WeWork's CEO Makes Millions as Landlord To WeWork (wsj.com)

An anonymous reader shares a report: For more than two months after employees at IBM moved into a Manhattan building managed by office space giant WeWork, frequent elevator problems forced workers to climb the stairs of the 11-story building and prompted complaints to the company. One of the landlords behind the building was no ordinary owner: It was Adam Neumann, WeWork's chief executive, who leased the property to WeWork after buying it [Editor's note: the link may be paywalled; alternative source], according to people familiar with the situation.

Mr. Neumann has made millions of dollars by leasing multiple properties in which he has an ownership stake back to WeWork, one of the country's most valuable startups. Multiple investors of the privately held company said the arrangement concerned them as a potential conflict of interest in which the CEO could benefit on rents or other terms with the company. [...] WeWork, which was recently valued at $47 billion by investor SoftBank, signs long-term leases for office space with landlords, then subleases the space on a short-term basis to companies. Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork's largest individual shareholder and has voting control over the company.

Comments

Oldest trick in the book

[JaredOfEuropa]

That’s how you siphon off money from startups, struggling companies or even foundations into your own pocket.

Re:Oldest trick in the book

[XXongo]

Self-dealing.

It's the way unrestrained capitalism works.

Re:Oldest trick in the book

[Anonymous Coward]

Except for the whole fiduciary thing.

Re:Oldest trick in the book

[MightyYar]

So my sympathy is somewhat blunted by this being a private company, but yes, he does still need to act in the interests of the other stockholders. If he's shirking that responsibility that is another thing, but it being private I have pretty much zero ability to make that call.

Re: Oldest trick in the book

[jellomizer]

What is your hate against Startups?
Do you just want to keep the big heartless corporations, and oppose all new ideas and products. Where thousands of people can get fired off because their unit has slightly less profit then the other?

The startup and small business is really the heart and sole of most economies. While the big companies may get all the political attention, because if they go out of business thousands of people would effect the community, that they are in. But the small business and startups actually hold the lion share of the economy. While each startup is higher risk then a big company, overall on on the Macro level they allow the economy to be far more robust.

Re:Oldest trick in the book

[MightyYar]

No, look, this is a private company. Thar be dragons. We have very little visibility into the goings-on. We don't know who the other stockholders are or what their agreements are with one another. The CEO has special 10-to-1 voting shares, so we already know hijinks is afoot.

Does he have a "fiduciary responsibility"? Sure. Is that a squishy, ambiguous term? Yeah. Short of a lawsuit by the other owners, though, we aren't going to have any idea what is going on aside from a partial picture painted by people with competing interests.

Don't spend to much of your outrage on this company, that's all. Save it for public companies, criminal behavior, and by extension politicians.

Re: Oldest trick in the book

[FuzzyDaddy2]

It is not an unusual arrangement, I know a small business owner who leases his own space to himself. What doesnâ(TM)t make sense is why anyone would agree to invest in WeWork with this sort of arrangement.

Re:Oldest trick in the book

[Gilgaron]

Sears may well have died anyway, but this sort of thing was also used to drain it of money as well.

Re:Oldest trick in the book

[clovis]

This arrangement is typical, and it's more about tax avoidance than anything else.

It's so common that I wonder why this arrangement merits an article.
You want to see a master at work? Look at Ikea's corporate structure.

Re: Oldest trick in the book

[MightyYar]

Exactly my thoughts. It could be an elaborate tax dodge - or he could be a crook. I have no idea without details, and there is no way to get that kind of detail about a private company. This is firmly in the realm of "somebody else's problem".

Re:Oldest trick in the book

[liquid_schwartz]

This arrangement is typical, and it's more about tax avoidance than anything else.

It's so common that I wonder why this arrangement merits an article. You want to see a master at work? Look at Ikea's corporate structure.

Yes Ikea is an absolute scam in terms of its tax situation. However one way to help fix it is to keep bringing it up and to try and force change. Want to make your country better? Start tackling scams like Ikea by forcing the government to actually do its job on the big guys and not just us peons. If only there was a party for the working class in the US.

Re: Oldest trick in the book

[Darinbob]

Small business maybe. But startup as a term refers to a particular type of new small business. Funded by venture capitalists based on flimsy proposals, business plans that focus on getting bought out soon rather than on long term profitability, workers given valueless equity to offset their lower than average pay, etc.

Most small businesses plan to stay in business, yet the majority of startups fail without any analysis by the investors of why they failed or how to improve in the future.

