What to look for in a lease – DSP 142

Picking a location is stressful and time consuming, but it can still be one of the most fun parts of starting a float center.

Graham and Ashkahn examine what to look for in a new center and how to go about the search. Along with all this, they explain some of the nuances you want to discuss with your landlord when drafting your lease. Tune in here.

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Transcription of this episode… (in case you prefer reading)

Graham: Today’s question is, “Is it better to hire a commercial realtor or go yourself and look for a lease? And what do you look for when looking for the right place? And what terms do you negotiate?”

Ashkahn: I thought we made it clear, one question per episode. You’re sneaking a few extra questions in there, so you threw a few hands in there and just wrapped them all together, huh?

Graham: Alright, so let’s do the first one, which is, “Is it better to hire a commercial realtor or go for yourself and look for a lease?”

Ashkahn: Well, I guess you should know that we have never-

Graham: Big disclaimer coming.

Ashkahn: Yeah, big disclaimer. Big disclaimer: we’ve never worked with a commercial real estate and we only have one float center.

Graham: Yeah.

Ashkahn: We did not go through a commercial real estate agent to find it.

Graham: We just looked around. In fact, we didn’t even apply to anywhere else. We found this and one other spot, applied to this one, and the landlord told us no and so, we harassed them for about two weeks until they finally decided it was easier to say yes than to keep denying us their spot and that’s it, that’s how we found our spot for Float On. So, take any advice that we give in this area with a big chunk of Epsom salt.

Ashkahn: Yeah, you probably should, so that’s just everything, right? There’s a trade off between money and probably your own personal time happening here. When you go to find the float center, you probably have some more specific requirements for what you’re looking for in a commercial spot than perhaps a lot of other businesses do. You’re not just looking for a good location that’s the right size, you’re also looking for how much water capacity does your spot have, is the electricity situation already big enough, do you have to upgrade the breaker panels, is the foundation thick enough for you to cut a bunch of light spots, and if you’re a plumbing.

Graham: What’s your neighbor situation like?

Ashkahn: Yeah, your neighbors.

Graham: Is a giant train going nearby?

Ashkahn: Is there already a built-in HVAC system with the building that you have to work with? There’s just a lot more questions than if you’re opening up a convenience store or so many other businesses.

Graham: Is there an empty lot nearby?

Ashkahn: So, that’s legwork that you’ll have to do if you don’t have a commercial real estate agent and that’s legwork a real estate person could do. You could just be like, “This is what I need.” They’d be like, “Okay, you’re crazy; but I’ll go find these things.”

Graham: Right, and that’s cool because the fun part of looking at places is actually looking at places that might be a serious location for your center and having a list of those you can go around here is the fun part of location choosing, going out and vetting things out and finding out what the thickness of their slab is, and what the neighbors are like noise-wise, and all of these other restrictions.

It’s the drudgery of going around and choosing a location, so it is 100% possible do-it-yourself; but just like everything that you need to do like building a website, like making your business plan. All of it, it takes a really long time and these are experts who, again, given a list of restrictions, which, by the way, as long as we’re on the topic, I do think that looking for totally new construction or any buildings that are going under a serious renovation is a great thing to look for when you’re moving into a place just because you essentially wanna gut your space down to the bare bones anyway.

So, before anyone builds walls or even puts studs in to divide your space into tiny offices or something like that, being able to say, “Don’t, don’t do any of it and just give me the money you would’ve spent, so that I can take that to build out my float center” is one of the best positions you can be in when you’re actually finding a location.

Ashkahn: That’s often when we hear about people getting tenant improvement cost is what that is, where there are people or the landlord’s actually giving you some money for your build out. Most of the time, it is because of that exact scenario, like they’re building something new and, sometimes, they haven’t even poured the foundation. It’s just literally dirt and bare walls and you’re coming in at that point and so, they’re just giving you the money they would’ve spent on turning it into like and the bare bone, something they could’ve rented, and that money just gets to be put toward your construction, which is real nice.

Graham: Yeah, so that’s a great thing to give as a criteria to your commercial real estate agent if you go that direction.

