You could be signing a five-year lease depending on the location, landlord, and how competitive the area is. That’s a long commitment for a business that you’ve yet to start, which means it could be a miserable and grueling 1,826 days until your lease is over if you don’t have favorable terms.
Not every commercial property landlord or company is going to bend over backwards just to serve you. However, that doesn’t mean they should get away with everything in a lease contract. Otherwise nobody would rent from them. You have to haggle, barter, and make sure certain terms and conditions are set in your lease to protect yourself from aggravation, added expenses, and regret. This is what you need to know.
The expectation of Excessive Loud Noise During Business Hours
Gyms get loud. Whether it’s barbells hitting the floor or the sound of treadmills whirring that echo through the entire place, it’s not a quiet place. In your lease, you absolutely must have specifications that align with the maximum amount of noise allowed by city ordinance.
If the city you’ve created your gym in has no problem with noise until 7:00 PM, so long as it doesn’t majorly impact the operation of nearby businesses (such as if you’re in a strip mall), that doesn’t mean your lease will include that. Your lease might say that, per also renting the space to other nearby businesses, that they only accept a certain level of noise between specific hours.
Make sure that noise ordinance is explicitly listed in your lease. Don’t settle for a “We go by the city ordinance” as a verbal agreement. Just because verbal agreements are valid doesn’t mean they’re easy to prove—if a landlord wants you out, especially if rent prices are going up but you’re locked into a fixed rate lease, they’ll look for any reason to kick you out.
Noise complaints are not only one of the most ridiculous ways to get kicked out of a leased space, but because it’s so basic, people often forget to include it in the lease and reap what they sow (or rather, what they didn’t) later on. Don’t have regrets over something this small.
Restrict Competing Businesses (for Large Buildings with Subdivision)
You’re renting a building with ten different spots. It’s new construction, so many of the lots are similar. What’s stopping the landlord or property company from renting the lot at the other end of the building to another gym?
Absolutely nothing. Unless you explicitly state it in your lease terms. You can request that they not allow another business of the same type. It’s not anti-competitive, because there’s a very big difference between being the only game in town versus being the only game on one specific corner of one specific block.
This helps to cut down on competition, sure, but by a reasonable standard. It’s the same reason that franchises can’t build restaurants directly next door to each other.
Large buildings that have 90,000 square feet of rentable space may have their own provisions in mind. They may tell you, “We won’t prevent another gym from opening up in the building” and then negotiate the lease with you. We define your gym, in this context, as a CrossFit gym. They may define “gym” as anything that allows recreational activity.
Basically, you’re not competing with Dave & Buster’s or a restaurant with a play place, and the commercial property owner doesn’t want to restrict those businesses from renting space in their building. This is where distinct lines in the sand have to be drawn.
If you’re a large-scale gym and you’ll be taking up a considerable amount of space (earning the property owner a lot of monthly rental income), you have more power to negotiate with. Know how big of a fish you are (rental space you’re looking at) and how big the pond is (total rentable building space).
Stud-in vs. Stud-Out Maintenance: What Your Landlord Has to Cover
This may be referred to as wall-in and wall-out on insurance forms. There’s a pro and con to this. If you want to change the sign on your gym, say for an update or to bring in a brighter, higher quality sign, you have to negotiate with the property owner if they still hold wall-out rights.
Most of the time, they will. They have to maintain a certain number of rights to the building so they can control its appearance and exterior maintenance. This is a benefit to every shop owner, otherwise one owner could let theirs become entirely run-down and ruin the appeal of the entire building, or paint it a vibrant color to majorly distract onlookers.
Reasonably, you’ll cover wall-in maintenance, and unless you’re under triple net terms, you’ll likely pay for and personally hire contractors for wall-out maintenance as well. It’s not convenient or the way that people want to do it, but it gets the job done.
Work out what your landlord has to cover in your lease details. If it’s vague, ask them to clarify in explicit detail. You should never be surprised by the terms when they’re brought up due to interior or exterior damage.
Heating and Cooling Equipment Repair and Costs
Gyms heat up quickly. A full gym doesn’t need to be heated that much in the winter, but there’s also far less occupancy during the winter as well. This means you’ll be cooling this place in the summer more so than heating it in the winter. With the way we’ve been having global heatwaves, cooling costs are only going to rise with time.
Here’s what you need to know about heating and cooling costs depending on your lease terms.
