“Hope is not a strategy, action will be rewarded”
Vince Lombardi paraphrased by David C Baker
Welcome back to The Fitness CPA’s Covid-19 series. If you missed last week’s video and/or blog, you can check out what we recommend doing to preserve cash flow, here. Hint: if you’re still open…. go back and read the post.
This week, we’re talking about the most expensive elephant in the room – the upcoming rent bill. Our goal throughout this guide will be to help you forge negotiations with your landlord to see one full month of rent abated – meaning never paid back – for this initial time period. That’s our goal. We’ll walk you through how to setup the initial conversation, how to handle negotiations, and hand you a full script for you to use for your ongoing rent abatement requests.
Rent is every fitness business owner’s biggest expense, often equaling to 1/3 of annual revenues. And that’s why we’re taking action. You’re going to have a difficult time making that large rent payment each month when you aren’t selling anything or have moved to a virtual platform with receiving less revenue.
But let’s start this guide off positively. The fact that you are reading this means you are taking action. And those who take action during this time period are the ones who are going to succeed and come out the other side of this. As Vince Lombardi kind of, sort of said, as paraphrased by David C Baker, “hope is not a strategy, action will be rewarded.”
Skip ahead to:
- · A Few Predictions
- · A Tough Look in the Mirror
- · Your Legal Obligation to Pay Rent
- · Reading Your Lease
- · Lay the Framework: Tenant Landlord Relationship
- · Try on Your Landlord’s Shoes
- · Reflect on Your Existing Relationship
- · Prepare for the Initial Ask
- · The Initial Rejection
- · The Secondary Ask
- · The Road Ahead After COVID-19
- · Download Full Script
- · Get in Touch
So, let’s start with a few predictions.
Studios moving to virtual options are going to lose revenues by as much as 30 to 50% during this COVID-19 shutdown or closure. As harsh as it sounds, it’s reality. We’re projecting closures to go for a minimum of eight weeks, and revenue numbers will suffer accordingly.
Studios who aren’t offering virtual options will see even bleaker revenue numbers in imminent weeks. Where virtual options are not feasible, studios will see revenues drop by at least 50% over the next few months. As time goes on, members will be less willing or able to contribute to keep the business afloat during these tough times. That’s why we recommend setting up some type of virtual offer – whether online classes, trainer e-meets, nutrition sessions, etc. – to help soften the blow over the upcoming months.
With harsh realities out of the way, let’s take a look at where your business is currently.
A Tough Look in The Mirror
If your studio is still open, please see our previous post about why we recommend closing. And if you still insist on staying open, the rest of this post is not for you, largely because rent abatement won’t be in the cards.
Currently Closed or Operating Virtually
If you’ve closed or have gone virtual, you need to ask yourself the tough questions. Can your business still afford to pay rent? One month? We believe most businesses will be okay with one month, but what if this goes on for three months, four months, six months?
Even if the business does not have the money that it needs to pay the rent, do you or your partners personally have the money that you can put in so that you can afford to pay the rent?
To Reopen, or Not To Reopen?
Finally, do you even want to reopen? This is a question a lot of fitness business owners are unfortunately struggling with during this time period.
This could be a chance to close the business and we’ve already seen a few people take this route.
We have two examples in our portfolio right now of clients who were very much on the brink of closing before the COVID-19 crisis. So, the prospect of trying to rebuild a membership base at the end of all of this for a business that’s already struggling really begs the question – is it worth it to throw another $10,000 to $12,000 towards monthly rent during this time period to potentially not reopen?
We know it’s a tough but genuine question right now for a good segment of our fitness businesses who are living week-to-week, or day-to-day as we wade through this crisis.
We recommend you take a long, hard look at your current situation – talk to your loved ones, talk to your team – and think about whether or not you really want to reopen after all of this is said and done. It’s a hard question and nobody can answer it for you. But there can be opportunity (and relief) either way.
If you need help wading through these options, my team and I are happy to help. Just shoot us a message here, and we’ll respond to you personally before close of next business day.
