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.
Some of today’s self-service laundry owners are multi-store operators who have studied and learned the real estate business thanks to a series of building purchases and retail storefront leases over the years. Others are real estate investors who essentially “backed into” the laundry industry – and liked it. And many are simply budding small business owners looking for a successful location, far removed from the 9-to-5 corporate grind.
But, whatever your background, the fact remains that, as a laundry owner, you are – by definition – a player in your market’s commercial real estate arena. As such, the upswings, downturns and nuances of the commercial real estate industry can affect your business as strongly as your equipment mix, your attendant training program or your utility costs.
And 2013 promises to be an interesting year in that regard. According to Forbes’ recent commercial real estate forecast for 2013-14, retail space is seeing more absorption than construction, but there’s still plenty to worry about. Retail spending has only increased 4.4 percent in the last 12 months; a year ago we saw a 6.2 percent gain, and a year before that a 7.8 percent increase. Although the recent figure is certainly an increase, it’s not terribly large, especially in light of 2 percent inflation.
On the positive side for property owners is the extremely low interest rate for commercial mortgages. “Those owners who qualify pay so little interest that it’s almost free,” according to Forbes. “Others, however, still have some difficulty obtaining cheap financing.”
In addition, the National Association of Realtors recently weighed in with its analysis of the commercial real estate sector in the U.S., pointing out the fact that vacancy rates have fallen modestly and rents have risen moderately as financing remains a challenge for small business, according to the organization’s recent quarterly commercial real estate forecast.
NAR Chief Economist Lawrence Yun noted that the market is showing an uneven recovery. “The wheels appear to be greased for the big players, but not so much for small business,” he explained. “Overall, the commercial sectors are firming nicely, with multifamily continuing to show the best performance.”
A companion NAR report, the Commercial Real Estate 2013 Lending Survey, shows widely varying availability of lending capital depending on property size, with a significant disadvantage for buyers of smaller properties.
Commercial sales volume of major properties valued at $2.5 million and above increased 24 percent in 2012 to $294 billion. The uptrend continued during the first quarter of 2013, with a $72.8 billion volume that is 35 percent above the first quarter of 2012. Some 16 markets in the first quarter experienced triple-digit gains.
Also, commercial mortgage-backed securities regained market share in 2012, accounting for 22 percent of lending for major commercial properties. A comparable source was government agencies, followed by national banks, insurance companies and regional banks.
“Despite the improvement for major commercial properties, 52 percent of realtors report they had a commercial transaction fail in the past year due to a lack of financing,” Yun said. “In addition, 42 percent of respondents said clients failed to complete a refinancing. Credit for small business remains unnecessarily tight.”
Commercial members of the NAR have also reported that new and proposed U.S. legislative and regulatory initiatives, and regulatory uncertainty for financial institutions, account for the lack of capital in commercial lending for smaller properties.
What does that “big picture scenario” really mean for you, the laundry owner? We asked a number of long-time laundry industry experts from different parts of the country to boil down the current real estate trends and issues, as well as the factors shaping today’s commercial real estate market:
Russ Arbuckle (Wholesale Commercial Laundry Equipment Co. SE, Southside, Ala.): We’ve been seeing a large inventory of empty space. This inventory has been driving rents to some of the lowest numbers we have seen in years. We have also seen store owners who have been able to renegotiate their current rents to more favorable rates.
Obviously, the poor economy, coupled with difficulties in borrowing commercial money, are keeping entrepreneurs from opening new businesses and expanding existing ones.
Stephen Bean (Universal Coin Laundry Machinery, LLC, Royal Oak, Mich.): The commercial real estate sector is interesting here in Michigan. Commercial real estate is certainly available, and the prices are reasonable. Some landlords will even participate significantly financially in the build-out cost of a new laundry for the “honor of the tenant’s presence.”
Of course, the usual suspects – supply and demand – rule the game. Landlords need tenants more now than ever in this economy.
Karl Hinrichs (HK Laundry Equipment, Armonk, N.Y.): The U.S. has been in a recession since the banking crisis that began in late 2008. Real estate values have dropped during this five-year period. Of course, this depends upon the local economy and the supply and demand in the local market; but, overall, commercial property values have dropped.
With that said, however, this decline has been less so in the commercial markets, versus the housing market. It appears that there is always a strong demand for good quality commercial real estate. The recent trend for commercial real estate has created a steady increase in prices and values.
Currently, we have historic low interest rates, so now would be an ideal time to purchase commercial real estate, as long as it fits in your long-term investment plans.
The factors shaping this current real estate market are the ever-constant supply and demand. Typically, the commercial real estate market is much more stable and less volatile than the home ownership market. Owners of commercial real estate are typically characterized by long-term stable ownership. There are few commercial real estate speculators who flip properties, unlike within the residential real estate market. Typically, the owners of commercial real estate are long-term owners, where ownership is characterized by holding the property for long term appreciation.
Dion Marcionetti (Laundry Concepts, Addison, Ill.): They’re starting to build new shopping centers, and that’s a very recent development. All of a sudden, we’re seeing some shopping centers pop up.
All that’s going to mean is that there is going to be more inventory, more places for people to rent. I don’t know if it’s going to drive the prices down. It certainly won’t lower the prices on new properties, but you might see a small price decrease on some of the older locations.
