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Comment by aresant | Hacker News Reader

The icing on the cake in this article is the following picture caption:

"Mitch Lowe, chief executive of MoviePass, in the company’s office at a WeWork in Manhattan."

So the movie company selling dollar bills for half price is leasing their HQ from a real estate company that owns no physical asssets but has $5b in upcoming leasing liabilities as they proudly arbitrage 15 year triple net leases into 1 - 3 year terms for startups.

At some point the gas on the fire will stop and it may be awful cold for a while.

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I'm with you on MoviePass, but I'm unconvinced there's any problem with WeWork's business model. Lacking any assets or output of their own hasn't stopped middlemen from making a mint since the invention of trade.

Sure. But WeWork isn't making any money as a middleman. And their debt is already down to junk.

Oh shit, you're right. My mistake, I just assumed they were profitable given the seemingly solid revenue model and fairly high rents.

> their debt is already down to junk

For those unaware, this is not a metaphor.

https://www.wsj.com/articles/weworks-debt-receives-junk-rati...

https://www.bloomberg.com/gadfly/articles/2018-04-25/wework-...

What would happen to the CRE market if WeWork goes under?

The problem isn't the lack of assets, it's being heavily dependent financially on other risky companies. This is part of what happened in the dot-com bust -- lots of media properties went under because their advertising portfolio depended heavily on splashy advertising buys from well-funded startups, so when the startups failed and the ads suddenly stopped coming, those publications' balance sheets rather suddenly went from boom to bankruptcy.

To apply to this case: WeWork's services are aimed very heavily at startups, small design/creative operations and solo operators, all of whom could easily be floating at the moment upon the same bubble. If that bubble were to burst, those customers would vanish and WeWork would be in a heap of trouble.

This. A middle-man can handle some of their clients failing. The problem is that, at my guess, WeWork's clients have highly correlated failure rates.

Hummm big companies relying on end buyers of real-estate products to keep being able to honor their commitments, where did I hear that before.

I suspect they get plenty of business from established companies that need extra space or a way to bootstrap offices in new locations. Linkedin, for example, used them to open the Detroit office.

My company has a "real" HQ and then satellite teams at a few different WeWorks. Anecdotally, lots of other people in this WeWork are in similar situations. But I'm still not sure it totally invalidates the larger point; if business were to slow, these offices would probably be the first to go.

Ditto here, however unlike some other commenters, we're an ad agency.

They work for our satellite offices in Denver (one designer) and London (two account people).

> it's being heavily dependent financially on other risky companies

WeWork has a creative solution to this vulnerability:

"In mid-2017, the giant landlord Brookfield Property Partners L.P was in advanced talks to buy the Lord & Taylor department store building in New York City for about $700 million, when an unexpected buyer swooped in and sealed a deal... Behind the deal was WeWork Cos., which put together the $850 million purchase...

WeWork didn’t put up the money. Instead, it came from a new real estate fund co-managed by WeWork and one of its early shareholders, private-equity firm Rhône Group. The fund aims to raise tens of billions of dollars from investors in coming years to buy buildings where WeWork would become a tenant, people familiar with the fund said."

https://www.wsj.com/articles/wework-the-workspace-giant-want...

Maybe this is a stupid question, but, why is that a solution? Presumably the fund's investors want to see the sort of returns they expect from investing in Manhattan real estate. Is WeWork / this fund prepared to turn into a Brookfield-like company if the market for short term leases to startups dries up? And can they produce the same percentage of profit on $850M that Brookfield would have produced from paying $700M for the same property?

When tenants go out of business you can rent your property to other tenants. If we work goes out of business, how will it hurt the owner of the property any more than it would hurt anyone else who would be the owner of the property?

Unless of course they are giving a deep discount to Wework, which would be concerning.

Because the new owner of the property paid $850M for something that an experienced non-WeWork-affiliated landlord was ready to pay $700M for.

So, either the new owner is correct that WeWork's model is sustainable will make them 21% more profit, or they'll be hurt once they try to turn into e.g. Brookfield (or sell their property to e.g. Brookfield for a loss).

It's not a stupid question and you're right, this doesn't solve anything, it just shifts the problem.

No sure it means anything but my first pass I read "The fund aims to raise tens of billions of dollars from investors in coming years to buy buildings where WeWork would become a tenant, people familiar with the FRAUD said."

Can the same be said of large cloud providers?

Cloud Providers are also being used by large profitable companies and in the case of Amazon, they are thier own best customer. If AWS starts losing customers, they can just reduce their capital expenditures and start replacing hardware at a lower rate. Besides AWS also has GovCloud.

Azure seems to be more popular with large profitable enterprises than startups.

And in fact, during the dot-com bubble, contagion went even further because a lot of those startups were also buying all kinds of Sun servers, EMC disk arrays, Cisco networking gear and so forth.

The hopeful part here is that a mass weeding out of these companies with no business models at this point would obviously have an impact on those getting free movie tickets and taxi rides today, as well as the relatively modest number of people working for those companies and their associated suppliers. But, at least on the surface, it's not clear how many people outside of the mostly Silicon Valley startup scene would even notice if the bubble popped.

Contagion via California real estate?

That's still a local phenomenon though if the numbers were even big enough to make a big difference in traffic and pricing.

No, I mean contagion into the banking system via mortgage defaults: California is an enormous economy.

To be fair, that's just a rehash of the way things played out in 2008. I'm sure when the crunch comes, it'll come from somewhere less expected.

Their model is similar to VC where they don't need or even expect everyone to be successful so long as enough of them survive. Conversely, they don't get big paydays when a company strikes it big because they'll just buy a real office.

That setup sounds awfully like Hollywood Accounting and several other (possibly technically legal) accounting scams.

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