How not to sign up a flexible workspace operator

The property industry thrives on negotiating a good deal, whether that is securing a higher or lower rent or extra incentives. But when it comes to signing up an operator to run flexible workspace using a management agreement, approaching the negotiation in the traditional way could result in a horrible deal that has repercussions. Why? A management agreement isn’t a real estate transaction. It can’t be valued in the same way and shouldn’t be approached as such. You are hiring an operator to run a flexible office service on your behalf in the same way you would hire a cleaning company to clean on your behalf. The value of the flexible office space to the real estate asset is not necessarily accrued in rent. Not directly. Squeezed deals Twenty years ago, most management agreements were on distressed assets, where the owner couldn’t get rid of the space. The operator would let out the space to one- and two-person companies on flexible terms and take up to 20% of the revenue in return. The deal was about mitigating rates and service charge costs rather than driving income for the owner. Fast forward to today, and flexible workspace is being used as a proactive approach to enhancing a building’s offer. It is a service, not simply space for hire. Using a management agreement rather than signing an operator on a lease can look like the owner is taking all the risk, but they aren’t. The operator still needs to deliver the service or risk being turfed out. They also need to make money. The management agreement gives the owner control over the flexible space in a way they wouldn’t if the operator was a tenant. The agreement is a partnership, which is why negotiating the deal needs a different approach. Problems arise when one side sets out to leverage as much value out of the other party as possible. If one side feels like they’ve been squeezed, it doesn’t set the scene for a good working relationship – or make for a sustainable one. Squeezed deals can lead to renegotiations 24-36 months down the line simply because the margins are too narrow or one party does not feel they are receiving the right returns or service. I’ve seen some horrible deals being done that are likely to come back to bite both parties. But the ones that work well are negotiated with an understanding of what both sides are trying to achieve and are mutually beneficial. In and out Traditional leases are about guaranteed value per square foot, while management agreements are notoriously difficult to value. But with the right product and operator, the benefits to an office asset could easily outweigh the lack of guaranteed income from the floor space alone. A good deal allows the owner to offer flexible workspace alongside traditional leases – giving occupiers more options – and gives the operator a profitable margin. For example, a business might need 20,000 sq ft of office space today but not want to commit to a long lease to allow for changing requirements. With flexible space within the asset, the owner could offer a combination: 15,000 sq ft on a longer lease and the rest on flexible terms. The tenant can be in one building with the option to flex in and out of extra space when they need it. While difficult to negotiate and get right, management agreements for flexible space can add value to an asset, facilitating higher rents and longer leases on traditional deals. And they can provide an alternative income stream for those owners looking at meeting occupier demand moving forward. Will Kinnear is the director of HEWN