Financing, Lending & Leasing

Tips for Negotiating a Laundry Lease

It’s often said that the life of a laundry business may only be as long as the lease. Recognizing this fact can lead to the realization that the store lease is probably the most important business document the owner will ever sign … and the terms of the lease are one factor in determining the longevity of the business.

A business lease is a complicated legal document that can contain numerous traps for someone who has not considered or is unaware of the options. But a lease can also reap tremendous rewards for those who plan ahead. Obtaining legal counsel is highly recommended before signing a lease. Lease attorneys are specialists who are experienced in the art of negotiating.

Laundry owners are entrepreneurs who are independent, self-confident, impulsive, introspective and resourceful — all of which are important characteristics in the area of lease negotiations. Because negotiation impacts the profitability of the business, it is important that owners become somewhat skilled negotiators.

The object of successful negotiation is to get the best agreement possible. Here are some key lease negotiating tools to practice:

Start low. Negotiation normally comes at the end of the sales process after all the facts have been discussed and agreed upon. Don’t immediately quote the target price. Leave room to make concessions. Starting low helps create the illusion of making a deal once terms are reached.
Don’t be easy to get. It is important to give concessions, but don’t give them readily. Be particularly careful near the end of the deal when the other side may add just a few small points. Don’t be tricked. Sometimes being hard to get can be advantageous. People normally put a higher value on things that are difficult to obtain.
Be patient. True, time is money; but when a large sum of money is at stake, people become naturally cautious and want to make absolutely sure about the offer before making a major decision.
Use the big “if.” Don’t give any free gifts when making concessions. Barter. Say, for example, “The company will go an extra $5,000, but only if the lease is extended from 10 to 15 years.”
Consider a krunch or two. A “krunch” is a probe to the other side asking them to make a better agreement. For example, when being asked what the target price is, use finesse and ask what price they need. Silence and laughter are also krunches, which can be very effective.
Keep the atmosphere positive. Don’t argue. It is easier to get more concessions from friends.
Some lease terminology is discussed later that also offers tips on how to handle certain areas of lease negotiations and warns of areas in which to be cautious.

Lease Terms

The term of a lease is the period of time that the lease will be in effect. The objective for laundry owners should be to get a long initial term, at least 10 years, for several reasons. A long-term lease is a sign of stability. Due to today’s economic climate, financing is often carried out long term, sometimes up to 10 years, especially if new equipment is involved

or if the store is purchased as a total package. The longer the financing period, the greater the cash flow requirements will be. Therefore, it’s important to understand the lease payments. A problem in recent years is that mounting fuel costs, rising taxes and higher maintenance costs have left a few landlords in the unenviable position of actually subsidizing their tenants. For this reason, more and more leases are being designed to include clauses that allow landlords to increase rent under specified conditions.

Some leases are designed to include the tenant as a participant when expenses increase. These so-called participatory leases usually contain one of the following items:

