Negotiating Favorable Terms in Today’s Economy

WSD’s Bryan Maxwell contributed to this article written by Bob Nieman and originally published in Planet Laundry Magazine. The article is republished with their permission.

When it comes to your self-service laundry’s lease, there are two points to keep in mind:

1. The terms of the lease almost always favor the landlord.
   
2. With some effort, you can negotiate improvements to those terms.

In theory, all terms of a coin laundry lease are negotiable. However, your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win several landlord concessions. If your area’s rental market is tight or you’re chasing a unique space, you’ll have considerably less leverage. Clearly defining your needs, understanding market forces and finding common ground on the details are all essential to successful negotiations and can result in a lease that’s favorable for both you and your prospective landlord.

How the Game Has Changed

“The economy has really humbled many landlords,” said Bryan Maxwell of Western State Design, a laundry distributor based in Hayward, Calif. “Their tone and attitudes in the negotiation process have changed. Landlords that were previously arrogant and aloof are now accessible and willing to negotiate. They are more open to longer leases, better terms and significantly lower rates. Many landlords are also short on cash. As a result, they may be unwilling and unable to concede to tenant improvements in advance but instead are willing to negotiate longer periods of free or reduced rent.” Of course, negotiating with landlords varies dramatically by region. In fact, in talking with associates throughout the country, some regions have not been as adversely impacted by the economy, according to Maxwell.

“There seems to be some willingness to negotiate rents and terms of the lease a little more so recently,” agreed John Vassiliades of J. Vassiliades & Co., based in Chicago. “On the other hand, landlords are facing problems of their own with vacancies, devaluation of their property values and demands from their banks and mortgage companies. The value of their properties is based mostly on the net rental income. So, lowering their rents also lowers their property value and, coupled with vacancies, the landlords are not likely to pass on drastic reductions to their tenants.”

However, these days, landlords are more willing to give a couple months of free rent, according to Vassiliades. In addition, they may consider longer terms, adjust future rent increases and perhaps give certain concessions other than rent reductions. “I have found them a little more responsive and willing to listen,” he admitted.

Lamar Thomas of T&L Equipment Sales Co. in Charlotte, N.C. thinks that today’s landlords want to ensure that they are getting stable tenants and that they appreciate long-term leases more than ever. He added that they have become more liberal on rent-free periods and are willing to be more accepting of conditions required by the banks with regard to financing.

“In our area, they are getting short-term leases with churches, worship centers and sweepstakes centers to fill the empty space,” Thomas explained. “And they seem less worried than before that our laundry customers will damage to their parking lots in terms of leaking oil from cars and pickup trucks, less worried about our clientele in general, and more concerned about cash flow.

“As a result, landlords are now allowing coin laundries where previously they many have blocked this type of tenant. They’re also allowing more penetrations in walls and roofs, as well as allowing for free time and graduated rent schedules.” “In an economy that trends only upward, buyers generally think positively and thus do not focus as much as they should on what might happen if the economy or their business tanks,” noted Myles Mattenson, a California-based attorney who has worked extensively with self-service laundry owners. “It is always essential to consider the downside risks in purchasing a business or negotiating a lease. Some buyers and operators take that advice to heart; others think, in a growing economy that I am merely giving cautious, ‘lawyerly’ advice.”

Currently, there is a greater amount of attention being paid to common area maintenance, procedures for periodic audits of CAM, management fees and the manner in which rent increases will be imposed under the lease, Mattenson explained.

“Today’s landlords are more likely to give ground than in the past when it comes to the amount or percentage of annual rent increases, management fees, tenant improvements and parking considerations,” he added.

Negotiations with landlords have changed because they have different needs now, according to Dan Naumann of Great Lakes Commercial Sales in Brookfield,Wis.

“The financial institutions have clamped down on valuations, so the days of low base rental rates are hard to come by,” Naumann pointed out. “What the building owners are being trapped with is they have to show what the cash flow will be and have that be enough to give an appraisal that exceeds what their financial institution will require, or what the federal regulators make the banks keep in loan ratio values.

“As a result, you can expect to see higher rental rates, but an extended period of free rent – or sometimes having a good share of the lease hold improvements paid for. If the building owner has no debt on the building, you still can negotiate pretty hard to get some great rent deals.”

