By Bob Nieman | May 12, 2009
Every laundromat has the potential to be a winner. Every laundromat has the potential to be a loser.
And if you’ve ever been to one of former CLA Chairman Bob Eisenberg’s presentations – either at a Clean Show or a CLA management conference – you’ve heard him repeat this mantra over and over… and you know what’s coming next.
If you haven’t yet had the pleasure of hearing Bob speak, the two things that determine “winning” and “losing” are the note and the rent.
Although financing is a separate topic for another day, let’s tackle that thorny lease issue, including rent, right now.
“Negotiating a lease is like horse trading,” said Eisenberg, who currently owns two laundries and operates a distributorship in Pennsylvania. “There are no two the same. Even within the same shopping center, every tenant may have different terms and different situations.”
With that in mind, here are some tips to try, traps to avoid and negotiation strategies that should make your next coin laundry lease just a bit more palatable.
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 cost of living basis, like that primary base rent did.
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 it, then 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 say that your lease cannot be assigned "without the expressed written consent of the landlord." Period.
You need to counter with a clause that states, "consent cannot unreasonably be withheld." Ideally, it would be nice to be a bit more specific than that.
“I would rather see something in place of that, where the landlord’s consent is not required if the new tenants have, let’s say, a net worth of $250,000 and a credit score of 650 or higher,” suggested John Vassiliades of WashPro USA in Westchester, Ill. “Tie it right down so that it’s not just at the whim of the landlord.”
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 coin 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.
“Understand what triple net rent means,” said Clay Pederson of Business Consultants International, based in San Diego. “That’s a huge issue. People see the rent on the first page, and they assume that’s the rent. Back somewhere in the lease, there is additional rent. And that additional rent has gone from 5 cents a foot per month to, in some cases, 50 to 60 cents a foot per month. That can make a huge difference.”
There are also leases called percentage leases, which require the tenant to pay a base rent, plus a percentage of his 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 want 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 complete understanding as to 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.
Other Key Clauses
Of course, there are other key clauses that you should be familiar with before even considering signing a lease to protect your business within your shopping center or strip mall.
Exclusivity and ancillary services. One of the things you need to negotiate is an "exclusive" in that center to do your type of business, as well as the ability to offer the ancillary services you'd like to provide. You'll want to have those OK'ed ahead of time in writing so that the landlord can't come back to you and say, "I just gave you permission to run a laundromat, not drop-off drycleaning and vending." That must be clearly defined in your lease.
Perhaps include a clause stating that you plan to run a "laundromat business, incorporating wash and dry service, drop-off laundry services, vending of snacks and soda…" Add any other ancillary service that you feel is going to be an integral part of your coin laundry business.
In one case, a tenant received permission from the landlord through the lease to operate a coin laundry. However, he did not have specific permission to offer drop-off wash-dry-fold services. In the meantime, the drycleaner located in the same shopping center bought a washer and dryer and began offering wash-dry-fold. Of course, the laundromat tenant complained, claiming that wash-dry-fold was his "turf." But the landlord quickly corrected him, saying that the lease clearly spelled out the laundromat's mission as "self-service" washing and drying. That's all the coin laundry operator had asked for, and that's all that the landlord had given him permission to perform. The drycleaner asked for wash-dry-fold permission and got it. Now, the coin laundry owner had no way of offering the same service to his customers.
Other examples of this have included coin laundries that were denied the right to install ATMs because there were already banks or other ATMs in their shopping centers, as well as operators who could only vend soap in their stores because the convenience stores within their strip malls had already negotiated exclusive rights to snack and beverage vending.
Losing a major tenant. Another thing to protect yourself from in a shopping center is if, for any reason, the major draw of that center leaves. The reason you picked your location is probably because of demographics, visibility and "draw." People congregate in a shopping center because there are several businesses that complement each other. Those businesses feed off of each other.
Therefore, you should protect yourself in the event that your center becomes more than a certain percentage vacant and/or if the major tenant, such as a supermarket, should leave. In such cases, you should have the right to get out of the lease or at least be entitled to some sort of a rent abatement or credit.
"I can show you center after center where the major tenant moved and the center is like a ghost town," Vassiliades said. "All of the other little teeny guys are struggling. They can't make it and they can't do anything about it. They can't leave because they didn't have that 'out' written in the lease."
