Cross Campus crowd

Cross Campus, which is among the largest and most popular co-working and event spaces in Los Angeles’ Westside startup community, is moving into a larger facility. Sounds like good news right? While that might ultimately end up being the case, the move wasn’t entirely voluntary, despite the impression given by its latest blog post and in coverage of the move in today’s LA Business Journal.

The truth is, Cross Campus was forced to move far sooner than it originally planned, and it’s likely to to be a costly exercise.

This all started late last year when the company Cross Campus was subleasing from, building owner and former occupant CODA Automotive, filed for bankruptcy. As a result, the building was sold to Archway Properties, and, in the process, Cross Campus’ lease was dissolved. This was through no fault of Cross Campus, other than the risk they assumed by subleasing from a troubled business owner.

The space was immediately listed for lease at a rate well above that which Cross Campus was paying previously – thanks in part to sublease-related discounts it was receiving – as the new owners sought to better monetize their newly acquired asset. After extensive negotiations with the new owner, Cross Campus decided not to renew their lease at the increased rate and, as a result, began making preparations to move.

The current Cross Campus facility is a beautiful space, but it wasn’t always that way. Founders Ronen Olshansky, Dan Dato, and Michael Kianmahd put several hundred thousand dollars – one source called it “in the neighborhood of half a million dollars” – into tenant improvements after moving into the facility in early 2012. The extensive work included the buildout of internal conference rooms around a central common area, installation of a commercial sound and video production system, construction of a large bar and lounge area, and standard upgrades to paint and carpeting, among other items.

At $50 per square foot in improvements (our hypothetical $500,000 over 10,000 square feet), the company would have spent well above market for the work done, which one might expect to be closer to $20 per square foot according to a local commercial real estate broker, who spoke on the condition of anonymity. But regardless of the exact figure, the bottom line is that Cross Campus has heavily invested into their current facility.

The rub is that California real estate law provides those leasing no right to reimbursement for tenant improvement expenses. Cross Campus can take with them anything that’s not “nailed to the building,” like AV equipment and furniture, but all structure improvements, including the bar, would be property of the building owner. Thus, it’s likely that most of their investment will be lost.

Cross Campus’ owners admit that they are moving far sooner than they expected when signing a 3.5 year lease less than two years ago and also that much of the investment made into tenant improvements will be lost. Nonetheless, this situation is one they claim to have considered from the beginning.

When reached by phone today, Dato said:

These were things that we always anticipated based on signing a short-term sublease. It was a big considerations when we signed the lease initially. None of the events were things that we hadn’t prepared for.

The timing of them occurring when they did was probably quicker than we anticipated, but we were always thinking of how this business would expand in Santa Monica and elsewhere. But the reality is the bankruptcy created an opportunity for us to get out of this lease and put into play all of the momentum that we’ve built over this first year…

This was not an emotional decision. We were not connected to this space in any way other than this was version one, and we’ve proven our place in the market. The time was perfect for us to be able to make this move.

This may very well be true, but it surely sounds like a glass is half (or three quarters) full analysis of a very complicated situation.

Cross Campus’ new building, which is just two blocks away from its current location, is only 3,000 square feet larger. And yet, for this modest 30 percent increase in space, they’ll be forced to make another round of significant and presumably costly improvements to the new facility prior to moving in in early 2014.

Our broker source described the new facility as “pretty empty,” saying, “It needs a lot of work.” The biggest issue with the move may be the new location’s lack of parking, which is far less than the already insufficient 20 or so spots that Cross Campus has at its current location. These issues are countered, presumably, by the fact that the new space is a “landmark building in Santa Monica,” in Cross Campus’ words, with “great acoustics and an abundance of natural light.”

Cross Campus writes on its blog:

[This move is] our chance to implement all we’ve learned over the past year. Our current space is Cross Campus 1.0: it’s our “MVP” or minimally viable product. There’s a lot that we have done well, and also a lot we learned from. This is our 2.0 – an opportunity to put all that learning to work. The 2.0 buildout will allow us to cater to some of our member companies’ core needs. For example, we will have private offices for those companies whose teams are growing. Our members thrive through collaboration – so we’ll be adding more meeting rooms.

The question begging to be asked then is what is the financial solvency of Cross Campus? The business opened its doors publicly approximately one year ago and was just starting to reach full capacity in recent months. Co-working spaces take time to ramp up and are typically money-losing propositions at the start. This unexpected move is surely a financial blow and a major distraction that the company could have done without.

Olshansky argues that this is anything but the case. “We’re well capitalized, and we look at this very much as a positive in terms of our new space, the economics that were negotiated, and the fact that it’s now a long term lease,” he says. And while the company may not get back the dollars that it invested into improving its current facility, Olshansky says, “The good will, brand value, and learning that we were able to capitalize over the last year and a half more than make up for the cost of tenant improvements.”

The move to a new facility comes at a time when LA is bursting with co-working options. Within a three-mile radius of Cross Campus’ current (and future) location are CoLoft, CoWorks, NextSpace, and ROC, with others like Be Great Partners rumored to be moving into the area.

The Cross Campus model has always been about more than office space. Olshansky and Dato, the two day-to-day faces of the business, have positioned Cross Campus as a product that offers founders and aspiring entrepreneurs mentorship and access to education and events around startup building. Several hundred members have proven willing to pay $100 to $600 monthly for access to these “value adds.” But this too is growing increasingly competitive.

In addition to the proliferation of accelerators throughout LA, Cross Campus must compete with the rapidly growing General Assembly campus just a few blocks away and events hosted by Startups Uncensored, TechCocktail, TechZulu, and even our PandoMonthly fireside chat series.

The bottom line is building a successful coworking and events business is hard work in the best of times. The latest developments put Cross Campus and its owners under increasing pressure.

The good news is that Cross Campus has found a new location and that there will be limited interruption to its current operations amid the transition, according to its founders. The buildout at the new facility is currently underway, and the Cross Campus’ owners expect it to be completed in full by the time that members make the move at the beginning of the new year.

Nonetheless, there’s no telling how the business will ultimately be able to weather these latest challenges. It would be an unfortunate blow to the LA startup ecosystem if this were to prove more than the company could survive.

[Disclaimer: PandoDaily held an event at Cross Campus in July 2012, but parted ways after a dispute between the companies.]

[Image via CrossCampus]