Industry Experts Sound Off on the Most Common and Dangerous Pitfalls of a Laundry Lease – And How to Avoid Them
[This is the second of a two-part series on obtaining the most favorable lease terms for your laundry business. Part One appeared in the July issue.]
Once signed, leases tend to be rather unforgiving documents – as many former self-service laundry owners can attest.
More than a few store operators have put pen to signature line on a commercial lease that ended up, in one way or another, being bad (or even fatal) for their business.
This month, in the second part of our series on laundry lease negotiation, we’ve rounded up seven of the industry’s leading lease specialists to point out some of the most common and deadly traps that lie waiting for unsuspecting entrepreneurs.
Be sure to study these popular pitfalls, miscues and miscalculations before scrawling your John Hancock on that next laundromat lease:
Continental Laundry Development
Los Angeles, Calif.
A truly good laundry real estate lease has many critical components – and all of them are extremely important to the ultimate value and viability of your vended laundry. With that said, here are just a few key factors, with the caveat that there are many more:
Negotiate a good assignment clause. An assignment clause dictates the terms of the transfer (assignment) of the real estate lease to the buyer of your laundry. A bad assignment clause can give your landlord the right to dictate who you can sell your laundry to and also allow your landlord to ask for tougher lease terms when you sell your laundry. This can greatly impact the sale price of the laundry. A good assignment clause in its best sense will allow you to sell your laundry to anyone you choose without any lease terms being altered.
Poor default clause. A default of the lease means that you have breached one or more of its provisions. This breach can have dire consequences, such as allowing the landlord to terminate the lease. You have invested a huge amount of time and money in developing your laundry business and the prospect of losing it or allowing the landlord to take over the space and simply installing new equipment while assuming your business is devastating. So, negotiate a proper “cure” to any default, inadvertent or otherwise, that you may commit with the stipulations of proper notice by the landlord of a default and a proper cure period for you to effectuate that cure.
Don’t be afraid to negotiate. A well-run laundry can draw many customers to the landlord’s shopping center for many years – and these customers will patronize other tenants (making them stronger). This has real value to the landlord, as he will have a much better chance of a stable tenant mix. Appreciate and convey that value while asking for lease language changes. You also should consider asking the landlord to provide tenant improvements, such as bringing utilities to the space (for example) of a proper size for your laundry. In addition, present the landlord with a solid business plan and other professional documents that demonstrate your abilities. Be prepared to concede non-essential lease changes in the process of garnering the essential ones.
Lease options. Obtain lease options that are not “personal” to you and that will not escalate to current “market” rents. That means the options will not be lost upon assignment and that you can transfer the lease options to your laundry buyer at their predetermined cost.
Lastly, perhaps the most important advice I can offer is to elicit the help of a good real estate lawyer and/or an experienced, ethical laundry development professional. Crafting a good lease is a dynamic proposition with the requirement that you must have a lot of knowledge at your fingertips and be able to effectively parry your landlord’s lease negotiations. Spend the time to find the proper real estate advisor, as it can make all the difference to your laundry’s success.
Fowler Equipment Co.
Tenant leases can be complicated, and there are many technical issues that need to be navigated in each one. First and foremost, a real estate attorney should read the lease to protect your interest, as well as with respect to the laws that apply to your state or region. For example, a “confessed judgement clause” is illegal in most states, but not all.
Given that, please realize that negotiating a lease is like “horse trading,” no two leases are the same; there may be 10 stores within a center, and 10 different lease rates and terms. You need to be proactive. Three of the most important aspects to pay attention to are:
• The assignment clause – assuming one day you might sell the business, you will need to assign the lease, so you will need a clause in the lease indicating that the lease is assignable. It’s critical the landlord acknowledge that his or her consent “will not be unreasonably withheld.” Otherwise, the landlord could charge anything to assign the lease, or even demand that you stay on the lease.