Visibility. This is key. Perhaps you have a nice location in your center, maybe an end piece. Then, all of a sudden, a few years down the road, the landlord erects a building right in front of your coin laundry - and now no one can see you from the street. Again, you should be able to protect yourself from that, either with rent abatement or the ability to get out of the lease completely.
First right of refusal. If your coin laundry becomes a very successful store, you may want to not only stay in your current location, but also expand. If that is the case, you should try to get the first right of refusal on the space on either side of you. This way, if that space ever does become vacant, at least the landlord has to come to you first and offer you the space. Sometimes, a space in a strip mall or shopping center will become vacant and the landlord won't notify anybody; all of sudden, you've got a new next-door neighbor, despite the fact that you may have wanted that space in which to expand.
Utilities. Be sure you know what's happening with your utilities. Is the landlord providing the heating and air conditioning unit? Do you have to provide them? Or does he provide them, while it's your responsibility to maintain them? More importantly, if these units break down while you're in the space, do you have to replace them?
Many leases will provide you with these things; however, you have to maintain them, as well as replace them. Clearly understand your responsibilities in this area so that you don't get a surprise 10 years down the road when your air conditioning unit bites the dust. “Excuse me, Mr. Landlord, my air conditioner is out, please come and fix it." He may just reply: "Yep, it's out all right. And I had my guy take a look at it. It needs to be replaced. By the way, you've got to replace it."
That's a $15,000 hit you can avoid (or at least prepare for) if you read the fine print on your lease.
Parking. Ideally, you always try to find a shopping center where your customers can park their vehicles right by your door. If the parking is going to be tight, you surely will want to see if you can get some reserved parking directly in front of your store.
Signage. Have a clear-cut idea as to the type of signage the landlord will require you to put up. You cannot just throw up any old sign. You typically have to go with what the landlord tells you.
Also, find out ahead of time if renting space within your shopping center or strip mall also gives you the right to have your coin laundry's name on the marquee? If so, how many square inches or feet will the landlord allow you for that particular signage? Some coin laundry owners have taken the fact that they were going to be on the center's marquee for granted - only to have their business' name nowhere to be found after they moved in. Sometimes if you don't ask for it, you won't receive it.
Roof maintenance. Historically, the business owner has been responsible for the interior of the building, and the landlord has been responsible for the exterior of the building, including the roof. However, in the case of coin laundries, where there is a lot of roof penetration from dryer and plumbing vents, there can be an issue as to who is responsible for the roof. Obviously, a roof is a very expensive thing to replace so that needs to be clarified in your lease.
Remodeling. Many times, a tenant will need to receive permission from the landlord in order to remodel his store. Often, the tenant is will be required to submit some kind of plan. See what your lease says about this.
Insurance. Normally, the lease will specify how much liability insurance has to be carried by the tenant. You need to take that into account when you're getting quotes for insurance. In addition, most landlords require that they be named as an additional insured as well.
Of course, all of the above items are merely a "wish list." When it comes right down to what your actual lease is going to look like, you may or may not get these concessions from your landlord. But at least you know ahead of time what you're getting yourself into.
In the Trenches
Clearly, the folks who know leases best are those who are living (or who have lived) with one or more of these documents day in and day out. Below, some current laundry operators share their personal “essentials” for a strong coin laundry lease, as well as some of the missteps they’ve made along the way with regard to their leases.
Chris Johns, Pride Cleaners
Gotta Have It: The most important elements are caps on increases in your option years and your CAM. Watch CAM charges and get several options to renew. If your landlord is responsible for something such as additional parking, you must have some sort a penalty in the lease for non-performance of that task, such as reduced rent. Landlords will drag and drag and drag if they have to spend money.
Lesson Learned: My biggest mistakes were not getting caps on my option and CAM increases, as well as not requesting an itemization of my CAM charges.
Gary Gray, Fun Wash Laundry Centers
Little Rock, Ark.
Gotta Have It: One of the most important items to include in a lease is the amount of rent for the full term of the lease and any extensions. The first lease that I signed in 1986 provided for two five-year options at a rental rate to be agreed upon, which was almost worthless.
Lesson Learned: My biggest mistake is one I will never forget – and never make again. I rented 4,000 square feet for a new store with the assurance from the landlord that all utilities were available, including a two-inch water tap. As it turned out, the water main in the parking lot was only a two-inch line and could only support a one-inch water meter.
