The two locations that WeWork plans to open in Detroit early next year will look similar to the almost 100 locations that it already operates. Like offices in New York or San Francisco, the Detroit spaces will have glass walls separating tiny offices that tenants can rent on a month-to-month basis, communal coffee, and WeWork’s “Do What You Love” branding–but the business side will be structured differently.
WeWork typically signs traditional leases for its real estate, which it then subleases to its tenants. In Detroit, the company’s real estate partner, Bedrock, has instead structured WeWork’s lease to include a profit-sharing component. “It’s almost a percentage rent deal,” says Bedrock CEO Jim Ketai, “so the better they do, the better we do.” WeWork recently made a similar deal in India, but this is the first time it has made such an agreement in the United States.
The deal structure addresses one of the biggest criticisms of WeWork’s business model: the company signs five- or ten-year leases, which means that if real estate prices fall, it will be locked into relatively expensive leases while its tenants, who pay by the month, expect lower prices.
Miguel McKelvey, WeWork’s cofounder, says that under the new agreement in Detroit, “we would have a little more flexibility when it comes to pricing, whereas in a normal lease agreement you’d have a specific floor in how you could respond to the needs to change pricing.” Bedrock and WeWork will share the cost of remodeling the space.
WeWork projected in 2014 funding documents that it would create 376 locations serving 260,000 members by 2018. In the same document, it outlined an “asset light” model in which landlords provide about 75% of the capital to remodel a space and WeWork signs a longer-than-usual lease, making up for the upfront remodeling expenses with a profit-sharing agreement. WeWork said the deal structure in Detroit is an evolution of this “asset light” model.
In April, the company reduced its profit forecast by 78%, citing delayed building openings and landlords who covered less of its construction costs than expected. In June, WeWork cut about 7% of its staff.
“What WeWork creates is the ability for all different sized tenants to enter the market and get into downtown Detroit, where the tech scene is booming right now,” says Bedrock’s Ketai. He partnered with WeWork rather than running a similar business himself, he says, because he believed young companies would benefit from WeWork’s network of entrepreneurs in other cities and that WeWork’s scale would help it run the space more efficiently. “They know how to service tenants better than I do,” he said.
McKelvey says that the agreement in Detroit may serve as a model for deals elsewhere in the United States. “Obviously getting the first couple done opens the door to a few more,” he says.