Negotiating Strategies and Tactics for Your Next Laundromat Lease
Since there have been self-service laundries, there have been landlords. And, since there have been landlords, there have been leases.
Of course, in the beginning, these were simple one- or two-page documents. However, over time, they have evolved into 70 pages (or more) of legalese and fine print, posing potential pitfalls for today’s laundry owners and potential investors.
On the surface, leases seem benign, hiding away in a file cabinet, never seeing the light of day. However, they have the potential to spring from that cabinet drawer in the blink of an eye and wreak havoc on your entire business life.
Over and over again through the years, laundry owners in leased space have paid heavy prices merely for not understanding the full ramifications of their leases. Likewise, new investors who spend hundreds of thousands of dollars to purchase laundries yet don’t take adequate time to understand the long-term impact of their leases are inviting problems.
“The lease is the most important part of your business,” said Charles Pasquale of Village Mart Laundromat in King of Prussia, Pa. “It is the first thing you do. If you didn’t build your lease properly, you might as well forget about building your laundromat, because you’re building yourself into a hole. The lease is invaluable.”
With this in mind, let’s highlight the basic components of a laundry lease, as well as what you should be trying to accomplish when negotiating this all-important business document.
Duration: The main thing to focus on when negotiating your lease is the time factor. You’ve got to give yourself enough time on the lease to make it worth your while. If you’re going in with a new store, it’s highly recommend that you get 15 to 20 years as an absolute bare minimum – with 25 years being the ideal situation.
Of course, this duration can take different forms. It can be an initial lease term of five years, with five-year options thereafter, totaling 25 years. That’s all negotiable with the landlord.
The landlord will probably want more time on the initial term, like a 10-year lease with three-, four- or five-year options. But the whole idea is to get as many options as you can tie up, because eventually the worth of your business is going to be based on the amount of time you have left with the lease.
It’s also crucial to know what type of option you are being offered. There are different types of options. For instance, a “market value” option is really no option at all. If it’s a market value option, it merely means that you have the right to talk to the landlord about an option based on various formulas that are used to determine your new rent.
If it’s a “calculated value” option, the most common situation is that the rent will continue to rise on a cost of living basis, like that primary base rent did.
Assignability: The next most important thing is the assignability of your lease. If you’ve got a lease and you can’t assign it to somebody else when you sell the business, it’s going to cost you a lot of money.
Therefore, the assignability must be reasonable. The more you can define that in the lease, the better. Typically, the landlord will want to say that your lease cannot be assigned “without the expressed written consent of the landlord.” Period.
As a result, you need to counter with a clause stating that “consent cannot unreasonably be withheld.” Ideally, it would be even better to be a bit more specific than that. For instance, it would be helpful to have a clause saying that landlord’s consent is not required if the new tenants have specific net worth and credit score – let’s say, for example, at least a $300,000 net worth with a credit score of 680 or higher. This would tie it down so that the decision is not left to the landlord’s whim.
Types of Leases: There are a few different types of leases. Gross leases include all of your costs, such as taxes and common area maintenance. However, the majority of today’s laundry leases are net leases or triple-net leases.
That latter simply means that you’re going to pay a base rent, plus common area maintenance, insurance, real estate taxes and all of the other associated costs. In many cases, this can include things such as resurfacing the parking lot. So be clear where you stand on this issue.
Some people see the rent figure on the first page of the lease, and they assume that’s the entire rent. But, back somewhere in the lease, there is additional rent. And, in some cases, that additional rent can go from five cents a foot per month to 50 to 60 cents a foot per month. That can make a huge difference.
There also are leases called percentage leases, which require the tenant to pay a base rent, plus a percentage of sales. However, these types of leases are more popular with high-volume operations, such as drug stores and supermarkets.
Rent Escalations and Other Costs: The next thing you need to do is develop a clear understanding of how your rent is going to escalate. There are several ways this can occur. One way is through a simple fixed amount formula. For example, this year you would pay $1,000. Next year, you would pay $1,500. And, the year after that, you would pay $2,000. And so it would go, down the line. In this scenario, the rent is written out, and you know what the amount will be year after year.
Another way landlords can escalate your rent is on a percentage basis. They’ll write down an amount to start with and jump it annually, based on an agreed-upon percentage. However, be wary of the dangers of compounding with this type of rent escalation.
Also, be sure you have a firm grasp on how your landlord is going to charge for common area maintenance and real estate taxes. What are you responsible for paying? For instance, if your store represents 10 percent of the shopping center or strip mall, and the taxes are $100,000 a year, does this mean you pay $10,000 in additional rent for the taxes? Develop a clear understanding of how that will work.