• Of course, it goes without saying that you want to negotiate the lowest rent as possible; however, often lost in the details are rent increases. Typically for a laundromat lease, you will negotiate a 20- or even a 25-year lease, and you will want to negotiate all of the rent increases up front and have that detailed within the lease. Many landlords will want to charge 3 percent per year increases, which doesn’t seem unreasonable. However, realize that, on a 3,000-square-foot store at $20 per square foot, the rent is $60,000 per year. With a 3 percent per year increase, the rent will be $80,640 in the tenth year. This is where your negotiations come into play; I would counter with 2 percent per year or CPI, whichever is lowest. Or level rent for each five-year term, and then a 10 percent increase – do the math, it’s in your favor.
• With additional regard to rent, consider triple-net charges. These charges are your proportionate share of the tax, insurance and maintenance costs on top of the rent – and they are paid monthly. You should ask what that number is. It could be as high as $5 or $6 per square foot on top of your base rent, and it can (and likely will) increase yearly, which you must project into your cash flow forecast when determining the viability of your laundry business. You need to ask the landlord how triple-net charges will be determined, what the taxes per year will be and how these numbers are calculated.
As I indicated, leases can be complicated and not always easy to navigate, so be sure to lean on your distributor and your real estate attorney for advice. Of course, there are many more lease items to consider than just the three above, but those are the biggies.
Lastly, a word of warning: if you’re having a bad experience while negotiating a lease with a particular landlord, be aware that – unless that individual sells the property – you will be forced to have a relationship with him or her for the entire time you own your business. Will this person fix that leaky roof or properly clean up the property? That, too, needs to be considered.
J. Vassiliades & Co.
In my experience, the most common pitfalls with regard to laundry leases are:
• Not getting enough time on the lease.
• Not being able to assign the lease to another party without great difficulty.
• Not fully understanding the terms and conditions of the lease, such as escalations in rent and common areas; responsibility for the HVAC units, roof, parking lot, etc.; or responsibility for the condition of the premises after the lease expires or is terminated.
If you don’t negotiate enough time on your lease – let’s say a minimum of 15 years or more – the landlord could hold you for ransom when your lease runs out, since you will have to remove all of your equipment and find someplace else to do business if you can’t get a reasonable lease extension. Basically, a similar scenario holds true when you go to assign your lease.
In addition, not understanding the terms and conditions can be surprising and very expensive. For example, not realizing that you will have to replace the building’s HVAC units when they no longer can be repaired likely would be a big, costly surprise when that time comes. Or, not understanding that your increases in base rent will be compounded and, therefore, much higher than you expected after several years would be another rather unpleasant shock.
When it comes to signing a lease, especially for the first time, make certain you’re represented not only by a good attorney who understands leasing, but also someone from the vended laundry industry to help you and your lawyer understand the important nuances of the industry and the laundromat business. I also would suggest contacting the Coin Laundry Association to tap into their wealth of information on this subject.
New York, N.Y.
When putting together your new self-service laundry business, the lease is one of the most important pieces to the puzzle. Here are some of the most common – and dangerous – pitfalls to avoid when hammering out your next laundry lease:
Failure to secure exculpation of personal guaranty upon assignment of lease. Let’s say you eventually sell your laundromat for an astonishing amount of money, thanks to your own hard work. However, two years later, you can be personally sued by the landlord for all of the projected lease term rent, if you fail to get released from a guarantee.
Failure to secure a non-disturbance agreement from the mortgagee bank. You just bought an expensive store, and your landlord isn’t paying the bank. Guess what? If your landlord is foreclosed upon, your lease is worth nothing – since it crumbles unless you have a non-disturbance agreement, permitting you to pay the rent directly to the bank in the event of a foreclosure.
Tax stop and construction clause. Your landlord decides to build up – and I mean straight up, right on top of your store. Your lease states that you will pay 25 percent of taxes as additional rent. The landlord’s improvement puts hundreds of thousands of dollars of rent in his pocket, and your taxes just skyrocketed due to the construction, which increased the taxes and your proportionate share ballooned.
