Closing Costs

Whether you’re opening your first club or your 100th, a new facility’s location can make or break its success. As a result, it’s vital to put time, effort and research into real estate site selection.

“The biggest challenge, or more importantly the math equation, is to balance the cost of the space while understanding the market demographics, including competition, all-in cost of the space and opportunity for growth,” said Doug Katona, the chief operations officer and director of training and education for World Gym. “Parking is also a critical component that can affect capacity and ease of traffic flow. Patience pays off — do the due diligence.”

According to Katona, there are a variety of factors a club operator should consider when evaluating the site for a new location, including the demographics, competitive landscape, planned operating model, brand power, current and future costs, and condition of the building or space.

In addition, it’s important to consider who is responsible — the landlord or you, the tenant — for certain expenses, term and type of lease, who the landlord is and what their history is, and if the landlord will participate in tenant improvements or any relief for initial rent.

“It is also important to take a look at what ‘feeds’ the area, such as highways, traffic patterns and ease of entering and exiting the space,” added Katona.

World Gym currently boasts more than 200 clubs worldwide, and with each club opening, Katona explained they glean valuable learning lessons on what it takes to open up a club from scratch.

“Every gym is a learning opportunity and that’s the beauty of what we do,” explained Katona. “Prepare your financials, confirm your operating costs and have a target EBITDA. We may often go through up to 10 versions of our financials, but it’s worth the process. I’d also highly recommend to project manage the entire process and allow for delays or unforeseen obstacles. Get your leasing lined up early and don’t over-engineer the gym. Spend time training and culturing the staff — the customer experience is arguable more important than the equipment or fixtures in the gym.”

Other factors to consider are whether you will own the building a new gym resides in, or lease from a landlord. According to Randy Karr, the president of California Family Fitness, there are pros and cons to both scenarios.

“It really depends on what your background and experience is in,” explained Karr. “I think the question is: Is your strategy to just operate health clubs and basically make your living off of that, or do you have an appetite to be a real estate owner? Because with that comes additional responsibilities. Overall, it depends on the cash flow and what you can afford.”

If you decide to lease an existing space from a landlord, Karr explained it’s important to pay attention during lease negotiations. “When you’re doing the lease negotiations, you want to make sure you’re aware of what you’re getting into,” he said. “Items to consider are rent, price per square foot or overall rent per month, tenant improvement dollars and rent holidays. All of those are typically negotiable, so depending on what you’re trying to do and what the time frame is, realize that you have those at your disposal — those can really work in your favor if you negotiate correctly.”

Katona echoed these sentiments, adding that club operators should also consider what and how the costs are executed when negotiating a lease. “CAM (Common Area Maintenance) and related building costs need to be fully understood,” he said. “Replacing an HVAC can cost north of $20,000 and affect the return. Other issues like hazardous materials and the indemnity should also be analyzed.”

Lastly, Katona explained it’s vital to know what you are in need of — and not to comprise on those items. “A gym is a viable business, but expenses and unforeseen costs can adversely affect cash flow and profitability,” he added. “Make sure the demographics are suitable to the gym population or target you are going after. Visit the competition. Know the area and the purchasing habits of the market. Wait for the right location.”