No doubt, the people who know laundry leases best are those who are working with – and living with – these documents day in and day out. Below, some laundry industry veterans share their personal “essentials” for a strong and successful laundry lease negotiation.
Elite Business Investments Corp.
Valley Village, Calif.
If you’re negotiating a new lease for a new laundry, show the landlord a complete package as to what they are going to invest into the laundry, from construction to tenant improvements and equipment. Explain to the landlord that the laundry is a destination business and therefore will be bringing more customers to the center. With a new laundry, the landlord is getting a long-term tenant, unlike a standard retail store.
In re-negotiating an existing lease, the deal can be a bit trickier, especially if the current tenant is paying the rent on time. However, if the current laundry is in bad condition and the intent is to purchase the store and remodel, you want to show the landlord what it is you’re planning on doing to improve the status of the existing business – how much money you’ll be investing, new equipment, tenant improvements, marketing ideas and so on.
Corporate landlords will typically have property managers that act as the go-between. In fact, some tenants will never meet the actual landlord. And these property managers get paid based on the increases and on the rent that is charged, so it’s in their interest to always try and get the highest rent possible.
Mom-and-pop landlords want their spaces leased at the highest rent, and they want to know they have a good tenant in their center. The difference is that you have a better chance of negotiating a fair rent face-to-face with the actual landlord than you would with a property manager.
Over the years, I’ve seen new buyers negotiate their own leases, completely unaware of what they have just committed to. Some of the most common mistakes are: too short of a term; not being able to assign the lease; having options at the end of the lease and not being able to assign those; allowing the landlord to be able to relocate them; and, the worst, allowing the landlord to cancel the lease with a 30-day notice.
If you are undergoing new construction or a complete remodel of a laundry, you want, at the very minimum, 10 years with at least three five-year options for renewal – the longer the better.
If you’re purchasing an existing store and the lease has less than 10 years, it would be wise to ask the landlord for a few five-year options. Finance companies won’t give a loan for any stores without a lease that is at least one year longer than the term of the loan they are requesting.
The market is still somewhat soft coming off of the recession, and some landlords are willing to discount the rent to get a long-term tenant. Use that to your advantage. No landlord wants a vacancy in their center, so the longer a space is vacant, the more willing the landlord will be to lock things up and get a tenant in there.
Of course, do your homework before approaching the landlord. Find out the market rate for retail rent in your area. Call the local law enforcement agencies and find out the crime rate. Drive through the neighborhood to see what’s going on around the location; look for signs of graffiti, etc. And see if there are any vacancies in the shopping center. If so, how long have those storefronts by vacant?
King of Prussia, Pa.
It’s imperative that the landlord know the positive effects a laundromat has on any retail center. It becomes the anchor or sub-anchor, as it brings customers back to the center on a weekly repetitive basis, with time on their hands to visit other stores within the center. Plus, the laundromat will be a long-term tenant. These are items that need to be brought out to a potential landlord when negotiating. It’s also important to share photos and images of your vision for your new, modern-looking business with the landlord, as many people still have preconceived, negative notions of dark, dirty, old-school laundries.
Negotiating with mom-and-pop landlords can go either way – they can be great landlords that are interested in your success, or they may not be funded well enough to take good care of the exterior and roof of the building. You need to decide if you can live with this person for the life of your lease. A personality conflict is a red flag; it could be like a bad marriage. By contrast, dealing with a large corporate landlord is typically “by the book.” At times, corporate landlords are harder to negotiate with because they don’t always seem to care whether or not they have some vacancies. Then again, in some respects, they’re easier to negotiate with because it’s not personal and there are deeper pockets for buildouts. However, when you see a corporate lease, be prepared – it’s typically long and tedious.
I recommend anyone with 10 years or less on their current lease to begin negotiating with their landlord for two five-year extensions to the end of the lease. Don’t renegotiate the existing lease document, unless you want to open up a can of worms. If your landlord won’t negotiate new options, that’s a red flag and perhaps it’s time to sell. Once you have less than 10 years on your lease, your store value drops considerably; and, under five years, it may have no value, unless your buyer can negotiate an entirely new lease. Either way, it will cost you.
A few of the more common mistakes I’ve seen in lease negotiations are: not getting a clear understanding of what the triple-net charges are; not getting exclusivity within the shopping center; not getting a right to assign the lease if you sell the business; not trying to negotiate free rent during the construction phase; not trying to get the landlord to bring the utilities to the space; and not trying to negotiate fit-out money from the landlord. But the biggest mistake is not having your attorney review the lease carefully. Landlords don’t expect you to sign the lease as is – so don’t. And, remember, laundromats don’t close, even in bad economic times; they stay in business and pay rent, while the Starbucks of the world come and go, causing vacancies. Leverage this fact.
New York, N.Y.