As a result, we had to do a directional bore across a five-lane state highway and tap a six-inch water main into the fifth lane of the highway. The one lane could only be closed from 9 a.m. until 4 p.m. without us have to pay a large fine. Fortunately, the work was completed by 3 p.m. Nonetheless, this was a very expensive lesson.
Duane King, Lmaries Laundromat
Bowling Green, Ohio
Gotta Have It: If you are buying an existing laundry, try to get a lease for at least 20 years total. If you are putting in a new store, reduce your risks and start with a three-year lease with several five-year options for a total of approximately 23 years. This way, if the new store isn't doing well after three years, you can get out of the lease and sell the equipment.
Everything should be spelled out in the lease: the length of lease, the number of lease options and their lengths and how the rate increases will be handled – CPI, percentage, fixed amount, etc. I prefer CPI. If it is a triple net lease, make sure there is cap.
Also, who is responsible for: the HVAC, the utilities, the roof, the outside paint, snow removal, grounds work, parking lot maintenance and cleaning, outside lighting, plate glass coverage and the doors?
So other questions to ask: What recourses are there if the landlord or tenant does not comply with the lease? What kind of insurance is needed for the building? Can the laundry be unattended? Can the laundry be open 24 hours? Does the landlord need a personal guarantee? Is the lease transferable to new owners?
If you have incorporated your company, sign the lease as the company. Make sure everything is spelled out. And, lastly, have a lawyer look over the lease.
Lesson Learned: My biggest mistake was not being able to get a long lease from the beginning. Being a college town, the landlords were used to one- to two-year leases. I wanted a five-year lease with three five-year options, but I only got a three-year lease with one three-year option. However, I recently signed a new lease for 15 years.
Larry Snow, Crystal Clean Laundromat
Morehead City, N.C.
Gotta Have It: If you’re located in a strip center, tie the lease rate into the general occupancy of the center. If not, you could end up being the only one left in the center with no draw – and a huge payment.
Lesson Learned: I made the mistake of not securing enough five-year rollovers on my first lease. I was able to amend that later, but at a great disadvantage.
Vince Leone, Cape Laundromat
Cape May, N.J.
Gotta Have It: Before you sign your lease, be sure the rooftop HVAC unit is in good condition, and make certain that the lease specifically states who is responsible for repairs and replacement of that unit.
Also, on triple net leases, get a cap on your CAM charges. Commercial landlords bill back all kinds of charges for the year. Under “CAM reconciliation” for the previous year, charges can go as high as 20 percent of your monthly CAM charges.
Damian McKay, Quality Coin Laundry
Gotta Have It: One of the most important things in your lease is to make sure you clearly spell out how the maintenance and upkeep of the air-conditioning units will be handled. This can create a lot of issues between laundry owners and landlords.
Lesson Learned: I wish I would have included some sort of no-competition clause in my lease.
Pierre Rogers, All in One Laundromat
Gotta Have It: The first thing you need to look at is the duration of the lease. If you are investing in building a new store, you’ve got to have a lease for 25 years or longer. My current lease is for 27 years. This is very important down the road, when you plan to sell your laundromat.
What’s more, try to get a gross lease. This is the kind of lease that I have. Even if you have to pay $2 more per square foot with this type of lease, it will be worth it. Your taxes, maintenance costs, insurance, garbage fees and sewer costs will be increasing every year. And with a your gross lease, your costs are easier to forecast
Clark McDaniel, Fabricare Cleaning Centers
Guelph, Ontario, Canada
Gotta Have It: In my opinion, the single most important aspect of leasing space is making sure the length of the lease or the renewal terms are indeed long enough. Also, be sure the option is exercisable freely and completely at the discretion of the tenant – not the landlord. A laundromat with a short-term lease is only worth the value of its used equipment.
Renewal options – and the lease rates for those options – should be structured so that the tenant has the option of calling in an arbiter to settle any unreasonable requests by the landlord for unconscionable renewal rates.
Another pitfall to watch out for is language in the lease that states, if the building is sold to another purchaser, your lease can be terminated within 90 days. I have seen such a clause in leases and have had it removed immediately.
It is also wise to seek an option or first right of refusal to purchase the building should it become available for sale.
