Very few gym owners are fortunate enough to own the space out of which their business operates. One of the certainties in life (along with death and taxes) that we brick and mortar fitness entrepreneurs need to come to terms with is paying rent. The long-term viability of our business is closely tied to keeping overhead as low as possible, and this begins with negotiating a favorable lease.

We’re currently in the late stages of negotiation for another five years in our current space in Massachusetts. This is the fourth time we've negotiated a lease with our current landlords dating back to 2008, and I am thrilled to say that the relationship is amicable, transparent, and always productive. This being said, I realize that landlord/tenant relationships aren't always as pleasant as ours.

There are complexities of lease negotiation that I may never master, but I do have a quick tip that is likely to help you in part now, then even more so when the time comes to renew your lease three, five, or even ten years down the road.

Be wary of early savings in exchange for late increases

Let’s imagine you’re in the process of securing 5,000 square feet of space for your new gym. To keep things as simple as possible, we’ll say that all of the operating expenses associated with the property will be built into your dollar per square-foot cost (AKA this is not a triple-net lease). Now let’s assume that you’ve done your homework, and come to the conclusion that $10 per square-foot is a fair market value for the area you are considering.

Next, the property owner presents a proposal for a five-year lease:

Year 1 – $07.00/sq-ft
Year 2 – $09.00/sq-ft
Year 3 – $10.00/sq-ft
Year 5 – $12.00/sq-ft
Year 5 – $12.00/sq-ft

She’ll then say “I want to do everything I can to ensure that you succeed in the early stages of your business, so I made sure to keep your costs as low as possible in years one and two while still maintaining an agreement with an average annual cost of $10 per square-foot.”

Sounds enticing, right? You get a chance to build that client roster, create some great cash flow, and allow your business to find its groove in year one while paying a monthly rental fee of $2,917 as opposed to the $4,167 you’d be shelling out every month if you were attached to the aforementioned $10 per square-foot cost. That $1,250 in monthly savings would be huge for you to reinvest in the growth of your business, right?

The obvious catch is that by the time you find yourself in year four of this agreement you’ll be paying $5,000 per month in rent, but assuming you’ve capitalized on the savings in years one and two, this will be no problem at all. After all, you’re going to spend $250K on rent over the lifetime of the lease regardless of whether you agree to the terms proposed above, or a scenario that features a flat $10 per square-foot annually, so why not get creative with the structure of the agreement to ensure success in year one?

What we tend to forget

Sometimes we get so caught up in the excitement of signing that first or second lease, that we lose sight of where we are left when we return to the negotiating table. Assuming that business is strong enough to justify signing another lease at that point in time, you’ve established a starting point of $12 per square-foot. Your landlord isn’t about to voluntarily move backwards.

Instead, she’s going to say: “I’m going to do everything I can to keep you at or as close to where we have you right now because keeping your costs from increasing is of the utmost importance to me!”

She’s counting on you losing sight of the fact that the $12 per square-foot you’re paying today is inflated thanks to the savings you experienced in years one and two of your last agreement. The playing field is far different coming out of a $12 per square-foot year five than it would be if you’ve been cutting checks to the tune of $10 per square-foot up until now.

With this in mind, I would encourage you to target an agreement that will maintain a manageable variability in cost per square-foot between the start and end of your lease term to ensure that your end point is a reasonably accurate reflection of the state of the market. The discount that feels like a huge favor today is likely to be a detriment to your negotiating position a few short years down the road.

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