In today’s episode of the PT on ICE Daily Show, ICE COO Alan Fredendall delves into various lease terms, including flat rate leases, triple net leases, and percentage-based leases.
Take a listen to the podcast episode or read the full transcription below.
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00:00 ALAN FREDENDALL
Welcome to the PT on ICE Daily Show. Happy Thursday morning. I hope your day is off to a great start. Thanks for being here today on Thursdays. My name is Alan. I’m happy to be your host today. Currently I have the pleasure of serving as the Chief Operating Officer here at ICE and a lead faculty over in our fitness athlete division. Today, Thursdays, Leadership Thursdays, we talk all things business management, clinic, and practice leadership. Thursdays means it’s Gut Check Thursday, so let’s talk about this week’s workout. We have a little couplet of power cleans and push jerks with a low to moderate weight barbell and some running. So we have 20, 15, 10, 5 power cleans at 95-65 and push jerks at 95-65. After each round you’re going to run 200 meters. 20 power cleans, 20 push jerks, go for a run, 15-15 run, so on and so forth. When I sent this to our CEO, Jeff Moore, last night, he said, wow, that seems like a heavy, high-volume barbell workout. And I don’t agree at all. This should feel about a 10-minute workout as usual on Gut Check Thursdays. You should be able to pick a weight on that barbell where you can really cycle big sets of power cleans. Maybe for some of you, even hang on to all of the power cleans and go right into your push jerks and really get a high intensity stimulus out of that workout and hit some quick 200 meter runs in between. So goal time, 10 minutes, scale to do big sets on that barbell. I love workouts like this because they’re really easy to modify. This is the type of workout that I’ll probably give to a patient in the clinic, right? If we can ditch the barbell entirely, we can do some dumbbell cleans and jerks, we can do some kettlebell swings and some landmine press, we can run, row, bike in between. It’s a workout where you can take kind of the stimulus and manipulate it a number of different ways to achieve the same result based on the equipment you have and what your patient or athlete can do in front of you. So have fun with Gut Check Thursday. Course is coming your way. I want to highlight our pregnancy and postpartum division as we’re rebranding to Ice Pelvic Health. So we have one live course and one online course with a second online course launching in 2024, a level two course, an advanced course. So you can catch that Level 1 course. The next chance to catch that will be January 9th. And then that Level 2 course, which will require the Level 1 course as a prereq, will be launching in 2024. And then some live courses are coming your way between now and the end of the year. This weekend, this weekend coming up, Alexis and Rachel will be down in Scottsdale, Arizona. The weekend, next weekend, September 30th and October 1st, Christina will be up in Hamilton, Ontario, up in Canada. The weekend of October 14th and 15th, Alexis will be in Milwaukee, Wisconsin at Onward Milwaukee. Out in Bozeman, the weekend of November 4th and 5th, again, Alexis. The weekend of November 18th and 19th, again, Alexis will be on the road, this time in Bear, Delaware. That’ll be out at CrossFit Bear. That’s actually ICE faculty member Lindsey Huey’s gym. And then your last chance to catch the ICE public live course this year will be the weekend of December 2nd and 3rd. Again, I’m in Canada with Christina. That’ll be in Halifax, Nova Scotia. So check out that course. Our goal with that course, bringing on the second online course, is to have a three-course series that results in a certification and management of the pregnant and postpartum athletes. So that’s what’s coming your way from the Ice Pelvic Division.
04:31 IMPORTANCE OF LEASE NEGOTIATION
Today on Leadership Thursday, we’re going to talk about negotiating your lease. And maybe for some of you, this is a thought you have in your mind as maybe you’re thinking about beginning your practice of what does it look like cost-wise, what does it look like in practical application to buy or rent a space such as a clinic space where you can set up your practice. And maybe for some of you who are working for somebody else, or maybe already working for yourself, and you are maybe going through lease renegotiation, you’re thinking about moving locations, of what are the essentials to look for in a good lease, what are the different options available to set up a lease, and what are some things that we look out for. So let’s talk first about what and why this is so important. Of all the expenses that a business can have, your lease or your mortgage, the money you pay for your physical space, is going to be one of your highest expenses, but it’s also probably the one that is the only one of all your fixed expenses that actually has room for manipulation. When we think about paying for internet or paying for maybe a fax service or something. Those are fixed costs, but they’re unlikely to budge, right? You can’t really call up the cable company. You can’t call up Comcast and say, Hey, you know what? I think I paid too much for this. I’d like to pay half as much, right? They’re just, they’re going to hang up on you, right? They’ll probably talk to you about bundling or try to give you a 5% discount for six more months or something, but you’re really not going to be able to move the needle on that expense. Likewise, payroll, paying our folks is another big expense that’s fixed. And that’s also not an area where we can really budge the needle on expenses. If you don’t believe me, go ask the folks that work for you if they would work for you for half as much money. Again, you’re probably going to be met with maybe some laughter or maybe anger if they think you’re serious. but that’s an expense that we’re unlikely to be able to significantly manipulate. It’s very different with something like a lease. Based on the current commercial market for commercial real estate, based on even zip code, it may only be a five minute trip down the road to a new location, but based on zip code, based on a number of different factors, there tends to be more room here to hopefully reduce that expense a little bit. So I want to talk about ways to do that. and ways to set up your lease terms and maybe terms you have not even heard of yet. So let’s start with there. Let’s start our first point. Let’s talk about what are the typical terms of a lease. So the most common, the one we’re all probably very familiar with, even if you’ve never leased commercial real estate, you’re familiar with this because you’ve probably done this with an apartment. It is a flat rate lease. This is paying X amount of dollars per month based on the lease terms. We’re very familiar with renting apartments, maybe renting townhomes or condos of hey, it’s $900 a month and it’s a one year lease, right? And usually at the end of that lease, the price probably goes up a little bit and if you’re still gonna live there, you renew that lease and you’re kind of in that fixed rate lease cycle.