- You’re Responsible for the Power: Unless you have specific terms with a gross lease, you’ll be paying for all the power. Technically, either way, you’re still going to pay for power even with a gross lease, so it only matters so much. The point is: treat it like it’s your own home and you want to mitigate the electricity bill as much as possible, because it’s going to come back to you.
- Season Are Drastic: Winter and summer are drastically different when it comes to heating and cooling costs. It’s not a simple little flick of the thermostat dial—you’ll see hundreds, possibly thousands of differences in your bills. Thankfully, winter has lower bills, and since it’s a much slower season for just about every gym in the US, that will help to offset the costs.
- Repairs: Who fixed the AC unit on the roof of the building if it goes out? Or rather, when it goes out? You’d better make sure you have that set up ahead of time, because if you have to pay for it, it’s going to be a huge repair bill that you have to be ready for. This is one expense that tends to hit people square on the nose that they never account for. You have to keep the place cool during the summer, otherwise nobody’s going to stay for more than ten seconds.
This is another section where you want to be really explicit in the details of your lease. If your landlord has a large window of time to fix it, talk to them about offsetting repair costs. If you can find someone to repair it in under 24 hours (which is ideal), will they pay the bill if you defer it to them? WOrk out the details.
Rentable vs. Usable Space
Every square foot you rent isn’t usable. Doesn’t that stink? It’s referred to in real estate as a loss factor. You have to rent the space that the elevator shaft sits in, you have to rent the space that the vestibule is in, but you can’t alter those spaces.
You’re basically paying for common areas within your own building. They’ll all be laid out in detail within the terms of your lease. Whether it’s featured in the online listing for the building or it’s disclosed at the time when you tour the building, you will get a number of rentable space, and a number of usable space. Here are some things you need to know about these different numbers.
- Your Budget Will Change: Yes, you have to pay for the rentable space, but your budget for electrical costs, gym equipment and more can all be attributed to your usable space. If you already have machines and furniture all set to go when you find a place, be careful that you don’t mistake the usable number for the rentable number.
- “White Space” Will be Different: White space can refer to the space in between areas of your gym, like the distance from the front counter to the area with exercise machines. You don’t want things too close together in your gym, so it’s important to focus on how the available, usable area will change your layout. Most of the time you’ll find that white space makes up a large percentage of your layout (or at least, it should) and the usable space will constrict how you arrange your gym. If you’re going into this building as you start your gym from scratch, you’ll be in a better position to furnish and arrange the area.
- Measurements Are Altered: You have a solid number of usable space, right? But now let’s look at the layout. Measure out the confined areas, and find out what you can actually place there. If there are some awkward walls that you’re not allowed to bring down, account for it as white space or unusable space. Because both restaurants and gyms have high turnover rights, sometimes gym owners will rent out old restaurants. You’ll end up with small half-walls in entryway areas and the like. Measure what you define as a usable area based on what you’ll be filling the space with, and keep that in mind while you furnish the place.
If you work with a commercial real estate agent (your agent, not theirs), talk to them about local laws regarding rentable and usable space. While it’s a pretty universal rule, you may find some interesting details through their experience.
Subletting Requirements and Limitations
You have 3,500 square feet for five years. The problem is, about 1,000 square feet aren’t being used. What do you do?
You can sublet if it’s worked out in your lease. You can help offset costs by subletting small areas of your gym to coaches, independent trainers who need extra space, and anyone else who wants to rent it.
Subletting gets hairy, so you want to work out all the details if this is an option you ever want to approach. It can really help with slow seasons, but it also comes with its own headaches, so you have to decide if it’s worth it in the first place.
There will be limitations on subletting even if you do have the option to do it, so be completely sure that you know what you’re doing before you consider it.
Insurance Requirements for Your CrossFit Affiliate Gym
Insurance requirements depend on the building, zoning, and sometimes even the ceiling height. This usually means you need public liability insurance, which covers you, your business, and third-party vendors from liability for loss of property or injury.
This involves death, damage, and tons of other horrific acts or events that you’ll absolutely want to indemnify yourself against. Additionally, some leases may require that you uphold insurance, and they can terminate the lease if you don’t uphold that insurance agreement.
This can be a little invasive since it requires you to constantly share information with your landlord or the commercial property company representative. Outline how this information will be shared, what reporting has to be done, and get all the contact details in writing. Nothing’s worse than doing everything right and being hit with the claim that “You didn’t try to contact them” when it happened. And yes, that’s happened to people before.
