Finding The Right Location for Your Fitness Facility
First, you need to check what is available in your area or the area that you would like to open the fitness facility in, as the rent factor will also determine some of your pricing and business plan.
You may want to look into whether renting, building, or buying is the right choice for you…even though we’ll assume that you are starting off with very little and renting is your first choice. I bring it up as I had an option for a client to invest in real estate, in which I could have opened a gym. In the end, I thought it was not the right option for me and I did not want any partners or people that would have an influence on which direction I decided the business should go in.
Since you’re starting off, you’ll be looking for a small place and probably renting. I do recommend square footage to be a minimum of 2,500 square feet, as it will allow you to grow over the years (to a certain degree). Before I move on I would like to say that I started in a 1,100 square foot garage, which was the right choice for me at that time. I also had a one year lease with month to month after that, which meant that when I grew, I could move to a new location without much hassle.
To see what is available, check online (Craigslist), drive around in the neighborhood you are looking at and check for parking, look through windows, etc.
When getting my second facility, I connected with a real estate agent and realized that not every agent will hustle for you. The fifth agent that “worked” for me was the one that really hustled, found me a location and negotiated the right lease.
You should consider interviewing different real estate agents and find out who will hustle for you rather than who is the most recognized or has the most credentials. Making that mistake cost me 6 months of searching for the right facility.
There is a lot to be said about the difference between industrial/flex space vs. retail space. Starting off, I would always go with the light industrial/flex as the rates per square foot will be much, much lower than retail space.
Although you may not have as much foot traffic going by your facility, the lower overhead from the beginning will make this a much better option and it will force you to market the right way.
When you find the location you want, you will know.
Negotiating the Lease for Your Fitness Facility
Getting this part wrong could prevent you from having a successful business in the long run. The lease that you sign will be with you for the duration of the lease term (in most cases 5 years with options after).
If you have never dealt with lease negotiations, make sure you get some good commercial real estate lawyers to look the lease over and discuss it with you, make any necessary changes, as well as help you understand what everything means.
While getting my first facility, I negotiated the lease myself because it was a mom and pop place, which is also why it was only a two-page lease. My next facility had a lease that was 75 pages long, which was why I had lawyers go over everything and make sure I was getting what we negotiated in the meetings.
It’s important to know that when it comes to leases, almost everything is negotiable. Things you think may not be negotiable can become negotiable under the right circumstances.
Also know that when it comes to negotiating a lease, you must be prepared with a business plan (unless you already have an established business and revenue stream, etc.) and have everything else in place.
The landlord will weigh the risks associated with renting the space to you. They have to believe that you will be able to pay rent long-term, grow, not have issues (otherwise they may have to evict you- costing them stress, time, and money).
Even though I had a successful business, many locations that were vacant for long periods of time wouldn’t discuss leasing just because we were a gym and they didn’t want to deal with that. Be prepared for anything.
As mentioned before, you should definitely consider hiring a commercial real estate agent that will hustle for you and represent your best interests. Avoid dealing with the agents listed on the “for lease” sign as they may be working for the landlord and are far from looking out for your best interests.
If you ever have an agent just ask you to make an offer on the proposed property, they are trying to see if they can have you make a rookie mistake and bid higher than proposed.
ALWAYS start a negotiation with an offering sheet from the landlord, which should list the particulars of the property, especially the size and asking price. It is much easier for the agent to have you start the process and not present you with an offering sheet.
Once you’re presented with an offering sheet, you are in a position to make a counteroffer, presenting everything you want from the landlord.
I have gone into negotiations without getting an offering sheet, but in that instance, I did my due diligence, researched the market, area, property and always low balled as much as possible before throwing the ball into the landlord’s side of the court (This is what has worked for me in the past, but keep in mind that every negotiation is different).
Basic Lease Terms
Even if you are not negotiating the lease yourself, it is important to know the basic lease terms so you can discuss them with your agent, and are able to convey your needs to the landlord if necessary.
Base Rent – Base rent is only a part of your gross rent and is the asking price the space without taxes, CAM (Common Area Maintenance) fees, and insurance. The numbers you will see presented, most of the time will be base rent, so be aware that is not the actual number you will pay for your rent.
Triple Net – Taxes, insurance, and CAM fees are considered triple net. In retail/strip mall space, you will pay your pro-rated share of the above charges based on the percentage of square footage you hold in the whole mall/space.