Ashkahn: Just know that you’re gonna have to come in with some of this information and specifics, too. You might be able to find a commercial real estate agent for another industry where they’re gonna already have some preset knowledge, but you’re not gonna be able to say, “I wanna open a float center.” They’re gonna be like, “Oh, well, I know the exact structural core or core requirements, and water, and stuff like that.” You’re gonna have to provide that level of detail for them.

Graham: Yep, okay. I was just looking back at this second part of this question now.

Ashkahn: Yeah, what’s part two?

Graham: I feel like we did a pretty good job on that one of just saying it in a long, long form that we have no idea.

Ashkahn: That’s what we should just rename this podcast to, “Long form, we have no idea.”

Graham: So, let’s see. Second question.

Ashkahn: Part two of the first question, let’s call it. We’ll be generous and say this is all one question with multiple parts.

Graham: Okay, okay. Two question marks, “What to look for when looking for the right place and what terms to negotiate.”

Ashkahn: Oh, okay.

Graham: So, I’m gonna give a redirect to the first part of that, which is the “what to look for when looking for the right place”, and say we have a great blog post out there that goes into a good amount of depth on what to look for when finding a location and a lot of the things that Ashkahn went through there, things on the first floor, no noisy neighbors, good concrete foundation, stuff like that. We also, with that, have nice free resource that’s actually just a full checklist of things that you can download. So, we’ll throw it in the show notes as well and you can download this property assessment checklist for seeing it might be a good fit for you.

Ashkahn: Yeah, a lot of it, almost think about what permits you need to get and make sure each category has a big enough capacity for what you’re trying to do. It’s like, make sure the water is enough, and make sure the electrical is enough, and make sure the HVAC is enough and built the right way.

Graham: Yeah, and that your plumbing pipes are accessible and everything like that. The terms to negotiate are interesting, though, so one of the big ones, we already talked about, which is just tenant improvement cost. So, how much money are they going to give you for your build out?

Ashkahn: The first time I heard about that, I was like, “You’re crazy. Some landlord’s gonna pay me money for my construction?” That’s actually not that uncommon. We’ve heard of a number of float centers going in and getting something like that, usually somewhere in the tens of thousands of dollars.

Graham: Yeah, that can range anywhere from around 10,000 to, the most that I’ve personally heard of from a float center, there was a five-tank center starting up in a place with new construction, was around, 90,000.

Ashkahn: Yeah, and that’s awesome. I was excited to hear that number.

Graham: Oh, yeah, we just gave them a double-high five, like, “Yeah, way to go, that was awesome” and felt immediately jealous, too. My landlord didn’t give me $90,000. Yeah.

Ashkahn: So, that’s definitely a good one and absolutely worth asking about.

Graham: Hand-in-hand with that, too, I was gonna say, is just free rent.

Ashkahn: Right, and that’s also, again, really not that uncommon. It’s really not unusual for a landlord to give you a few months or sometimes they just say the amount of time until you open your doors.

Graham: That’s ideal. If you can do that, that’s golden because your construction almost always takes longer than you think it’s going to take as well.

Ashkahn: Yeah.

Graham: So, if you’re landlord’s in this with you and you’re not paying rent until you’re open, that’s awesome. I’d say three to four months is something that I hear quite a bit, somewhere in there is pretty standard for getting free months of rent, and even more common, I’d say, almost an order of magnitude more common than getting actual tenant improvement cost if you’re moving into a place that’s already built out and you’re just taking over a space.

Ashkahn: The nice thing about negotiating for a lease is you can just ask for everything and they’ll say no to whatever they wanna say no to. It’s hard for them to say no to everything, so it’s really nice to just throw all of this stuff on the table.

Graham: Yeah, for sure. Lots of times, if you’re going with a lease that the company or the building that you’re renting from is presenting you, it’ll already be skewed heavily in their favor. They will have taken most things that are good for the tenant and removed them or reworded them. So, this is another place where actually having a commercial real estate agent can really help is going through these leases. Regardless, I totally recommend having a real estate attorney actually take a look through your lease beforehand, too. When we did this at Float On, they looked through and then, actually said they had taken the standard Oregon lease and cut out about half of it, right? So, it took a little bit of back and forth to get it to a place that made sense; but, for a big company, that’s the game they play, right? If you’re not paying attention and if you’re not on top of your stuff, they’re not gonna take care of you. They’re gonna look after themselves.