Escalator Clause. The rent is fixed, but a percentage of the landlord’s expenses is paid by the tenant if expenses rise during the term of the lease.
Expense-Participating Clause. The rent is fixed, but the tenant also pays a fixed percentage of the landlord’s expenses right from the beginning of the lease.
Reevaluation Clause. This is one of the least attractive lease clauses. At specified intervals, the property is appraised and the tenant pays an agreed-upon percentage of the appraised value or moves out. The mathematics becomes simple: the cost of moving versus the higher rent. Avoid these circumstances.
Consumer Price Index (CPI). Rent increases are usually based upon the CPI. With the base being 100 each time the CPI increases, the rent increases by the same margin. If the index rises too high, it could even put the store out of business. Avoid that unfortunate situation by negotiating a cap of 5 percent on CPI increases.
Use Clauses. Build an ambiguous use clause into the lease. The laundry business is a rapidly changing business. Currently, stores offer such services as video games, tanning spas, snack bars and various other revenue producers. Some landlords will attempt to have the use clause say coin laundry store only. Since nobody knows for certain what new concepts may develop in the future, it is wise to leave the options open to avoid renegotiation.
Exclusivity. If the store is in a shopping center, be sure that no competing businesses will be at the same location.
Commencement. The first month of rent is often required in advance, normally 30 days after the option becomes effective. In a turn key store situation, the landlord usually wants the tenant to pay rent 30 days after the lease is signed. That doesn’t seem fair. No one should have to pay rental while they are fixing their store and have no income. Avoid this.
Performance Clause. It is common to see one-sided performance clauses … particularly those on the wrong side. The landlord can close a business that does not perform, even before the business can turn a profit. However, there is some recourse. The landlord also has to perform. For example, the landlord should fix a leaking roof, repave a buckling sidewalk or stairway, etc. If not, the landlord is breaching his/her side of the agreement.
Assignments. There are many horror stories about an owner selling the store and assigning the remainder of the lease to the purchaser because an assignment clause in the lease permitted the owner to do so. Or did it? All of a sudden the landlord can realize the store is successful and wants to share the wealth. Large cash lump sums have been known to be paid to a landlord to get a lease assigned to the purchaser. Or the landlord can stall, while the buyer becomes impatient and backs out of the deal. To avoid this situation, indicate in the lease assignment clause that if the landlord does not OK the deal within 30 days of written notice, the deal becomes automatic. The only instance in which a landlord should block a purchase is in the event that the purchaser has a poor financial reputation. Also, beware of the landlord who has a friend or relative who wants to get into the business.
Subordination & Conditional Assignment. This is important for owners who want to purchase new equipment. In most states, there is an automatic landlord lien on any personal property that goes into the space being leased.
Licenses. Consider adding a license clause to the lease agreement, saying that in the event that the store cannot obtain any governmental permits or licenses within 30–90 days, the lease is automatically null and void and the owner receives money back from the deposit. This could be crucial because of impact fees and sewage allocations.
Construction. There are several ways to come to terms regarding construction. For example, the landlord could provide four walls and not even a bathroom … or the owner can demand that the landlord does all the leasehold construction, including any building improvements or remodeling. Negotiate this deal in the lease to decrease out-of-pocket expenses. In other words, the financing will require less of a percentage of dollars in the entire deal.
Utilities and Services. Always reserve the right to choose the utility company, if possible, which will usually boil down to gas usage.
Store Identification. Some landlords say that they have the absolute right to decide what signage goes up on their walls. However, shouldn’t the store owner have control over how the business is to be promoted? Get this clearly stated in the lease.
Tenant’s Rights. Most leases will say the tenant gives up all rights, but in reality the tenant may not have to give up any rights. That’s why it may be best to consult a professional who is familiar with state law.
Impact Fees. Businesses in an area where the local municipality or a private sewer and treatment plant has control will most likely have to pay a tap-on fee. Try to get the landlord or developer to pay these fees upfront when obtaining permits because, before the fact, either party will undoubtedly pay less than someone will have to pay going in as a separate entity after the permits are let and construction is underway. It may cost another $.50 per foot on rental for 10 years, but it is well worth it for the savings realized on start-up costs.
Percentage Rental. This is usually applied in the retail business, where the owner pays a percentage of gross sales over and above the minimal guaranteed rental to the landlord up to a certain breakpoint.

Know the Market

A laundry is a localized business … and so is real estate. It’s important to be familiar with the building, its location, local regulations and the landlord.

Consider these questions: The building itself may be ideal, but how is it run? Is it maintained properly? Who are the other tenants? At first, the location may seem great, but is there any nearby road construction planned for the future? Or are there zoning changes that would alter the characteristics of the neighborhood? Are there adequate parking facilities for employees and the volume of visitors expected? What’s the reputation and financial condition of the landlord? These questions need to be answered before entering the negotiation process.

Protect Future Needs

Where will the business be three to five years from now? How much space will it need? How many attendants will be employed? When entering lease negotiations, have a feel for the future outlook of the store. Rent space that seems a little too generous for present requirements, but allows room for growth. Consider subletting additional space, if needed — and arrange for a sublet clause in the lease. Consider the option to rent more space. It may be possible to get an option clause in the lease to rent more square feet at a later date when adjacent space opens, sparing the headache and expense of moving. However, this option may come at a cost. At the minimum, get the first right of refusal to extend the lease … the first opportunity to match any price the landlord has received as an offer for the property. Even if it’s at an increased rate at the end of the initial lease term, it still may be cheaper than moving.

