Lessons in Leasing

By Bob Nieman, CLA Member posted 28 days ago

  
Don’t Sign Your Next Laundry Lease Before Reading What Some of Today’s Owners Have to Share With Regard to Their Own Lease Experiences

[This is the first of a two-part series on obtaining the most favorable lease terms for your laundry business.]

When caught in an unfavorable lease, a vended laundry can be doomed before it ever does its first load of wash.

And, without significant experience in negotiating commercial leases, it’s far too easy for store operators to enter into toxic lease/landlord relationships, which can haunt their businesses for years to come.

Leasing_Keys.jpgNo doubt, signing a commercial lease is a serious commitment. What’s more, “unlike residential tenants, there are no laws to protect commercial tenants,” explained real estate expert Otto J. Kostbar. “You are on your own to negotiate a lease that protects your own interest. Remember, a bad lease can kill your business.”

Laundry industry veteran Bob Eisenberg of Fowler Equipment Co., headquartered in Union, N.J., likens negotiating a laundry lease to “horse trading.”

“No two leases are the same,” he explained. “There may be 10 stores within a shopping center, and 10 different lease rates and terms. You need to be proactive.”

To avoid some of the common pitfalls of a laundry lease, it’s important to:

Anticipate your business’ needs. This is one of the more difficult, yet most important, aspects of the leasing process – at least for those who don’t have access to a crystal ball. Before the negotiation process, laundry owners need to have a good understanding of the future needs of their business. This could include expected growth rate, amount of employees hired, parking needs, advertising expectations, property improvements, specialized equipment needs and so on. By thoroughly understanding and anticipating the business’ needs, the leasing process will be more efficient and decisive.

Understand different leasing options. Different types of leases impose different obligations on each party. In a gross lease, the tenant simply pays monthly rent, while the landlord pays for expenses – such as utilities, taxes, insurance and operating expenses. However, a net lease requires the laundry owner to pay monthly rent, as well as the utilities, taxes, insurance and operating expenses, which all are passed through to the tenant. Net leases can be single net (tenant pays rent plus property taxes), double net (tenant pays rent plus property taxes and insurance), or triple net (tenant pays rent plus property taxes, insurance and operating expenses).

Beware the “standard lease” myth. One of the most common myths told by landlords is that, “Everybody signs our standard lease; it’s boilerplate.” However, there are, in fact, no standard commercial leases. Most of the consumer laws designed to protect tenants in residential leases simply do not apply to commercial leases. Therefore, it is largely up to the parties to construct their own customized commercial lease, which tends to leave room for landlords to take advantage.

Value and weigh your options. New laundry businesses should value flexibility just as much as cash flow. The best way to add flexibility to a lease is by incorporating options. Depending on the landlord and the space, there are several categories of options and rights that may be available: renewal options, termination rights, expansion options, contraction options, purchase options, etc. For example, an option to renew the lease is one of the most important ways to add flexibility.

The more renewal options given, the longer that space can be locked in without the tenant actually being obligated to remain there. Just be sure to negotiate exactly what the monthly rental price will be during such renewal periods.

On the other side of the spectrum, adding termination rights may allow the laundry owner to cancel his or her lease early if certain conditions aren’t met, such as failing to meet a minimum sales number. Many times, however, landlords require tenants to pay hefty termination fees.

Lastly, it’s critical to maintain the ability to assign or sublease to a new tenant should the need arise. Just be sure to include language to the effect that the landlord “may not unreasonably withhold its consent.” Otherwise, a landlord can arbitrarily refuse to allow a sublease or assignment.

Know the true leasing cost. In a net lease, laundry owner pay for their proportionate share (usually based on square footage) of utilities, property taxes, insurance and operating costs. It’s important to know exactly what costs you will be responsible for. Operating costs and common area maintenance (or CAM) fees typically are defined within the lease, so pay attention and be wary of any vendor who may be related to the landlord. In general, CAM fees include costs for management, landscaping, janitorial service, security and snow removal. It’s wise to negotiate a cap on annual increases for such CAM fees and operating costs. Additionally, pay attention to how utilities are billed. Are they separately metered? Be sure to inquire to avoid paying for other tenants’ costs. Finally, be aware of the condition of the premises and who is responsible for repairs – don’t assume the landlord will be required to repair anything.

Above all, a lease is very much like a relationship, and it should be cultivated as such. Take the time to carefully establish the bounds of that relationship, and there will be fewer unexpected speed bumps along the way. No doubt, having the ability to negotiate a successful leasing relationship will create a solid foundation for the future success of your laundry business.

“Seek experienced, professional advice, especially from someone who is familiar with the particular needs of a self-service laundry,” explained George Morgan of Best Laundry Brokers in Grass Valley, Calif. “Also, read the lease – every word of it – very carefully. One word can make a big difference in some cases. If the laundry is in a center with other tenants, talk to the other tenants about their leases and their experience with the landlord. Find out what they are paying for rent to see if the rent the landlord wants for the laundry is similar to what the other tenants are paying. This establishes the market value, at least for that particular location. Your laundry’s lease is the most important asset of your business.”

