Who pays when a flex partnership underperforms?
This question belong in the conversation before the doors open, and deserves an answer before anyone negotiates the profit share.
I shared some early thoughts on landlord-operator partnerships on LinkedIn recently. Thank you to everyone who added their perspective in the comments. I wanted to spend a little more time on the question here, because the agreement we sign will shape the decisions we can make when things get difficult.
Two parties can be enthusiastic about the same building and have very different expectations about what happens when it takes longer to fill.
A recent Coworking Europe interview with The Shire founder Rafał Pisklewicz, published on 15 September brought this into focus:
“Sometimes we’d rather not earn than put the landlord at a loss.”
The Shire reports growing to 12 locations in three years, with more than half its portfolio under management agreements. The interview does not disclose site-level returns.
What interests me is the willingness to discuss whose economics the agreement is designed to protect.
That conversation should go both ways.
The partnership starts in the underwriting
In my previous article, I explored whether overlooked secondary offices could become premium assets through the right repositioning strategy.
Once you identify that opportunity, someone has to fund the transformation and someone has to make the business work.
The landlord and operator may each contribute capital, expertise and relationships in different proportions. Their expectations need to reflect those contributions and the risks they retain.
Take a building that needs a substantial fit-out before the first member arrives. A slower opening affects the amount of working capital required, the timing of distributions and the return on the initial investment.
A building can cover its operating costs while leaving its owner years away from recovering the fit-out spend.
An operator can show a positive site contribution while still needing to fund the central team supporting it.
Both deserve to understand the full picture.
For me, a profit-sharing percentage becomes meaningful once we agree what profit includes, which costs come first and when invested capital is returned.
Pay for the capability you expect
This is where I would be careful with the idea that an operator should only get paid once a landlord makes money.
A premium workplace needs a properly resourced operation.
The team, sales capability, technology, hospitality and management all have to be funded. Expecting an operator to absorb those costs indefinitely can weaken the business responsible for delivering the landlord’s return.
An agreed operating budget and a sustainable management fee can support that capability. Each should come with clear responsibilities and visibility of what is being paid for.
Performance incentives can then be linked to agreed outcomes.
Those outcomes need some thought.
Higher occupancy achieved through heavy discounting may do little for net income. Cutting service costs might improve this quarter’s figures while making renewals harder next year.
I would want the agreement to encourage decisions that protect the quality of the workplace and the income it can sustain.
Each party needs a viable business.
Give the partnership room to respond
A downside forecast is useful when it helps both parties agree how they will respond.
If demand is slower than expected, who can change pricing?
Who approves additional sales spending?
Who funds the shortfall, and how much has each party committed?
There also needs to be a point at which the strategy is reviewed.
Continuing to fund an underperforming location should involve an honest assessment of why it is missing expectations and whether further investment has a credible purpose.
Ending an agreement requires thought too.
Members still need a functioning workplace.
Staffing, systems and service continuity need a practical handover plan.
These decisions become much harder when cash is running short and the two parties are working from different assumptions.
Transparency is part of the partnership
At Brave, this is how we approach underwriting:
making the assumptions, costs and potential returns clear for everyone involved.
We want the operating proposition and the investment case to work together, with enough visibility for each party to understand how a decision affects the other.
That includes being explicit about fees, capital recovery and the consequences of underperformance.
I believe this matters as more office buildings become operating businesses. The quality of the relationship between owner and operator will influence the decisions made inside those buildings.
Before committing to a partnership, I would want to know we could have an honest conversation about a difficult year.
Because we should have that conversation while there is still time to change the agreement.