Opening a fitness franchise is an exciting venture, but one of the most critical and complex steps is negotiating the commercial fitness franchise lease. A lease not only defines the long-term costs and financial responsibilities of the franchise owner, but can also dictate how quickly the location opens and begins generating revenue.
In a recent podcast episode, Rick Mayo, CEO of Alloy Personal Training, and Jared Breen, Alloy’s VP of Real Estate and Studio Development, delved into the key aspects of navigating a fitness franchise lease. This blog will provide an in-depth exploration of those insights, covering critical financial terms, negotiating strategies, and the importance of timing when opening a fitness franchise.
The Importance of a Well-Negotiated Fitness Franchise Lease
A commercial lease for a fitness franchise is more than just a rental agreement—it’s a financial commitment that has long-term implications. Whether it’s understanding how rent is structured or negotiating for tenant improvement allowances, each detail in the lease has the potential to affect the franchisee’s bottom line. For first-time franchise owners, it’s essential to have a deep understanding of these terms to avoid any costly surprises.
Rick Mayo explains that “if you haven’t done a commercial lease before, many of the phrases we throw around—TI, FF&E—might seem like a foreign language.” Having a trusted team, such as Alloy’s real estate experts and brokers, is invaluable when negotiating these deals.
Key Lease Negotiation Strategies for Fitness Franchises
1. Base Rent and Cost per Square Foot
The base rent is typically calculated per square foot, and understanding what constitutes a fair rate in your market is crucial. As Jared explains, a typical range for Alloy studios can be anywhere from $35 to $50 per square foot, depending on the location. The base rent can significantly affect the franchise’s profitability over time, especially when combined with other costs like common area maintenance (CAM) charges.
It’s essential to balance the base rent with other negotiated incentives, like tenant improvement allowances (TI) and rent abatement. “Every landlord has their own financial situation,” Jared notes, which means some landlords may prioritize getting higher rent, while others may be willing to lower the rent in exchange for contributing more to the build-out.
2. Tenant Improvement Allowances (TI)
Tenant Improvement Allowance (TI) is money that the landlord reimburses to the franchisee to cover part of the build-out costs. This can significantly reduce the upfront expenses that a franchisee needs to cover. For instance, if a landlord offers $35 per square foot in TI, it could amount to tens of thousands of dollars, depending on the size of the space. The key is that this TI reimbursement happens after the build-out is complete, so franchisees need to be prepared to cover those costs initially.
The typical Alloy studio requires specific configurations and equipment, which can make build-out costs substantial. A robust TI allowance can ease that burden. According to Jared, a “gold standard” lease might involve receiving TI that matches the cost per square foot of the base rent, plus 120 to 150 days of rent abatement after permits are approved.
3. Rent Abatement (Free Rent)
Rent abatement refers to a period of “free rent” before the franchisee begins paying the agreed base rent. This period is crucial because it covers the months when the space is being built out and not generating any revenue. In the fitness industry, build-out times can vary, but Alloy aims for 120-150 days of rent abatement post-permits, allowing franchisees enough time to finish construction and launch their business without the burden of rent during those early stages.
As Jared explains, “The goal is to secure enough rent abatement to cover the build-out, so you’re not paying rent without generating revenue.” In some cases, landlords may offer extended rent abatement periods if they cannot contribute significantly to the build-out.
Align Leases with Funding
One of the critical aspects of opening a franchise is ensuring that the timing of your lease aligns with your funding, especially if you’re securing an SBA (Small Business Administration) loan. According to Jared, funding typically happens “after permits are approved and before construction begins,” which means franchisees need to plan their financials carefully.
If the lease begins too soon and funding is delayed, franchisees could be caught when they’re responsible for rent payments without the funds to complete construction. This is why Alloy’s project management team works closely with franchisees to align the lease signing, permit approval, and funding timelines, ensuring a smoother opening process.
In the podcast, Rick Mayo emphasized, “We want to get you to revenue as quickly as possible, and the first step is finding the right space and negotiating the right lease terms. The timing of everything—permits, build-out, rent abatement, and funding—is crucial.”
Educate Landlords on the Franchise Model
One key takeaway from the podcast episode is the importance of educating landlords about the specific needs of a fitness franchise like Alloy Personal Training. Fitness businesses often get a bad rap with landlords due to concerns about noise, parking, and wear and tear on the property. However, Alloy’s unique model—smaller class sizes, lower noise levels, and high-end clientele—means it doesn’t pose the same challenges as larger, low-cost gyms.
“Landlords immediately think of Planet Fitness when they hear ‘gym,’” says Rick. “But we only have six clients in the gym at a time, we’re not loud, and we’re serving a 45-to-65-year-old demographic that tends to be very respectful of the property.”
Having a one-sheeter or a detailed brand manual that outlines these points can make a significant difference in lease negotiations, often leading to more favorable terms.
Financial Planning and Liquid Capital
An often-overlooked aspect of opening a franchise is the amount of liquid capital needed to cover costs before funding comes through. Franchisees are required to inject 20% of the total loan amount in capital before SBA loans are disbursed. In the Alloy system, franchisees must be prepared to cover various upfront costs—such as architecture fees, permit applications, and initial build-out expenses—before they can access those funds.
Jared Breen ensures that all franchisees have a clear map of every payment milestone, explaining when capital will be required and when funding will kick in. This transparency is essential in ensuring that franchisees are financially prepared to navigate the early stages of opening their business.
The Benefits of a Strong Franchise System For Negotiating Leases
Rick Mayo summed it up best when he said, “This is why you buy a franchise—because navigating leases, build-outs, and timing with funding is complicated.” Having a strong system and a dedicated team, like Alloy’s real estate and project management experts, ensures that franchisees can avoid costly mistakes and get their locations open faster.
Franchises, by nature, are designed to remove many of the challenges that independent business owners face, particularly with real estate. Alloy’s franchise model includes experienced brokers, weekly check-ins, and detailed project management, all of which streamline the leasing process and help franchisees make informed decisions.
Understanding and negotiating a commercial lease for your fitness franchise is a complex but vital part of setting your business up for success. Key terms like base rent, tenant improvement allowances, and rent abatement all play significant roles in determining the overall cost of opening your franchise. Additionally, timing is crucial—aligning lease agreements with SBA funding and build-out timelines can make the difference between a smooth opening and costly delays.
By trusting a franchise system like Alloy Personal Training, franchisees benefit from years of experience, expert guidance, and a well-developed support system to help them navigate these challenging waters. Whether you’re negotiating with landlords, securing funding, or planning your grand opening, following the process and leveraging the support available can ensure your fitness franchise thrives from day one.
Additional Lease Resources:
- Sage Advice For Negotiating Fitness Facility Leases
- Strategies To Effectively Lead Remote Franchise Locations
Podcast 261
- Intro (00:00)
- Lease negotiation strategies (02:54)
- The ideal timeframe for lease negotiations (04:29)
- Importance of educating landlords about the franchise model (06:32)
- Tenant improvement allowances and rent abatement (11:55)
- Financial planning and the importance of liquid capital (17:57)
- Timing for securing SBA funding in the lease process (22:32)
- Coordinating lease signing with funding availability (24:28)
- Understanding the broader financial implications of lease terms (27:43)
Additional Resources: