provide first and last month’s rent, a deposit, personal guarantees and tenant improvements. Management agreements may not require all of these components, but landlords will want to see some upfront investment or evidence of other differentiators the operator brings to the table. Some examples include:

• The operator has already established a desirable brand
• The operator has already established a predictable business model that can be plugged into the landlord’s building
• The operator will cover expenses for fixtures, furniture and equipment (FF&E)

Management agreements are gaining popularity because of their ability to create more resilient coworking businesses and reduce landlord vacancies. If you’re a space operator who wants to propose a management agreement for a new or existing coworking space, be sure to take into consideration all of the items listed above. Keep your eyes and ears open for potential vacancies, and seek a deal that’s a win-win for both you and the landlord.

Solutions for coworking spaces and landlords

Proximity is a workspace management platform that helps coworking spaces and landlords with automation for memberships, check-ins, reservations, conference rooms, door access and Wi-Fi access. View Proximity features to learn more about streamlined management for your flexible space.