Traditional Lease vs. Flexible Management Agreement – What’s Best?

For a long time, leases were the only game in town in the coworking world. As a result, operators had to sign a long-term lease (5-10 years) with their landlords and pay a fixed sum every month, regardless of how much revenue they generated.

However, the COVID-19 pandemic changed the game for good. The flaws of the lease model were exposed, as businesses had to adjust to new government regulations and employee demands.

This is where management agreements came to the rescue. 

In this article, we’re going to discuss everything you need to know about management agreements, including:

• What they are
• The benefits they have over traditional leases
• How to negotiate a lease agreement with landlords

Let’s dive in.

Lease and Management Agreement Definitions

First, let’s get the terminology out of the way:

• A lease is an agreement by which one side (coworking operator) pays the other side (landlord) for the use of an asset (real estate). Leases are pretty straightforward — operators agree to pay a fixed monthly sum for the duration of the agreement. This sum remains the same, regardless of how much revenue the space generates, making leases a pretty safe bet for landlords.
• A management agreement is a flexible partnership between the operator and landlord, in which they agree to share the coworking space’s revenue. Operators are still responsible for generating that revenue (by selling memberships and additional services) but they don’t have to pay a fixed monthly sum. Instead, the revenue is split between the operator and landlord, per the management agreement.

The Post-Pandemic Rise of Management Agreements

Now, it’s worth noting that management agreements have existed for years. They’ve been the primary mode of operation for the hotel and apartments sectors. 

At the same time, the commercial real estate world wasn’t too interested in them. But then came the COVID-19 pandemic. Suddenly, offices, and coworking spaces were empty, yet operators with leases still had to pay up every month. 

And as the economy started slowly re-opening, the standard office experience had to be tailored to government regulations and new employee expectations.

In short, the pandemic highlighted a major problem with the lease model — its inflexibility. This was the perfect opportunity for management agreements to shine.

On the one hand, landlords wanted to keep their flex spaces full and continue to create new value. This meant they had to find ways to accommodate the new needs of businesses and their employees. On the other hand, coworking operators already had the track record and know-how of creating exceptional flexible experiences for businesses. 

As a result, management agreements became the logical way to go for operators who could help landlords adapt their space to the demands of the post-pandemic world.

The Benefits of Management Agreements Over Traditional Leases

There are key advantages that management agreements bring to the table compared to traditional leases:

• More options for operators. As an operator, management agreements remove one of the biggest recurring expenses — the set monthly lease payment. Instead, you can negotiate different payment options, depending on how much revenue you bring in. 

• Flexible workspaces for businesses. Employees have made it clear that they don’t want to go back to the same old office. Instead, they demand workspaces that fit their specific needs during the workday — whether that’s collaboration, quiet time, or anything else. Landlords who can offer that (through the expertise of their operators) have an easier time filling their spaces and making the end customer happy.

• Net new value creation. This stems from the previous point — when you provide a better service, you create more value. And since this is a revenue-sharing agreement, both landlords have the potential to earn significantly more from the space than they would with a traditional lease. 

2 Key Points to Focus on When Negotiating Management Agreements

By now, you hopefully have a good idea of how management agreements can be beneficial for operators, landlords, and end customers.

However, getting landlords to use management agreements can be difficult. And there’s a good reason for that — management agreements are riskier because they don’t offer the same stable, predictable monthly payment. 

In this final section, we’ll show you how to overcome this objection and successfully negotiate management agreements by focusing on two key points.

#1 New Value Creation

As with all other negotiations, you have to start by considering what the other side is after. In this case, the answer is simple — new value creation.

The key point here is that traditional leases (which are static) limit landlords’ upside. Even if the space is doing amazing, they’ll get the same monthly payment, with operators keeping the extra revenue.

That’s why your first goal should be to explain how you plan to generate more value with your business model. There are no specific rules here, but our experience shows that you need a 20-30% premium over market rents for landlords to get interested. 

For example, if landlords can get $25/square inch with a lease, you’ll likely need to get them to $30-35. That should be enticing enough for them to consider taking the higher risk that comes with management agreements.

#2 Regular Updates and Reporting

Most landlords who lease a space don’t need to be actively involved in how operators run it. 

However, things are different with management agreements.

Landlords will likely be more interested in your business since you’ll be sharing the revenue. This means you need to look at them more as a business partner and keep them up to date with your operations. 

One way to do this is by sharing regular lead generation reports. This can be as simple as exporting Excel files from your Facebook or Google Ads accounts, for example. Also, if you ask new customers how they heard about your business (which you should do), you can send the findings to your landlords. 

While simple, this will help them understand how you’re spending your marketing budget, what types of businesses you’re bringing in, and which channels produce the best results.

Additionally, it’s crucial to share reports about your space’s utilization, finances, revenue, memberships, and other key metrics. These factors directly affect each landlord’s bottom line, so you reporting on them is a must.

While these reports will be simple at first, they can easily become overwhelming when you have to pull data from multiple tools, organize it into spreadsheets, and send them on time every month.

On that note, OfficeRnD Flex — our space management software — has an analytics module that can help you:

• Visualize the relevant metrics and KPIs using a drag-and-drop editor and over 100 predefined widgets. This means you can have one or multiple dashboards with all the relevant information — revenue, memberships, utilization, and so on — neatly packaged in one place.
• Then, you can give your landlords access to OfficeRnD Flex, in addition to sending them spreadsheets every month. As a result, they can simply log in at any time. Not only will this save you time and effort, but it will also show your commitment to transparency, which can be a big plus during negotiations.

Note: If you’re interested in seeing how OfficeRnD Flex can help your business in more detail, book a free demo with our team.

Get Flexibility and Drive More Value With Management Agreements

While the popularity of management agreements has grown, we believe they’ll become even more dominant in the coworking world.

Why?

Because they’re a win-win for everyone. 

Operators have more ways to negotiate with their landlords. Landlords can earn significantly more than with a traditional lease. Businesses get more flexible, dynamic, and tailored workspaces, which is exactly what they’ve been looking for since the COVID-19 pandemic started.

In short, if you haven’t tried management agreements yet, we strongly suggest you give them a shot.