Your Legal Obligation To Pay Rent (Each and Every Month)
For this special COVID-19 segment, I spoke with Brandon Hall of The Real Estate CPA who deals with a very wide network of landlords. What is his first piece of advice to The Fitness CPA audience? That all tenants have the legal obligation to pay rent.
Not the reminder that we all want, but probably the one that we all need. It’s important to keep in mind that despite all of the work-around ideas and compromises with your landlord we are going to present to you today, you have a legal obligation to pay rent until an alternative solution is in writing.
While working on your rent abatement request, we don’t recommend stiffing your landlord on the rent. By stiffing, we mean ignoring your landlord, not paying rent when you’re supposed to, avoiding the topic or not communicating altogether. We certainly don’t advise anyone take this approach.
A common solution will come from tenants and landlords both working together during this unprecedented time. While societal pressures will mount and arguments will bend, an advantageous agreement will favor those who keep communication lines open and amicable from day one.
#1 Read Your Lease
First things first, you’ll need to revisit your lease. It is safe to say that most of us don’t read our lease in its entirety, at least not in the detail that we need to now.
ACTION: Read your lease and look for ways that this could potentially be resolved from a legal perspective potentially already outlined.
When digging out your lease, here are a few things to look for.
Check to See if You Have a Force Majeure in Your Lease:
A force majeure clause generally describes the circumstances outside of a party’s control that may not be enforceable unless conditions at issue relate to those specifically enumerated in the clause. Examples include things like government shutdowns or labor strikes.
While force majeures can be a gray area, some clauses have been adapted to include “epidemic” or “pandemic” scenarios due to other deadly virus outbreaks such as SARS and MERS. Some attorneys believe the more broad-sweeping the clause is, the better chance a tenant has to argue its case. While other attorneys have told us the best force majeure clauses specifically mention the words pandemic or epidemic.
While not every lease will have a force majeure clause, some will, so it’s worth the look. Out of the handful of clients we surveyed, about one in four clients had this clause in their lease agreement.
Here’s an example of what a force majeure looks like.
And what it doesn’t look like. Note this is a casualty clause. As much as we would like this be construed as a force majeure clause, it is not.
Force Majeure Next Steps
The next step that many businesses will take is to figure out if the force majeure, or “Act of God,” clause justifies a tenant’s suspension of performance of their duties under their leases — primarily operating stores and paying rent, Marmins explained. This will depend on the specific contract language, local law and the “causal connection between the pandemic and the particular tenant’s inability to meet its lease obligations.”
Of course, your attorney is going to be the best person to go to for the legal ins and outs. The force majeure may be an opportunity where you can even break the lease and get out of it entirely, which would be a potential win for certain individuals who are looking to get out of their lease agreement.
Accountants can also review leases, not from a legal perspective, but we can point things out if you need some help. If you’re one of our clients, definitely reach out. We can look for it in the lease for you or look for language that may be similar.
A lot of this is likely going to play out over the coming weeks on a case-by-case basis, between each tenant and their respective landlord. But with April rent payments coming due in the next few days, tenants and landlords do not have much time on their hands to figure things out.
Don’t Count on Business Interruption Insurance
While looking through your lease, you may notice a business interruption inclusion. Unfortunately, don’t count on this as an out. Many retailers will have what is known as business interruption insurance, real estate experts said. But, typically, a pandemic caused by a virus is not covered by that. Instead, it is more for fires and natural disasters.
Prepared to Go to Court?
Nobody wants to go the legal route. This should be your last resort. Court is expensive – monetarily and mentally. I’ve never met anyone who was glad they went to court over a business dispute. Personally, I believe that everybody loses when attorneys begin litigation. You must be prepared for a long and drawn out litigation process as the courts are already backed up and will become even more so in the coming weeks and months.
So, it’s something to weigh carefully. If you’re speaking with an attorney about how to combat your lease, pointing out the nitty gritty, and whether or not it will hold up, then you’re going to have to be willing to go to court to prove your case.
We’re going to do our best to give you the resources to avoid this scenario through rent abatement negotiations further down in this post. The goal is to come to a mutual agreement that favors both parties without the need for legal counsel.
