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Comment by chadash | Hacker News Reader

Their economic model can be clear and simple even if it isn't profitable. At it's core, the model is:

a) buy or rent commercial real estate

b) rent that same real estate out to people who want office space

As long as the money coming in from b is sufficiently greater than the money being spent on a, you should be good.

As far as profitability, the company is making investments now that will pay back over time. Since they are growing quickly, you'd expect them to take a loss since they have to make upfront investments in new offices (and on real estate, which they seem to be getting into the business of purchasing outright rather than taking out long term leases).

EDIT: I don't have an opinion one way or another on whether WeWork is a good business to invest in or not, but it's definitely a straightforward and easy to understand business, as opposed to say, a bank or a biotech company.

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I think the model is rather: a) buy long-term leases at low price b) sell short-term leases at high price

The problem with this model is that when demand for real estate falls (e.g. because of economic cycles, trends/tastes, etc.) the revenues will evaporate and the costs will remain.

It's like the old joke: If you can't pay back a $1 million loan, you have a problem. If you can't pay back your $1 billion loan, the bank has a problem.

If WeWork can't pay the lease on 29,000 square feet of office space, WeWork has a problem. If they can't pay the lease on 2.9 million square feet of office space, the owners have a problem.

that is true only when WeWork may be in danger of filing bankruptcy, otherwise contract law prevails.

I think also more true when they rent from a single owner.

My understanding is that they spin up separate entities to sign leases, and have cancellation clauses. It seems nuts landlords would agree to that but it’s come up a few times in prior threads.

There's a bit of longer-term reputation damage which is significant in an industry dominated by companies who tend to think over the span of decades rather than quarters.

One fairly big serviced offices company pulled the "separate entities" trick in one of the previous recessions, and some of the major landlords in that country still to this day, more than a decade later, refuse to do business with them.

An HN submission 4 months ago¹ reported that WeWork forms a separate subsidiary for each lease agreement. So at least when they're not the owner, they've conveniently arranged to not be on the hook if a particular location or region doesn't work out.

¹ https://news.ycombinator.com/item?id=18714962

Also this: https://wolfstreet.com/2019/03/25/how-can-a-company-with-1-8...

And commercial real estate never goes down...

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