Rather than a 25-year lease, I prefer a fixed-rate, 10-year term with three additional five-year options. In the event that the neighborhood dramatically changes for the worse, you want the option of canceling the lease at the end of an option period and vacating the premises.
In addition, be sure that your lease specifically states that you are not to be held responsible for any previous environmental issues on the property.
I own the buildings for two of my stores and lease the premises for one store. Needless to say, I prefer to own by a large margin.
Dan Marrazzo, Laundry Depot
Gotta Have It: The best lease is a deed. But, beyond that, be sure you have enough options for an ample period.
Lesson Learned: My biggest mistake was not reading the fine print about CAM charges.
Patti and Dave Fielding, Embassy Laundromat
Gotta Have It: It would be great if lease rates were tied directly to the revenues of the business. That might ensure the landlord's cooperation in maintaining an attractive property. It's crucial that the lease is clear about the responsibilities of all concerned parties.
Lesson Learned: The biggest mistake we made was not investigating the market rate for our area. We relied solely on our landlord (from whom we bought the laundromat). This was our first business venture and, not completely understanding the long-range impact of the lease to our bottom line, we didn't negotiate on a level playing field with the landlord. It would have been helpful to know where to get the market rate information – and then to use that information to negotiate a better deal.
Larry Adamski, Muskegon Laundromat
Gotta Have It: I think the most important items to include in any lease are additional five-year options to renew, including a renewal rate or a calculation for a renewal rate.
The second most important item would be a clause that makes the lease transferable without undue requirements.
Bill Bakos, B&D Luxury Laundry
Gotta Have It: Get everything in writing. Spell out everything – right down to the very last light bulb. My last lease was 40 pages.
Lesson Learned: The biggest mistake I’ve made was leasing in the first place. I much prefer to own the property.
Another mistake was not getting a long enough lease. Twenty years just isn’t long enough for a high-volume store.
Trey Noe, Richmond Neighborhood Laundry
Gotta Have It: I own a group of five small laundromats in the city, all on leases. I insist on the first right on any purchase of the location. This allows me to control a transition to a new owner, even if I don't personally buy the property.
I also have a no-compete clause, which provides that I cannot be replaced by another laundromat or cleaners once my lease expires for five years. This prevents the landlord from replacing me – either with himself or someone else of his choosing – upon my lease’s expiration. Basically, it means that any lease negotiations are between me and some other type of business.
To me, the key is to treat the property like it is your own. This includes maintenance, upkeep such as paint and lighting, and security. I ask for very little from the owner except those things that protect the owner’s investment. Being a good partner will make it much easier when you begin negotiations.
Josh Swank, Squeaky Clean Laundry Co.
Gotta Have It: I prefer to let the roof be the landlord's responsibility, as he should also be responsible for the heating and cooling system. By negotiating this into my lease, it has saved me tens of thousands of dollars over the past several years.
Lesson Learned: If I had it to do over, I would have broken my lease up into five-year segments with the opportunity to renew in increments of five years. Instead, I signed a lease for 20 years, which really impacts the long-term options I have with my laundry. I don't have as much flexibility as I'd like, in case the neighborhood or demographics change.
Bob Meuschke, Family Laundry
Kansas City, Mo.
Lesson Learned: Over the years, I’ve made a few mistakes on my leases. One was not reading all of the legal jargon or getting help to understand what it all meant.
Another mistake was going by memory on my renewals. In fact, I actually lost a location because I thought I had a five-year lease before renewals, but it was only a three-year agreement. The landlord moved me out.
Other past mistakes have included not asking for enough renewals to outlast me in the business (for resale value) and not negotiating for tenant finish monies or free rent – or both – for a new start-up.
Thomas Krawczyk, Midway Laundromat
Kendall Park, N.J.
Lesson Learned: My biggest mistake was not taking the time to read and fully understand what was written. At the time, I left it up to my attorney, which may not have been very wise. Everything is focused in favor of the building and the landlord, not the tenant. It seems like I can't even turn on a light without permission from the landlord. And no matter what requires repair or maintenance, I need to pay for it some way, some how.
‘Living With It’
“The main issue that people have to understand is that the lease is drawn up by the landlord’s attorney, and it favors the landlord to almost every extent,” Pederson explained. “As the business operator, you have to be able to at least swallow the lease. It can’t be a real killer for you. However, it’s never going to be in favor of the tenant. You have to be able to live with it.”