In the Trenches

This month, we asked several store owners to discuss what went right and what went wrong in their past lease negotiations:

Ross Dodds
Wash On Western
Los Angeles, Calif.

While during the construction/rebuilding process after a fire in our building, we took over the space next door to the laundry in order to expand our business. Naturally, we assumed that the street sign currently occupied by the old tenant would automatically become ours; however, it wasn’t specifically spelled out that way in the lease. So, to our shock, the landlord said that was not our space on the street sign because we didn’t need two signs – and he gave that space on the sign to one of the other units.

Although it’s hard to measure whether or not that has impacted our business, I don’t think any useable street space is without value. It was a huge reminder and a lesson to us to never to assume anything, especially if it’s not specifically noted within your lease.

Larry Vladimir
Bakers Centre Laundry
Philadelphia, Pa.

Here are some mistakes that I’ve seen other laundry owners make over the years:

• Signing a lease for a laundromat without knowing if there were any impact fees, or even what those fees might be.

• Not negotiating or including the lender’s agreement as part of the lease, prior to signing.

• Not having the personal guarantee removed and replaced with their LLC after five years.

• Not having a reasonable assignment of lease, in order to be able to sell the business to a qualified buyer.

• Not having at least 20-year control of the store, including the initial term and tenant options.

• Not having reasonable rent increase along the term of the lease, including the option years.

• Not having at least 120 days to build the store before the rent begins.

T.J. Kardas
Soap Opera Laundromats
Lemont, Ill.

Here are some key provisions owners should consider when negotiating their laundry leases:

1. You should have a lease that is both fair to the landlord and the tenant. It has to be a win-win situation, or you should walk away from the deal and look at other locations.

2. Never accept a lease with 3 percent yearly rent increases, because that will be your laundromat’s downfall as time goes on. The Consumer Price Index has been averaging a lot less than 3 percent for the last 10 years.

3. We now renegotiate to start with a 10-year lease, to be followed by two to four five-year option periods afterward. The first five years are at a fixed rate for that period, and the second five have a 10 percent increase for that period. The option periods are at an overall 10 percent increase for each of those five-year periods.

4. Triple-net charges can be added to the base rate, or they can be built in as part of those 10 percent increases.

5. With regard to parking, you want to negotiate permission to put up temporary signage in front of your store’s location, especially if parking at your location is at a premium during the weekends, due to traffic from restaurants or supermarkets.

Patrick Montgomery
Lighthouse Laundry
Federal Way, Wash.

Our biggest mistake was allowing for 4 percent a year rent increase on our lease, starting in 1999. This has resulted in us now being about $7 per square foot over market value. With inflation being so low, I would recommend laundry owners negotiate for a 2 percent annual increase and a clause to allow for reduced rent, if the market rent is less at the time of renewal. Unfortunately, our lease doesn’t allow for a reduction at renewal.

Sam McKnight
Little Giant Laundry
New Haven, Conn.

When I bought my store in 2004, I happened to have a good closing attorney, and he offered to take a look at the lease for me.

I think the lesson is that, as new owners, we sometimes may have a false sense that “we know it all.” However, I’ve learned over the years and from listening to other store owners that not all landlords or leases are the same. A key phrase or sentence can easily be interpreted in their favor.

A Coin Laundry Association-sponsored seminar that I attended in 2004 was a wonderful opportunity to receive a general overview of important components to a lease. And the bottom line is to never feel that you know it all and paying a few bucks to have someone knowledgeable check out your lease before you sign it can be a huge factor in the success of your laundry business.

Mark Murray
Adrian Fabricare Center
Adrian, Mich.

I purchased my building on a land contract right out of the gate, so I have been the landlord and the tenant. I’ve always had a lease between myself and the corporation leasing from me, owned by me.

We use an escrow account to collect 26 equal installments from the tenant (laundry, etc.), and we pay taxes, utilities, insurance and rent from the escrow account. That way, both landlord and tenant have equal access to the information and, in the event that the next store owner fails to make the biweekly deposits, the default is clear and nothing is hidden.

Many times in our area, buyers have defaulted by failing to pay taxes, insurance and utilities but continue to pay the seller until someone shuts them down. By then, there can be tens or hundreds of thousands of dollars owed, which falls on the building owner/seller. I regularly check around with other building owners in the area to be sure I’m paying myself fair market rents, because I want to sell the business and keep the real estate for a few years after that.

Doug Friend
Eagle Hill Laundry
Boston, Mass.

I own the buildings where my laundries are located, but I do have a few other commercial leases. I must say that very few people have experience with leases, so paying attention to the details is important.

In my case, when I received a lease, I assumed my lawyer would point out some items to me that should have been flagged. Unfortunately, he didn’t – and I have a good relationship with him; he’s smart and also a personal friend. So, anyone can make mistakes.

I had to do a buildout. And, although the lease spelled out what I would provide, I had neglected to put a dollar limit on the buildout. Therefore, the project went over-budget by double, and I got stuck with the bill.