When considering space needs, remember that real estate people talk in terms of rentable space and usable space.

Rentable space is all the space being paid for and can include common or shared areas such as entrance ways, stairways and so on. Usable space comprises only the space the store will actually be using. Be familiar with these differences. Without careful planning beforehand, the owner could come away with a cheap rate for the total rentable space, but end up paying an expensive rate for usable space.

Another important factor in lease negotiations is to know the zoning requirements. Try to get this into a clause. As a precaution, have the lease say that the owner must be able to operate the business or he/she can cancel the lease without penalty.

There are a plethora of clauses to include in a lease to protect the lessee in any number of situations. Be sure to cover all bases and provide for the following contingencies for the future of the business.

Three Important Considerations

These three clauses should be included in any lease:

(1) a renewal option, (2) a cancellation option and (3) an option to buy.

The Renewal Option. The advantage of the renewal option is that if the owner decides to stay after the lease expires, the terms of the renewal clause are often more favorable than new terms would be under a renegotiated lease.
The Cancellation Option. Protects the owner in the event that he or she may have to vacate the premises before the lease expires. Avoid a penalty by including a cancellation clause in the lease. This can save the potential contingent liability for the full remaining term of the lease. Negotiate an option of automatic cancellation, by the owner, with no penalties if the building suffers any serious damage that makes it impossible to use (i.e., flood, earthquake, fire). It might seem that such a matter would be understood, but legally this may not always be the case. It may depend on state law. In any case, have insurance to protect against this contingency. Generally, if a building is sold, the new landlord is obligated to honor existing leases. Still, it’s a good idea to have this obligation specified in the lease.
Option to Buy. This can obviously prove to be very profitable. If the business has grown to the point of being financially stable, purchasing the building would become an investment rather than a monthly expense.

Some More Tips

Read every word of the lease very carefully. Always look for areas to add to the lease. For example, where it may say the owner is subject to “rules and regulations,” change it to read, “reasonable rules and regulations.” This doesn’t make the lease one-sided, but if it’s ever necessary to go to court, that word “reasonable” could become a very important factor.

Decided what is essential to have in a lease agreement. Remember, negotiation is not always a win/win situation.

Be prepared to compromise. Remember, the relationship with the landlord may be for a very long time … sometimes under the best of circumstances and other times under more tenuous situations.

Get the lease done right. The location of the store and the strength, clarity, terms and conditions of the lease become important factors in determining the odds of business success. Don’t make any verbal agreements. A nice guy could sell or die and the next landlord could be very bottom-line oriented. Have everything in writing to avoid losing the business.

Negotiation is a skill every laundry owner should have … one that is used repeatedly whether negotiating with landlords, distributors, customers or workers. Answer Yes or No to these questions.

A Negotiation Quiz

Is it necessary to define the terms of negotiation upfront? (Yes or No)
Should the owner ever let the other side take the offensive? (Yes or No)
Is the use of psychology important in negotiating? (Yes or No)
Is it best to avoid confrontations during the negotiating process? (Yes or No)
Do you want to put yourself in your opponent’s place as you negotiate? (Yes or No)
Is it important to keep cool during negotiations? (Yes or No)

Yes. Before negotiations begin, the problem or point of contention should be clearly defined. Both parties should summarize their stand on the matter.
Yes. When talking money, have an idea of what the other party expects, to make an offer that is not too high or too low.
Yes. Use psychology to convince others that they are getting everything they want, without letting them realize what they are giving up.
Yes. The purpose is to reach an agreement not to alienate the other party. Don’t use phrases such as “take it or leave it.”
Yes. Think, “What will it take for them to agree?” Find out what limits the other side.
Yes. The person who stays in control emotionally usually stays in control of the negotiation.

At the end of the negotiation, both sides need to be able to walk away with some measure of self-respect.