Inside WeWork's troubled Lord & Taylor building: A tale of outsized ambition, audacious renovations, and now financial worries
- The Lord and Taylor building in midtown Manhattan, owned by a real estate fund linked to WeWork, is a symbol of the co-working company's grand ambitions gone unchecked.
- Purchased in late 2017, the building was an ambitious bet for WeWork's brash and charismatic founder Adam Neumann. WeWork planned to lease the space and turn it into a global headquarters.
- The landmark property is still under construction, but as WeWork slashes thousands of jobs - eliminating the need for a new headquarters - and faces a difficult financial future after shelving its IPO, the building's future is in doubt.
- For more WeWork stories, click here.
On a recent autumn day in New York, construction sounds drifted out of the Lord & Taylor building on Fifth Avenue. Contractors in yellow vests clustered outside a green-painted plywood wall encasing the ground floor. The location, spanning the block between 38th and 39th Street, is the site of an audacious renovation to restore the Italianate structure to an earlier grace.
But it's also a symbol of grand ambitions gone unchecked. The building is owned by a real estate fund linked to WeWork, and the coworking startup has leased the entirety of its nearly 700,000 square feet. The lead banker for the company's failed IPO holds the mortgage. One need look no further than this trophy asset at the heart of New York's real estate scene to understand the company's current fate.
Lord & Taylor opened its flagship location at 424 Fifth Avenue in 1914, with the New York Times touting its "artistic architecture as a business asset." The building retains some of its original features, including crown molding and "original wood floors with amazing structure," according to two sources who were involved in the recent deal.
In September 2006, Lord & Taylor and its 12-floor flagship store was sold to a retail developer and owner of the Hudson's Bay Company as part of a 37-property sale. The developer was founded by Richard Baker, now Hudson's Bay chairman.
WeWork agreed to lease the entire space with plans to fashion some of it into its global headquarters and allow Lord & Taylor to reoccupy about a quarter of it for a slimmed down ground floor retail store. WeWork would lease space in other Hudson's Bay buildings, including its flagship on Queen Street in Toronto, and two more in Vancouver and Frankfurt.
The purchase would be made with WeWork's property fund, a joint venture with an investment fund run by a board member, Rhone Capital's Steven Langman, to purchase properties that WeWork could lease. Rhone took a stake in Hudson's Bay as part of the deal.
'A chance to conquer'
Perhaps most importantly, the landmark purchase was the most ambitious yet for WeWork's brash and charismatic founder Adam Neumann.
"For someone like Adam, this is a chance to conquer, to capture a big deal and make a statement," a person who worked on the deal told Business Insider.
He paid up to do so. WeWork Property Advisors offered $150 million more for the Lord & Taylor building than what commercial property giant Brookfield Property Partners was reportedly prepared to pay, according to the Wall Street Journal. The $850 million purchase price was a 30% premium to where it had been appraised just a year before.
"WeWork's role in this big trend will be to reimagine and reshape places so as to foster collaboration, innovation and creativity," the founder and then-CEO said in the statement announcing the deal. "Retail is changing and the role that real estate has to play in the way that we shop today must change with it. The opportunity to develop this partnership with HBC to explore this trend was too good to pass up."
The tenant eventually signed a 20-year lease starting at $105 per square foot, with annual increases and a 15-year guarantee that WeWork would pay. Current midtown rents averaged about $88 a square foot in the second quarter, a new quarterly high, according to brokerage firm CBRE.
See more: How WeWork spiraled from a $47 billion valuation to talk of bankruptcy in just 6 weeks
Nonetheless, that would be enough to convince JPMorgan, then angling for a spot on the startup's highly anticipated public offering, to sign off on a mortgage whose balance stood at $389 million in February, according to public records. In total, WeWork lined up $900 million in financing from JPMorgan, Starwood Property Trust and others, according to real estate data provider Real Capital Analytics.
WeWork, which scrapped its IPO last month and ousted Neumann, is now on the hook for about $74 million in annual lease payments than will step up over the next 15 years.
Representatives for Neumann, WeWork, JPMorgan Chase, Rhone Capital and Hudson's Bay declined to comment on the record for this story.
