In this episode, Rick speaks with Karen Abrams, a leasing specialist for boutique fitness franchises. She provides a unique perspective for franchisees on negotiating fitness facility leases.
Karen is a preferred vendor with Alloy and has a wealth of information on leasing, entity creation, and business resales. This is one of many Alloy Franchise Perks: Benefits, Vendors, & Buying Groups.
Karen is an attorney and has been practicing law for almost 30 years. Not only is she a lawyer, but she also is a franchise owner. She’s built locations from the ground up, bought existing locations, and done SBA financing twice. She has realized success and failure.
She works exclusively with franchises and franchisees, doing everything from entity formations with LLCs and corporations, helping our clients with loan closings, and leasing documents and negotiations. They also do an extensive amount of due diligence and they also have a practice helping people who are buying and selling franchises.
For a large majority of her clients, they don’t have experience running a business or particularly a franchise. They are either quitting their job or cashing in their retirement savings to start up a business. She has the unique insight into starting a business, and understanding the stress, excitement, joy, and anxiety that comes with it. It is important that a franchise attorney has both failed and succeeded and sat in the exact seat that a franchise investor is sitting in, because that gives them a human lens besides the legal lens.
She shares some sage advice on leasing, and other business functions critical to opening a fitness studio.
Advice For Negotiating Leases
Leasing a commercial property for your business is a huge investment, both financially and strategically.
Leasing contracts set the foundation for your entire relationship with your landlord and should not be taken lightly. Yet, many small business owners make the mistake of not having their lease reviewed by an attorney.
Commercial leases are complicated documents that cover a lot of ground. There’s a lot to consider, from rent payments to maintenance responsibilities, presale arrangements, competitor clauses, and more. If you don’t have a lawyer specializing in commercial leasing, you could put yourself at risk.
For instance, did you know some leases require you to foot the bill for air conditioning repairs, which can run into tens of thousands of dollars?
People think a relative or friend can advise and review the location and facility leases, but that is a mistake. Have your lease reviewed by an attorney.
Review Commercial Lease Responsibility
Commercial leases are five to 10 years long and typically cost at least $100,000. They talk about many things, including who’s responsible if your air conditioning breaks or if you want to sell your business.
If you don’t work with someone who really understands the fitness industry, you may not know the risks you’re taking and you may be fine, but if your air conditioning system breaks, you may be stuck with a $20,000 bill that isn’t in your budget. As an example, she had client where they added an amendment to the lease, and she didn’t have to pay anything to fix her air conditioning system, saving $25,000.
The reason it is important is you are agreeing to pay several $100,000 on your lease over time, and you’re also spending several $100,000 to just open the business. So why would you nickel and dime and choose this as the place to save a few $1,000 by not hiring a lawyer?
If your business fails after three years and you default on the lease, your landlord can come knocking on your door for you to pay up.
Letter of Intent (LOI)
Don’t wait till after you sign a Letter of Intent (LOI) to negotiate terms. A letter of intent is not binding, but it is a good faith statement of where you are going. Renegotiating things at the lease stage is possible, but it’s frowned upon. The landlord will not be happy if you go back to them and say, I know the LOI said a specific guarantee, but my client didn’t understand that.
She encourages clients to take the time to go through their LOI with their broker, and if they still don’t understand it, they should talk to their franchisor or a lawyer.
“It is very important to go through the Letter of Intent (LOI) with an attorney. It was a tenants’ world during COVID, but now it’s a landlord’s market because there’s greater demand. Landlords don’t want to put up with nonsense from people saying they didn’t really understand the LOI.”
~ Karen Abrams ~
If you are a tenant, unless you are a big tenant with very deep pockets and a long history, you are going to have to give a personal guarantee. You need to understand what that means.
The landlord can come after you personally, and not your LLC, if you fail to pay your rent. This is why they require a personal guarantee, even if your spouse has nothing to do with the business. Landlords require you and your spouse to give a guarantee, but the terms of that guarantee have to be negotiated during your LOI.
Negotiate Personal Guarantee Terms
You need to understand the terms of your personal guarantee, including whether it’s a full guarantee or a rolling guarantee. If it’s a rolling guarantee, you’re only liable for 12 months of rent if you default, and then you’re done.
Include Ability To Transfer
Also checkout this Site Selection Criteria For Locating A Gym, by Alloy Founder and CEO, Rick Mayo. We discuss the best site selection process to identify your ideal gym location, as well as a few important insights about gym design and gym traffic.
- Karen Abrams’ background and experience (01:17)
- Why an attorney needs to review and negotiate your lease (13:21)
- Nightmare stories in commercial real estate leasing (16:44)
- Letter of Intent in real estate (21:06)
- Top pieces of advice for someone negotiating a lease (27:46)
- Why the Personal Guarantee clause is critical (31:03)
- What happens when you sell your business? (32:26)
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