Define CAM Fees (Triple Net)
CAM fees refer to common area maintenance. These can hide in plain sight in your lease agreement, so watch out for them. In a large-scale building or strip mall setting, CAM fees are basically maintenance fees for mutual areas. This would include common areas in a mall-type setting, parking lot maintenance, trash removal, and more.
The problem with CAM fees is that you get roped into maintenance for other people’s buildings. Sometimes you can’t avoid CAM fees, and since they at least make sense (for the most part), they’re not the devil. The devil is in the details, so don’t see “CAM Fees” and simply ignore the following paragraphs.
CAM fees can sometimes mask the equivalent of triple net fees. Triple net refers to the tenant paying their usual rent, as agreed upon, but adding three more fees: property tax, insurance, and maintenance. Because CAM fees and triple net fees share maintenance as a common goal, they can be masked in a well-structured contract.
Triple net leases have tax benefits, keeps the landlord off your back, and generally guarantees long-term occupancy without raising the rates. There are benefits, however in many situations with an unpredictable industry such as fitness (thank you, COVID-19 pandemic), it’s difficult to jump on board with triple net lease terms.
Base Rent vs. Gross Rent
Base rent is the baseline cost for renting the space. If it’s $12 per square foot per year, and you have 1,000 square feet, that’s $12,000 for the year, and $1,000 per month. That’s just a very simple example.
Most rental spaces, especially for gyms, will include 3,500+ square feet with an average cost of $15-$22 per year, so your base rent could be anywhere from $52,500 to $77,000 per year, which equates to anywhere between $4,375 to $6,416 per month. It all adds up quickly.
The kicker? That doesn’t include any utilities. You’re paying for electricity, water, and the works. Your annual operating expenses stack up very fast.
Gross rent includes the base rent plus operating expenses, but if you go outside of the basic operating expense limit, that’ll be on you. This is common with electricity bills.
Gross rent can be a good option, but you have to monitor your electricity expenses so you don’t go over the cap and have to pay some out of pocket. Pay attention to the terms and make sure you aren’t just paying a chunk of the overall building’s electricity bills, because that could include other shops in a strip mall, for example.
You have to figure out what works for you. In most instances, base rent works best because you have more control over your operating expenses. Gross rent can’t accurately take your expenses into account since you don’t know 100% what they will be, so if you’re okay budgeting your operating expenses, you might be able to save money with a base rent lease agreement.
Lease Length and Renewal Policy
Never, ever sign a tenant at will lease. Just avoid them at all costs. This means you pay a month’s rent, and then you can stay for a month, but there’s no guarantee that you’ll be allowed to rent the following month. For a business with tons of equipment, you have to clear out quickly (and it’s no easy task).
Tenant at will leases are terrible for businesses. There’s nothing stopping the landlord from hiking the rent up by an obscene amount from one month to the next. Even if they give you “proper” notice by 30 or 60 days, that’s still a short amount of time to have your rent prices spike.
Your lease should be for at least two or three years, based on your growth plan. If you want to grow your business and move to another location within two years, that’s fine, but have that two-year guarantee on paper so you don’t get kicked to the curb.
Is it a common occurrence? No, but it can happen, and if your business is on-track to hit that larger gym goal, being evicted due to a tenant at will agreement will stifle your business growth. And there’s no legal recourse for it that you can take against the landlord.
Get a two-year or longer lease. Now that we’ve covered that, let’s talk about the renewal policy. You’ll find that very, very few landlords will put renewal policies within their contracts. This may be more common in places that aren’t experiencing booming growth, and perhaps in short-term leases, but otherwise it’s usually a detriment to the landlord’s income.
As time marches on, rental prices for commercial property will continue to rise. Landlords want to take advantage of that, so if you have a renewal option in your lease that you can exercise, they’re locked into that term in the contract and they lose money. However, since commercial property can sometimes sit dormant for years without a tenant, they may include it so they’re at least propositioned to receive money for longer than the initial term length. It’s pretty up in the air.
There’s a Lot to Cover About Your Lease
Don’t settle for less on your lease. Be reasonable and understand that you can’t have everything, but do not compromise unless you get something in return. Make a list of your highest priority items on your list, and your lowest priority. Work them out so you can imagine a life with your highest needs met and your lowest needs unmet, and how that would look.
There’s no reason to expect the world from these commercial property landlords and real estate companies, but that doesn’t mean you have to hate your terms, either. Make sure it works for you and your business so you can focus on running your CrossFit affiliate gym instead of worrying about other things in the meantime.
