Biggest losers from Adam Neumann’s $1.7 billion WeWork payday

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  • Softbank agreed to pump another $5 billion into WeWork, effectively taking over the office-sharing company.
  • The deal will reportedly result in a $1.7 billion windfall for WeWork’s founder and former CEO Adam Neumann.
  • But high-profile real estate developers and some individual investors could be left with losses from WeWork.

Jared Kushner has a WeWork problem. So does Canada’s second-largest pension fund; high-end fashion designer Elie Tahari; dozens of the nation’s largest real estate firms; a private equity firm that recently hired President Trump’s former national security chief John Bolton; and possibly even average investors through real estate and mutual funds that have soured investments tied to WeWork. 

All are among the list of property owners and investors that collectively face losses if WeWork, the troubled proprietor of co-working spaces, is no longer able to pay its bills. Losses appear to be climbing for the company following its aborted initial public offering, and some analysts have said that, without a rescue, it could run out of cash in a matter of weeks.  

The list of those with a stake in WeWork’s fate also shows how completely and quickly the company, which opened it first laptop-friendly office-sharing space in 2010, has in less than a decade infiltrated an industry — commercial real estate — that is at the bedrock of the rest of the economy. 

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For example, WeWork is already the largest office tenant in New York City, with as much as 9 million square feet leased, according to one estimate — that’s enough to fill three Empire State Buildings as well as two-thirds of the Chrysler Building. It also is the largest non-government tenant in both London and Washington, D.C., and the second-largest in downtown Chicago.  

In all, WeWork has signed leases worldwide that commits it to pay as much as $47 billion to its landlords.

Last month, real estate mogul Sam Zell told CNBC that he believed WeWork’s size, as well as its tremendous financial losses, have become a major liability for the commercial real estate sector as a whole. He said real estate developers as a whole have “committed suicide” by renting so much space to WeWork.

Co-working: When the home office is away from home

So far, it’s WeWork that is on life support because of all those leases. The Japan-based investment fund Softbank said this week that it would spend $3 billion to buy WeWork shares from employees and other investors. It will also invest another $1.5 billion directly in the company and lend WeWork another $5 billion. 

In all, the deal will value WeWork at $8 billion — down 83% from the $47 billion it was thought to be worth back in January.

The new investment will give Softbank an 80% ownership stake in WeWork. But the deal isn’t only a bailout for WeWork. It will also sever ties and pay out an estimated $1.7 billion — including a $185 million consulting fee — to Adam Neumann, WeWork’s 40-year-old founder and former CEO, according to the Wall Street Journal.

That eye-popping package should offer some consolation for Neumann. But here are some other players in the WeWork drama who are not as lucky:

WeWork’s 15,000 workers

Many WeWorkers who joined the company in recent years had been granted options to buy shares of stock that would pay out when it went public. Now they are likely to get nothing, while their former boss walks away a billionaire on paper. 

“You’ve got to be kidding me,” a commenter posted on WeWork’s staff communications system Tuesday regarding Neumann’s payout, Bloomberg reported

The Softbank deal values WeWork’s stock at $19.19, but the strike price for employee options has been above $20 since early 2016. 

Worse, former WeWork employees who have already exercised their options at higher prices may now be stuck with lower-priced stock. Worse still: WeWork said it plans to lay off thousands of the company’s 15,000 employees, although it hasn’t said how many. 

Kushner and other NYC real estate players

Among the dozens of developers doing business with WeWork is Jared Kushner and his family’s real estate empire. WeWork is the second-largest tenant in the Kushner family’s Dumbo Heights development, a group of office spaces on Brooklyn’s waterfront. 

Seryl Kushner, Jared’s mother, is listed as a co-borrower on the property’s mortgage, along with fellow prominent New York real estate developers Aby Rosen and Michael Fuchs. WeWork occupies 160,000 square feet in the building, which it has leased through 2031.

Fashion designer Elie Tahari, who’s runway show earlier this year featured supermodel Christie Brinkley and her daughter Sailor, seemed to be getting a sweet deal back in 2015 when he bought, along with Neumann, Manhattan’s 88 University Place near Union Square. WeWork leased space in the building almost immediately following the purchase and soon after re-leased it to computer giant IBM. In August Tahari and Neumann put the building up for sale for $110 million, but so far the property hasn’t sold. 