07:36 GRADUATED LEASES
The next is really kind of unheard of and very uncommon and falls on you, the person looking for a space to really inquire about it as if it can be an option for you. And that’s a graduated lease, where you’re eventually going to arrive at a fixed price per month that does not change, but you’re not going to start out there. So an example might be you pay $500 a month for the first three months of your lease, Maybe the second three months of your lease, you pay $750, and maybe the last six months of your lease are built up to maybe $1,000 a month, as a quick example. So we’re slowly graduating to the full terms of that lease. Why is this helpful? Obviously, it’s less money over the 12 months. That’s the number one reason. The other way is this is really helpful when you’re first beginning your business. When you first hand your shingle, you probably don’t have a full clinical caseload, which means the revenue coming into your business is probably not where you would want it to be to maybe even pay the full amount of that fixed rate lease. So negotiating for a graduation of the understanding of, hey, I’m not making 100% of the revenue I believe I can make currently. Can we kind of step up to that amount over time? This is a great idea, a great model to pitch, especially if you’re not renting your own building or space. If you’re thinking about starting up a side hustle in the corner of a gym, and you’re literally just getting a portable treatment table in the corner, you’re not getting a lot for your money, so the idea of spending maybe $1,000 a month to have 20 square feet in a corner is less than ideal, especially when you’re first starting, of hey, can we just see where this goes? Can we do $200 a month for the first three months? Can we do 400 for months four to six? can we do 600 months six through nine and then maybe months nine through 12 we’re at 800 a month and then we can revisit at the end of the year what changing to a fixed rate amount might look like. So this gives you some breathing room that you don’t have to rush out and think about stressing and worrying about maximizing your revenue from day one. It gives you that kind of room and time to go out and market your clinic and not just thinking about maybe I need to be working in home health or something to even pay for this lease and I don’t actually even have time. to see patients at my own clinic because my lease is so high. So graduated lease is a really great option that’s often not really thought about, not really offered, something you may have to ask about, but something that a lot of business owners, especially if you’re subleasing a space, might be very open to because for most of those folks, that space is empty anyways and they’d rather have you paying more and more and more over time than paying nothing at all for that space.
11:01 TRIPLE NET LEASES
The next type of lease is something that almost no one is familiar with unless you live in a really big city or you deal with really serious commercial real estate, and that’s called a triple net lease. How a triple net lease works is you pay a little bit of money for the actual principal on your lease, but a lot of the cost of your monthly payment is a shared split of usually the insurance for the building, the maintenance costs for the building, and the taxes for the building. So this is very common in bigger cities where you have multiple businesses inside of the same building, where you have a shared entryway. When I think of a triple net lease, I think of the flagship Onward and Onward Charlotte, where there are, I think, 12 businesses in a three story building, a couple businesses per each floor. That is usually where you will see a triple net lease of the taxes, the insurance, the maintenance costs for that building, are all kind of added together and then divided among the number of leases inside of the property. So this can be a great way to get a cheaper lease, especially the bigger the building. Yes, more maintenance costs, more taxes, more insurance, but more people to spread the cost across. So overall, a pro to this approach is we tend to see cheaper rent and overall a cheaper lease payment because those costs are shared. Now there are some downsides here that we need to be aware of. If you’re the first tenant in a brand new building, you have no one else to share your costs with, right? So asking if that does happen to be you and the lease is a triple net term of how does that work with the sharing of this cost? Am I expected to pay 100% of it because I’m the only business in this building currently? That’s not ideal. Or is the landlord going to assume the majority of that as more and more businesses open up inside of the common building? The other concern there is that overall physical therapy is really low maintenance. When we look at actual property wear and tear, maintenance, that sort of thing, we don’t tend to damage a lot of the buildings we’re in. We might have some scuff marks on the door frame from maybe folks coming in and out with with walkers and wheelchairs and things like that. But you don’t tend to see a lot of big property wear and tear in a physical therapy clinic, which means in a triple net lease, you could make the argument that we’re probably paying more than we need to because we use such a small amount of the shared spaces, especially in something like the bathroom as well. physical therapy clinics are not nearly as business busy as a business like a gym or a restaurant where maybe hundreds of people per hour are coming and going and if they’re using maybe shared bathroom spaces they’re really causing the majority of the maintenance costs for that compared to your clinic. So just being aware of how many tenants are in the building and also what are their business types. Is there a lot of foot traffic? If so, that’s going to jack up the overall maintenance cost of the building, which is then gonna be passed on to you as one of the tenants