When negotiating, be aware that most commercial leases have a clause whereby the landlord takes a security interest in the tenant’s assets as additional security to ensure the tenant’s compliance with the lease. This may be a significant problem for a lender. As such, it’s imperative that the potential tenant insist that whatever agreement his or her lender will want the landlord to sign is included as an addendum to the lease. In other words, before a potential tenant signs a premises lease, or at the signing of the lease, make sure the landlord has agreed, in writing, to the lender’s written requirements, especially the “Collateral Assignment of Lease” document.
Basically, the potential tenant needs to say: “If you don’t sign the agreement that my lender wants you to sign, I won’t sign the premises lease.” If a lease is signed before the lender’s agreement is signed, that tenant will have no leverage with the landlord and may not be able to secure lender financing.
Another issue to keep in mind, if rent escalates each year by, for example, 2 percent, request that you fix the rent for five-year increments – and, after five years, increase the rent by 10 percent. Although it may sound the same, the tenant is benefiting by not paying the compounded effect on the lease. It’s subtle, but it adds up to savings over the life of the lease.
In my view, when negotiating, knowing the asking “market rents” in your market is crucial. If you overpay, relative to the area, another operator can seize an opportunity to compete. Understanding the demographics of the area is important as well. What’s the percentage of renters? What are the income levels of the residents? What is the racial component? These key demographic statistics are available from the Coin Laundry Association, as well as your local distributor.
HK Laundry Equipment
When negotiating, always point out the two major benefits of having a laundromat in a shopping center. First, laundromats are a draw to the shopping center. They attract and hold cash-carrying customers. Once the clothes are in the washer, the customers are free to patronize other businesses. So, laundromats help the financial well-being of most every other store in a shopping center. Secondly, laundromats are stable, recession-proof businesses that have long lifecycles. The leases for laundromats are long-term, which helps the financial stability of the shopping center and decreases the vacancy rate.
I’ve found that mom-and-pop landlords are generally easier to work with, because they do business on an emotional level. If they like you, they will want to do business with you, and you, as a tenant, will have more bargaining power. Whenever I’m dealing with a landlord, I try to be as personable as possible. It’s a fact that people want to do business with people they like and can relate to.
Conversely, dealing with a corporate landlord is much more analytical and bottom-line driven. Recently, I was trying to get an extension on a laundry lease where the landlord was a REIT, or Real Estate Investment Trust. Although I had a good relationship with the agent, I just couldn’t get an extension before the termination of the lease. Corporate landlords work on their own schedule and at their own pace, and they generally dictate their own terms.
With new leases, you’re trying to sell yourself and the concept of a laundromat in the shopping center. This is a big sell on many levels. You’re trying to convince them that a laundry will be a benefit to the shopping center, and you’re also trying to minimize any concerns about the “negative impression” about laundromats and our customers. You’re also trying to get as long a term lease as possible – 20 years, if not longer.
With a lease renewal, you will be fine-tuning any problems that came up in the past and were not addressed in the original lease. Typically, these are minor points, and the real area of negotiation is about price and the length of the lease extension. If you’ve been a good tenant, the landlord will be glad to keep you.
My lease “wish list” would have all of the properly sized utilities provided within my space. I also look for four months make-ready time and static rental for the first five to 10 years of operation. I want the option or first right of refusal to purchase the property. I look for first right of refusal to rent adjacent spaces. And I would make sure that the lease is assignable and that assignability will not be unreasonably withheld.
Continental Girbau West
Santa Fe Springs, Calif.
The strongest tactic is to demonstrate to the landlord your professionalism. Have a well-crafted business plan prepared with photos and even possibly videos of the type of laundry you envision. The more you can communicate your vision of success – and how that benefits the landlord by having a “mini-anchor” tenant that will be there for the long run and will attract customers who will patronize the adjoining tenants, thus increasing their chances of success – the more willing the landlord will be to bet on your success by conceding to your lease requests. Also, remember to ask for some concessions that you will willingly concede during your negotiations to show the landlord your fairness.
Corporate landlords are all about the ROI, whereas mom-and-pop landlords are much more deposed to being concerned about their ongoing relationship with the tenant. With corporate landlords, you need to have as much empirical data as possible – pro forma, demographics, financial statement, cost containment, and so on. By contrast, mom-and-pop landlord will be concerned more with the quality of you as a person and your laundry vision.
Above all, never be adversarial. That doesn’t mean you shouldn’t be strong, but be strong in a “these are the lease terms that will enable me to be successful” manner. Make sure the landlord knows you’re being as fair as possible while protecting your probability of success. Engender a feeling of a cooperative effort with the landlord to ensure your success. Also, never negotiate in bad faith by being untruthful – this will only backfire in the long run.
