Lease prices vs. member income

[David Clinton III]

Hey All,

I’ve been lurking in this group for a while, listening, learning, and researching.  Thank you all for your immense insight and knowledge!

I’m hoping to start a Coworking space in Coeur d’Alene, Idaho.  From what I can tell, there may be one in Spokane, WA (45 minutes away), but otherwise, the nearest are in Seattle, and Boise.  There seems to be a big enough population of “regulars” working in coffee shops, they may just appreciate a space of their own.

Anyway, as I’m looking at spaces, I’m a bit overwhelmed thinking about numbers.  In some industries they say you can only afford a lease that costs 10% of your company income.  Does anybody have an idea what sort of percentage would work like this in the Coworking world?  What do some of your rent: income ratios look like?  I can’t imagine overhead would be that much in this business, but before getting started and bombing, I really do want to at least break even.

Thanks,

--
David Clinton III

[John Burns]

David-

You might find this helpful

http://wiki.coworking.info/w/page/16583920/PricingExamples

[Alex Hillman]

Our rent (4400 sq ft) in a high density urban area of Philadelphia is $6000/month + use and occupancy tax (another $550/month).

Our income is $12-15k/month fresh recurring membership dues, with periodic reserve refreshes as well.  

We opened in an 1800 sq foot office (approximate $2000/mo). At a stride (inside of 6-8 months for us) we were pulling in $6-9k/month, allowing us to build up reserves fairly quickly to roll into our growth.

-Alex
IndyHall.org

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/ah
indyhall.org
coworking in philadelphia

[gerard sychay]

David,

10% sounds reasonable if you are looking to make a big profit.  But if your goal is to only break even on coworking, then wouldn't 90% of your income going towards your lease be okay, with the rest going towards other fixed expenses?

Twice now, we have created a lease with a sliding rent. The more members we had, the more rent we pay, up to a fixed point. This allowed us to get started quickly which was good for both ourselves and the owners who were happy to fill some vacant space. Independent owners will probably be more flexible about this than property management companies, but everything in commercial leasing (and in life, I guess) is negotiable.

Hope this helps. To give you another sample point, we have 2100 sqft. We pay $175/full-time member and cap out at paying for 12 full-time members (there's space for 20 desks). So for 6 members, our rent was $1050 ($6/sqft).  For 12, we will pay $2100 ($12/sqft).  Our utilities are about $250/month. Other fixed expenses: internet, insurance, janitorial, but those are all $125/month or less. Our full-time membership rate is $250/month.

Gerard

[Tm Mahdi]

Gerard, 

I find your "sliding rental" program an interesting concept. Care to share more on it? 

How did it came about? How was introduced to the landlords? What challenges if any have you found in applying such a program? And it came to tracking the number of members vs what is reported to the landlord - what structure did you use? 

Much Appreciated for taking the time to answer these, 

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Tm Mahdi

Director & Founder,  Cg6 Inc.

 

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[Alex Hillman]

The sliding rental programs are awesome, I've seen them take shape a few ways:

1) A landlord "gets" the model and wants to support it to see it flourish in their space. A smart, forward thinking landlord is going to see how this sort of model existing in their property will be valuable for their overall property value, as well as any surrounding property if they happen to be involved with it in any way. Indy Hall, for instance, has brought 4 additional businesses to the building we're in - just because they wanted to be closer to Indy Hall and its membership.

2) A landlord is desperate to fill a vacancy. While a buyer can most certainly make this work in their favor, it must be done carefully. How are the terms structured so that if/when the landlord is no longer in the submissive position, they can't then take advantage of you at a renewal. I tend to stress to people I advise that, in general, having a positive relationship with your landlord can be INSANELY VALUABLE, more than just in rental negotiation. If this sounds like the game you're entering into, always be thinking a few chess moves ahead and protect your queen.

There's also models - Gerard mentioned that their rent increases as their membership grows and can provide more revenue. The nice part of this model is that the landlord is incentivized to help the coworking space grow, and may even feel "invested" in the model moving forward. 

There's other ways to work the real estate math (because, like wall street math, it's all made up anyway) - it really comes down to proposing creative terms.

The key to GETTING creative terms, from what I've seen, is building a good relationship with the landlord. Make it clear that they're supporting you, not SAVING you. As soon as they feel like you need them (when in fact, they need you to not have idle space) - it's a business power play and you're in a weak negotiating space again.

p.s. this stuff isn't unique to coworking or even rental agreements. it's just smart negotiation. :)

-Alex

/ah
indyhall.org
coworking in philadelphia

[gerard sychay]

Sure David.