in the building. So be aware of those factors if you’re thinking about a triple net lease or you’re being offered a triple net lease. The last type of lease type available is something we should never do, which is a percentage-based lease. We should never do this, first of all, because it’s illegal for us to do this as healthcare providers. Getting into a negotiation where you pay 10% of your monthly revenue as your lease, what that looks like, how that functions, is essentially kickbacks. We are not allowed to be involved in any sort of kickback system as healthcare providers. Does it happen? Yes, but part of being a business owner is managing risk and one of the biggest things you get in trouble for. is something like that. So knowing that you should not do this, this also just becomes weird of now if your rent is based on a percent of your revenue. First of all, the payment is different every month. It’s not going to be exactly the same. It’s going to fluctuate up and down. So that’s always a little bit awkward. The other awkward part is now you have to sit down. You either have to give complete access to your landlord, to your financials so that they can look and say, I will be the one that calculates how much you owe me. Or you need to sit down monthly and give that information to your landlord. And that just doesn’t feel good for one business owner to just be laying open how they do their operations and financials to another business owner. The issue with this, aside from it being illegal, why it’s not good for business, is that in general, a physical therapy clinic can expect linear growth. As my caseload gets more full, I see more patients, my revenue increases. When I reach the point at which I have no more time, in my week to see patients, I hire another therapist. And the process just keeps repeating. Their caseload gets full, their revenue increases in a linear fashion, so on and so forth over time. That does not happen in other businesses. For example, with a gym, especially a gym that maybe has an unlimited membership model, they’re going to reach the point at which they can have no more members, and there’s no more way for them to increase their revenue at all. So as your Revenue at the clinic continues to increase as you hire a second, a third, a fourth, maybe a fifth therapist. Your revenue grows and grows and grows. In a percentage model, your rent is going up, up, up, up, up, up, up in a way that it starts to become unfair for you as the PT clinic owner to be expected to always pay 5%, 10%, 20% of your revenue of your monthly lease payment is going to increase linear alongside your revenue as a clinic. And it’s going to become very quickly an out of control expense. So that’s never something we want to get involved in. The last thing we never want to do is not a type of lease that is official is any sort of quid pro quo, any sort of this for that arrangement of if you treat me 10 times a month for physical therapy, you can rent the back room of my gym or my spin studio or my yoga studio or whatever. That’s just not really good business for a number of reasons. First of all, we have, I would argue, a lot more to offer as physical therapists. At any given time, 87% of the American population has some sort of pain, which means When you give up time on your schedule in exchange for something, you can expect those times to be almost always booked, right? Imagine that same situation with a massage therapist. Hey, you can have this back room if you give me two massages a week. Guess who’s never missing those two massages that week, right? The landlord, right? They’re always gonna be using those in a manner where, again, very similar to a percentage lease, you’re gonna find yourself having the feeling that you’re giving more than you’re getting. The other main reason to never do this is that if you trade lease payments or really any other sort of expense in exchange for physical therapy treatment or programming or something like that, that is now an expense you cannot show on your taxes. Part of being a business owner is yes, making money, but also being able to justify all the expenses related to running your business that you possibly can to reduce your tax liability so that you pay less taxes over time and overall the clinic has more profit. If you are exchanging your lease and it has a $2,000 value a year, you cannot write off that $24,000 as rent payments on your taxes to reduce the tax liability of the income that the clinic generates. And the more you do quid pro quo stuff, the less expenses you show, and to the government that looks like more revenue with less expenses, it looks like more profit, it looks like more taxable income. We never want to be in a situation where we’re paying Anywhere close to the amount of taxes is actual profit that the clinic makes. It doesn’t feel good to go to work and run a business and then pay almost all of your money in taxes at the end of the year and not have a lot left to show for it. So that’s really why we want to avoid quid pro quo type arrangements, trading expenses in exchange for physical therapy treatment or other physical therapy services that you may offer at your clinic. So I hope this was helpful. We talked about different lease terms, about why leases are maybe the one area of running a business where we have a lot of room, wiggle room. to hopefully reduce the price, or at least keep the price as capped as we can. We talked about different types of lease terms, a typical flat rate lease, a graduated flat rate lease, a triple net lease, quid pro quo, and percentage based leases. So, I hope this was helpful. I hope you have a fantastic Thursday. Have fun with Gut Check Thursday. I’m literally getting ready to go next door and do it right now. If you’re gonna be at a live course this weekend, I hope you have a fantastic time with our instructors. Have a great Thursday. Have a great weekend. Bye everybody.
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