This week we spoke with Ken Jorgenson, national director for CARR, the nation’s leading provider of commercial real estate services for healthcare and fitness businesses. Our enlightening discussion turned up good advice for gym owners on extracting the best, highest value concessions and the most favorable leases from potential landlords or property managers.
What makes a gym special when seeking to secure lease concessions from shopping plaza owners?
Gyms draw people! Fitness centers are often the largest drivers of traffic for a plaza. The industry refers to them as “portfolio stabilizers,” because health clubs bring in people who exercise multiple times per week. Their routine feeds additional visits to the other stores in the plaza. So, while a landlord might worry if their smaller businesses are experiencing enough foot traffic, they can count on a gym to stabilize this portfolio of tenants. Unfortunately, most landlords may not understand the connection between fitness centers and increased foot traffic, so it is up to you and your agent to educate the plaza representatives.
By showing potential landlords the value of a gym in their plaza, you can position your business advantageously, saving money during construction and after your club opens.
What are four concessions gym owners can negotiate?
When represented by the right broker, a gym owner can gain multiple concessions from a landlord. But in order to approach the landlord from a position of strength, you need to know what to ask.
First, ask for tenant improvement allowances
This is what the landlord is willing to provide in build-out allotments. It is essentially cash for work: The landlord agrees to pay for certain parts of the build-out once the improvements are completed. This can result in thousands of dollars in concessions. The better a negotiator you or your broker is, the higher the number of concessions. Simple math.
How do tenant improvements work? The details are negotiated between the landlord and gym owner/broker once construction plans are available. These can range from interior wall construction to plumbing installs and everything in between. The gym owner then receives a cash payout after the certificate of occupancy is issued.
Second, ask for additional build-out time
How many gym owners are ready to pay rent before signing on new members? Between construction, possible delays, and permitting, it can be months before the first member steps on a treadmill. To counter this, brokers negotiate a delay in rent payments substantial enough to cover this block of time. Now, instead of paying rent on an empty building, the gym owner is using his capital for renovations and property improvements.
What if the landlord is already building out the space?
Speak up early because the property manager’s build out might not fit your gym’s needs. Instead, negotiate your required design. This ongoing dialogue is vital to ensuring your gym is perfect from day one. Upfront negotiations, as well, identify exactly who is paying for which improvement. These conversations reduce friction and future problems between the lease and lessor, i.e., landlord.
Third, ask for free rent
Yep, it’s possible. Rent is usually the second or third major expense for a gym owner. Negotiating one or more months rent-free after the fitness center opens gives the gym owner a chance to grow the business without additional financial pressures.
Fourth, ask for lower annual rent increases
Jorgenson says this is where many gym owners lose a lot of money. Although, realistically, most leases include an annual rent increase, the secret is to keep the increase as low as possible. By conceding to a standard, or higher-than-average annual rent increase at the beginning of a lease, tenants may end up grossly overpaying a decade later.
In growing states such as Florida, many property owners are pushing for 5% annual increases. Market rate, though is 3%, and with the right leverage, a gym owner can get it down to 2%, he says.
What are other ways gym owners save money when signing a gym lease?
There are many places where gyms can reduce their financial exposure, Jorgenson says, such as fine-tuning legal clauses.
Yet, the easiest way to lose money is to not know what you don’t know. Ask yourself, how many leases have you negotiated in your lifetime? The right commercial real estate agent negotiates leases weekly..
Walking into a property lease negotiation with a broker is like hiring a coach to get you to the Olympics. You might have the raw talent, but they’ve got the industry knowledge to make sure you achieve your dreams.
Gym owners, it all comes down to good conversations.
As this blog shows, up-front dialogues and strategic negotiations are the best way to ensure you sign the tightest, most effective lease for your gym. In our next blog, we discuss common mistakes gym owners make when searching for space, and how commercial real estate agent agreements work.
Thanks for reading the second in our series on commercial leases. Watch for additional insight soon on our Gym Owner’s Podcast when we interview Jorgenson for more good advice on lease negotiation strategies.
Gym Insight
Thank you, Ken, for sharing such vital information with our gym owners. If you are not familiar with our company, we are a gym management software firm established in 2008. Gym Insight provides a fully integrated, custom-designed software created to help gym owners businesses run smoother and make more money. Our extensive feature selection includes our tablet-based Sales Guru©, digital keytag 24/7 gym access, easy online sign-up tools, a Member’s App for safe communication, an incomparable reports system for fine tuning business expenses, and affordable pricing that does not take a percentage of sales. For a free demo and more information, call us at 855-FOR-GYMS (855-367-4967) and ask for Anthony or Natalia.
