Would appreciate some insight from you all.
Our properties have all fared well during these crazy times save for our gym tenant (LA Fitness). Thankfully, they are back in business and paying us rent once again (we negotiated a rent deferral for the past few months along with a lease extension).
The industry, however, took a beating. 24 Hour Fitness filed for bankruptcy and is closing over 130 locations throughout the U.S. Golds Gym also filed for bankruptcy and is closing over 30 locations. We've heard from agents that LA Fitness plans to let leases expire at over 100 locations but they don't plan on filing for bankruptcy (yet).
We have recently been presented with a few LA Fitness properties, all with new leases in excellent locations. We're being told to "make any offer". I don't know how low of an offer the owners will accept but apparently some are laden with debt and open to negotiating.
I'm not sure how I feel about proceeding forward. Sure, we don't lose anything by making an offer, but hypothetically speaking, if we do end up purchasing another gym, I believe we're taking on quite a bit of risk. While LA Fitness has fared better than the other middle-market gym chains and the company is structured completely different than the other companies, who knows what the rest of this year will bring.
Another lockdown is a possibility if there is a second outbreak later this year and I know many have already cancelled their memberships.
On the other hand, if things improve we could have an opportunity on our hands now to pick up a property (or two) at a low price.
Thoughts?
All things consider and stating the obvious, but the location is very important. Are these LA fitness in the middle of a fairly populated suburb? Lower income area? This would factor in my thought process. LA fitness would default on rent only b/c folks are not going back to the gym or they are not allowed. If it's the former, a lower income area would mostly likely cut their gym membership first when compared to a more affluent location.
Since these are relatively new leases that seem to be negotiated already, I wonder what type of default remedies or penalties are included if they decide not to pay rent (just another layer of protection).
I might be off base since I'm not familiar with LA fitness, but is your question circled around owning the land that LA fitness sits on or actually buying the LA fitness and becoming a gym operator?
These are in the middle of largely populated areas near freeways with adjacent big-box tenants like Costco, Wal-Mart, Lowes, etc. They are not lower income areas. Each property is over 4 acres of land with 35,000+ sq. ft. building.
I need to go back to our current lease with LA Fitness for the specifics on defaults and remedies, will report back.
We would own the land/building, LA Fitness would be our tenant and they are operating the gym, not us.
do you have other offers for the spaces?
I'm not sure, I'd have to ask our agent but I'm going to assume no.
How long until people feel comfortable enough to go to the gym? You mentioned LA Fitness is structured differently, but are they well capitalized enough to ride this out? I would assume that you lose them as a tenant. Hopefully, they can stay in place long enough for the bank to value the in place cash flow for LTV. Then, think about if you still consider it a good deal if you have to subdivide or put in new tenants. Or, can you convert to another use? You'd have to check the zoning.
Well the gyms are open now and there are people going but I'm certain the damage is done or will continue to be done as memberships get cancelled and/or another lockdown hits. If another lockdown does happen, I don't think they'd make it. Fortunately we own our LA Fitness free and clear but we obviously want the company to survive as the lease is quite new.
While all the properties are in great locations, I suspect it would be hard to convert to another use if anything due to CC&Rs that are in place as they are all part of larger shopping centers, unless those can be renegotiated.
Have a chat with an architect/lawyer that you think would be good and get their thoughts on how tough to renegotiate/change use. Your lender is going to want all the financials on the tenant, and will likely make you put up reserves etc. since they will assume the space becomes vacant sometime in the next 1-2 years.
Is the space able to be reconfigured for storage or a different retail use?
Lowball them with 50% discount on what it would be worth based on the in place NOI. If they are the proud owners of LA Fitnesss in a shopping center; they likely have other retail buildings and are facing a cash crunch.
I'd stay away. None of these guys are public, so you can't get any in depth detail on financial health, but corporate and several franchisees have debt trading at distressed prices (low 80s and downward). Don't remember off the top of my head when the corporate maturity wall is, but they're not raising any new money and are almost surely liquidity constrained right now. Couple that w/ the possibility of a second wave of and/or longer continued lockdowns in several states w/ heavy location concentration (thinking mostly of TX and NY, but AZ and FL are both states w/ 5%+ of total locations IIRC), and it's not difficult to imagine a scenario where they file and flush most of their leases. Also an exceedingly tough environment in which to backfill those spaces if that were to happen w/ two competitors in BK and the rest almost certainly not looking at expansion right now.
Wouldn't touch w/ a 10-foot pole unless it's enough of a lowball offer that you can make re-purposing the space and re-leasing to non-gym tenants pencil, which I seriously doubt is an offer they'd consider.
Some good points, thank you. I think you touched base on many things on my mind. We received their financials from a few years ago during due diligence when we purchased our LA Fitness and like most, if not all fitness companies, they're carrying quite a bit of debt as they were heavily expanding prior to all of this.
I'm assuming worse case scenario which is another lockdown and I don't see them surviving another one. They have the most gyms in CA and in FL.
We would go in with a lowball offer for sure but as you said, not sure they'd consider it. I suppose it won't hurt to try but if there was any opportunity to this, it would be in securing the property at such a low price.
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