Originally posted – Jan 30, 2013
From our experience in brokering existing laundries and developing new ones, it is clear that now, more than ever, a building lease can determine the success or failure of a store.
Over the last four years, we have had many store owners meet with us to list their laundries for sale. Some are breaking even or losing money every year. The problematic areas can almost always be traced back to a building lease that has high lease rates for the current market or excessive debt service. In the Southwest, most store owners who negotiated leases prior to 2007 are paying excessively high rent rates, compared to current market rates.
According to LoopNet, an online commercial real estate listing website, asking retail rent rates for the Phoenix metro area peaked mid-2007 at just under $22 per square foot per year. Asking retail rent rates at the end of September 2012 were at $14.16, a 35.6 percent drop from the 2007 peak.
A store owner negotiating a building lease at today’s rates will have a significant advantage over an owner paying 2007 rates. Many store owners have had success in meeting with their landlords to discuss rent adjustments. There are some proactive steps that can be taken to increase the likelihood that a landlord will work with his or her tenant.
If store owners find themselves in situations where they are paying high rent rates compared to current market rates, the following steps should be taken in preparation to meet with a landlord about a rent reduction:
1. Understand the mind of a landlord. Landlords are looking for long-term security. This is one of the advantages a laundry has over other types of businesses. Laundries typically negotiate long-term leases. Landlords also understand that reducing rent rates will not necessarily make a failing business successful and only delays the opportunity to market the space to other types of businesses at higher rent rates. A store owner needs to be able to demonstrate that the store is not headed toward an inevitable closing and is worth keeping in the center.
2. Research market rent rates for your area. Free tools such as loopnet.com can provide rent rates for an area. Driving around and calling brokers with listings for other retail spaces for lease in the area will also provide market rates. When meeting with a landlord, a tenant should be prepared to make a proposal for a rent adjustment. An understanding of the market rates will give a store owner credibility in the eyes of the landlord.
3. Maintain a good relationship with the landlord. Laundry owners are more likely to have success if they already have a good relationship with the landlord. A local store owner in Phoenix, who had success obtaining a rent reduction, made the comment that, while meeting with his landlord to discuss a rent reduction, the landlord said he had seen the owner picking up trash around the center and appreciated that fact. This landlord had also replaced a cooling unit on the laundry owner’s space, and the store owner had called to thank him. The landlord appreciated the return gesture of a call to say thanks. The landlord saw the effort the store owner was putting into the business and was open to helping him.
4. Never be late with your rent. A laundry owner is more likely to obtain help from a landlord if he or she is not late – and has never been late – with the rent. This demonstrates to a landlord that the business is worth keeping as a tenant.
5. When sitting down with a landlord, dress professionally. In a meeting to discuss a rent reduction, dress the part of a knowledgeable businessperson. This will give the landlord confidence in your abilities as a business owner.
There may be cases where a rent reduction is not possible. If a landlord is not willing or is unable to offer a rent reduction, consider asking for other concessions besides a rent reduction. These concessions could include waiving future rent increases, a marketing campaign for the tenant’s business paid for by the landlord, putting the business’ name on the shopping center’s marquee, adding an additional marquee with the business’ name on it or showcasing the laundry on the shopping center’s website, if the center has its own site.
From our experience, a tenant will have a more likely chance of obtaining a rent reduction from a landlord who owns and manages the center. Centers owned by out-of-state investor groups and managed by professional management companies are unlikely to offer a rent reduction. A tenant is more likely to receive other concessions in this case.
If a lease term is about to expire and the lease will need to be renewed, it is an excellent time to review the lease and to have an attorney look it over to ensure that your interests are protected. A few terms to consider for a self-service laundry lease include:
- Loss of the anchor tenant. The anchor tenant in a shopping center can drive a significant amount of business to a shopping center. If that anchor tenant were to close, a coin laundry and the other businesses in the center will surely see a drop in income. A laundry owner should address this scenario in his or her lease and negotiate a rent reduction, no rent increases, etc., if the center’s anchor tenant were to leave.
- Exclusivity. A laundry owner should obtain the exclusive ability to offer services that are commonly offered by laundries. These services could include coin- or card-operated washers and dryers, drop-off laundry service, drycleaning service, vending soda and snacks, check cashing, ATM, vended computer access, etc.
- Vacancies. If the center experiences a high vacancy rate, a store owner should be protected by a reduced rent rate or no rate increases. A higher vacancy rate will mean less traffic through the center and could mean less business for a laundry and other businesses in the center.
- Cap triple net fees. We have seen landlords asking for higher than normal triple net fees on retail space for lease in an attempt to recover losses from high vacancy rates and incentives offered to gain new tenants. Store owners should have a cap on triple net fees specified in their leases.
- Landlord tenant improvement money. If a lease is being renewed, it is an excellent time to consider upgrades and improvements to the store. For example, if a store is short on large-capacity equipment, the installation will most likely require some electrical and drain modifications. A landlord could be asked to cover the costs of the improvements as an incentive to renew a long-term lease. If equipment upgrades are not required, consider tenant improvement money to upgrade and enhance your flooring, paint, lighting, restrooms, bulkhead panels, etc.
A building lease is an extremely important element of a successful coin laundry. Take the time to thoroughly review your building lease, and always have an attorney go over it as well to ensure your interests are protected. Today, more than ever, a building lease can make or break a laundry business.
#PlanetLaundry #Laundry101 #Public #Finances #Article #BusinessManagement #FeaturedArticle