'All smoke and mirrors'
But in 2017, WeWork looked like it could do no wrong. Hudson's Bay chairman Baker sold the deal by saying it would bring an additional 6,000 to 8,000 people by the firm's store, with customers getting access to WeWork's member platform. WeWork employees would get exclusive access to clothing sales with Lord & Taylor, a brand more synonymous with an older generation than the millennials who frequent WeWork's spaces.
"The original plan to keep Lord & Taylor in the Fifth Ave building was all smoke and mirrors," the person who worked on the deal said. "It was never going to happen."
The deal featured the types of conflicts that would later help derail WeWork's IPO. For one, WeWork sat on both sides of the deal, as an investor in the fund, with control of the management team, and as the tenant.
In theory, the property fund made sense: as WeWork brought its industrial chic design approach to buildings, their value would increase. It had happened in the past. And the real estate fund could enjoy some of that appreciation. In the end, outside investors contributed much of the money the fund would eventually manage.
But there was more: Rhone Capital agreed to invest $500 million into Hudson's Bay Company as part of the deal, further tying the three entities together. Langman and WeWork exec Eric Gross joined HBC's board. And earlier this year, Baker proposed taking Hudson's Bay private, counting himself, WeWork's property fund, and Rhone as holders of a combined 57% stake and further entangling the co-working company in activities outside its core mission.
It took a long time for the Lord & Taylor transaction to close. The October 2017 press release initially said it would close no later than August 10, 2018, with the renovation work beginning after that year's Christmas season. The parties haggled over terms and WeWork lined up financing through the end of 2017 and into 2018.
On August 3, 2018, Hudson's Bay announced an amendment to the original agreement, extending the transaction closing date to November 13 and also disclosing options that would allow it to extend the closing date to February of the following year. The retailer said it collected an additional $25 million for extending the dates, and would collect another $25 million if the buyer asked to extend the closing date to January 2019.
In November of 2018, Community Board 5, which oversees the district that includes the Lord & Taylor building, took a hard look at WeWork's planned renovations. The board members, whose recommendations are non-binding, gave it a lukewarm response.
The board's landmarks commission recommended denying the proposal, citing the company's plan to alter one of the city's largest and most intact rooftop terraces in favor of a two-story glass cube perched above the building on dozens of skinny columns.
In any event, WeWork showed little interest in considering the board's suggestions, the person said. Later that month, the city's Landmarks Preservation Commission signed off on the project despite the community board's reservations.
The transaction finally closed in February 2019, and included a provision that gave Hudson's Bay a $125 million preferred equity interest in the building. Renovations were expected to cost $400 million, according to the Wall Street Journal.
Outsize ambitions
To date, WeWork has not moved into the building, and its headquarters remains in Chelsea. Even as work continues, the office company has looked for other options. Rumors circled earlier this year Amazon might lease the building for more than the price of WeWork's lease, either in whole or part.
As WeWork explores options, it's also in talks with its largest investor, SoftBank, for another cash infusion, and with a collection of banks, including JPMorgan, for debt financing. Bloomberg reported Friday that the financing package could be as big as $5 billion.
JPMorgan's role shows how conflicted the bank has become -- if it chooses against lending to WeWork, the startup's property fund is more likely to default on its Lord & Taylor building mortgage. It also holds mortgages on residential properties Neumann has bought.
Two years after the deal was first inked, much of what was announced has failed to materialize. Lord & Taylor will not take 150,000 square feet of retail space in the building - a source who was involved in the original negotiations said "those conversations ended pretty quickly." The retailer shuttered its flagship store this January.
And about those three Hudson's Bay locations where WeWork would lease space? So far, it has only announced plans for one, in Toronto, whcih is scheduled to open in November. And the company, which is set to lay off up to a quarter of its staff, has little need for a new headquarters.
One executive who was involved with the original deal said the Lord & Taylor building is representative of WeWork's outsize ambitions under Neumann. While the company, especially Neumann, wanted a trophy building to encourage future investments, the source said executives failed to anticipate the complexity of both the deal, with layers of options, warrants, and parties, and the overhaul of a landmark property.
Despite the chaotic financial backdrop, construction crews are still at work on the building. They're peeling away drop-down ceilings that have obscured crown molding, working to transform the landmark retail building into the office of the future. Just who will sit in those seats, though, remains to be seen.
Additional reporting by Alex Nicoll.
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