Opening a Gym - Finding & Negotiating Your Space
This week's installment of the Business Plan wraps up the subject of location, with a review of various ways you cab find the right location, and some ideas on how to negotiate the best possible lease. While location is a major element in your potential success, you want to be sure that you don't overpay or get stuck with terms that may cost you major money down the line. You'll want to make sure you find the best possible location by using some obvious and not-so-obvious tools.
Before we pulled the trigger on any one of the gyms we own, we spent countless hours driving around and touring potential locations. For every 15-20 spaces we toured, we wrote one offer and went into real negotiations on that property. We patiently waited until we found the right space. Looking back, it was worth the wait. Don't let your enthusiasm about opening a gym push you to choose the wrong space.
Below are some tips on how to look for commercial spaces. We feel confident in providing this information because prior to opening our gyms, both my business partner and I spent many years in commercial real estate. Here are some tricks of the trade we used to find our spaces.
Locating the Spaces:
Drive Around: This is one of the best ways to find good spaces and good deals, Drive around on your own and look for buildings with “For Rent” or “For Lease” signs on them. One benefit of this method is that you may come across a building where you can deal directly with the owner. Potentially dealing directly with the property owner may save you a lot of headache in having to prove yourself a worthy tenant to a commercial broker who may be acting as gatekeeper. The owner may be more flexible on paperwork and requirements on deposit if he or she gets to know you and understand what you're about. Another benefit is that, by driving around, you actually get a real sense of the neighborhood and community.
One potential downside is that you will likely be left to negotiate on your own behalf, and may be at a disadvantage against a better informed opponent. Some owners choose to represent themselves because they're unwilling or unable to pay a leasing commission. They may also be unrealistic in their expectations of price and terms.
Online Search: Another great way to locate spaces is through LoopNet. This is a nationwide commercial real estate listings platform that allows users to search properties both for sale and lease. Properties on LoopNet are listed by both commercial brokers and owners, and generally pay a commission, so if you find a location you like, you can either deal directly with the listing agent or find your own agent to represent you. Since the listing agent has a fiduciary duty to the landlord, you may want to hire your own agent who will work their ass off to get you the best deal. If there are a number of offers on the space, consider using the listing agent as he or she has an inside track with the landlord, which can be in your benefit.
Hire an Agent: Find a commercial leasing agent in your area who specializes in the type of property you want to rent (industrial, retail, office). As tempting as it may be, do not hire your cousin or aunt, unless they specialize in this area of real estate. The benefit to working with your own agent is that it's free. In almost all cases, the landlord pays the commission for your agent, so consider it free professional advice and service. An informed professional agent will suggest what price to offer based on knowledge of market rents, and he'll assist you through the contract and leasing process. Another benefit to hiring an agent is that he/she might know of off market properties. Ability to see properties before they hit the market is key. Again, we can't stress this enough: make sure your the agent has experience in your particular market area and product type. Don't hire a residential agent as most are not familiar with commercial properties.
Writing the Offer:
Now that you found the perfect location, it's time to put together an offer. Typically, initial lease offers are written in an informal format called a Letter of Intent. This is a written statement that outlines the principal business terms of the offer, generally in bullet point format. The Letter of Intent is normally non-binding, and is designed so both parties proceed in good faith toward a final and binding lease agreement. You should be aware that the Letter of Intent only outlines negotiation points and that you don't have a deal until the lease is signed.
Key Points of a Letter of Intent to Lease
A basic Letter of Intent to lease should outline the terms and conditions under which you're seeking to lease a property. We feel that it is better to include more points up front so that you don't get down the line into lease negotiations and find that you disagree on deal points that you thought were minor. Make sure that your Letter of Intent includes the following points:
Lease Rate: Use the same calculation the landlord or their agent used in advertising the space. If they listed the space in dollars per square foot per month, you should do the same. The landlord has run his or her numbers based on the method they've advertised, and you want to keep things as simple as possible for them.
Length of Term: Are you looking for a month-to-month and the landlord wants a five-year commitment? That may be too wide of a gap to bridge. Make sure you know what the landlord is looking for up front to see if you are in the same range. Oftentimes landlords are bound by their bank as to what length of lease they can provide, and as much as they may want to bend, they simply cannot.
Option Periods: This paragraph spells out what happens once the initial term of your lease is done. This is a great tool for you, as it binds the landlord today as to what he can charge you in the future. You do not have to elect to exercise the option if the time comes, and can re-negotiate your terms at that point if the market has softened and you can get a better rate than what you've agreed to. On the other hand, if your business takes off, you don't want to have your landlord come to you and seek exorbitant rents just because “you can afford it.”
Expense Payment: Most retail and industrial spaces rent “triple-net.” This means that you, the tenant, must reimburse the landlord for all of his expenses on the building, including property tax, property insurance, and maintenance. You'll be responsible for maintaining the equipment, including the air conditioning and heating, plumbing, and electrical inside the space. You may even be responsible for maintaining the building in some cases. Most advertising doesn't list the triple-net rate, which could be as high as the rent, so make sure you understand what that cost is up front. Some owners rent their properties as “modified gross,” which means that the tenant usually just pays the rent and may need to maintain some of the equipment in their space. A very small number of spaces rent as “full service gross,” which means that you just pay rent and the landlord takes care of everything. If choosing between two spaces that have differing methods of expense payments, make sure to calculate your costs by factoring in all potential maintenance and repair expenses as well as reimbursements. You may find that what looks cheap to start ends up being the more expensive alternative.
Increases: All leases have some sort of annual increase built into them. Some landlords use a calculation called CPI, or consumer price index, published by the US government. This number is essentially the rate of national inflation. This number may vary from year to year, and is generally better for the landlord than for the tenant. We preferred to propose and push for a flat rate increase each year of 1.5% or 2.0%, so that we could accurately forecast future rents, and in most years, pay a little less than if we had been stuck with CPI.
Personal Guaranty: This is the big mamma of lease terms, where the landlord asks you to put your money where your mouth is. Most businesses, if organized as an LLC or S-Corp, will try to lease their spaces using the name and credit of the business, but most landlords understand that without a personal guaranty they have a worthless lease. The personal guaranty clause allows the landlord to come after you personally if you default on the rent, so not only do you risk losing your business, but your personal assets as well. If you can avoid it, don't give a personal guaranty.
Here is a tip about submitting good offers to landlords. When submitting a Letter of Intent make a good impression and appear professional by providing the landlord with additional information listed below. It greatly distinguishes you from other potential renters, and when a landlord reviews the letter of intent, she has all the necessary information to make an informed decision. Always provide, along with your Letter of Intent:
Proof of Funds: Copies of recent bank statements or SBA commitments. Something showing you've got money.
Personal Financial Statement: A basic balance sheet showing your personal and business assets and liabilities.
Bio about yourself and/or Business Plan: Another reason to take this process seriously.
Personal Credit Report: Download from Experian - you get one free per year Reviewing the Lease: A final tip: Before executing a formal lease agreement, spend the money and time to have a real estate attorney review the lease contract. Many mundane and seemingly harmless clauses contained in lease agreements are one-sided and only serve to benefit one party – usually the landlord. A commercial real estate agent is not qualified to do this for you, and it's not part of his job. Consult with an attorney who specializes in real estate contracts, and you'll be much better off knowing that you've had a professional review and fight for you. All of our leases are triple-net, and the list of expenses one of our landlords was asking to be reimbursed for was just crazy. It cost us about $1,500 to get our contract reviewed and negotiated, but it saved us more than that in the first year alone. It may seem like a waste of time and money, but it was well worth it for us.