Hess

[ArhcAngel]

I was told a yarn when I worked at Hess about how all the artwork in the building in Houston was owned by Hess himself and when he retired he leased all the artwork back to the company. He allegedly made more after he retired then when he ran the company.

Is WeWork profitable at those Properties?

[spinitch]

Related party transactions common and ok if arms length at market prices. WeWork investors should have an oversight function and require board approval. But this is a private investor concern. Ho hum. Just be careful on the iPO.

Predicting a great future to this young man!

[140Mandak262Jamuna]

New York real estate? Check

Self dealing and raiding public company to fill private coffers? Check

Corrupt? Check

I see a future presidential candidate from a major political party.

What a wasted opportunity

[Anonymous Coward]

Money that could be used to grow the start-up to make it thrive and prosper is just lining the pockets of an already wealthy individual. Can I just say, we don't hate on the rich enough. At least not this type of rich. They're the ones killing jobs, not those pesky immigrants or regulations.

Re:What a wasted opportunity

[Keick]

That's not really a fair judgement, and depending on the situation I'd do nearly the same thing.

A building like that isn't bought in cash, but financed. You buy a building as an individual, and you get some deduction on your taxes based on the interest you had to pay. You then rent the space to a company you also own. This ensures that (a) you have enough income guarantee to pay your mortgage, (b) you have income to write your mortgage expenses off against, (c) your company has a front page deduction on it's taxes for the rent it paid you.

This isn't about siphoning money out of your startup, it's about ensuring that the money that the startup has to spend anyways is as deductible as possible. If the startup bought the building as an S or C CORP, then it has to get the mortgage in it's name, and take that deduction over a 30-50 year period of time per IRS rules. It also has to have enough credit and assets in order to qualify for the mortgage.

Buy having the owner buy the building, then rent it back; the company doesn't have to qualify for the mortgage on it's own, gets to write off rent immediately with no 30 year deduction rules, and doesn't have the large dept on it's books making it look more financially stable.

The rent that WeWork is charged by the owner needs only be enough to cover the owners mortgage, and both get front line deductions on their taxes.

Self-dealing at its best

[ErichTheRed]

I wonder if the whole Millenial hipster open-space preschool workplace thing will survive this latest tech bubble...but WeWork is guaranteed to profit. Apparently they're one of the largest commercial landlords in the world and they seem to specialize in this free-flowing startup space. It's akin to selling prospectors supplies on their way to the gold fields.

Whenever I see self-dealing like this, I simultaneously think that it's totally unfair that things can be set up this way, and wonder why I don't take advantage and profit from it. :-) Most business owners structure their affairs in such a way that their company is buying everything they own to offset any profits that pass to the owner. And then they complain bitterly about taxes. It seems ludicrous that I can set up Bob Smith LLC, have Bob Smith LLC purchase a car in the company's name, rent houses and offices, etc. and I would work for Bob Smith LLC as the CEO paying myself a salary of $1/year. This happens all the time with small business owners. I know that the "corporate veil" can be pierced if the IRS or someone suspects this is going on, but the reality is there are way too many ways to avoid it.

We'll see what happens when Dotcom Bubble 2.0 crashes in the next year or two and the VC funds used to rent these offices dry up. I'm assuming WeWork will be just fine though...here in NYC people will give you their life savings for a closet and a hot plate.

Bigger fish

[fluffernutter]

The president of the United States makes billions sending dignitaries with deep pockets to his own resorts and hotels; perhaps that is the bigger issue.

Re:Bigger fish

[GameboyRMH]

And the emoluments clause case was about to reach the stage where it would draw a lot of media attention before the shutdown started, but now the government shutdown is delaying the case, giving Trump another incentive to keep it going for as long as possible.

McDonald's corp isn't in the Hamburger business

[rsilvergun]

they're in real estate. You typically have to lease property from them to run a franchise.

Re:McDonald's corp isn't in the Hamburger business

[cordovaCon83]

This. There's a reason that Ray Croc's face is on display at darn near every McDonald's in the nation and it's not because he came up with the McDonald's business model as much as he came up with the McDonald's realty scam. There was an interesting movie about it on Netflix not too long ago.

Re:McDonald's corp isn't in the Hamburger business

[mangastudent]

the McDonald's realty scam

Maybe, but it's traditionally been held to be a quality control measure, especially when the chain was starting up and their greasy spoon competition's food safety was iffy. I mean, prior to their creation of the Egg McMuffin, it wasn't a place you went to because their food was great, but because it was dependable and you were likely to have good to at least OK options.

