Who’s Going to Build your Martial Arts School?
When you are negotiating a build-out, be sure the lease specifies how the credit is going to be paid. Will the landlord pay the builders, so you have no out-of-pocket expense? Will you pay, and then get a credit in free rent? That might mean less cash for start-up expenses but, as with everything in negotiations, it depends on your situation and on that of the landlord.
Also, make sure the free-rent period starts as late as possible and lasts for a specific number of days after obtaining your construction permits. If your build-out gets held up for a month because of permit delays, you will essentially lose the value of that month.
The great thing about a martial arts school is it requires little in the way of build-out. Unlike a restaurant or pub, you don’t have strict regulations for equipment and food storage.
Schools usually require little more than a padded open space, an office, changing rooms, and mirrors.
When entering into a negotiation, it’s important to have a sound understanding of how the law of supply-and-demand applies to your situation.
This will be the most influential condition of most negotiations for a lease. If you are looking at a strip mall with a lot of vacancies, it’s clear the demand is not there, so these spaces will be less expensive and negotiations far more flexible than a busy, vibrant strip mall with only one vacancy.
The opening number offered by the landlord is usually the base rent amount. Because base rent doesn’t include triple net expenses, it’s a lower number, but it’s not the real number you will pay each month.
Usually, base rent does not include insurance, taxes, and common area maintenance (CAM). These additional charges are called triple net. The base rent plus triple net equals your gross rent. Your gross rent is the check you will write each month.
Most leases, especially in larger plazas, are triple net. This means the tenants share in the expense of insurance, property taxes, and CAM.
Many people confuse CAM with triple net. CAM is one third of the triple in triple net. It does not include the other two thirds, which are insurance and taxes.
When you are projecting your gross-to-rent ratio, you must include the triple net into the equation.
You don’t want to believe you are going to pay $3,000 per month rent, only to discover the bill is actually $3,500, because of $500 per month in insurance, taxes, and CAM.
Length of your lease can get a little tricky. On one hand, you may want a long lease, so you can lock in a low rent and spread your start-up costs over a longer period of time. On the other hand, the longer the rent, the longer you are obligated to pay your landlord.
Often the solution is to negotiate a shorter lease, but include an option of first refusal on the space when the lease expires. This means that if the lease runs its full course, you have the first right to either renew the space or abandon it. If it’s a really good space, you will want multiple options to renew.
For instance, you may sign an initial lease of three years with three more options to renew at three years each. This way, if the school is doing well at this location, you know you will be there for at least the next 12 years.
This works best if you combine the Option to Renew with a three percent cap on any rent increase. Your lease might specify that you have the right of first refusal, and that if you opt to renew, your rent will not increase any more than the Consumer Price Index (CPI) for the previous year.
The CPI works well, because it’s universally accepted for determining rent increases and is published by the U.S. government annually, so it’s easy to access.
This way, a landlord can’t pressure you to leave by saying, “You have the option of staying, but your rent will double.” The rent will not increase any more than the inflation index, which has been in the low double digits since the early 1980s.
This is not always easy, but try to avoid putting a personal guarantee on the lease. If the school doesn’t work, you would be personally responsible for paying the school’s rent.
In most cases, you would be on the hook until a new tenant took the space but, in a bad market, that could be years. Furthermore, if the new tenant has a lower rent than you paid, the landlord could come after you for the difference. Worse yet, if the new tenant fails, the landlord may be able to go back to you to start paying again!
Try to limit any personal guarantee to the period of time that would cover the landlord for any out-of-pocket build-out expenses he or she incurred. This way, if the landlord pays $10,000 for your build-out, you will personally guarantee that amount, nothing more.
If you can’t limit it to that amount, try to limit it to one year. Then say you will pay the rent in full for 30 days after you leave the space, to give the landlord time to find a new tenant.
You do not want a kung fu school opening next to your karate school. Protect your market from competition with a clause that states the landlord will not rent to another martial arts school or a health club that offers martial arts classes.
Try to get the restriction to apply to all of the landlord’s properties within a five-mile radius. If the landlord balks, you can concede to the restriction just for the plaza you are in. But always get something in return for any concession.