Ashkahn: It should be noted that a lease for a Float Tank Center is a lot more important to you as a business than it is to a lot of other businesses. It’s really not easy for you to just pick up and move places, right? Usually, you’re asking for a pretty long lease and, usually, you really wanna stay in that place because your money’s invested in your walls, and in your floors, and in stuff that you would just lose if you have to move locations.

Graham: So, that’s actually a number three thing to negotiate as well is what’s your length of lease.

Ashkahn: Yeah.

Graham: Not number three in order of priority, just the third one that we happen to be getting to. Length of lease might actually be one of the more important things to negotiate there.

Ashkahn: The nice thing is that, often, your interests and the landlord’s interests are aligned in this one. They want you to have a long lease and you want you to have a long lease.

Graham: Searching for tenants, and redoing the space, and negotiating all of this again, and getting them free month’s rent and extra build out costs, it’s almost a way bigger hit on commercial real estate than it is for residential real estate a lot of the time. So, they really don’t want to be finding new tenants.

Ashkahn: So, this is a good one. Usually, this, the fact that you will want a long lease will give you some negotiating power in the other stuff that you’re looking for. When we say “long”, we’re talking probably five to 10 years is what you should be shooting for in your first go around. Often, what we do, too, is try to build in a renewal into the lease.

Graham: Yep, so guaranteed renewal period in there. Yeah.

Ashkahn: Yeah, and the language. You should look at the language of that, too, sometimes, that’s a spot where they can choose to increase the rent. Sometimes, serious extenuating circumstances can break the lease at that point and the stronger it’s worded in favor of you being able to just have your choice of continuing onto another five or another 10-year lease at that point is ideal.

Graham: Yup, and so, the minimum that we recommend is around a five-year lease with a five-year guaranteed renewal period that you can set up, so a minimum of 10 years you’re guaranteed to actually have in that space. I know float centers, so, right now, we’re on a seven-year lease with three five-year renewal period?

Ashkahn: Two, I think.

Graham: Did we negotiate it to two? Yeah, I was going for three. Sometimes, I have dreams about the better deals that I got on things. Oh, I think it is two, two five-year ones, so that’s enough to make us feel pretty comfortable with it. We just negotiated that, so we have another six years in there. This is coming off of our first five-year renewal period that we had on our lease after having taken over a … Now, we won’t get into the details; but that’s what you should feel comfortable for. I do know some float centers that’ve even launched with a 10-year lease or something like that and the obviously slightly scary thing from the business standpoint is if you do go under during that 10 years, you can be responsible, or on the hook, for a lot of loss, renter damages, or something like that.

Ashkahn: Another thing that’s really nice to build into your lease is something to protect you against very noisy neighbors because what can happen is you might have totally fine neighbors when you move in, but you might have someone next to you who used to be a pillow-testing store go out of business because that’s a horrible business. You might have jackhammers ‘r’ us move in afterwards, that would be really, really bad for you as a business and so, having something in your lease that protects you against that scenario can be really important in that worst-case scenario.

Graham: Yup, and so, it’s also really hard to actually get the landlord to agree to terms like that. There’s this general idea of quiet enjoyment of space. Or quiet use to the space in the commercial sense.

Ashkahn: That’s a normal thing you find in leases, but the language that’s in there is usually not strong enough for what we’re looking for.

Graham: Yeah, and there’s even a common law version of that, too. It’s just a written into the way that we do business in the US, have control over the space you’re in, at least to be able to conduct your business. Yeah, again, so what we have written into ours is less than we would like. Ideally, what we would have in is if our neighbors make enough noise that we can’t run floats, they’re on the hook for that money or you as the landlord are on the hook for that money, that would be the ideal.

Ashkahn: Right.

Graham: If we lose money because our neighbors are noisy, we get it back. The best we can get our company, rental company, to agree to was to say if we have noise that interferes with business and that goes on more than a couple days, so if we’re on day three, then we start getting rent paid for all of those days that we’re not able to be in business. So, it doesn’t make up for our expenses. Obviously, one float that’s missed or one round of floats is way more that we’re losing than we’re getting back in rent from our agency; but at least that means that that’s their problem now, right? We’re not the only people losing money and it’s not just something that we have to deal with with our neighbors. Now, there’s a distinct reason why our landlord should want to get involved, which is they’re not getting paid by us until they are.

