WeWork, as part of the flexible workplace provider's bankruptcy reorganization plan, rejected its New York headquarters lease and said real estate software firm Yardi will become its majority equity owner after Yardi agreed to fund most of WeWork's new financing needs to exit bankruptcy.

The proposal, still requiring the approval of the bankruptcy court, symbolizes the changing fortunes over the past five years for a business that gained fast growth and a high profile in the years following its 2010 founding. Its expansion, at the cost of profit, led to the company in 2018 to claim it had become the largest private occupier of office space in Manhattan, with over 5.3 million square feet.

WeWork rejected its headquarters lease at 12 E. 49th St., lawyers for WeWork and building landlord Kato said Monday in a court hearing. The location, spanning over 300,000 square feet, is one of WeWork’s “largest and most expensive” leases and serves over 2,800 members, according to a WeWork filing.

“Our intention is to stay in as many buildings as possible under economic terms that position all parties for a sustainable future,” a WeWork spokesperson told CoStar News in an emailed statement, adding WeWork will reach out to members this week to find alternative solutions. “Unfortunately, after extensive conversations, we have been unable to reach a deal regarding our operations at Tower 49 that would enable us to successfully operate the building for the long term.”

WeWork also said it reached agreements with stakeholders including Japan-based investment giant SoftBank, an ad hoc group including asset manager BlackRock, and a third-party investor going by the name of Cupar Grimmond on $450 million in combined debtor-in-possession "new money" needed on an interim basis and for exiting bankruptcy.

If the proposed plan is approved, Cupar, a name used in the process by WeWork’s workplace management software partner Yardi, will become WeWork's majority owner after it emerges from bankruptcy with a 60% stake as it’s giving most of the new money, Steven Serajeddini, an attorney for Kirkland & Ellis representing WeWork, said at the hearing. The ad hoc group will have about a 20% stake while SoftBank’s stake will fall to 16.5% when WeWork exits bankruptcy unless WeWork taps some undrawn letters of credit from SoftBank, he said.

Up to $337.5 million of the $450 million will come from Yardi, with the ad hoc group to fund the rest, according to a 393-page amended disclosure statement WeWork filed Monday. No new money is coming from SoftBank.
The debtor-in-possession "new money" loans are secured by a "superiority lien on substantially all property of" WeWork's estates, according to the filing.

WeWork said it expects to emerge from Chapter 11 with about 175 locations in the United States and Canada, the two countries where its bankruptcy case applies.

SoftBank and Yardi haven't responded to CoStar News' separate requests seeking a comment.

WeWork “isn’t in a position to service debt,” Serajeddini said, adding the company’s new financing needs came as its renegotiations with landlords and concessions that didn’t come quickly enough led to WeWork “paying above market rent” and administrative expenses. Debtor-in-possession “new money has to be in the form of equity,” he said.

WeWork has said in a recent filing that it may need “a $400 million capital contribution” when it exits bankruptcy, planned at the end of May. Serajeddini also said Monday WeWork will have administrative claims, including rents it owes to landlords, of $212 million, less than half of the estimated $443 million WeWork previously disclosed in a liquidation scenario, he said.

WeWork also has settled its disagreements with its official committee of unsecured creditors, which includes landlords, and a separate group of unsecured noteholders. He said the company has reached “a critical mass of landlords” in its lease talks to emerge from bankruptcy.

WeWork’s proposed plan doesn’t go without objection or questions. For instance, attorney Susheel Kirpalani with Quinn Emanuel Urquhart & Sullivan, which represents WeWork co-founder and ousted CEO Adam Neumann and his investor group, known collectively under the name of Neumann's new real estate firm, Flow, said at the hearing WeWork’s “new money exit facility” isn’t a debtor-in-possession loan at all. He called it a “misnomer to disguise a sale of WeWork as a means to exit” bankruptcy.

WeWork’s amended disclosure statement contains “mountains of unintelligible and oxymoronic terms,” he said, describing many of them as “gobbledygook.” WeWork is “using those words to mask what they are doing” and selling the company when Chief Executive David Tolley has said the company isn't for sale, Kirpalani said at the hearing.

In an emailed statement to CoStar News, Kirpalani said he expects "there'll be robust objections to confirming" WeWork's reorganization plan. "After misleading the court for weeks, WeWork finally admitted it is trying to sell the company to a group led by Yardi for far less than we are continuing to propose," he said. 

Neumann’s first personal correspondence with the bankruptcy court, filed late Friday, described meeting Tolley in December to express an interest in buying WeWork, but Neumann was advised it was “not for sale.” Tolley suggested Neumann make a debtor-in-possession financing proposal instead, Neumann said, adding Flow offered to buy the company for $650 million in March as well as provide it with debtor-in-possession financing of up to $250 million, subject to due diligence.

Neumann said WeWork’s reorganization plan calls for selling 80% of WeWork’s post-bankruptcy equity for $400 million to Cupar/Yardi, and possibly other consenting stakeholders, a price he said reflects just $500 million of equity value, which he said is far short of the $650 million Flow offered.

He also criticized WeWork’s financial projections as “unsustainable in light of the razor-thin margin for error baked into the plan’s financial projections.”

WeWork’s projections “predict a hockey-stick type of increase in occupancy percentage — anticipating a climb of historical occupancy from the mid-70% percentage to 85%,” he said in the Friday filing.

Neumann was removed as WeWork’s CEO in 2019 over corporate governance concerns when the money-losing company failed in its first attempt at going public with a valuation of $47 billion. That figure plunged to $9 billion when shares eventually started trading on the New York Stock Exchange in October 2021. WeWork filed for bankruptcy in early November after years of signing expensive leases at the cost of profit under Neumann.

Serajeddini said at the hearing the due diligence request from Flow, which he described as a WeWork competitor, amounts to Neumann seeking “access to sensitive commercial information.”

Flow’s debtor-in-possession proposal “was well below the amount required to pay off [WeWork’s] nearly $4 billion in secured debt obligations,” James Baird, a partner at investment bank PJT Partners, a WeWork adviser, said in a filing Friday, adding Flow’s proposal is not “actionable.”

It’s important for WeWork to move forward with its planned exit by the end of May as “the cost of these [bankruptcy] procedures is not sustainable,” Eli Vonnegut, an attorney representing the ad hoc group of secured lenders, said in the Monday hearing, adding the group will fund 25% of the new money for WeWork’s exit. “It’s needed medicine but it’s not cheap. The cost of these procedures is not sustainable. It’s important to move along to reduce the fee burn. … [The plan] is fast, cheap and a clear path to exit. … If [Flow] wants to buy [WeWork,] they have to clear [$4 billion in] secured debt.”

The due diligence Flow wants also “is not a cost-free exercise” that he said involves “fraught exercise of sharing sensitive information with a competitor.”

WeWork projected that it will turn profitable next year after emerging from bankruptcy protection. The company has been renegotiating leases with landlords to cut its lease burden, the biggest challenge to WeWork becoming profitable.

The company has said revamping its real estate portfolio is expected to result in the "elimination of over $8 billion in total future rent commitments." WeWork said it’s expected to end this year with 335 locations globally, 297,319 members, and an occupancy rate of 76%. By the end of 2028, it expects the occupancy rate to rise to 85%.

WeWork is a tenant in a Virginia building CoStar Group acquired earlier this year, making CoStar a creditor in the case. CoStar also competes with Yardi in providing real estate data.