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The Business Plan - Part 11: Tenant Improvements & Allowances

We continue our blog series, How to Open a Affiliate Gym. This week's blog will discuss Tenant Improvements Allowances, more commonly known as TI Money, which can be negotiated as part of your lease. Most landlords are willing to give a new tenant TI Money to aid with start-up costs, and often do so in the form of free rent (rent abatement) or reimbursements for actual tenant improvements. Here are some ideas to help you negotiate TI money for your gym:

Before we get into it, there are a few factors that affect the amount of TI money a landlord may consider giving a tenant. Landlords calculate the total lifetime value of the lease by using the total rent collected over the period of the lease, including rent increases but excluding option periods. This gives the landlord the total amount of rent they will collect over the lease period, and provides the landlord insight on how much, if any, of tenant improvement money they choose to give.

Free Rent : Free Rent is typically preferred by Landlords as it allows assistance to the tenant without any out of pocket outlay of cash.  Depending on the level of construction required by the tenant, free rent can range from a week to a year. When we opened our gym in West Hollywood the time-frame to complete the work, the complexity of the improvements, along with the market expectations, warranted free rent, and we were able to negotiate several months’ of abatement into our lease.

TI Reimbursements : Another method of landlord assistance is through tenant improvement reimbursements. When negotiating the lease, a set dollar amount or a dollar per square foot amount is established where the landlord will reimburse the tenant for construction and fixture improvements to the landlord's property. A TI reimbursement allowance is great as it offsets your construction costs. Most TI reimbursements are structured where the landlord will only reimburse the tenant upon completion of the project and with a full release from the general contractor. This means that you’ll be responsible for paying all of the construction costs and ensuring that the general contractor has been satisfied, and only then will the landlord reimburse costs.

How to Negotiate:

Landlords want to see their tenants succeed as it is a win-win situation for both parties. Paint that picture for the landlord. Provide them with the necessary information, such as a business plan, bio and track record, something to make the landlord feel comfortable that your business concept will succeed. Secondly, provide the landlord with detailed information on the level and quality of the intended improvements, along with time-frames. In West Hollywood we approached the landlord with a plan to do extensive plumbing, electrical, lighting and HVAC work, which included the ground-up construction of bathrooms and showers rooms. Our time table was to get City approval by month 2 and have construction completed within 5 months. This was our first gym, and prior to this we had no major construction experience, yet we convinced the landlord to give us 6 months free rent. We painted the picture and it worked.

Before you can effectively negotiate for TI Money or an allowance, you need to have a handle on approximate construction costs and timeframes. 



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