Because of a bad experience, you can learn from my mistakes and make sure to inquire as much as you need to when the landlord refers to CAM charges. These DO NOT include taxes and insurance but the landlord may talk like they do. Always make sure that the landlord clarifies what he means and ask for verification.
Also, when it comes to variable CAM charges, ask the landlord what the average annual increase in those charges is, so that you know what to expect. It is very important to get verbal agreements, as well as paper, and note all the original charges so you can make sure he is not adding profit on top.
Gross Rent – This is what you will actually pay for rent each month; it is the combination of base rent and triple net.
CPI (Consumer Price Index) – this is a government-derived number that shows the comparison of buying power between today and 1967. This is important to lease negotiations because it is a universally accepted number to determine rent increases.
Tenant Improvements (TIs) – Tenant improvements (sometimes called build out), are what it takes to finish the space, aside from the equipment. These are things like wall coverings, mats or any other type of floor covering, plumbing, locker rooms, bathrooms, etc.
Your Fitness Facility Lease
Most leases are standard and basic (they are very similar to each other no matter where you are), and are going to contain the following:
Most leases will be 5 years, BUT here is where you have to make sure that you will not outgrow your space in only a couple of years and be stuck. Check for options like shorter lease terms (I had this in my first space and I’m very glad that is what I decided to do), extension options after 2-3 years, etc. Understand that the long term will give you better negotiation potential, and is a good tool for bartering when the time comes, as it gives the landlord better leverage with the banks, expansion, etc. because you guarantee them that you will be there for at least 5 years.
Ask for as many months free rent as the length of the lease, a month for a year. Times have changed and although the demographics of commercial real estate vary a lot, I would recommend you find a place that has been vacant for a while and ask for a month of free rent for every year length of your term (we asked for 5 years and got 3 months in a strip mall). Having some time to build your business and recoup the investment without having an overhead, or having reduced overhead, makes a huge difference in building a healthy business and becoming profitable as quickly as possible.
Have options and cap increases at 3%. You have to look into the future when it comes to your fitness business. So, when negotiating the long-term lease, make sure you have fixed definable increases so you don’t get stuck with market value options (this can really affect you in a negative way as the landlord can raise the rent to whatever the market will bear). A 3% increase is bearable for most businesses and makes sense, although in my situation the increase is higher for the reason that I had negotiated a below market rent in the first years. This just shows how different every situation can be; adapt to it and make sure you are getting what you need and what will make your business successful in the long run.
Ask for TIs (build out money) from the landlord. This can vary depending on many factors, from how long the property has been on the market, length of term, landlord’s willingness and need to get it leased out, etc. Usually, there will be a tug of war between asking for free rent and build out, and it comes down to what is more important to you. Sometimes you can negotiate both, depending on the situation and the position of the landlord.
Get permission to sublet space to complementing businesses (Sports Nutritionists, Fitness Chefs, Wellness Coaches, etc ). This will not only add to the value of the gym, offering services our clients need, it will make a profit.
Assigning the lease and exclusions. Should you decide to sell your business, make sure you can assign the lease without having to go through a ton of crazy processes. You should always have your attorney handle that. Also, if you are in a strip mall, plaza, or retail park, make sure to have exclusions that prevent the landlord from leasing to competing businesses.
Signage and parking. Check for legal rights on signage, and check with the city. Make sure you also get educated and prepared for what signage could cost. The strip mall where we are located had signage requirements that that ended up costing us $6k for our sign. Find out beforehand so you can budget and not be surprised.
You will think parking won’t be an issue, but it can become a big one when you get busy. Make sure you address parking needs prior to signing the lease.
Consider rent averaging. This is something we did, as I wanted to get the new location rolling and profitable and it made sense to have a lower rent at the beginning and higher at the end. It has been a good move as we have grown at a fast pace, making the future rent increases a non-factor in profitability and growth of the business.
You’re a gym – soundproof your location! We were turned down multiple times by property owners because they expected us to throw around weights and play loud music. Most of these situations can be rectified by installing soundproof walls, which isn’t much of an issue when done before build out, so make sure that you address it with the landlord.
Personal Guarantee. When dealing with bigger properties, you will have to sign a personal guarantee, almost no way around it, especially when you haven’t been in business before or you are small and don’t have much history or liquid assets. Just know what you are signing and check with your attorneys, so you understand all the consequences of a worst-case scenario.