WeWork’s largest landlord in New York City is Joseph Moinian, an Iranian-born real estate developer who arrived in America when he was 17. He was recently ranked No. 29 on a list of top developers by real estate industry publication Commercial Observer. WeWork has leased nearly 450,000 square feet in a number of Moinian buildings, including about a quarter of one of the developer’s buildings near Manhattan’s Central Park.

From Washington to Los Angeles

In Washington, D.C., WeWork is the largest tenant in three prominent buildings owned by local developer Douglas Jamel, including a former Wonder Bread factory and another called Chinatown Row, of which WeWork has leased nearly 60% of the space. Jamel’s Douglas Development has borrowed about $100 million against the operations of the three buildings. 

WeWork occupies nearly a third of the 500,000 square-foot Park Square Building in Boston, about 10% of the 800,000 square-foot Tower Place 100 in Atlanta and nearly 7% of the Brookfield Properties-owned Gas Company Tower in Los Angeles.

Real estate experts say WeWork’s problems alone are unlikely to be a major issue for any single developer. Even Moinian Group’s 450,000 square feet of WeWork space is small compared to the developer’s overall portfolio of 20 million square feet. And WeWork’s No. 1 tenant status in New York City still comprises less than 3% of the city’s massive office market. 

There is also no evidence that WeWork has stopped paying its rent on any of its leases. Some experts said developers would easily be able to re-rent WeWork’s space to other companies and professionals. But that doesn’t mean there won’t be losses.

John Bolton’s private equity partners

Politically connected private equity firm Rhone Group and its investors have a 50% stake in a $900 million joint venture with WeWork to buy up buildings in which WeWork would be a tenant. Late last month, Rhone rehired John Bolton, who recently quit as President Trump’s national security adviser. 

Rhone co-founder Steven Langman, a former Goldman Sachs investment banker, met Neumann nearly a decade ago through the Kabbalah Centre, the spiritual organization that offers classes tied to Judaism. Langman is also a member of WeWork’s board, and one of two members of its compensation committee. 

At the end of 2017, Rhone owned nearly 2.3 million shares of WeWork’s now devalued stock. Rhone is leading an investment group that is seeking to acquire Saks Fifth Avenue owner Hudson’s Bay for $1.4 billion. For now, the WeWork joint venture remains among the investors listed as part of the Hudson’s Bay deal.

REIT investors, Canadian pensioners, Fidelity

Publicly traded real estate investment trust SL Green, which says it is New York’s largest office landlord, has three buildings in which WeWork offers co-working space to its customers. On a conference call with analysts last week, SL Green got questions about its and other developers’ exposure to WeWork. 

Executive Steven Durels said he expects WeWork and its office-sharing competitors to slow their leasing activity. He said larger tenants would probably sign leases directly with the landlord if WeWork were to go bankrupt, but he wasn’t clear on what would happen to WeWork’s smaller tenants, which still make up the majority of co-working users. 

Shares of SL Green have fallen nearly 9% in the past year, compared to near 13% gain for the S&P 500 in the same time period.

Canadian pensioners might be looking at losses from WeWork’s potential demise as well. Caisse, Canada’s second-largest pension fund manager, which invests the retirement assets of Quebec government workers among others, has leased to WeWork nearly 300,000 square feet at 85 Broad Street in New York, the former headquarter of Goldman Sachs. Caisse’s real estate investment arm has also invested another $1 billion in a WeWork real estate investment fund.

And though WeWork was unable to pull off its IPO, average investors could still end up being among the losers if WeWork were to switch off its lights for good. In recent years, a number of large mutual funds have invested money in startup companies before they go public. Fidelity’s popular ContraFund, for instance, said it had $312 million worth of shares of WeWork as of the end of June. That stake would now be worth about $110 million.

That was by far the largest WeWork investment among mutual funds. But funds managed by Vanguard, John Hancock and T. Rowe Price, according to data provider Pitchbook, all have stakes in WeWork that were worth tens of millions of dollars each just a few months ago. Like just about everyone else who had put money in WeWork, the investments are worth considerably less now.

Here’s who’s holding the bag for Adam Neumann’s $1.7 billion WeWork payday

Softbank agreed to pump another $5 billion into WeWork, effectively taking over the office-sharing company. The deal will reportedly result in a $1.7 billion windfall for WeWork’s founder and former CEO Adam Neumann. But high-profile real estate developers and some individual investors could be left with losses from WeWork.

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