Water payment. You’re a good tenant, and you pay your water and sewer as additional rent to the landlord. However, let’s say that the landlord isn’t so good and fails to pay for the water. The city shuts off the water, and you are out of business. Therefore, pay the water directly to the municipality under the lease, or obtain proof of payment contemporaneously with your payment if it is sent to the landlord. The same principle applies if you sublet space from an over-tenant. Request that you pay the rent directly to the landlord and also request to be notified of any defaults in lease terms that may arise. Failure to do so may result in eviction, if the over-tenant doesn’t pay the rent or comply with the lease terms.
Dark clause. Where there is a large shopping center and large anchor tenants are in place, request a rent reduction if the center loses said tenants. Losing a major national supermarket chain or other retail establishment can have a huge impact on drawing customers to the center.
Of course, a big mistake would be not having an attorney review the lease. Let’s say you want to save a few bucks, so you didn’t use a lawyer. Forget the fact that you wouldn’t think of buying a house or condo without being represented. Spend a few bucks so that you don’t end up turning to some clause buried in the back of your lease one day and discovering that your landlord snuck a demolition clause into the document.
An even bigger mistake would be failing to have the landlord execute a finance company’s “collateral assignment of lease” document at the time of the lease signing. If you so afterwards, it may be difficult for the landlord to consent to the terms. They usually object and may also charge you a fee for having their attorney review the document. All leverage is lost after the signing.
Also, here is some fine (or not so fine) print common in laundry leases to be aware of:
• The “pre-printed” fine print is very dangerous. Before computers, you knew what was in a real estate board lease. Today, given the perfection of word processing, you can’t afford not to read the fine print. Review it as if you were reviewing your very first lease.
• No assignment or sublet. This restriction is usually baked into every pre-printed form. Unless the rider modifies that language, you will have a tough time selling the business, as the landlord can hold you hostage to its financial demands.
• Beware the fine print repair clause. A tenant’s repair obligation should be limited to interior, non-structural repairs. Often, fine print hides such costly items such as structural repairs and sidewalk repair and replacement. This is very costly.
In addition, have your attorney do a building department search online to look for any violations. More than once, we’ve seen buildings with Stop Work orders – which mean you can’t build a thing. Also, do a litigation search to be certain that the owner isn’t in foreclosure.
It’s a fact of life that the wrong lease can be an absolute nightmare, while the right lease can add great value to your investment.
Woodland Hills, Calif.
I know this may sound like a bit of self-promotion, but there are sophisticated purchasers/tenants, and there are those who are not. Many potential tenants look over the lease only to confirm the amount of rent and the term of the lease, and assume all else is “standard” because it’s a printed document. The lease may even be titled “standard lease.” Landlords and brokers form associations to publish leases; tenants do not. The so-called “standard lease” thus will routinely be slanted in favor of the landlord. Yes, there are a myriad of ways to slant 18 pages of a lease in favor of the landlord.
For example, CAM charges are frequently not subject to audit under leases. Under these circumstances, the only way to review CAM charges, absent the landlord’s voluntary consent, would be to commence litigation against the landlord – not a great way to promote good relations. The right to permit your accountant to annually review CAM supporting documentation should be included. These clauses customarily require the tenant to pay for the audit, unless the variance is more than 3 percent or 5 percent, in which case, the cost shifts to the landlord.
Landlords and tenants are notorious for adding an addendum providing for a non-enforceable option to renew. An example of such folly is an option to renew the lease “upon the same terms and conditions except for the rent which shall be determined by mutual agreement at that time.” To be enforceable, the provision must provide clear guidelines or method for fixing the rent.
In addition, tenants are all too frequently very shy. It’s amazing what can be learned by talking to each of the other tenants in the shopping center where the laundry is to be located. Is the landlord cooperative after the lease is signed? Are there security problems that are unaddressed? Talk to these other business owners.
Current so-called “standard leases” provide that the tenant shall repair all ADA violations. Tenants rarely retain the services of a knowledgeable contractor to review the premises for ADA violations. The time to negotiate for such repairs is before the ink has dried on your signature.
Best Laundry Brokers
Nevada City, Calif.
