[shimms]

I find this whole “owe $18b in rent” thing that’s come up recently interesting.

They only "owe" $18b in rent the same way any company leasing office space "owes" their landlord money. The word "owe" is thrown around here in relation (almost exclusively to WeWork) to imply they're in arrears to the landlords to the sum of sum of $18b.

It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.

Over the length of their leases they have an $18b obligation, but that isn't the same as the way "they owe 18b" is used colloquially to mean currently in arrears/default.

It is the same as entering into any agreement - over the agreements length you have an obligation, which if you can't service you're insolvent.

I guess I find the narrative that they "owe" $18b to imply a far greater extent of distress than the reality of their leasing obligations actually entail.

[aphextron]

>It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.

Precisely. They have liabilities of $18b with no profits. In the event of revenue drying up, they are still on the hook for those leases. There is no real difference financially between a lease and a loan in that sense. If I lose my job and can't pay the rent, I don't get to just say to my landlord "Sorry, lease is up!", and move out. I can be sued for that entire value.

[nwienert]

You can't frame it as a loan because it's nothing like that. In fact they can only get $18B because landlords know if WeWork goes under they aren't getting paid the rest of the lease (lucky to get much at all). The point is, they don't mind. It's not lost money it's lost contractual revenue on a building that can be turned around immediately. The risk profile is not even close to the same.

If I was an investor in WeWork I'd care 0 about the total amount and almost entirely on what their trajectories look like, and the terms of those leases, etc. The $18B number is a red herring.

[subpixel]

If they operate like most real estate companies, each lease is entered into by a different corporate entity. Any one of them could be sued for breaking a lease without touching WeWork.

But nobody sues when they can just rent to another party.

[jmalicki]

As a WeWork member, I can confirm that the lease of my local WeWork (and the fee I pay) go to a subsidiary specific to the location.

[aphextron]

>It's not lost money it's lost contractual revenue on a building that can be turned around immediately.

That's the whole point though.It is lost revenue because in an economic downturn, when no one is trying to rent office space, the landlords will be left with no recourse but sue if the leases aren't paid. There are underlying construction and mortgage loans on the buildings being leased that must be paid regardless of whether the lessees bail out. At a certain point someone is left holding the bag.

[mdb333]

Its still a short/long term liability on their balance sheet... until they have substantial enough assets (eg 5-18B worth of future revenue) they are working out of a massive negative equity hole.

[shimms]

Leases haven't been on the balance sheet historically, although a 2016 change (which comes into effect next year) will see them move onto the balance sheet, however offset by a corresponding right to use asset.

The right to use asset is depreciated over the course of the lease whilst the liability is decreased as payments are made.

So it isn't a huge negative equity hole (particularly at present since lease obligations are off balance sheet), but with these changes gross debt will increase substantially, which may trigger covenants with regards to debt ratios (equity will be offset by right to use asset however, so no bit equity hole even with new accounting rules).

[shimms]

There is a huge difference - the duty to mitigate losses.

A landlord can re-let the space to another tenant, and start earning revenue again.

The money loaned however is gone until it is repaid. The total loss of a loan is the principal remaining unpaid at time of default, since you have permanently parted ways with the money once you transfer the funds to the borrower.

A lease on the other-hand hasn't deprived you of anything. You've still got the asset that can be released.

The losses in this instance are limited to the period of time the premised was vacant and unpaid for, as well as associated other costs such as an amount of any incentives provided as a proportionate to the length of the lease term remaining, legal costs, reletting costs, advertising and renovation costs etc.

You can't simply sue them for the entire value of the lease - especially if someone else moves into it and starts paying rent, you'd be double dipping.

[TheSpiceIsLife]

You can be sued for the entire value, but in all likelihood the lessor would expect you to pay until you or they find another lessee.

[mlthoughts2018]

But it does impact your appraisal of their net present value, since you know their future income streams have to exceed at least that obligation plus other operating costs.

I think it’s fair for their rent obligation to contribute to the concern about their business in this sense.

Yes, it’s not like an immediate obligation of $18 billion. But the effect on a net present value calculation of a company already operating on big losses is still very important.

[shimms]

Agreed - just haven't seen future cashflow obligations referred to as "owe" in the same way, except for when discussing WeWork, so (to me) comes across disingenuous given the lack of consistency in application.

[kgwgk]

It’s pretty standard use. Owing is not about being late on payments or in default.

https://www.cnbc.com/2018/02/15/heres-how-much-the-average-s...

https://usatoday.com/story/money/personalfinance/2017/11/18/...

[shimms]

Again they're loans not lease obligations - different.

You can sublease or assign your obligations in a lease, typically you can't assign a loan in the same way.

Edit:

To clarify, when the average household talks about their family debt, they don't include the future lease payments that they're liable to pay over the remaining term of their family home's lease in their calculation - that is (rightfully) an expense, not a liability.

They do think about their mortgage though in terms of net worth and debt position.

[kgwgk]

Actually I was replying to your previous claim that "owe" "is used colloquially to mean currently in arrears/default". Colloquially "owe" means "in debt". According to the dictionary "to be under obligation to pay or repay". To what extent other liabilities (leases, pension fund obligations, whatever) can be assimilated to loans is a different question.

You're right that only WeWork appears in the news in these terms, but WeWork is an unusual case. I would be interested to know if there are other companies in a similar situation.

[shimms]

Gotcha, sorry - I guess you're right, doesn't mean immediately due, or past due, I just don't think of leases as owing, just a commitment to pay, which might be splitting hairs.

In the linked article of this thread though, and a few others I've read specifically about WeWork, it feels like it is used to imply a currently due debt that they can't pay, mostly for dramatic effect I imagine.

Someone else had some comments in another part of this thread about other companies with large plant/equipment leases receiving similar commentary, such as expensive data centers.

[freehunter]

You only hear it on businesses that have substantial future cashflow obligations, which most startups don't. That's levied against anything with capital. I've heard it used against scooter and bike rental companies, I've heard it used any time a company has its own datacenter instead of AWS, etc.

Of course Uber and Basecamp and Reddit and Dropbox and other unicorns don't have this kind of criticism, because they don't have the same amount of heavy plant capital that WeWork has.

Look at any thread about a company building/buying a datacenter and you'll see the same argument. It's a bad idea because if they shrink in the future they're stuck with capital they can't pay for and now they go out of business. Only in this case, they can't shrink any more because they're already massively unprofitable, PLUS they have ungodly amounts of debt obligations.

[shimms]

Fair call, and good distinction to draw.

[martin_bech]

Having 18b in obligations is the EXACT same thing as owing 18b. Litteraly the exact same thing. Here in Denmark the name of a bond is “obligation” againg litteraly the same thing.

[Spooky23]

I get what you’re saying, but real estate is all about cash flow. Losing a billion a year is a problem for a capital intensive business.