Karl (not Groucho) Marx, citing Hegel as the source, famously said that history appears first as tragedy, twice as farce. While I will spare you from a dialectic, suffice it to say that the WeWork bankruptcy might be an example of what these famous economic and social philosophers had in mind. Let me explain by taking a look at the big picture through the arc of history, or at least the more modest arc of WeWork history.
At the outset, it is important to acknowledge that WeWork had a brilliant idea. Until it graced the scene, many co-working sites were stilted, drab and boring. WeWork changed this and today virtually every company strives to create offices with an open, light, and positive environment, which at least gives employees a feeling of the comforts of home. Fair play to WeWork and Adam Neumann individually for being pioneers in bringing this important innovation to the market.
Of course, WeWork fell prey to the common errors of so many entrepreneurs as it grew too quickly and overpaid for their office locations. In 2019, Neumann was forced out after it was revealed that the $47 billion valuation of the company by Softbank as it was on the verge of going public proved to be an illusion.
Several restructurings and one failed public offering later, WeWork landed in Chapter 11 last November. It started the bankruptcy proceeding with the wind at its back as WeWork and its major secured creditors and largest shareholder Softbank agreed on a restructuring agreement that provided the outline of a new capital structure, with secured lenders slated to receive most of the equity of the reorganized company upon emergence from bankruptcy. So far so good, but the hard work was just starting.
There was just one more minor problem that needed to be solved, which was that the company required a successful business plan. Throughout its entire existence, WeWork was never a profitable business and had lost $14 billion in the aggregate, mostly because the cost of its leases was too high and above market. It tried to get landlords to make concessions by hiring consultants after it filed a warning with the SEC in August 2023 that it could run out of money in six months, but that did not work.
Bankruptcy was the last option for WeWork as a massive leverage play to pressure landlords into concessions to bring down the cost of those leases. Right off the bat, WeWork rejected approximately 69 leases at the outset of its case. It also indicated that it would seek to either reduce the rent for over 400 leases or reject some of those leases outright.
Unsurprisingly, WeWork has been playing bankruptcy hardball with some of its landlords and admittedly did not pay $33 million rent in January at some locations which WeWork believes have above market rent. It is also asserting that 160 landlords have no claim for rent at all during the “stub rent” period from the November 6, 2023 filing date to the end of November, According to the Wall Street Journal, WeWork’s attorney Steven Serajeddini threw down the gauntlet as its liquidity is limited, saying “We took steps to force the issues and held January rent payments for the free riders … The message was clear: You’re either with us or you’re against us.”
However, it doesn’t appear that WeWork’s brushback pitch has been working thus far. At least seven of those landlords were upset enough that they filed motions to compel payment of the unpaid rent which are scheduled for a bankruptcy court hearing on February 20.
Any bankruptcy lawyer (including Eric whom I consulted) will tell you that bankruptcy judges hate it when debtors don’t pay their bills after a bankruptcy filing. Accordingly, it will be interesting to see if Judge Sherwood lays down the law or tries to finesse the issue at the hearing to help WeWork.
Enter Mr. Neumann through his new residential housing company Flow International. He has resurfaced to express his interest in providing desperately needed debtor in possession financing to WeWork, and has also requested the opportunity to review WeWork’s financials so he can consider a potential re-purchase of the company. In a letter to WeWork, Neumann’s attorney said he had the backing of Daniel Loeb’s Third Point (although the venerable hedge fund hedged when asked for comment) and others, which according to reports include venture capital powerhouse Andreesen Horowitz. To date, WeWork has refused Neumann’s entreaties to provide information despite the understandable interest of creditors in opening up a competitive bidding for the company.
It is not unusual for prior or current management to buy a company it was previously involved with in bankruptcy. However, this situation raises the definition of chutzpah to new heights. In a just world, Neumann would return some of the money from two generous settlements he received from Softbank in addition to whatever market value offer he wants to make. Don’t hold your breath waiting for that to happen.
Right now, the WeWork landlords are faced with a Hobson’s choice. They can either reduce their rents and capitulate to WeWork, or they can hold out in a very unfavorable market which will make it very difficult for them to find replacement tenants. It’s a horrible decision to make in which both options are bad. The success of the WeWork reorganization rests on the outcome of those negotiations on a collective basis. In the meantime, Adam Neumann, who may be the person who contributed the most to the company’s slide into bankruptcy, is waiting in the wings to pursue a potential takeover. What’s wrong with this movie, and can Neumann’s potential second act possibly have a happy ending?
Thank you,
Ruth Colp-Haber
Partner
Counselor of Real Estate
Fellow of Royal Institution of Chartered Surveyors
