WeWork is setting up a $2.9 billion fund to buy buildings that it will lease to itself

Troy Wolverton

May 16, 2019, 03:02 IST

WeWork is setting up a $2.9 billion fund to buy buildings that it will lease to itself

AP Photo/Mark Lennihan

WeWork CEO Adam Neumann's new plan for the company is to buy buildings through a special investment fund that will be leased to WeWork.

WeWork has set up a new fund to purchase commercial properties that it will then lease.
The move is a change from its traditional strategy of leasing space from other building owners.
Most of the money in the fund will come from outside investors, but WeWork will have majority control over it.
CEO Adam Neumann plans to sell to the fund properties he's purchased stakes in that WeWork has leased space in.
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WeWork CEO Adam Neumman has a new plan for the $47 billion office-sharing company: Instead of subleasing space in other people's buildings, he wants WeWork to buy its own buildings.

WeWork announced Wednesday that it has set up an investment fund called ARK that will be used to purchase commercial properties that the fund will lease to WeWork. The fund will be separate from WeWork and most of the money it will invest will come from outside sources, according to Bloomberg Businessweek, which first reported the new fund. But WeWork will be the majority owner of ARK, the company said in a statement.

ARK will have $2.9 billion in cash to invest, $1 billion of which will come from Ivanhoé Cambridge, a Canadian real estate company, Neumann told Business Insider.

Read this: WeWork's CEO explains why he thinks his $47 billion company is recession proof, and how he keeps his ego in check as a young billionaire

"Now that people believe in us and are willing to give us money to buy [properties], we're very happy to have [partners] like Ivanhoé Cambridge," Neumann said. "We have some of the largest institutions of the world, and we will not let them down."

ARK represents a change of strategy for WeWork

Prior to the launch of ARK, WeWork has generally focused on leasing space from traditional property owners rather than buying and leasing out its own properties. The company typically subdivides the space it leases and sublets it to other companies, mostly startups.

With that strategy - and with plenty of backing from venture and other investors - WeWork has become a major player in the real estate market. It now has some 45 million square feet of office space around the world, about the same amount in all of downtown Philadelphia, according to a separate Bloomberg report.

But the company's massive expansion has come with major costs. It lost $1.9 billion last year and has repeatedly had to raise new funds to replenish its coffers.

Neumann has generated controversy by personally purchasing stakes in properties that then lease space to WeWork. Although the transactions have been legal, he's been accused of engaging in a kind of self-dealing that raises questions about conflicts on interest.

Neumann is selling properties to ARK

As part of establishing the new fund, Neumann plan to contribute his interest in those properties to WeWork, Neumann told Business Insider. He'll sell them to ARK basically for the price he paid for them, he told Bloomberg Businessweek.

"Whatever I own that has any WeWork tenancy in it is moving to WeWork," he told Business Insider. "I'll lose money on that transaction, but the reason that's not a problem is because I'm a large shareholder of WeWork. WeWork is me; I am WeWork.

"If it's good for WeWork, it's good for me. The only vision moving forward is one aligned strategy."

To be sure, transferring the property to ARK doesn't eliminate the conflict of interest concerns, as Bloomberg Businessweek noted. What's good for the outside investors in ARK - such as which buildings to buy, which potential tenants to lease to, and the rental rate to charge - may not be good for WeWork and vice versa.

Although WeWork will control the fund, it will be overseen by Steven Langman, who will serve as its chairman, Neumann said. Langman and his team will run it to the benefit of the fund's investors, he said.

"They have fiduciary duties toward the people they raise money from," Neumann said. "It's their job to buy real estate that is going to make a return for their investors."

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