2/16/2020 spaces like WeWork, Coalition carry risks for members - Business Journal

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From the Boston Business Journal: https://www.bizjournals.com/boston/news/2020/02/14/sudden-closure-of-boston-coworking-space.html

COVER STORY Sudden closure of Boston coworking space highlights risks of the industry

Feb 14, 2020, 5:35am EST Updated: Feb 14, 2020, 8:55am EST

The abrupt closure last month of a small coworking space in Chinatown — in which a uniformed officer appeared one Thursday morning with an eviction notice for all members of the coworking space — may expose potential drawbacks to an industry that's seen an explosion in Greater Boston.

As reported by the Business Journal last week, Coalition Downtown LLC, located on the sixth floor of 68 Harrison Ave., had not paid full rent for 17 months leading up to the eviction on Jan. 16, according to Mai Luo, the building's landlord and owner. Luo took

Coalition to court and is now owed more than $2.8 million in back rent and other fees GARY HIGGINS from Coalition, court documents show. Mai Luo, owner of 68 Harrison Ave., in Chinatown, terminated the lease of coworking space Coalition, in November, and started eviction proceedings. But because Coalition operated its Boston office under a special-purpose entity — a limited liability company or a limited partnership company that operates as a standalone business, versus one that’s connected to a parent firm — Luo and the members may never get back the money they are owed in the shutdown.

It's the same structure employed by WeWork, which surpassed Liberty Mutual, Wayfair and other large tenants to become Boston's second-largest office tenant over the past five years. According to CoStar research, almost all of WeWork’s facilities in Boston are operated via an individual LLC — 40 Water Street Tenant LLC, or 200 Berkeley Street Tenant LLC. Those types of single-purpose entities create uncertainty for landlords, because it’s not as secure as signing a lease with a credit-worthy tenant.

Those types of entities frequently appear in real-estate transactions, but — until recently — rarely in leasing deals, said Amy Moody McGrath, director at law firm Goulston & Storrs in Boston who has advised co-working lease deals.

“It is highly unusual for the leasing world to have a single-purpose entity on the lease, with the exception of the co-working deals,” McGrath said. “A lot of times, in these leases, you see security — whether it’s cash, letter of credit or a guarantee that helps the landlord get over the fact that, unlike the other traditional office tenants, the co-working people are putting each individual lease in a separate LLC.”

WeWork's highly publicized meltdown last year, which spurred a rapid decline in the company's value in the eyes of investors, has some wondering whether the same kind of sudden shutdown that happened at Coalition might be repeated in other coworking spaces.

A money 'mystery'

Coalition operated its Boston office as Coalition Downtown LLC, a special-purpose entity managed by Boston Link Space LLC. Coalition Space still operates four locations in and New Jersey. https://www.bizjournals.com/boston/news/2020/02/14/sudden-closure-of-boston-coworking-space.html?s=print 1/2 2/16/2020 Coworking spaces like WeWork, Coalition carry risks for members - Boston Business Journal Coalition was about 87% occupied — an “amazing number" for a co-working facility, Luo said — and owed about $25,000 a month in rental payments.

“The money they collect from their members is almost two times the money they owe to me, so the mystery is why they told me they have no money,” Luo said.

Several of Coalition’s members told the Business Journal they had heard nothing from the co-working company regarding the eviction. Many are owed thousands of dollars in security deposits and rental payments that Coalition says it cannot pay.

Coalition tenants are now out thousands of dollars in security deposits and rent — which Farhan Abbasi, the general manager of Coalition in Boston, has said the company cannot pay. In an email to a Coalition member obtained by the Business Journal, Abbasi said "the company is undergoing a dissolution process. We regret the outcome.” He added that while members may sue the company, "there are essentially no assets in the business, so it would likely be a waste of time to pursue a defunct entity with no assets."

Disturbing signs at WeWork's backer

Unlike Coalition and other co-working concepts with relatively small footprints, WeWork is backed by the $100 billion SoftBank Vision Fund from Japanese telecom giant SoftBank Group Corp. The fund also includes ride-sharing company Uber and food-delivery app DoorDash among its expansive portfolio. But this week, the Vision Fund had its first publicized failure: e-commerce retailer Brandless is halting operations and cutting 70 workers, according to multiple media reports.

SoftBank infused nearly $9 billion into WeWork after the embattled company dropped its plans to go public. WeWork this month has installed a new CEO: Sandeep Mathrani, formerly chief executive of the retail group at Brookfield Property Partners.

Yet despite global concern regarding the wisdom of SoftBank’s WeWork bailout and the ongoing question of whether the company can turn a profit — and despite Coalition’s abrupt failure, and the fact that WeWork is Boston’s second-largest office tenant — Boston’s real-estate circles are not overly concerned with a potential co-working collapse.

“I don’t think that many people in Boston are overly worried about WeWork,” said one Boston-area real estate source who did not want to be identified. “It may be in . In New York, you have instances where WeWork bought buildings, which is not the case here.”

Catherine Carlock Real Estate Editor Boston Business Journal

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