Money Rehab with Nicole Lapin - How WeWork's Potential Bankruptcy Might Raise Your Taxes

Episode Date: August 18, 2023

On this week's roundup of the biggest headlines on Wall Street and how they'll affect your finances: Zuck vs Muck is off, why WeWork's downward spiral matters to you (even if you don't use WeWork) and a tip for borrowers stressed about student loan repayments. If you're able to support Maui in the wake of the devastating fires, please consider donating here: https://www.hawaiicommunityfoundation.org/maui-strong

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to it's time for some money rehab. Psych. It's actually not Nicole. Hi, it's Morgan, the executive producer on the show. And I'm not going to say that I'm filling in for Nicole today because nobody ever could. Those shoes are just way too big to fill. But Nicole couldn't record today. It's a story that she'll tell you very soon, as soon as she's back, I promise. But she didn't want to let this week go by without filling you in on the headlines

that affect you and your wallet, so I'm going to be reading her notes. Let's get into it. We're sorry to report that Mark Zuckerberg has announced that we all need to move on from his brawl with Elon Musk. The reason? Zuckerberg doesn't believe that Musk is serious. Now, Musk trolled his way into spending billions of dollars to buy Twitter and turn it into a letter. So just because Musk is joking doesn't mean it won't happen. However, it is understandable that Zuckerberg, who is a serious guy, would think it's all over. As far as I know, Zuckerberg has only been credited with having a sense of humor literally one time. His wife Priscilla reports that she liked his beer glasses in college, which had a C++ joke on them. Since Zuckerberg is kind of a wife guy and his wife is a brilliant doctor who seems to love him, he's gotten a lot of mileage out of that only

one time he was funny. Musk is currently too busy to fight anyone because he's probably trying to buy a steel company for their stock market ticker. The stock ticker is X and the company is U.S. Steel Corporation and their market capitalization, or the value of all common shares owned by stockholders. At the time I'm recording this is $6.93 billion with a share price of around 31 bucks. Two other steel companies, Eskmark and Cleveland Cliffs are bidding for the company. Cleveland Cliffs initially offered $17.50 a share in cash and Eskmark doubled that offer to 35 bucks a share. U.S. Steel Corporation reports that it has also received other private offers. Musk's jet landed in Cleveland, where Cleveland Cliffs is located, on Monday morning, leading to speculation that he could be going in

on a deal with them for U.S. Steel Corporation to claim the ticker name, if not the entire company. The question here is, would Musk spend almost $7 billion to get the perfect stock ticker for his new pet project? Probably? It remains to be seen if anyone will let him, but there's no reason to think he wouldn't try. Meanwhile, the rest of us don't have $7 billion to spend on perfect branding. While inflation continues to cool, the cumulative impacts of inflation have taken a serious toll on household budgets, with the average American family reporting that they're spending $709 more a month than they were two years ago. Wages have risen, but not at the same rate as inflation, meaning everything costs more, but you aren't making that much more money. Only now that inflation is starting to cool,

are wages getting their shot at catching up, but it will be a slow road and help will come too late for many families. And that's especially true for families who will be resuming payments on student loans. About one in five adults in America have student debt. Of those who do owe, almost half or 45 percent expect that they will be unable to pay their loans when they come due this fall. If they're already spending an average of $709 a month more than they were before the pause, then it makes sense that resuming payments will be incredibly difficult. If this is you, then be sure to check out income-driven repayment plans. These are a type of repayment plan that sets your monthly balance at what should be an affordable amount given your income. Participation in these plans can also result in your loans being forgiven after you've made a certain number of payments.

It isn't only families struggling with keeping up with financial obligations. payments. It isn't only families struggling with keeping up with financial obligations. WeWork, a company that describes itself as a co-working space provider but is really a corporate landlord with some extra steps, has announced that they are worried about their ability to remain a quote going concern. Now being a going concern is a legal term that speaks to whether a company is making enough money to stay in business. And fessing up to that worry means that bankruptcy is on the table for WeWork. But let's back this story up a little bit because this is a company so notoriously wild and mismanaged that they were the subject of their own Apple Plus miniseries, WeCrashed. WeWork was founded by Adam Neumann and boy did he keep it toxic. We're talking bottomless kegs, tequila shots in the office after layoffs, and ignoring workplace sexual assault allegations.