Re:McDonald's corp isn't in the Hamburger business

[cordovaCon83]

Very much so. Ray Croc discovered that the McDonald's brothers had created a kitchen that optimized workflow efficiency and pumped out consistent quality food. He struck a deal with the McDonald's brothers where he went around the country franchising out the McDonald's business model. However, Ray was not profiting as handsomely as he'd like from franchising. He eventually added a clause that McDonald's franchises had to be built on land leased from a second realty company that he created. After that, Ray did a hostile takeover of the McDonald's brothers, who had never been a part of the realty company. One of the stipulations of the buyout was that the McDonald's brothers were gagged about telling people that Ray Croc was not the actual found of McDonald's, and the McDonald's brothers are slowly forgotten from the franchise's history. I do not discredit the McDonald's brothers for running a good business, I simply note that Ray Croc may very well have invented the move that the WeWork CEO is using - using realty to buy out the whole the business from those that really built it.

Tax form makes it obvious - go to jail

[raymorris]

> I can set up Bob Smith LLC, have Bob Smith LLC purchase a car in the company's name, rent houses and offices, etc. and I would work for Bob Smith LLC as the CEO paying myself a salary of $1/year. This happens all the time with small business owners. I know that the "corporate veil" can be pierced if the IRS or someone suspects this is going on

The thing about that is you have to report your salary on the tax forms, as well as revenue, etc. A $1 salary isn't going to be "if the IRS suspects", that's pretty much "go directly to jail. Do not pass go." These days IRS computer sees that $1 and you're dead.

Yes, people try it - and people pay large fines and penalties and go to jail.

Re:Tax form makes it obvious - go to jail

[Anonymous Coward]

You are correct! I forget the exact language, but it is something like the salary must be normal for the industry. I have an S corp and you even pay unemployment taxes on the salary you pay yourself even though as an officer of the company you cannot collect unemployment.

Debt structuring

[WoodstockJeff]

So, Neumann takes on the debt of buying the building, rather than WeWork, while providing the stability that WeWork won't lose their lease because the building owners don't like them, or get a better offer.

What's the problem?

Re:Debt structuring

[Luthair]

He knows how much he can get away with increasing rent. He's also using access to internal secrets & research of WeWork about how they choose locations, building size, timing, etc. in order to benefit himself.

Try another scenario - what if Tim Cook were to use his knowledge about Apple's supply chain to purchase companies before Apple signed supply contracts with them?

Re:Debt structuring

[Xylantiel]

Isn't one major problem pointed out in the summary? The tenants can't hold the actual landlord accountable because WeWork is really just an intermediary. This is like you sue your landlord to get them to fix the pipes and they spend months or years saying it's not their fault and actually there is some other landlord that isn't doing what they agreed to. Then you finally get a case against that higher-level landlord and first landlord walks out and then walks back in as the supposedly deadbeat landlord. This is abuse of the incorporation laws and is the kind of thing legislatures should actually be discussing.

To say it the way you have, I think the issue is that while Neumann might hold the debt, WeWork holds all the liability but none of the assets. That's convenient. I believe there are some rules against this general sort of thing, but they are not enforced ("smaller government") and there are well-known ways around them.

Such Debt structuring can be a scam (like Mervyns)

[ron_ivi]

Remember when Mervins (the moderately successful retailer) was split into two companies? One was set up to hold all the real-estates and assets --- the other of which held all the debt and liabilities and retail operations? The former then raised rents on the latter, sending the latter to bankruptcy (wiping out the debt); while the owners of the former laughed all the way to the bank. Well - not quite -- some sued; and they had to pay $166 million settlement on their huge (IIRC ~$400 million) profit from the scam. https://www.reuters.com/articl... Sears seems to be going through the same now ---- where Sears' CEO is also the biggest debtholder; and he's systematically stripping all assets (land, brands) away from Sears and to his other companies (ESL, etc) through debt structuring.

For me the problem is

[rsilvergun]

I'm being sold a narrative that guys like this are job creators who I have to give special privileges to (like lower taxes than me, nicer living and working conditions, private jets, etc) in exchange for a place to work.

What we have here is a company that isn't structured to grow jobs but instead to divert profit into the CEO's hands. This runs contrary to the narrative I'm told.

When I see this there's a moment of cognitive dissonance that borders on physical pain. There's two ways to reconcile this:

1. Double think. Tell myself the Job Creator Narrative is correct _and_ a CEO can plunder his company.

2. Get angry.

From the comments a lot of people are choosing #2, but the ones who choose #1 are usually silent. Double think is usually not perfect. You know something is wrong but you go with it anyway. It's tough to speak out in that instance unless you're one of the propagandists working for our pro-corporate media.