Scrutinising flexible workspace management agreements

For a start, heads of terms for a lease could be two pages long, whereas a management agreement might be 10 to 15 pages to include everything. Leases have familiar language and terminology, but while management agreements are becoming better understood, nuances and minutiae can trip up owners and their agents if they do not know what to look for.

A good management agreement serves both parties positively (and profitably) for the long term. A bad one risks an owner being tied into an agreement with an operator and product that are not a right fit, which can affect a building owner’s desire for the property and returns.

There are several points to consider in a management agreement. It is important to scrutinise how the management agreement will work for both parties in the short and long term. Does it reflect the dynamics of the market and what an owner wants from the proposition and ultimately for their property?

Every operator will have a model to show predicted revenue, costs and returns, but it is important to ensure that all the elements are realistic.

There is plenty of market data on workstation rates, against which to compare office revenue forecasts. The same scrutiny needs to be applied to other income costs, not only comparative with the market but also the operator’s own operation.

Do the costs reflect the type of flex space and operation that will be installed in a particular building? What impact will rising costs have not only day to day but also throughout the term of the agreement?

While the building owner is contracting a business to perform a service on its behalf, it is still the owner’s space and income that could be affected if it goes wrong. Appropriate key performance indicators need to be in place to ensure that if the operation is not running effectively it cannot continue.

The balance of risk and reward needs to be reflected appropriately. Typically, the majority of the capital expenditure, including the cost of fit-out and working capital, will fall to the owner, which needs to be reflected in the share of the returns.

Operators should be fairly remunerated, but if they are shouldering less of the risk, their reward cannot be on a par with the owner’s.

Financial considerations

It is also important that the operation and product match the quality of the building, the area and the potential customer base. The investment in the fit-out needs to be appropriate; otherwise it risks being a product the market cannot support, with the inevitable impact on returns.

Understand how the space will be divided up, what the drivers are for people using it and the operator’s main source of income. For example, does the majority of the revenue come from fixed desks or co-working areas, and does the local market support this either now or in the future?

Some operators will put money towards furniture, fixtures and equipment; but if they are leasing the equipment, it could be charged back to the business for an additional fee.

There has been a period where the most desirable flex space brands were in high demand and, therefore, had more leverage in shaping the terms of the management agreement, but this is changing. This needs to be a true partnership where both parties understand their roles, risks and rewards and each start the relationship on the right foot.

Management agreements for flexible workspace require a change in mindset from traditional property deals. An agreement is not automatically a bad deal, but knowing what to look for and making an informed decision is in the best interests

of both the building owner and the operator.

Will Kinnear is director at flexible workspace agency HEWN