Lease Negotiation 101
The largest and most important agreement you will sign as a new gym owner is the lease for your commercial space. Understanding the ins and outs of negotiating a solid lease agreement is crucial to the long term success of your business.
Things to know…..
Commercial leases are different from residential leases.
- Most commercial leases are non-standardized, and offer less consumer protection under the law, but tend to be far more flexible and open to negotiation.
- Commercial lease terms are almost always written to favor the landlord.
- Commercial leases are calculated on a price per square foot basis. This number is then divided by 12 (a calendar year), to determine your monthly rent. Ex: The price for your desired space is $9/sq.ft. Your space is 10,000 sq.ft. That means that your monthly rent would be 80,000/12 or $7,500/month.
- Be aware that leases can be net leases (rent only) or gross leases (all repairs paid by landlord). If possible, try to find a gross lease. Although the net lease may have a more attractive price, gross leases ensure that repair costs of building fixtures do not go spiraling out of control.
- Most commercial leases require an additional CAM fee. This is assessed to cover the management fees for the company that handles the property. Often CAM is assessed in the same way as your rent, by sq.ft, and divided by the year, usually included with your rent.
Lease term- The length of your lease.
Most commercial leases run for a minimum term of 3 years and a maximum of 10 years.
Avoid lease terms that go longer than 5 years. Generally speaking, a shorter term with more options tends to benefit the business owner most. There is no way to predict the future. A lot of things change over that length of time and you want to leave yourself a way out if other competition moves in, the area becomes rundown etc…. A 3 year lease would be ideal if you can make it work but generally, the terms are more favorable for 5 years.
Consider a 1 to 5 year option at the end of the initial term, or multiple 1-2 year options. However, expect that you will have a rent increase during the renewal periods.
Lease details- The other stuff…..
Work to get a stabilized rent structure that does not increase incrementally every year. The landlord will try to say that a small % increase is standard but it is not. If increases are non-negotiable, be sure to secure a cap amount so that the increases are controllable.
Don’t give a personal guarantee for the lease if at all possible. This can be difficult to do but it is possible. If not, negotiate for the guarantee to drop away after a determined length of time.
Attempt to get at least 3 – 6 months of “free” rent. Depending how long the space has been vacant, the landlord will usually be willing to offer some grace period, or consider a graduated rent structure. This is extremely important in the first year of business as you are trying to grow your membership and get to a stable income stream.
Example: first year - $2500/month, 2nd year - $2750/month etc…
Make sure you are also aware of the clauses for:
- the security deposit and conditions for its return,
- the definition of the exact space you are leasing (including common areas, halls, etc)
- rules and restrictions for signage
- usage of common parking areas
- stipulations for subleasing or adding tenants/partners
- expansion options or right of first refusal for adjoining space
- who will maintain and repair the premises, including the heating and air conditioning systems
- specifications for lease termination if applicable
Tenant Improvements - Commonly called “build out allowance”. The amount of money the landlord is willing to pay to modify the space to meet the needs of your business.
Do get multiple bids for your needed improvements, EVEN IF there is a substantial difference in using the landlord’s preferred company versus your own contractor. Don’t be afraid to price shop, but make sure to go to a reputable contractor.
***If you are handy, consider doing some of the cosmetic work yourself. (paint, cleaning)
Build out funds can work in your favor during lease negotiation.
For example: The tenant allowance is $30k and the rent is $8 SF. You know you can hire someone to do the modifications for $15k, so you negotiate by agreeing to only use $15k, and applying the additional $15k towards rent in the first year.
Commercial leases can be tricky. Definitely have a qualified contract attorney look over your lease and advise you on advantages, disadvantages or questionable policies/clauses. Commercial leases are legal contracts, and involve, in some cases, a very large sum of money. Protect yourself, and choose wisely for your business.
And last, but definitely not least…
Do contact GYMCRAFTERS for help in getting your fitness project off the ground! With 80 years of combined experience, we can help you avoid some of the common lease traps, and help you ensure that you have the best deal for the best space which means the best chance for a successful gym.
If you would like more information please visit our website at www.gymcrafters.com