The 1st time, it came about out of necessity. We didn't have enough members, and that owner really wanted to fill his space. Since it was successful, when we were scouting out new spaces the 2nd time, we simply asked every landlord if they were open to doing the same. There are a couple details you need to agree on with your landlord in this arrangement: 1) what constitutes a "member"? Full-time? Part-time? and 2) what happens should you *lose* members. Does the sliding rent go down? Or stay the same?  As far as tracking, we just tell the landlord what we owe. As Alex said, it's all about trust.

In our particular case, our landlord gets it. He is himself an architect, very involved locally, and knows about the creative class, blah, blah.  So it's been a very good relationship so far.

Gerard
http://cincycoworks.com

[Evan Willms]

InHub Coworking in Victoria, British Columbia is officially launching this
week and I'm just preparing our first rent cheque for our landlord.

Much as Alex has discussed, we found a landlord with a vacancy he wanted
filled and could grasp the business model. We worked with a very
experienced local commercial realtor who knew who we could approach that
would be receptive to this kind of offer.

Unlike the previously discussed cases, we ended up negotiating an
overall 50% revenue
share for the landlord that has a fixed $2,000 minimum (which is about 2/3
of market rent for our 1430 sq ft). Today our $2,000 minimum rent payment
represents literally 100% of our founding member's fees. As we grow, our
relative rent payment will fall to just the 50% of our membership revenues
with unlimited participation for the landlord.

This is also a month to month lease, which means it's low personal risk for
the management but it does carry the jeopardy that if the landlord gets a
better offer for a fixed term lease, we have to match or walk. The ability
to continue listing the location is what made the deal work from our
particular landlord's point of view.

Cheers,
Evan

InHub Coworking
Space Catalyst
Victoria, BC
http://inhub.ca

[Craig Baute - Creative Density Coworking]

David,

You can't use the general rule of 10% of your income being in rental
income since this is your greatest expenses compared to most
businesses where employees are their biggest expenses (excluding
certain special manufacturers). You have to ask yourself a few
questions when developing the business plan and determining the final
price.

Do you plan on coworking suport yourself or any full-time staff
member?
Do you want this to be a profit venture?
What is the market rate for coworking in your area and what is the
market rate for space in the area your looking into?

If you plan on having the space sustain a FT staffer then the size of
the space and lease both need to be carefully considered. With a FT
staff member the space needs to be larger, at least 2200 sq. ft., and
a favorable rate not exceeded $15 sq. ft. (this will change based on
cities). Since most expenses are fixed the larger the space the larger
the possibility of profit. This is mostly because you need to have a
certain degree of shared space for hallways, bathrooms, kitchen,
lounge area no matter the coworking space size. Once those are covered
then the work spaces are considered and you can set the number of
desks.For a point of reference I have 23 places for people to work at
and I'm using around 2300 sq. ft. However, I'm adding 15 more work
spots soon because I have a large empty room I'm looking to grow into.
I won't need to anymore lounge space, etc. because I have enough
already.

Location is key for lease rates and marketability.
Creative Density is located in downtown Denver but I'm 9 blocks from
the city center and the high rises. My rent is 1/3 cheaper because of
it and I'm in a neighborhood that many coworkers are at. I did a
survey for people to vote on which neighborhood in Denver they would a
new coworking facility in. If I was just a 10 minute walk away with a
$18/sq ft lease I don't think I could be a sustainable business while
supporting a staff member without taking on much greater risks.

I hope this helps.

Craig
@CreativeDensity

[Mark Gilbreath]

Hey Y'all

On the topic of "sliding rent programs",   in real estate parlance these are known as participating leases, wherein the landlord participates in the income stream of the property as part of their total compensation.  Participating leases often consist of some base amount plus a variable, that might be a % of gross revenue, gross profit or some other performance metric.   This lease model has been utilized broadly by the Office Business Center (OBC) industry and is also quite typical with restaurants and other retail businesses that are sitting the ground floor of a mixed use property.   In most cases, the landlord is willing to accept this shared risk model because they see a strategic benefit to the tenant.  For example, restaurants are generally viewed as traffic drivers (or "activation") in mixed use projects.   OBCs are viewed as drivers of business traffic that could in turn translate to long term tenants elsewhere in the building.   

I'd encourage everyone to develop a trusted local relationship with a commercial real estate professional, to bone up on this terminology before you undertake your next lease negotiation.  There is no need to reinvent the wheel here, many great models have been pioneered and proven by other types of real estate users.  We can walk in their footsteps.   The OBCAI (Office Business Center Association International), a trade association for the industry, is also a great source of strategy and advice on the topic of smart real estate negotiations.

Best

Mark

Mark Gilbreath 

LiquidSpace
CEO/Founder/deckhand 

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skype    mfgilbreath
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