In other words, running his company like the world's worst frat party with a marketing budget. He was wildly successful and making money hand over fist. No, just kidding. WeWork was never profitable. over fist. No, just kidding. WeWork was never profitable. Newman used it as a personal piggy bank, giving himself interest-free loans, taking that money and buying commercial properties, which then he would turn around and rent back to WeWork. When Newman tried to take the company public back in 2019, the financial disclosure information revealed just how screwed up the company's financial situation was. That damaging

disclosure was followed up with reporting on Newman's partying and drug use, including getting so high he left his weed in a cereal box on a rented private jet. And he was ousted as CEO a few months later. Forcing out Newman failed to fix the fundamental problem of we work again the basic idea just isn't profitable they rent office space and then turn around and re-rent it to other companies and that's the whole model that's the entire thing much of the office space they control was rented by we work before the pandemic so they're paying pre-zoom pre-remote work era pricing on spaces that now go for much cheaper. Now, this would all be an amusing bad boy founder gets his comeuppance story if it weren't for the

fact that WeWork holds the leases for millions of square feet of office space around the country. They have a gigantic footprint when it comes to commercial real estate in America and Canada. In fact, they're so dominant that WeWork is the largest occupier of office space in New York City. And the commercial real estate market has been in trouble for a while. No one wants to work in an office anymore, but the problems here go a little deeper. When we talk about office vacancies, we often talk about San Francisco, but the drain is actually pretty widespread. Dallas and Houston have vacancy rates that are comparable to that of San Francisco at around 25%. And these are the vacancy numbers, so properties that are available to rent now,

but it doesn't include properties that are currently being rented but whose tenants don't plan to renew the lease. And by 2026, a third of all leases on office space will have come up for renewal, and it's expected that many companies will either not renew or seriously reduce the amount of space they rent. Now I'm sure you're going, who cares? Offices suck. I want to work in my pajamas. I love this life. Which same, but commercial real estate is a key part of how small to mid-sized banks function, how pension funds make money, and how cities collect taxes. So trouble here could personally impact your wallet and your retirement plans. Regional banks hold almost 70% of commercial property loans in America. This spring, the collapse of three banks exposed some serious

weaknesses in many banks' balance sheets. In short, rising interest rates have devalued the long-term government bonds that many banks hold as assets. Another major asset for most banks is commercial real estate loans. So if commercial properties can't find tenants, they may have to default on those loans. And a widespread default on commercial property loans can seriously destabilize some banks and the wider economy. But it's not just banks that invest in commercial real estate. Some pension funds have a massive exposure to commercial real estate, and almost all of them have some exposure to it. So a crisis in the commercial real estate market could be a serious

blow to people's retirement funds. Finally, these commercial buildings pay property taxes, and those help fund cities. So as occupancy declines, property values go down and the tax base shrinks. This means cities can either raise taxes in other places like on you or me or decrease the services they offer. So basically commercial real estate matters. The warning bell here has been ringing for a minute, but so far the commercial real estate market has held on. And the story isn't universal. Some cities like Charlotte and Nashville are actually experiencing an increase in demand for commercial space. The expectation is that losses will be staggered as leases expire. And in many cases,

banks will work with borrowers to try to prevent a crisis, which is great, unless WeWork goes under. Because remember, that's where this story started. WeWork holds a significant number of those leases. In some cities, they are the single largest leaseholder of commercial properties. So if they go bankrupt and break their leases across the country in an area of the market that is already struggling, the potential fallout could be pretty dire for the banks, for the pension funds, for the cities who will be left with empty office buildings. This story has bigger implications than just the potential for a season two of We Crashed.

So if you have a pension fund at work, take the time to look at how its managers allocate their resources and how invested they are in commercial real estate. Many plans actually do allow you to switch between funds and that's something you may want to consider if your current plan is heavily invested in commercial real estate. So here's a tip you can take straight to the bank. We've all been watching here at Money News Network the coverage of the terrible fires on Maui. My heart goes out to all of those who are suffering and I encourage you to donate to local aid organizations if you can. We link those in the show notes. In the wake of the fire, power is out in large parts of the island and some places are only taking cash. While it seems like this is an argument to use your cash when you build up your emergency fund, it's not. Because

if your cash was in your house and your house burned, well, there goes your cash. So the best practice is actually to put most of your disaster emergency cash on a prepaid credit card and hold a small amount of cash somewhere you can easily grab it in case of emergency, like an earthquake or fire bag. If your prepaid card is destroyed, you can report it to the issuing company and get a new card and use your cash on hand until the power gets turned back on. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money

questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.