The flexible or co-working office space has captivated the commercial real estate industry as companies can lease space on more tenant-friendly terms. Gone are the days of businesses being forced into long-term deals for space they don’t necessarily need. Instead, they lease what they need for as long as they need it, and can extend both amount of time and space they pay for if necessary.
The co-working industry has not only been beneficial to tenants, but the companies that lease these flexible office spaces. No company has been more successful than WeWork, which operates more than 550 office locations in 97 cities around the world. Since the company began in 2010, its formula has been simple—acquire space and lease it to companies that want some flexibility in their terms.
While that formula has been simple for almost a decade, there appears to be a wrench in the works. The Wall Street Journal recently reported that WeWork co-founder and Chief Executive Officer Adam Neumann has made millions of dollars by leasing properties in which he has an ownership stake to WeWork—the company in which he also has an ownership stake. The situation means he’s essentially watching his own company pay him rent.
The Wall Street Journal brought the issue to light when International Business Machines Corp. employees complained about constant elevator problems in the Manhattan building location they work from, which WeWork manages. It turned out one of the landlords was Neumann, who leased the building to WeWork after he purchased it, according to people familiar with the situation.
According to The Wall Street Journal, numerous WeWork investors said they find the idea of Neumann earning millions by leasing properties he owns back to WeWork concerning due to the potential conflict of interest as he could benefit on rents or other terms with the company. However, a WeWork spokesman said the board or an independent committee reviews and approves any related-party deals and discloses such arrangements to investors.
Prior to gaining control of WeWork, Neumann tried to purchase up to 5% of a Chicago building in which the company was trying to negotiate a lease in 2013. The WeWork board expressed concerns about the deal, pointing to a potential conflict of interest and bought the 5% stake instead, according to The Wall Street Journal’s reporting.
The following year, Neumann gained control of WeWork. After an investment round in 2014, Neumann was granted Class B shares that gave him 10 votes per share and he currently has more than 65% of the overall share vote, based on WeWork corporate filings. Since that time, the chief executive has bought several properties through investor groups and leased them to WeWork.
WeWork has disclosed it has leases with several properties that Neumann has partial ownership in and has paid more than $12 million in rent to buildings that WeWork officers partially own between 2016 and 2017. Over the life of those leases, WeWork will pay more than $100 million in rent.
Corporate governance experts have noted that Neumann’s ownership of buildings that WeWork leases is unusual for a large corporation, according to The Wall Street Journal. Typically, large companies don’t allow executives to make similar arrangements because companies risk paying too much in rent than they normally might.
“In a public company, that would be considered highly controversial,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware told The Wall Street Journal. “Usually human beings tend to think of themselves over the company itself when they’re on the other side of the transaction.”