Martial Arts Studio Tenant - Liability Issues? Sale Issues?

Question

I have a commercial property with 5 units that is part of three phase shopping center. I have a martial arts studio interested in leasing one of the units. Should I be concerned about increased liability and/or it being viewed as an undesirable tenant, should I decide to sell the property?

Charles Carillo · Answer

@Carl Jung

I would definitely speak to your attorney prior to signing any lease. They might have a special agreement for the tenant to sign and/or have you added onto the tenant's insurance policy.

Ronald Rohde · Answer

I wouldn't consider that use high risk. at least not from a liability standpoint, they generally aren't super strong tenants, so take that into consideration for your tenant mix. I posted a video on YT about retail tenant selection criteria...

It is "undesirable" for class A...

John Mocker · Answer

Carl,

Your object is to make the Tenant's Insurance Primary keeping your Insurance seconday.  Coupled with Jason's suggestion of requiring an Umbrella for additional coverage I would add somethings we see in Lease insurance requirements:

1. Require that their policy give 30 day notice of cancellation or coverage reduction

2. Require that their policy is "Primary & Non-Contributory"

3. Require that their policy waive subrogation against you

It is also a good idea to bring your attorney in to the process and draft the lease that supports your strategy.  A hold harmless and indemnification clause in the lease would be one of the clauses your attorney will probably recommend.

Another strategy used by dance, exercise, and similar schools is to purchase a Sports Accident policy.  That type of coverage provides for medical bills in the event of an injury without regard of fault.  Usually it is a limit of $25,000 to $50,000.  This provides a method to cover the injured student without it going to a Lawsuit/Claim.  You could suggest this to the tenant as it benefits them as well

Joel Owens · Answer

I have been taking martial arts for decades. 3rd degree black belt.

First you need to quantify martial arts school. Some schools say martial arts but really they do a lot of extreme MMA type stuff where you have a bunch of newbie's with limited control and big ego's. So the chances of someone getting hurt bad go up a lot with those type of places versus a school where mainly kids are being taught a certain martial arts style and some parents take along with them.

There are varying business models within the martial arts community so important as a landlord to research what type is interested in your space and why.

Also important to know if the school owner has shown success with a bunch of other locations or is this a franchisee that is learning the business on the location they want to occupy with at your center?

Lots of owners are small franchisees of a brand and they fee them a lot on testing splits for money to head corporate. The best schools the owners might make six figures profit with one location but most pay enough for them to make a living. Problem is the equipment wears down over the years and starts looking old and the owners do not allocate for the cool factor reimaging and putting new equipment in to boost sales up.

Check the tenant that will occupy liquidity and net worth. You want to know they can FLOAT the business in tough times with a personal guarantee. I do not like to take on tenants where they have limited reserves and experience and business has to do amazing first 6 months for them to make it. Remember this there are lots of excellent martials arts but POOR business owners.

I looked at owning a school a decade ago but you have a limit on income and not make much money. I would not consider a martial arts school a premium tenant but a filler tenant that can usually pay low rent but take up a lot of space so making NOI small for a center. Make sure and put in lease that you can more tenant with so much time notice. That way if credit tenant says I want the corner space you have the flexibility to move the karate school to another spot in the center. Sometimes karate school wants best spot in the center for lowest rent and then you have trouble leasing the other spots or karate takes middle spot in a big chunk.

Tons of karate schools shut down with covid because people did not want to train in person. Fitness places I also am no excited about. I see those 2 tenant types close down all the time.

No legal advice given

Jason Bott · Answer

Carl, $1M GL and added as an Additional Insured on the tenants policy are the main strategies.

If you would like more protection, require them to get an Umbrella for an additional $1M-$2M.

Carl Jung · Answer

Hi Charles,

Thanks for your reply. Lease requires 1million liability insurance policy and adding us as "additional insured".

Martial Arts Studio Tenant - Liability Issues? Sale Issues?

Most Popular Reply