Remember That Bankruptcy is an Option
As a tenant, you have signed a personal guarantee that you will pay rent, however bankruptcy is always an option. Another option is to strike a deal with your landlord to ‘buy out’ the remaining lease term. It’s possible though we believe landlords are going to be very hesitant to negotiate someone out of a lease during this time period, unless their legally obligated, because they’re worried about that space being empty later. But it’s always possible. Bankruptcy isn’t the only way out of lease but remains one of those “break in case of emergency” exit strategies to get out of a lease agreement and maybe an ultimate one for a lot of fitness business owners. Definitely speak with your Fitness CPA and attorney to weigh this option further.
#2 Lay the Framework: The Landlord and Tenant Relationship
As mentioned earlier, it’s important to set the communication off right between you and your landlord if you’re heading towards negotiating a temporary lease reprieve. Going in with, “Hey, I want 90 days rent free!” isn’t going to work.
So, it’s important to lay the framework for a favorable tenant and landlord relationship from the get-go.
Landlords aren’t all bad. They’re running a business – many trying to scrape by – and have most likely sacrificed a lot to get where they are today. They’re also in the middle of an economic meltdown and currently navigating how to deal with the same obligations and payments as you are right now. So, remove the image of Voldemort from your brain when preparing to broach the topic. The more you can remember to approach the topic with empathy and understanding, the smoother it will go.
You are in partnership together after all, although many tenants forget this. Landlords are invested in your success. You’re a trusted tenant and they want you to stay in the lease for as long as you can. A good tenant is worth a lot to a good landlord, in both actual money and time, so if you’ve been a good tenant, they’re in partnership with you. They want to keep you in the space… and they want to make this work as well.
So, with that being said, approach your landlord with a spirit of partnership and candor. When treating your landlord with partnership and a sense of mutual interest, it’s going to make it harder for them to say no.
#3 Try On Your Landlord’s Shoes
What do you know about your landlord? If you don’t know anything about your landlord, ask the original broker. They probably have some sense of the facts that we’re going to talk about here.
- – Is the landlord a large landlord? Do they have a large percentage of retail properties in your city? A lot of landlords tend to own several properties.
- – Or are they a single unit building owner? Some folks barely scraped together the money to secure and own the single building you’re in.
- – What does the landlord own and how are their assets diversified? If they have other real estate or properties or if you know they are pretty wealthy, it can weigh a little bit more in your favor.
- – How is the center doing overall? How much empty space is there? There’s a big difference between a space that has a wait list to get in vs. a space that is 50% vacant for half the year.
- – And then through the COVID 19 crisis, are landlords aware of the plight in your area? Are other businesses closing?
- – What were the market conditions before COVID 19 – were people in demand for the space?
- – Was it hard to get into the center? Were market rates high?
- – Or was it the opposite – rates were low, and spaces are still empty.
- – In contrast, what are the conditions afterwards? Are we going to see a lot of closures?
- – Is your area going to see a lot of available spaces?
These are all considerations you’ll need to weigh before going into negotiations. The strength of your local real estate market absolutely affects the strength of the tenant’s bargaining position. If the market is stronger, you have less of a position to bargain from. If the market is weaker, then you have a much stronger position to bargain from and strike a deal with the landlord.
And to be honest, none of us know for certain how things are going to play out.
In most every instance, landlords are going to owe money to the banks for the money they borrowed to finance the building purchase. They’re currently on the phones with banks themselves trying to figure out how to restructure their debt, find new loans and negotiate flexible payment options. They could have interest that accrues throughout this time period or they could have their interest forgiven by the federal government. If they are using private loans, as is the case in a lot of commercial lending, the lenders are not likely to abate interest so the financial constraints will be tighter. There are a lot of factors at play here.
When I reached out to Greg Glass of Gibbons White, a trusted real estate broker here in Colorado, he had this to say “without a doubt, very few landlords are going to give blanket rent abatements to blocks of tenants at their centers.”