In another situation, I gave the tenant a 10-year lease with no rent increases – and a fully operational kitchen where, as things broke, he didn’t have to replace them. I still have no clue why or how that didn’t get flagged in the lease.

A lease typically is a very long document, and it can seem pretty straightforward – most of it is boilerplate copy. However, there are factors to look closely at, such as the length of the lease, rent increases, extra operational costs within the triple-net charges, and what might happen that could break the lease.

Paula Gribble
Classic Drycleaners & Laundromats
Carlisle, Pa.

For any leases that I have in shopping centers, I negotiate a clause that enables me to break the lease should the anchor business – such as a supermarket – leave and the space not be filled for a period of six months. However, I do this more with our drycleaners than our laundromats, as it is not that easy to move a laundromat. I have witnessed this happen here locally, where a large anchor tenant leaves, and the small businesses left in the strip center suffer tremendously.

Hank Walter
Whale of a Wash
Martinsburg, W.V.

I have made several mistakes in lease negotiation over the 25 years of operating a dozen different laundry locations. Some important ones that come to mind are:

Assignability: The lease at a good location cannot maintain value without the words “landlord may not unreasonably withhold approval from a financially and professionally qualified assignee.” It may be wise to further describe minimum qualification to the landlord – such as credit score minimum of 740, three years of experience in the business, etc.

Personal guarantee: Do not personally guarantee the lease, unless it is for new construction. In that case, the landlord will place high value on this feature, and he or she will concede to items in return like HVAC maintenance or a cap on common area pro rata shared expenses. Avoid personal guarantee of more than three years, and don’t let it accompany an option to renew.

Lien: Do not grant a lien to the landlord on moveable fixtures and equipment in the store, either express or implied. It will impede your ability to use financing to equip the store when your lender or manufacturer inspects the lease as part of their acceptance consideration. If insisted upon, ask him or her to sign a generic subordination to your lender.

Length of lease: Five years with an option to renew “at the sole option of the tenant” of equal length gives you the opportunity to propose improvements of terms at renewal time, and the ability to sell the business with a suitable length of term to satisfy the buyer.

The pitfall of commercial leases is the “inflation clause.” An automatic 3 percent lease accelerator will teach the basic lesson of compounding. Better plug in your numbers that the rent will basically double over 10 years. Can you keep up with that on vend price increases? Perhaps, if there are no utility increases.

I now insist on the same rent for the full term on the second renewal. Remember that the landlord’s obligations to his or her present lender likely will expire in 15 years. Additionally, it can be helpful to actually refer to an inflation index (not LIBOR) for your annual rent accelerator as an alternative to an open-ended one – for example, “the lesser of (inflation index) or 2 percent annual rent increase.”

Leases can be tricky stuff. There are a lot of tripwires out there. Most important of all is to read before you sign – every word is meaningful and in there because somebody lost some money in a dispute over the issue described.

Jeff Klein
Suncoast Laundromat
St. Petersburg, Fla.

The mistakes I’ve made are primarily based on not reading the lease entirely. I’ve missed things such as the fact that I’m responsible for the roof. On another lease, I’m responsible for the parking lot. These are aspects of the building and its property that I’m responsible for, which are not on my other leases and should have been factored in.

With that said, all of my store leases were transfers, so I didn’t really have much choice or leverage to negotiate.

Ken Barrett
Washin’ Coin Laundry
Oxford/Anniston, Ala.

Leases can be a complicated issue and ideally are written to be fair to both parties involved. That being said, whoever writes the lease usually has the most protection, and making changes can be difficult.

Many landlords with multiple properties will have a standard lease agreement that they use. The ability to negotiate any of the terms or conditions is based on a number of factors, including the current rental market and the amount of vacancies they have.

As most of the big lease items are fairly obvious, let me list a few that may get overlooked:

Ask for the right of first refusal should the owner want to sell the building or get a legitimate offer to purchase. Have a set period of time that you can match or negotiate a purchase agreement. You may not be in a position to buy the building now or may not even plan to, but it’s good to let your landlord know you would be interested in the future. Nobody wants to find out their new landlord got the building at a great deal.

Make sure your landlord maintains fire and liability coverage on the building and property. They will require all tenants to have fire insurance, but what if there is a fire in a vacant unit that causes roof leaks into your laundry?

Who is responsible for utilities outside of the unit? If there is a leak in the water supply under the parking lot, your water bill is the one that’s going up until it’s fixed. Will it be repaired in a timely manner, and by whom?

Your lease is as much a part of your business as the equipment, so take the time to read it – and understand it.

For more on leases, Coin Laundry Association members can access an in-depth white paper on this topic at coinlaundry.org.

Part 2: Industry experts sound off on the best ways to avoid the most common and dangerous pitfalls of a laundromat lease.

[Editor’s Note: This article is not intended to provide specific legal advice. Before signing your lease or any legal/business document, it’s highly recommended to consult with an attorney or legal professional.]
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