Of course, some aspects of lease negotiation have remained the same despite the recession and real estate woes, according to a number of industry experts. For example,most landlords still want some kind of triple-net expenses to be added to the base rent. What’s more, landlords are not willing to cap these expenses, because they have no idea what taxes will be in future years.

“Landlords, particularly those with multiple properties, are generally sophisticated and, when negotiating a long-term lease, will negotiate to maximize income and security,” Mattenson explained. “Nothing changes in this respect unless the landlord is suffering multiple vacancies.”

The Keys to Successful Lease Negotiation

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.

“Understand and convey that a long-term lease is needed, because laundries require major capital investments,” Thomas said. “As a result, tenants have to be financially solid; more than cursory site analysis must be performed. Today’s laundry business is indeed a business, not just a side job for the owners. Also, be sure to emphasize that a successful laundromat is an anchor type of tenant – one that will draw customers to the site on a regular basis.”

Perhaps the second most important aspect is the assignability of your lease. If you’ve got a lease and you can’t assign it to somebody else when you sell your laundry, 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.

Another 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. 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?

Some other key clauses you should be familiar with before considering signing a lease include:

• 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.
• 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.
• Visibility. This is key. Perhaps you have a nice location in your center, maybe an end unit. 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.
• 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?
• 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 can not just throw up any old sign. You typically have to go with what the landlord tells you.
• 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 self-service 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 to remodel his or her 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.

Clearly, the above items are merely a “wish list.” When it comes down to what your actual lease is going to look like, you may or may not get these concessions from your landlord.

“I believe that, if you cannot get what you feel to be the right rent and lease terms, you should move on,” Vassiliades explained. “Your future success will largely depend on how good of a lease you have. So, you have to negotiate the best terms now, before you sign the lease.

“Since landlords have less demand for the spaces than before the bubble, you are more likely to get close to what you need and, if you can’t get it from one landlord, then go to another. Remember, it is a proven fact that laundromats tend to be a good draw of people on a consistent basis to the shopping centers in which they are located. Laundromats also tend to have the longest life when compared to other retail and service businesses, so you have a lot to talk about with your prospective landlord.”

The Last Word of Leases

“Be sure you understand what being a tenant is all about,” Thomas said. “Know and understand the pitfalls that may await you. First of all, you’re ‘working’ for a landlord who may seem impersonal when conflicts arise. Also, know exactly what is in your lease; have your real estate attorney review it and discuss it with you. And seek the help of a reputable distributor with experience in the laundry industry who will share his experiences with you.”

“Honestly, the best advice is the same as it’s always been,” Vassiliades explained. “Seek longer terms, with a minimumof 15 years, although 25 years is certainly better. Seek fair assignability clauses, as well as a simple and clear understanding of how the rents will escalate.

“Also, because of the emotional factor, I have found it wise to not try to negotiate your own lease. There are many aspects of a lease that require a clear understanding of what they mean, and how they may impact you not only now but also in the future. So, hire someone with a lot of experience in working with business leases to help you.”

“The devil is in the details,” Maxwell concurred. “And an expert can make a huge difference to your bottom line. For example, are the triple-net costs based on ‘leased space’ or ‘leasable space?’ If the center is 100 percent full, the costs to you are the same either way. If the center becomes 50 percent vacant, your triple-net charges will double. It all depends on the words in the agreement.”

In the end, if the landlord holds a desirable location, negotiations will always be more challenging, according to Mattenson.

“If a laundry owner is currently undergoing financial difficulty and consequently approaches the landlord for a rent reduction, landlords will occasionally negotiate a reduction for a period of time, perhaps with a rent increase down the road to cover the income loss,” he said. “A landlord will be more motivated to accommodate the operator if the landlord sees no viable alternative approach to renting the location – or if a substantial portion of the center in which the coin laundry is situated is vacant.

“But, above all, sign nothing until you have the lease reviewed by a knowledgeable attorney so that you have a chance to correct or modify overbearing provisions of the proposed lease, which you might not have noticed or understood,” Mattenson advised. “After the ink has dried on your signature, there is no further chance to negotiate. Also, always remember that although you are a buyer now, someday you will be a seller. Would you be comfortable buying your coin laundry with the lease you propose to sign?”

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