The goal of ARK — no relation to Cathie Wood’s ARK Investment — was to raise some $3 billion in equity to help the co-working startup branch out into building ownership. But the fund’s rollout in May 2019 came only a few months before WeWork pulled the plug on an initial public offering, at its peak $47 billion valuation.

A year earlier, when WeWork was still a darling of the venture-capital world, its co-founder and former CEO Adam Neumann pitched ARK to its main backer, SoftBank, as one of three arms of the company that would be “a $1 trillion business of its own,” according to the Wall Street Journal.

Last week, it warned investors it had “substantial doubts” about its ability to stay in business, after it lost $397 million in the second quarter and has $680 million of liquidity. It also plans to conduct a 1-for-40 reverse stock spilt on Sept. 1, as a way to regain compliance with the New York Stock Exchange’s $1 million closing price threshold, after shares closed at 16 cents this week.

The big thing it needs to do quickly is cut expenses. That’s why WeWork’s role at 600 California as a delinquent tenant and part-owner of a property in trouble is being watched as the company looks to cut costs to stay afloat.

Unraveling more leases might provide it more wiggle room, but the company also risks inflicting painful losses to ARK, particularly in San Francisco, a place where commercial property values have tumbled and many lenders and landlords no longer want to operate.

See: ‘San Francisco is not dead’: Not everyone is shunning the city’s reeling office market

Exposure on all sides

While San Francisco doesn’t have a huge exposure to WeWork relative to New York City or Los Angeles, its footprint in the city is substantial, and its lease at 600 California is for half its rentable space. That puts the property on the front lines of the city’s struggle to avoid a “doom loop.”

David Tolley, WeWork’s CEO, last week said the company is focused on reworking its pile of leases to cut costs, noting it already exited or amended 590 leases since the fall of 2019, resulting in an estimated $12.7 billion reduction in its fixed lease payments.

A recent client note from KBRA Credit Profile, a division of KBRA Analytics, estimated that WeWork’s overall exposure to the U.S. commercial-mortgage bond market was nearly $7 billion, although that figure that has been hard to pin down as WeWork has aggressively cut its rent and lease obligations in the past four years.

WeWork has been fairly successful in “wiggling out of its leases,” said Brian Quintrell at KBRA Credit Profile, even though his team notes that WeWork could end up on both sides of the negotiating table at 600 California when it comes to any debt relief.

That’s because WeWork owes rent through 2035 at the property, but it is also one of the non-recourse guarantors for the building’s past-due $240 million mortgage and is an affiliate of ARK Capital Advisors, which manages the investment vehicle.

WeWork declined to comment for this report, other than to say it remains committed to its co-working operations at 600 California, even though it’s past due on its rent. A representative for Rhone Group, a part of the ARK venture, declined to comment. Ivanhoé Cambridge, another investors in ARK, didn’t immediately respond to a request for comment.

Bond documents for the building’s 2019 financing show the borrower group had $130 million of equity in the property at a $370 million valuation.

However, the property’s appraised value this summer was cut by about half to around $183 million, according to KBRA Credit Profile.

Asset-liability issues

San Francisco’s office sector, more than other big cities, has faced the fallout of higher interest rates on a wall of debt coming due, while many tenants in the wake of the pandemic have been downsizing their office space.

WeWork was rapidly expanding it footprint in many big cities at a time when leases were fetching peak rents. While many people think co-working space has a place in the real-estate landscape as more companies embrace flexible work, WeWork’s rapid growth mostly came when interest rates were low and property values were high.

“I think it’s a good, old-fashioned asset-liability mismatch that banks can run into,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York, of WeWork’s financial woes.

“It seems WeWork’s got into that problem,” he said, noting the company took out long-term leases on mostly Class A office properties, while attempting to re-lease the space on a short-term basis to its clients.

“Now all of the sudden, there’s a big renter in the form of WeWork who may be dumping a lot of these leases back on the market, adding even more supply back,” he said. “It’s tough.”

Related: The $1 trillion ‘wall of worry’ for commercial real estate that spirals through 2027

WeWork went public in 2021 via a special-purpose acquisition company transaction when frothier corners of financial markets were still in vogue, before interest rates were jacked up by the Federal Reserve. Stocks
DJIA
posted sharp weekly losses on Friday, with the S&P 500
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ending at down 2.3% for the week