In 2017, workspace company WeWork outbid landlord Brookfield Property Partners LP to purchase the Lord & Taylor department store building in New York City for $850 million. WeWork, a firm that leases buildings and subleases office space to other businesses, did not put up the money however. Rather, it co-managed a real estate fund with Rhone Group, a private equity firm and early WeWork shareholder, reports The Wall Street Journal.
The fund’s goal is to generate tens of billions of dollars from investors in the years ahead to purchase buildings where WeWork would reside. This set-up would essentially make WeWork its own landlord with other investors’ capital. An arrangement of this kind raises questions about how WeWork would make deals with itself as a tenant and co-manage the real estate fund.
“There’s huge potential for conflicts,” Nori Lietz, a lecturer at Harvard Business School and longtime real estate fund investor adviser told The Wall Street Journal. “They’re using other people’s money, and they’re on both sides of the transaction at the end of day.”
However, WeWork claims it has taken measures to avoid conflicts from letting investors know up front about its connections and in some cases having outside groups negotiate certain issues.
The company sells investors on the idea that its dual role as tenant and landlord could yield better returns than conventional real estate funds. Its rational is when the fund buys a building WeWork would in effect lease to itself, the building’s value will be higher because there’s already a tenant in place.
WeWork is currently under pressure to secure more real estate because it promised to expand quickly. It created WeWork Property investors last year, which stated it raised $400 million has closed deals for at least properties. The company is now looking for $767 million in debt to finance the Lord & Taylor building purchase and renovations. The purchase is expected to be complete by the fall, according to The Wall Street Journal. WeWork intends to turn the building into its headquarters and lease part of the space to customers.
The fund, which WeWork and Rhone executives run, sought to raise money from Citigroup, Inc.’s wealthy clients. Real estate experts believe WeWork’s involvement could push decisions about things like lease rates in the company’s favor or take more chances than a normal landlord would to help WeWork.
“You’re going to push profits to the side (where) you have the greatest financial interest,” University of Chicago business school professor Joseph Pagliari said in regards to conflicts.
Airbnb, Inc. considered a concept similar to WeWork’s last year where the company would create a real estate investment trust (REIT) that would have rented its properties on Airbnb. The difference being Airbnb’s plan called for an independent board THAT would manage the fund in order to limit potential conflicts. However the company is not pursuing the fund plan, according to a company spokesperson.