Intro to Management Agreements for Coworking Space Operators (Part 1)
Management agreements are a hot topic in coworking and workspace industry circles. Commercial real estate people want to hand operational duties off to experienced workspace operators, landlords want to find coworking brands to turn their property into a flexspace, and coworking space operators are looking for opportunities to grow their brand and footprint.
In this informal conversation, Barbara Sprenger, CEO of Satellite Deskworks and Satellite Workplaces, and Robbin Orbison, CEO of CapeSpace share their insights, pro tips and must-do’s when getting into a management agreement.
What are the primary benefits of management agreements for coworking space operators and brands?
Robbin Orbison: The big motivator is that it reduces risk for both sides. For an operator, it removes the burden of coming up with all, or most, of the capital costs. It costs thousands, if not millions, of dollars to open a new center, depending on size and amenities.
Barbara Sprenger: There are also management agreements where you share some of the startup costs. And, of course, as a property owner, working with an experienced operator reduces your risk dramatically and gives you a much stronger likelihood of success.
RO: That is true. Every one of these things will be negotiated, so there can be all kinds of different terms. If you’re doing a pure management agreement, where the landlord is basically the owner of the business, the operator is paid a management fee, which can come in the form of a flat fee, a revenue share, or both. You’re being paid for management expertise and for branding.
I don’t know if somebody could do a management agreement if they were opening their first center, because, to a landlord, you are somebody who has experience and has already created a recognizable brand. So it’s not really for first-timers.
BS: Absolutely. Unless you have a very good friend who really, really trusts you! The downside of management agreements, though, is that you’re not building up a center that is saleable. When it’s a management agreement, what you have to sell is your brand. You don’t have centers to sell.
RO: What you’d be selling is your brand and your contracts, so it’s important to make sure that those contracts are assignable.
Another benefit comes from partnering with a large property owner in your area. The landlord of my second location has a very big center here. It’s what would be called a lifestyle center, with shops, restaurants, services, retail, residential—everything is here. And they’re a pretty big gorilla in this part of the region.
It’s really nice, sometimes, to have a partner who can marshall a lot of resources in the region. If I’m having trouble with the post office or Comcast or whoever, a call from the property owner is a lot different than getting a call from me. So, there’s a benefit to partnering with a large property owner who may be able to move needles more easily than we can.
What has your experience with management agreements been? Give us the good, the bad and the ugly.
RO: My experience has been great, for the most part. They’re just really good people to work with, the kind of partner you want.
I will say, one of the downsides is having less control over things like construction. This particular landlord is big enough that they have their own in-house construction people. And it’s very different dealing with the construction team if they’re owned by the people writing the checks, as opposed to you writing the check. It’s a very different way to interact with them. So that’s a downside. But, like I said, I’ve been very lucky. My experience has been pretty positive in every direction.
I think maybe another downside is not always knowing exactly what the motivation of the partner is. If it’s a big developer, there’s a head of development somewhere who is setting the vision and may have told some of his leasing people to go out and find a coworking space. But you don’t really have the benefit of the full understanding of how they’re looking at what coworking is. Are they thinking this is an amenity? Are they thinking that this thing needs to be performing at the same rate as other retail leases in the area it’s in? You have to learn how to navigate the structure of the partner’s organization. Making sure you feel comfortable and that your interests stay aligned can be challenging.
BS: That’s a really good point. I have had mixed experiences. And a lot of that comes down to setting expectations from the very beginning. We had one management agreement we did where the landlord just didn’t maintain the place very well, and I felt that that was going to affect our reputation. We finally ended the relationship when the ceiling let loose on a CPA’s head in the middle of tax season!
With the agreements you have, Robbin, you’re really managing the operations completely—you’re it. We’ve had agreements where somebody else had a lot of say, where we were in more of an advisory/consultant arrangement. Those can become cumbersome because you have a discussion and negotiation at each step of the way, rather than just doing what you believe to be best. When you can just do it, it’s much easier and faster.
RO: Clear division of responsibilities is so important. It’s really important to think through and make sure it’s clear in your contract who’s responsible for what, and then to build into that contract some kind of mechanism for when you need a decision on something.
Here, I don’t need them to do anything unless I’m going over budget. We basically built in the mechanism that said when we need to go over budget, we submit a request. If they don’t respond within a certain amount of time, we deem that request approved so that we’re not stuck in this pattern of always waiting for answers.
How would you advise space operators considering management agreements?
RO: I would advise them to talk to other operators who’ve done it so that they can get the benefit of our experience. I would say get a good lawyer. Here’s the thing with these contracts: Some people like to just hire lawyers to do documents and they don’t think it’s important to understand what’s in the documents. However, it’s really important in this case to know what’s in your documents—it is really important to know exactly what you have agreed to. You want a good lawyer but you also want to make sure you’ve read, understood and had input into that document before you sign it.
BS: To add to that, you want to be sure that all your interests are aligned—that there is never a case where one thing works for one of you and something different works for the other.
If you’re dealing with a real estate company, everybody’s trying to mitigate risk. You’re trying to mitigate risk, they’re trying to mitigate risk, you’re trying to share that risk. One of the advantages of a flexible workspace model is that it’s basically an arbitrage operation. You’re taking a big chunk of space, and you’re chopping it into little pieces, so no one client or member accounts for too much of your revenue. Real estate companies would like to have the advantage of that — at least to some degree — but it’s not what they know. They are used to long leases with fewer people, minimal ongoing interaction, and the protection of 30-100 page contracts and good lawyers. With flex space and management agreements they get to have the advantage of your expertise.
One of the structures we’ve done is where you pay outside vendors and labor first—out of the first dollars of revenue. Next money that comes in, we split 80/20, where the landlord gets 80% until they have received what is a low rent, but one that covers them. Then you split 50/50 until they get the equivalent of a good rent that they’re happy with. After that, you split the balance 80/20 in the other direction so they are making more than they would with a standard lease.
RO: That’s a great structure. I just want to add that you would take your management fee out before the first split. Your base fee is part of outside vendors and labor, then you start the waterfall.
BS: That’s a much better way to try to start the negotiation. The other thing I’d add into the management agreements is, you want to define what happens if they’re not living up to their part of the agreement, or they feel that you aren’t. How do you get out of it? Always have a way to get out, the termination clause, from the beginning.
RO: We’re doing everything in three year terms. If you’re not happy, or we’re not happy, or anybody’s not happy, you can just walk away. But you want to make sure that, if you walk away, you take everything with you that has value to you.
Make sure in that agreement that the landlord has no right to continue to use your name, your website, your logo, your marketing materials, your software, and your membership plan structures, even your color schemes. All of that is part of your brand.
Make sure that if the landlord says they’re not happy with you and they want to bring in another operator, that operator is going to have to basically start from scratch to build a brand in that location. You don’t want to make it easy for them to do it without you!
At Satellite Deskworks, we’re committed to supporting and growing a robust coworking and flexspace community. If you have workspace management questions, request a free 15-minute consultation at satellitedeskworks.com/consult. Our experienced and talented team has been running coworking spaces for over a decade and we’re eager to share our insights. We’re here to help.