They’re not just going to say, “Hey, you guys don’t have to pay rent. Don’t worry about it. All of you guys are in the clear, don’t pay us. We’re okay!” Many landlords will be going through a financial crisis of their own.
Hopefully you can see now why it’s important to see the whole board before going in with your rent abatement request.
#4 Reflect on Your Existing Relationship
We asked Megan Allen, of Fran Promise Consulting, to give us insight into how we can tackle this rent abatement request as she has consulted with hundreds of franchisees on rent abatement, rent negotiations, obtaining leases and letters of intent. She told us that it’s important to examine the existing tenant-landlord relationship you have first by thinking back on past interactions.
- – How was the original negotiation process? Was it high conflict or a smooth back and forth transaction?
- – Did you feel the landlord was fair? Were they open to last minute changes?
- – Were you stubborn yourself? Was the landlord stubborn?
- – Did you feel that you were able to come to a mutual agreement and understanding?
- – Was it a positive experience?
Additionally, find the answers to more logistical questions:
- – When did your lease start? How long have you been there? Just like any relationship, the longer that you’re in it, the more weight it may carry.
- – How many times have you asked for help in the past? Are you a needy tenant who has new repair requests every week, or have you generally tried fixing things on your own and left requests for emergency only?
- – Do you have a sense of the cost of those items that the landlord has put in during your tenure including the original or tenant improvement funds?
- – Overall, what is your rapport with the landlord? It is hard to go back in time and send a Christmas card now, but have you generally communicated in personable terms? Or have you treated the relationship as purely administrative?
- – Who is the decision maker? Do you deal with a property manager or speak directly to the landlord? Unfortunately, a proper manager may have no ability to help if they aren’t an authorized agent.
- – Have you made any past due payments without notifying the landlord?
- – How many major expenses has the landlord paid that you didn’t have to? Examples include repairs and maintenance, major incidents, unforeseen things in build out, etc.?
The answers to these questions will have a huge say in how flexible your landlord will be when we get to the upcoming request.
#5 Prepare for the Initial Rent Abatement Ask
Now is the time to shine – your initial rent abatement request. Don’t worry, we have a completely free script to download so you aren’t going to have to go through this negotiation blind.
But first, let’s figure out who you’re going to ask. If you’re dealing with a large, faceless landlord then you may struggle to know who to engage.
Who do you know there? Who do you contact normally? This is the person that you’re going to reach out to personally, rather than try to make contact through an administrative office or a form on the website.
You’re going to ask for a conversation – either by phone or in person – so you can sit down one-on-one and make this conversation personal. The last thing you want to do is send an impersonal request to a generic inbox to say, “hey so-and-so, we want $10,000 of free rent and we want it now.”
ACTION: Initiate your rent abatement request with a written document and personal appeal. Aim for a personal conversation with the person you’ve been contacting throughout your lease so far.
Here are a few more things to remember when developing your first rent abatement ask.
The Initial Rent Abatement Ask Do’s
- DO leverage the current relationship you have. As just mentioned, incorporate as many human and emotional elements as you can.
- DO show that you are doing everything you can in other areas and that you aren’t just looking for an easy handout. Show that you are cutting out every single expense you can and prove that it’s not just rent where you need relief. Landlords are not going to be open to giving you rent abatement if you are still paying for X,Y, Z every month, and rightly so. They don’t want to be the only one giving.
- DO ask in a direct way. A tenant’s ability to communicate is key.
Example: These are extraordinary times, our business is closed, and like the rest of the country, we could use some relief. At this time, what types of relief are you structuring for tenants who have been forced to close ?
We’re giving you downloadable templates to follow at the end of this blog so you can read other examples of direct & clear ways to ask. You can skip ahead to download here.
- DO ask for 30 days of rent abatement. Abatement means completely free and that you don’t need to pay it back. Asking for 90 days of free rent at this point is premature and can be harmful to your relationship. We want to reiterate: we believe asking for anything more than 30 days is unreasonable.
- DO ask the week prior to when the rent is due. Don’t hold off on your initial request using our script until the last possible moment. You’re going to need time for negotiation and wiggle room. We recommend getting your initial request in one week or at least a couple days before rent is due to allow time for the back and forth. You may also have a grace period on your rent which will allow for more time to find a fair deal for both sides.
