Master Lease Arbitrage in PropTech
Plus 2 Fundings, 6 Pieces of News, 4 Worthwhile Articles, and a Video
I’m going to save my comments on the lawsuit between CoStar and Crexi for next week. (See below)
For now, let’s talk about master leases and how startups in PropTech keep trying to use them for growth-hacking.
I’m not sure if it started with WeWork, but they probably made it famous. They would approach an office owner, convince them to sign a master lease, and then sublease out their space foot-by-foot.
There’s nothing terribly new about it. It probably started thousands of years ago when shepherds and farmers parceled out their lands into smaller pieces and sold/rented them off one by one.
In residential this is called a “subdivision.”
I’m being a little tongue-in-cheek but you get the point. It’s an old model applied to a new space (no offense, Regus).
WeWork’s problems have been well-documented and we don’t need to get into them here. I will give a shout out to Brendan at Fifth Wall for pointing out this concept well in the StrictlyVC podcast earlier this year (and for years before that but I don’t have a good link for that).
The essence is - a lease is a long term liability. And trying to lease by the floor and re-lease by the foot (“arbitrage”) while taking on additional liabilities at breakneck speed is . . . risky.
Yes, startups take risks. I get that.
But there MIGHT be a better way and you don’t have to take ALL the risks.
Industrious has grown their footprint just fine while being a manager of coworking space (i.e. not owning/leasing the space themselves).
And then it started happening in multifamily.
Building a new apartment building? Let (insert startup name here) lease out a few dozen units and we’ll rent them out by the night on AirBnB to boost your income during lease-up!
Sound theory . . . but you are still master leasing apartment units by the month or year and trying to arbitrage into profits by re-leasing them by the night.
Sound familiar?
I’m sure the same thing is happening in retail.
Let me lease out that un-leasable space in your mall and re-lease it to up-and-coming restauranteurs!
BOOM - food hall.
Seeing the pattern?
This model keeps popping up and keeps . . . not working.
The guys that did this is MF have mostly shut down. Stay Alfred and Bungalow (see below) are gone. As are several similar competitors.
Tons of coworking models have gone belly up.
Why is WeWork still around? I can think of about 20.6 Billion reasons why.
I’m not sure I’m ready to call this model a total failure. I’m sure there are companies that are doing just fine under similar models.
Maybe I’m simply admonishing caution when taking on long-term liabilities and hoping the arbitrage turns to profits (or community-adjusted-EBITDA).
It might be the quickest way to get a “yes” from a landlord but it also seems like one that pushes an already risky endeavor (i.e. any startup) into one that becomes LESS capital efficient and more liability laden.
Proceed with EXTREME caution. Yes, risks are part of the equation for any startup but I don’t think this path to growth is as direct as people seem to think.
On to this week’s deals and data:
Fundings:
Butterfly MX, a NY-based access control intercom for apartments, raised $35M led by Volition Capital.
RedTeam, a construction management platform, raised $5m led by JettyCove.
Funds:
We knew that Fifth Wall was raising in Europe, but it looks like they secured at least one investor.
In case you missed it, Alpaca VC (formerly Corigin) shared their diligence process.
News:
CoStar is suing another young competitor. This time it is Crexi. Any advice Compstak and Exceligent?
Looks like Bungalow is in trouble in yet another example of a failed master-lease then sublease strategy in PropTech.
The former CEO of Zillow just launched a fractional second home ownership platform called Pacaso.
Zumper released their rent report and the declines aren’t pretty in SF.
Retail landlords want a piece of the online action.
Navitas thinks that Facebook’s AR project has PropTech implications.
Articles:
Tica Hessing of CushWake has her take on the post-COVID workplace.
NfX did what they do. Great content that is looooong. This week they introduce the concept of product market promise. (Take the time. It’s worth it.)
Nice to see a strong player emerging from the ashes of the short term rental space.
NotBoring has an article that highlights FundRise and its evolution since founding ($4.9B delpoyed!). I have some issues with it and it’s a little rudimentary for my crew, but it’s worth a quick scroll.
Watch:
RXR is getting some love in the Smart Buildings space.
Company/Concept I think is interesting:
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