Coworking Firm’s Struggles To Emerge From Bankruptcy Reveal Issues Plaguing Operators

Coworking provider Serendipity Labs is attempting to restructure itself through the Chapter 11 bankruptcy process after failing to refinance its debt, one of several midsized coworking providers facing challenges during the coronavirus pandemic.

The New York-based company is moving forward with Chapter 11 bankruptcy proceedings in the U.S. bankruptcy court for the Northern District of Georgia, according to court filings first reported by Allwork. 

Serendipity Labs CEO John Arenas told Bisnow this week the company is looking to bring in new investment to help pay off its obligations and emerge from the bankruptcy process, and if it is unable to do so he would seek to sell the company next year.

The coworking provider has continued to open new spaces over the last several months, and its existing spaces continue to operate, Arenas said. Founded in 2011, Serendipity Labs has grown to more than 30 locations. 

"This is a reorganization. It isn't a liquidation, it isn't a fire sale, it isn't a company that's ending," Arenas said. "It's a company that's using the bankruptcy laws to reorganize itself, to optimize the benefit to creditors, to pay them all, and to move on and continue to operate, which is why these laws were set up."

The bankruptcy process stems from Serendipity Labs' inability to pay off or refinance a $4M loan from Dallas-based HALL Group ahead of its August maturity date, Arenas said. He said efforts to refinance the loan failed because many of Serendipity Labs' locations were still closed under government mandates. 

HALL Group also led Serendipity Labs' Series C investment round and has a member on its board of directors, Arenas said. HALL declined to give Serendipity Labs extra time by delaying the loan's maturity date, and it could have taken the company's assets when the loan matured, Arenas said. He said he entered the Chapter 11 process in July to avoid that outcome. 

HALL, through a spokesperson, disputed Arenas' characterization of the bankruptcy process thus far.

“John and Serendipity have made numerous assertions that we do not believe are borne out by the facts," the spokesperson said. "We’ve responded to such assertions in our public filings with the bankruptcy court and welcome review of those filings. Due to the ongoing nature of the litigation, however, we do not believe further comment is appropriate.”

Serendipity Labs was initially seeking to use the Small Business Reorganization Act, created last year as Subchapter V of the Chapter 11 bankruptcy law. Arenas said this subchapter had borrower-friendly provisions that could have allowed it to emerge from the process in a matter of weeks, but it was ultimately unable to use that portion of the law. 

In October, after a protest from HALL, the court ruled that Serendipity Labs couldn't use the SBRA process because one of its biggest investors is a publicly traded company, meaning it is no longer considered a small business for the purpose of the law, and it became subject to the standard Chapter 11 process. 

The company is now working to prepare a reorganization plan that would involve receiving enough investment to pay off its debts. It has received a $1.1M loan from Baypoint Capital to cover the legal and administrative costs of the process. 

It is also preparing a fallback option if the investment and reorganization plan doesn't work. The secondary plan, which would need to be approved by the court, would involve selling the company through a bidding process. 

Serendipity Labs' coworking spaces are licensed through third-party franchise agreements and are not involved in the bankruptcy process, which concerns the parent company. The company has continued to open new locations since beginning the Chapter 11 process in July, including spaces in Houston; Memphis; Clayton, Missouri; and Mount Pleasant, South Carolina. 

"Since we started in July, it's been business as usual, other than the pandemic, at all of our locations with all of our partners," Arenas said. "And it will continue to be business as usual, because none of those locations or entities are involved in the Chapter 11."

Arenas has experience with the bankruptcy process for a shared workspace company. He served as president and Americas general manager for Regus in 2003, when the company's U.S. arm filed for Chapter 11 bankruptcy protection. Regus, now called IWG, operates coworking brand Spaces, which has more than 30 locations in the U.S. 

Serendipity Labs isn't the only midsized coworking company going through financial and legal challenges during the coronavirus pandemic.

Flexible workspace provider Breather has been sued by multiple landlords in New York, most recently by IGS Realty Co., which claims it failed to pay $90K in rent and other charges for its space at 336 West 37th St., court records show. 

Breather hired an investment banking firm to explore a potential sale or capital raise, Business Insider reported last month. Breather declined to comment through a spokesperson. 

Knotel has faced lawsuits from at least four landlords suing the company over $1.6M in unpaid rent, The Real Deal reported in July. The company cut nearly half its staff in March and laid off more people last month, and has sought to give back a portion of its portfolio. 

Coworking provider Industrious was sued by one of its landlords in Chicago after not paying rent since April, Crain's Chicago Business reported last week. Most of Industrious' locations are operated through a management and revenue-sharing agreement.