The Initial Rent Abatement Ask Don’ts
- DON’T show all of your cards in the first round. In all negotiations, strategy is important. We want to be able to reach back into our pockets in coming weeks and play another card. So, don’t disclose all of the details in your opening ask; save your empty bank account or number of canceled memberships for the second round of requests.
- DON’T become overly emotional. Yelling or crying on the phone will get you nowhere fast in these critical situations. It’s important to stay cool, calm and collected in order to reach a mutual agreement with your landlord. If you tend to become overly emotional in these situations, use our script and practice several times beforehand with a loved one or friend.
- DON’T send financial documents unless your landlord requires them. We are working on a resource to help you send financials to third parties in coming weeks. In the meantime, try to hold off. If you must send financials ensure your accountant has sent you landlord approved financials.
- DON’T mention limited revenue streams if you have them. If you have revenue from virtual classes coming in or still have attending memberships – it’s not the time to mention it. We want to lead with, “the government has forced us to close, we’re not able to offer in-person training, our business has shut down, etc.” rather than, “we have a little bit of money still coming in that we’re happy to part with.”
The Initial Rent Abatement Ask Details
- Don’t ask for more than 30 days but do leave it open ended. Asking the landlord what they’re open to at this time could be very important. A good way to phrase this is, “what are you structuring at this time?” and go from there.
- Your landlord may have a more generous offer depending on the situation that they are in; meaning they may want to go ahead and settle on 60 to 90 days of rent abatement to avoid renegotiating every month depending on the administrative headaches and their current financial position. This is where we chime in, Hallelujah!
If this is the case, respond with “Yes, this generally sounds good. Please email me what you’re thinking so we have a record of it.”
The Initial Rejection
We are going to go ahead and say that 9 times out of 10, you’re going to be rejected when putting in a request for a full month’s rent abatement. But remember, it’s a dance.
This is a negotiation. This is when we get to pull out the back-pocket cards.
So, here are a few things to consider;
- – Did you get a firm no? Or did your landlord just need more time.
- – Did they request more information? If so, how quickly can you get it to them.
- – Did you speak with the right person? Just like with customer service, you might not always have the right person on the line. You’ll need to go back in with a much nicer version of, “can I speak to your manager?” and re-initiate your ask. In the nicest way possible, explain that this situation is financially dire, and you’d really appreciate any help you can get at this point. Are there any other decision makers that could help?
- – Remember it’s an evolving situation. What else has changed since you asked? What has changed in the last few weeks? Have there been other closures, or has your landlord been able to have his own loans abated? Patience is key. We believe that some kind of relief is coming for service businesses like yours. It’s just a matter of when and where.
The Secondary Rent Abatement Ask
If you made your initial rent abatement request in the week before rent is due, you’re going to make your second request at the very end of the month, so the 29th, 30th or 31st. You’ll generally make your secondary ask 3-7 days after your initial ask. Sooner than 3 days and you’ll seem desperate and longer than 7 days and rent relief will seem unimportant and have fallen off your landlord’s radar.
You may have a grace period in your lease, however we don’t recommend using this unless your landlord has offered. You’re going to want to solve this before the stated due date on your monthly rent payment.
Secondary asks are trickier and can vary greatly depending on personal circumstance. However, here is the general process we recommend following for your second rent abatement request.
- – Do it in person. You’re really going to want to go in person this time to make your second appeal. An in-person meeting can be highly valuable to show your landlord how genuine your ask is and how in need you truly are. The more relatable and humanized you can make negotiations, the better off you will come out of this deal.
- – Follow up in writing. We have a guide to help craft your second rent abatement ask – head to the end of this blog for more details. However, your secondary request will be unique to the situation of your first request so make sure to incorporate and reflect on the Initial Rejection Q&A listed previously when doing this on your own. Work with your Fitness CPA, attorney and consultants to structure your secondary ask.