Ashkahn: At the very least, it’s nice to have this conversation with your landlords. Anything they say verbally is not gonna be as strong as actually having something in your lease, that person could leave that real estate company and someone else could start working with you; but, at the very least, as you’re going through this part of your lease, having this conversation, just emphasizing the fact that, “Listen, I’m running a business dependent on the fact that things can be quiet in there and you would totally be screwing me over if you moved somebody in that wouldn’t allow me to do that.” It’s nice to just at least be on the same page.

Graham: Yep, and same with your neighbors. Unrelated to lease negotiation, but talking to your neighbors and just being upfront about things and letting them, unfortunately, know that they can’t just hammer a nail in the wall whenever they want to. It has to be only at these specific times.

Ashkahn: Yeah. 15 minute windows every two hours.

Graham: It’s a weird conversation, but it needs to be had, so I was gonna say first right of refusals are one of the last big things that I had on my plate for lease negotiation, which is first right of refusal to rent out any other spaces that become available in your building or in the area that your property owner runs. Then, first right of refusal to purchase the actual building if it comes up for purchase or if someone else makes an offer on it, which basically says you’re first in line according to your lease.

Then, they’re not allowed to grant this to multiple people, so if you’re able to get first right of refusal, it’s not gonna be on anyone else’s lease in that building, right? So, you’re just first in line to rent the space if it comes up or first in line to buy the building, even if someone’s making an offer. They have to go to you first for you to turn them down before they can actually sell it and the reason that you want that, of course, is because getting new neighbors can really suck. So, if you’re at a place where you can expand, deciding that you’re going to take over the shop next to you and not have to deal with noisy neighbors, now, all you have to deal with is yourself is a really nice option to have available.

Same thing with selling the building. If someone’s taking it over and they wanna demolish the entire building, you have, oftentimes, a huge amount of money invested in your center and having the chance, at least, to be able to save that and maybe make another investment and take on this broader role in building management is at least a nice opportunity to have on the table. You can always say no to either of them, so there’s no downside to having these written in.

Ashkahn: Yeah, those are the one that we always make sure that are in our leases.

Graham: I would say, even for the first right of refusal one, if I couldn’t get that, it would make me very nervous about renting a space. Sometimes, you can’t, especially if you’re opening up in more of a strip mall type area. There’s a lot of places or a lot of franchises where it’s built into their franchise model, that they won’t open up in a strip mall unless they have first right of refusal for purchasing or for renting other spaces just in case they want to expand. So, sometimes, depending on how chain-y the businesses are, it can actually be harder to find strip malls that have that available; but, again, it not only gives you the option to be able to rent out the spaces, and buy the building, things like that, it makes sure that you know what’s coming down the pipeline. If you have first right of refusal, there’s some very legally binding verbiage in there about the fact that they need to let you know that this is coming.

They need to let you know that something’s been vacated, they need to let you know months and, often, half a year ahead of time if they’re planning on selling the building. So, having that in there just as a head’s up, even if you don’t think you’re gonna be able to afford it, at least now, with the first right of refusal and the notification, you can start making plans for what to do next where it’s better than they can just spring a lot of that stuff on you.

Ashkahn: It would be nice to own the building eventually, that’s the best case scenario, because eventually you own the building. You’re in control of all this.

Graham: Yeah, again, all the details and how crazy this lease negotiation gets into is the result of the fact that float centers are really expensive and not owning the building you’re in, you can’t take out the expensive parts of them either, the float tanks, sure; but half, at least, of the investment going into float centers if the building gets demolished is just lost, so, again, that’s why it’s terrifying.

Yeah, alright. Don’t just listen to us. Get a good real estate attorney.

Ashkhan: Don’t listen to us at all really, like I always say.

Graham: Get a good real estate attorney to look over your agreement. Again, you’ll probably be surprised of what they turn up and what they might suggest.

Ashkahn: Yeah, you just might.

Graham: These are good things to keep in mind about consulting the professionals, which we are only vaguely.

Ashkahn: Alright, if you guys have other questions you wanna ask us, you can hop over to floattanksolutions.com/podcast. We’ll talk to you tomorrow.

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