In a nutshell, landlords want leases with good lease rates that will escalate every year by an index equal to or better than the cost of living. Laundry owners want leases that escalate every five years by a fixed percentage increase of, let’s say 10 percent; that allows store owners to accommodate the slow increases in vend prices.
Landlords also want lease options at fair market value, which means they can potentially increase the rent tremendously in a hot area. Laundry owners need a lease with fixed rent increases during the option periods. The landlord wants triple-net expenses that allow him to pass through all of the administrative costs of his company, while store operators seek to stipulate that only the landlord’s managerial costs directly associated with the landlord’s legitimate common area maintenance costs. Said managerial costs should be capped at 5 percent to 10 percent of the common area expenses, and the right to audit all triple-net expenses should be a right stipulated in the lease.
When negotiating, stress the longevity of a laundry. Stress the long-term ROI for the landlord. All of the money the landlord invests in tenant improvements will be returned to him or her in the long run through not having to pay releasing commissions, new tenant improvement costs or free rent for the tenant buildout.
Village Mart Laundromat/EasyPay
King of Prussia, Pa.
The number-one thing I tell everybody is to hire a good real estate agent that you trust. That’s the only way to negotiate. That way, the landlord – whether it’s a mom-and-pop or a corporation – will take you more seriously.
I’m a licensed real estate agent myself, but I hire a friend of mine to do all of my real estate work. You need someone who lives that business day in and day out.
Next, remember that assignability is a key. If you don’t have a right to assign your lease, you can’t sell your store and, therefore, its value is only what you can do with it. Also, negotiate fixed increases in rent, because you can plan for those. You can’t plan for increases tied to the economy, because you don’t know what it will do three years from now; you would have to guess.
If you have a new laundry, try to negotiate at least a 10-year lease, with two five-year options. After all, the shorter the lease, the less value the business has. When you’re on the last year of your lease, trying to sell your business and your landlord doesn’t want to negotiate, your business isn’t worth very much.
If you’re currently in the middle of your lease and perhaps business isn’t going that well, the best thing is to be honest with your landlord that you’re having troubles and try to renegotiate. As a landlord myself, when that happened to me, I renegotiated with the tenant; I was willing to drop the rent a lot, because I wanted something rather than nothing.
Coin & Professional Equipment Co.
Potential store owners negotiating a lease should approach landlords professionally and be able to demonstrate that they haves a history of being successful in a career, if this is their first business venture, or with previous business ownership. Typically, a landlord will request a personal financial statement from the potential tenant and may run a credit check. Having a good credit history and a strong financial statement will motivate the landlord to want you as a tenant.
If a store owner is trying to negotiate an existing lease, it’s important to understand the position of the landlord. If the landlord has the building paid off, he or she will have more room to negotiate the lease. If there is a mortgage on the building, the landlord will be more limited in what he or she can do.
In my opinion, tenant have the best chance of negotiating a favorable lease if they always pay on time and go the extra mile to be good tenants. Even if a landlord can’t reduce the rent rate, he or she may be able to negotiate on other points, such as canceling rent increases or providing the tenant a few months of free rent.
It’s important to understand that negotiating a new lease is quite different from negotiating an existing lease. Landlords are more willing to provide concessions to lock in a tenant with a new lease. However, once that lease is signed, it’s unlikely a tenant will have much success drastically renegotiating mid-term. A tenant typically approaches a landlord to renegotiate if the business is in trouble; landlords know that reducing the rent likely won’t make a failing business successful and simply delays the opportunity to market that space to other businesses at the market rate.
A laundry owner’s lease “wish list” should include the exclusive right to offer laundry-related services in the center; a reduction in rent if the anchor tenant closes down or leaves, or if vacancy rate reach a certain percentage; the right of first refusal on spaces adjacent to the laundry; reserved parking directly in front of the laundry; free rent for several months, if building a new store; having rent rates on all options negotiated up front; and a cap on triple-net fees.
‘Etched in Stone’
No doubt, a commercial lease is a serious commitment.
“The two most important factors in determining market value are the age of your equipment, and the length, terms and conditions of your lease,” said Eastern Funding’s Brian Grell. “And, in my view, the lease is the most important variable, as equipment can always be upgraded but the lease terms are usually etched in stone.”
The main issue to understand is that the lease is drawn up by the landlord’s attorney, and it favors the landlord at almost every turn. As a business operator and tenant, the lease is never going to truly be in your favor. However, you must be able to at least live with it without having it kill your business.
So, construct the terms of your laundry lease with great care, knowing that this document can ultimately be your best friend or your worst enemy.
[Editor’s Note: The suggestions and guidelines within this article may or may not apply to your particular business situation. Therefore, it is strongly suggested that you consult your attorney before signing your lease or any other legally binding documents.]