The most common miscues with regard to laundry leases are:
1. The lease isn’t long enough to fully amortize the owner’s investment or to allow enough time for the owner to sell the business and assign the lease without having to go back to the landlord to request an extension. I typically recommend trying to get one 10-year lease with at least one five-year option to renew; however, two five-year options would be ideal. Most landlords, if they agree to the options, want the rent to be negotiated at the end of the lease and before the beginning of the option, rather than having the rent amount continue in the same manner as the lease, with the same cost of living increases. Try to get the rent pre-negotiated all the way through all of the options. For new laundries, owners need at least one 10-year lease, with two five-year options, preferably three five-year options or more.
2. Another pitfall is having the cost of living adjustments to the base rent be higher than cost of living increases within the market area in which the laundry is located. Although this may not seem like a big deal at the beginning of a long lease, if the cost of living rate for the market area is only 2 percent and the lease rate is going up 3 percent to 5 percent a year on a compounded basis, the rent amount in the later years of the lease could be way above the market rate. This will make the laundry less valuable and more difficult to sell.
3. The third pitfall is having a lease contain “land mines” in the fine print, which aren’t noticed until several years later when the owner wants to sell the business or renew the lease. A common example of this would be a clause that simply states the lease is personal to the laundry owner and not assignable. If the owner wants to sell, he or the buyer would have to go back and negotiate an entirely new lease. Another example would be a clause noting that, if the laundry owner tells the landlord he has a buyer for the laundry and wants to assign the lease, this act voids the lease. A third “land mine” that I’ve been seeing more and more lately is a clause (usually buried way in the back of the document) stating that, if the owner sells the laundry, the landlord gets 50 percent of the net proceeds of the sale of the business! And, unfortunately, there are many other examples just like this.
Such costly mistakes are somewhat common, because many owners don’t seek professional help from an experienced commercial real estate broker or an attorney specializing in commercial real estate. Most laundry operators I speak with feel that landlords will be fair with them and not include such “land mines” in the lease in order to take advantage of their tenants. Sadly, many people simply don’t realize how vital a good lease is for their business, both in the short term and the long term.
Lease mistakes can be incredibly costly to a laundry owner. After all, rent that is higher than it should be will reduce a store’s net income. It also will lower the value of a laundromat and, if the rent is too high, can even make the business unmarketable.
Read the lease, every word – carefully. One word can make a huge difference in some cases. If a laundry is in a shopping center with other tenants, talk to those other tenants about their lease 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 for the location. In so many ways, your lease is your laundry’s most important asset.
Elite Business Investments
Valley Village, Calif.
When it comes to laundry leases, the most common “gotchas” are triple-net charges and CAM reconciliations, options not being clearly defined, and the inability to assign the lease and be released from liability.
Unless the laundry owner has a keen understanding of the terms and language of the lease, he or she could potentially be liable for additional funds to the landlord, other than the triple-net charges paid on a monthly basis. Most triple-net leases will word it in such a way that the triple-net charges are estimated and that there will be reconciliation at the beginning of the year. They also are entitled to audit these charges, and many don’t do this as well.
Options that are at FMV or market rate are open for negotiation, and this typically swings in the landlord’s favor. If the options are clearly defined, there will be no surprises at the end of each term. In addition, many commercial leases will have a clause stating “options are personal,” so when the tenant goes to sell the store, the landlord could decide he or she doesn’t want to extend the options to the buyer – or perhaps the landlord wants to change the terms. This could alter the value of the laundry very quickly. As a result, I always advise my buyers that, when purchasing a store, to always look at potential ways to improve it and to have an exit strategy.
If the lease you’re signing doesn’t allow you to assign it – or if the landlord makes it difficult to assign – you could be stuck. Most leases are written such that, even with an assignment, the tenant is still fully liable for the lease. I typically will ask in my Letter of Intents to the landlord that the tenant be released upon assignment. If the landlord declines, I will ask for a period of time, such as two years after assignment. That will limit liability. Also, know what fees will be charged in order to assign the lease.
Above all, read the lease fully and carefully. Seek professional legal advice from someone who has experience with leases. If one set of eyes is good, two are even better.
For more on leases, Coin Laundry Association members can access an in-depth white paper on this topic at coinlaundry.org.
[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.]