- – Send proof of mandatory closure from your state, governor or franchise. Send proof of closure enforcements in with your request. These can be government issued documents (go to your state’s official website to find copies) or your franchisors public statements. If the closure was voluntary, unfortunately you won’t have this option.
- – Be prepared to demonstrate through financials that the money isn’t there. Provide business financials that will paint your business in the best light for rent abatement candidacy. For example, there is no need to send in your January financial statement if it was your strongest month on record. Rather, send in your entire 2019 financials to showcase that last year was a struggle as well. We can work with you to find your best financial documents to showcase – just shoot us a message here.
- – Be prepared to meet half-way. We talk about abatement in this guide and how-to ask for 30 days of rent free. However, for the majority of circumstances we need to recognize that we’re most likely going to meet halfway. So, what are a few of those options?
- – A moratorium is one option. This is more of a pause button. Let’s give it 30-days to breathe and then we’ll revisit. We recommend this option for a lot of businesses and you can read more about it here.
- – Extending the lease term by a month is a great option. That means not paying this month, but tacking on and paying anther month at the end of the lease.
- – A deferral is another option. This means you’re going to pay it – just later. This is a less favorable option for gym owners depending on the payment period, as you are going to spend the second half of this year just building back your membership base. So, we recommend putting off any deferral payments to 2021 (or later) to spread the cost out over the course of the year. If you owe $12,000 in deferral payments for one month of rent, you’ll pay this over the course of 2021 with an extra $1,000 added to your rent every month (i.e. $13,000 rent payment vs. typical $12,000 over the course of 12 months.)
- – Your security deposit is another option. You can speak with your landlord to see if they will use your security deposit as an option for rent this month. This means you won’t have a security deposit in the bank account for damages when you leave the lease, so you may need to pay this back in advance as you would a referral.
- – The last, and most viable option is to agree to free base rent. Base rent is the piece that goes to the landlord to pay for their loans or lender expenses. Meaning, you won’t cover what the landlord is out for their loan, but you will still pay any out of pocket costs for the landlord – such as NNN and CAM. These are things like real estate taxes, insurance, and any maintenance of the place. We have this detailed out more in the resources attached to the end of the blog.
ACTION: Get it in writing. You could put your lease in default by not paying your full rent as agreed in the lease so it’s important to have your negotiation in writing.
I’ve spoken with two landlord agents to confirm that emails are sufficient at this time, provided it’s from an authorized representative of the landlord with clear terms. A court of law will look at email from a reasonable agent of the landlord and agree with the email. An adjusted invoice, should they send you one, is also sufficient in writing notice.
The Road Ahead After COVID-19
Thanks for hanging in there. We hope you’re getting value out of these guides and we will continue to release ongoing segment of The Fitness CPA’s COVID-19 series on our blog and YouTube Channel. We’d love for you to follow along.
Remember, it’s likely to be a long road ahead even for the best positioned gyms, boxes, studios or fitness centers.
While you may be weighing worst-case scenarios of not paying your rent in your head, remember that the price of defaulting on your lease will come with consequences that haunt you for long after this crisis is over. At minimum you could pay a few late fees, however at worst, your landlord will have the legal right to increase your rent payments and even deny your lease renewal in future.
We want to give a special thank you to those who have helped us form this guide with their expertise and wisdom; Brandon Hall of The Real Estate CPA, Greg Glass from Gibbons White, and Megan Allen of Fran Promise Consulting. You can read more about their respective businesses by clicking on the links to their name.
We’re always here to help if you get stuck. We know not everyone is built for negotiation and especially in times of crisis, it’s not always easy to think with a clear and calculated head. Read back through this guide several times and use the downloadable guides we have for you here. They will help guide you through what to say and do during this difficult process.
If you have any questions at all, please reach out to my team here or shoot us a comment over on our YouTube Channel. Either way, we’ll respond personally within one business day to help you get the assistance you need.
As always, if you have additional concerns or need to speak 1:1, please reach out to our team here.
Follow our emails and YouTube channel in the next coming days and please share with any other business owner who might find this helpful.
We’re here for you, and will continue to do our best to keep you informed over the next coming weeks.
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