Leasing or purchasing physical space for a spa can be a crash course in learning a foreign language. With an abundance of acronyms and real estate jargon, the already arduous task of making the right decision can become nearly impossible. Armed with this Rosetta Stone of commonly used terms, you can avoid many of the mistakes made by commercial real estate neophytes.
THE STARTING LINE
Regardless of whether leasing or purchasing, hiring a professional agent in commercial real estate should be the first step. Agents are the best resources for understanding the local market and having an advocate when negotiating for the business’s best interests.
ACRONYM AWARENESS
Letter of Intent (LOI)
After falling for a particular space, the first unrecognizable acronym will be the letter of intent (LOI). The letter of intent is the jumping-off point for negotiations between the owner and potential tenant. This is a nonbinding agreement that outlines all the terms and conditions of a particular property. There could be a fair amount of back-and-forth between all involved parties before the letter of intent is finalized and signed. While coming to an agreement on the letter of intent, most of the other important lingo will be brought to light as well.
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Common Area Maintenance & Triple Net
When negotiating, there will be a base rent price and Common Area Maintenance (CAM) or Triple Net (NNN) depending on the type of space being leased; both are usually given in price per square foot. Common Area Maintenance (CAM) is typically the term used for office buildings to divide the costs of running the building between all the tenants based on their percentage of square footage. These costs can include property taxes, insurance, utilities, maintenance of common areas, and exterior maintenance.
Triple Net (NNN) is essentially the same but is commonly used for retail space leasing. The three Ns stand for the three nets: taxes, insurance, and maintenance. Most landlords have more wiggle room for compromise on the base rent price than the Common Area Maintenance or Triple Net since there are fixed annual expenses attached to the Common Area Maintenance and Triple Net. So, the savvy renter will focus on the base rent price and the Tenant Improvement (TI) Dollars when striving for the most advantageous agreement.
TI Dollars
Having a landlord concede to a high Tenant Improvement (TI) Dollar amount is like winning the lottery for the business. Tenant Improvement Dollars is incentive money that can be used to build out the space. These dollars can only be used for walls, flooring, plumbing, doors, and similar building necessities, not for furniture, devices, or fixtures. If planned well, this can really limit the amount of out-of-pocket expenses when procuring the physical spa space. Having a clear idea of the costs of building out, furnishing, and running a spa will help you avoid some of the lease negotiation pitfalls like relying too heavily on Amortization.
Amortization
When there isn’t enough money in Tenant Improvement Dollars or the business owner’s budget to make all their spa dreams come true, the landlord or builder may offer up Amortization as an option. Amortization is when the cost of something is broken down into smaller payments over the course of the lease. Be aware, especially in longer-term leases, the amortized portion can include a hefty interest rate and will usually last the duration of the lease. This can be a useful tool if there will be a return on investment for the upgrades being considered. Otherwise, it may be a smart play to plan a phase two once there is more room in the budget several years down the line. Knowing the numbers of the business is always a great starting point, so working with a financial advisor before starting the real estate process will help to streamline this complicated transaction.
SETTING UP FOR SUCCESS
Having a financial advisor on the side of the business will also help to start with the end in mind, which can include succession planning, owning real estate, or selling the business. If selling the business in the future is in the plan, buying instead of leasing may make the most profitable exit. Even if purchasing is several years down the road, it’s never too early to start planning and saving for it. If a building is built or purchased with more space than needed, this could be utilized to have another stream of revenue for the business.
Whether purchasing or leasing, having a clean and well-appointed brick-and-mortar location is imperative for most spas. There are so many aspects of business that the spa owner must have a working understanding of, but luckily, there are also so many professional service providers and consultants to decipher industry-specific acronyms and terminology. The possibilities are endless when looking for opportunities armed with the knowledge of the secret language of commercial real estate.
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Melissa Allen has lived many lives as a dance teacher, biologist, and marketing director before becoming a successful aesthetician and spa owner. All of these former positions help color her opinions, actions, and style. Allen’s career in aesthetics has also been far-reaching; she has been an aesthetician in the back of a salon, a solo aesthetician, a spa owner with several employees, and a global brand consultant. Allen has experienced many of the paths of aesthetics and is open, honest, and willing to share her adventures. As her time in the treatment room comes to an end, she is focusing on mentoring and guiding the next generation of thinking skin care professionals and spa owners.
