January 11, 2019
Seth Martindale

By Seth Martindale
Senior Managing Director, CBRE

As the need for lease flexibility grows for office occupiers of all types and sizes, co-working space is increasingly being recognized as a serious tool.

The concept has actually been around for decades. But it is truly coming into its own with the increased need for tenants to become more agile in their approach to their real estate portfolios and optimize them to reflect changes in both their business and the overall economy, expanding and contracting on demand.

But, a service, or membership, agreement with a co-working provider is a different animal than the traditional lease most occupants are familiar with, particularly when it comes to the subject of incentives, as CBRE’s Seth Martindale explains in the following Q&A:

Q: Seth, let’s start with some basics. How does a membership agreement differ from a more traditional lease?


Seth Martindale: It really depends on the provider, but in general, you can think of these agreements much like gym memberships. You have the ability to use the amenities for, let’s say, five days a week for six months at such-and-such a rate, and you have to lock in a certain number of people. You have some choices, such as providers of prebuilt space, and those that will build it out and operate it for you. So there are different options, but the thing to remember is that it’s not always a standard lease contract, and that’s where a lot of the confusion comes in.

Q: What’s the issue with tax incentives that space users should be aware of before they sign?


Martindale: It’s not just tax incentives. All economic incentives can be impacted. Most states have a “But-for” stipulation as a condition for competitiveness, which basically says if you’re planning a project let’s say in Atlanta, the State of Georgia wants to know you’re looking at another state as well before they grant any incentives. So you have to negotiate the incentives and secure them, then sign the lease and make the public announcement.

But a lot of that sort of legislation is built around the traditional, formalized lease and the long-term commitment to that space. If you have a membership agreement instead, it gives heartburn to the state and city officials that have given you all of these economic incentives because they have a vested interest in you being there long-term.

That’s probably the most important issue, but there’s also the issue of credits for capital expenditures. State and city governments can look at the payments and buildout costs specified in a lease and give you credit for that capital expenditure as if you’ve already spent the money.

But if the shared space provider has spent that money, it throws a wrench into the state and local system. All of a sudden, a pretty simple, standard transaction becomes much more complex.

Now, none of this is so difficult that you can’t find an answer to it, but it delays timelines because the lawyers from the local and state EDCs need to redraft their contracts. And that’s just not a rapid process for state attorneys. And once that’s done, the client has to review and agree to all of those changes. All of this delays the process.

 

Q: Isn’t most flexible space taken for a short term or for only a fraction of the user’s total space need? If so, can the incentives be that much of a concern?


Martindale: To your first question, yes, co-working has been around for quite a while but never on the scale we’re seeing now, with so many companies opting for it and putting several hundred people in a co-working environment.

To your second question, the cynic in me says state and local governments are not usually the fastest-acting entities. There may be some that are already thinking through this, and if so more power to them. I haven’t run across them yet. That said, as the growth of co-working becomes increasingly prevalent, you’ll probably see them develop two tiers of contracts: State Contract A for a standard lease and State Contract B for co-working.

Q: Can we characterize either the length of delay or the dollars impacted by the drafting and vetting process?


Martindale: In terms of the timing, we’ve seen delays on the low end of three weeks, but on the high end it’s much longer as the negotiations go back and forth. Keep in mind too that generally most of the clients who come to us with a new relocation or operational requirement do so when they’re already behind--the get-it-done-yesterday syndrome--which already threatens their competitive advantage.

In terms of dollars it’s really hard to say since it’s a case-by-case consideration. But if it’s the space provider handling the CapEx that’s to be shared by various members, it cuts into the CapEx that an occupant would otherwise put into the city, which could conceivably negatively impact the amount of incentives secured. There’s definitely money being lost, but it’s hard to quantify.

Q: So what’s the message here for the corporate space user? What’s their recourse?


Martindale: The old cliche, knowledge is power, is still true. If you’re planning some sort of agile/co-working occupancy in a new market, you have to know that every state has its own programs, thresholds and milestones that could throw a wrench into your process. Working with your adviser will help manage this and, more important, manage timing expectations. Short of the day when municipalities have contracts for both types of space use, the occupant’s best defense if preparedness.

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Seth Martindale is a Senior Managing Director within CBRE’s consulting practice. He has extensive experience in real estate strategic planning working with both private and public sector clients and currently helps clients by developing practical and economical portfolio solutions through site location strategies, portfolio optimization plans and negotiating economic incentives.

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