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Management agreements and coworking operations
Management agreements in coworking spaces represent an evolving operational model that is gaining traction among commercial real estate professionals, coworking space operators, and flex office managers. These agreements are particularly relevant in the context of the challenges faced by the coworking and commercial real estate industries, especially after the significant impacts of events like the 2020 pandemic.
Introduction to management agreements in coworking
A management agreement in the coworking context is essentially a partnership between a property landlord and a coworking or flex space operator. The primary aim is to fill vacant space for the landlord while reducing the risk associated with starting or managing a coworking space for the operator. Under this model, both parties agree to share the revenue generated from the coworking space.
How do management agreements differ from traditional leases?
In traditional leases, a fixed lease payment is made each month to the landlord. However, a management agreement modifies this by having the landlord receive a percentage of the revenue or profit generated by the coworking space. This shift is significant as it eliminates or reduces the lease expense for the coworking operator, making it a more flexible and potentially more sustainable model.
What are the advantages of management agreements?
- Risk Reduction For both the landlord and the operator, management agreements reduce the risk by sharing it. This is especially beneficial for operators, as it lowers the burden of capital costs required to start or run the coworking space.
- Enhanced Cash Flow and Reinvestment Opportunities These agreements allow for faster cash flow generation, which can be reinvested in the business or shared between the landlord and operator.
- Leveraging Resources of Large Property Owners Partnering with significant property owners can bring additional resources and influence, which can be advantageous for the coworking space operator.
So, what are the disadvantages of management agreements?
- Reduced Control and Autonomy Operators might have less control over certain aspects, like construction, when the landlord has a direct financial interest and involvement in the coworking space.
- Uncertain Partner Motivations Understanding the motivations and expectations of landlords, especially large developers, can be challenging. This requires careful navigation and alignment of interests.
- Potential for Cumbersome Negotiations Management agreements might involve intricate discussions and negotiations at every step, which can be time-consuming and may slow down decision-making processes.
- Limitations for New Operators Management agreements are more suited for experienced operators with established brands, as they often involve selling the brand and contracts rather than tangible assets like centers.
Key considerations and advice for operators
- Educating Landlords and Financiers: Operators should be prepared to educate landlords and financiers on the workings and implications of the management agreement.
- Legal Expertise: It is crucial to involve a good lawyer and ensure a thorough understanding of the agreement documents. Understanding what is agreed upon is vital for both parties.
- Clear Division of Responsibilities: It's essential to clearly define who is responsible for what in the agreement, to avoid misunderstandings and ensure smooth operations.
Management agreements offer a flexible and risk-sharing model that can be beneficial for both coworking space operators and property landlords. While they present opportunities for growth and reduced financial burden, they also come with challenges like reduced control and the need for careful negotiation and legal understanding. As the coworking industry continues to evolve, these agreements could become a more common and integral part of its landscape.
Glossary of key terms
Coworking Space: A shared workspace where individuals or small businesses can rent desks or offices, often with access to shared amenities and resources.
Flex Space: A type of commercial real estate that offers flexible workspace solutions, often including coworking spaces.
Management Agreement: A contractual arrangement where a property owner partners with an operator to manage a property, sharing risks and revenues.
Lease Expense: The cost associated with renting a property, typically a significant expense in traditional leasing models.
Revenue Share: An agreement to divide the income generated from a business between two or more parties.
Capital Costs: The initial costs incurred to start or expand a business, including costs for property, equipment, and other necessary assets.