Also, there are going to be a lot fewer rent reductions going forward. Asking to renegotiate the lease is a tactic laundry owners have been using ever since somebody thought they could get away with it, but I think now there is a lot more resistance from the landlords. They are not as willing to sit back and say, “Let me help you out.” Because helping out the tenant typically hurts the landlord, as far as his payments and obligations to the bank.
Over the last few years, landlords have been a lot more flexible, but by the end of last year and the beginning of this year, I don’t see them being as flexible any longer.
All in all, many people still don’t have the money to make their mortgage payments, so you’re seeing a lot more pieces of property on the market. However, the demand for real estate – because our economy is what it is – isn’t great. So, prices are being adjusted slightly, not to say you’ll be able to get something for half of what it should cost. That’s not the case.
Bryan Maxwell (Western State Design, Cerritos, Calif.): I think biggest trend in real estate is not necessarily in the cost of the property/leased space but in the total cost of developing the space. Municipal impact fees continue to escalate at an alarming rate, dramatically increasing the cost of new projects. In many areas, space is available at reasonable prices but the total cost of development is very high.
Mark Svancara (Coin & Professional Equipment Co., Phoenix, Ariz.): Asking rent rates are still significantly lower in the Southwest than they were at their mid-2007 peak. One trend we are seeing in Phoenix is owners of commercial real estate asking higherthan- normal triple-net rates, which are fees charged to tenants – over and above the monthly base rent – to cover the landlord’s taxes, insurance and building maintenance costs.
Landlords are using these triple-net fees to compensate for the low rent rates and loses sustained over the last five years.
Although rent rates are low, retail property for lease is spending more days on the market in 2013 than in 2012. According to LoopNet, an online commercial real estate website, the median days on the market for retail space in the Phoenix metro area is 251 days. This is a 20 percent increase when compared to the first quarter of the year. It appears that retail leasing is slowing in Phoenix.
While the news reports promising signs of the economic recovery, there is still a level of uncertainty in the minds of business owners. Until government-run healthcare is fully implemented and the potential for new taxes and regulations are no longer a fear, the economy will continue to experience a volatile business environment. The commercial real estate market is dependent upon the success of businesses that lease space. Until the business environment is stable, commercial real estate will experience the same level of uncertainty and volatility.
John Vassiliades (J. Vassiliades & Co., Westchester, Ill.): There are still a lot of vacancies. That hasn’t gone away. But there is some movement in the positive direction with shopping centers filling out their vacancies.
Also, in talking with a lot of shopping center owners, the majority of them feel pretty optimistic that although it’s very slow in coming about, it’s definitely going the right way.
For laundry owners looking to lease, there is less of a chance of getting super deals on rent as time goes on. I think landlords are still making deals, because they want to get their properties filled. But, as they get closer to 100 percent occupancy, they’re going to make less and less of a deal – just because they’ve been short of money too and want to make it up.
Of course, the good thing about our business is that we’re solid, long-term tenants. Landlords would rather invest in somebody who is going to be signing a 10-year lease than someone who is going to be signing a two-year lease. If it means they’re going to invest some money in infrastructure like plumbing and electrical, they may be more likely to do that with a self-service laundry tenant than with a hair salon tenant.
The banks have kind of put the handcuffs on landlords. The value of commercial real estate is a direct relationship of the leases a landlord has and the net income from those leases. If their value comes out less than what is owed at the bank, then the bank is all over the landlord. So, it behooves them to make sure they rent out these properties.
That’s been a big influence – the banks putting a lot of pressure on the shopping center owners. As a result, they’ve been spending a lot of money advertising, promoting and trying to get their vacancies filled.
I think the commercial real estate sector has been lagging behind all of the other forms of real estate, particularly in the Midwest. Even housing has been slow here; everybody is great on the East and West Coasts, and we’re still struggling a bit.
To Lease or To Buy?
Regardless of the current market conditions, at some point, every potential laundry owner is faced with the dilemma of deciding whether to lease or buy his facility. What are the advantages and disadvantages of each? There are a few factors that should be taken into consideration when evaluating whether to buy or lease space:
- Credit ratings are not quite as crucial, compared to buying.
- You don’t need to worry about selling if moving to a new location.
- Your monthly rent is a tax deduction as a business expense.
- You may, with landlord approval, have the freedom to sublet, assign the lease or move if need be at the expiration of the lease.
- No loss if owning in a bad market.
- Rental rates with annual escalations based on market conditions.
- Loss of the reversion or the value of the property at the end of the lease.
- No equity buildup.
- You may be forced to leave at the end of the lease.
It’s important to understand that, when you sign a lease, it’s a permanent contract, only escapable by bankruptcy. When you sign a lease, it’s usually forever – and that’s regardless of whether or not your business makes money. When signing a lease, use extra caution and make sure you understand what you’re on the hook for. You have to be very careful to watch the lease escalations in relation to the volume.
If you’re going to buy a laundromat, leasing the space, it would be wise to create a spreadsheet detailing your expected revenue for the life of the lease, as well as your maximum possible rent for the duration of the lease.
- Interest on the mortgage loan is tax-deductible.
- Changes can be made to the building to accommodate your business.
- You can take annual depreciation deductions on taxes.
- No rent increases. You don’t have a landlord who can just automatically pick a number out of the sky and say, “This is what your new rent is going to be.” If that happens, your entire profit-and-loss statement could be out the window, and the next thing you know you’re not able to make it work financially.
- You can benefit if you sell when the market is good.
- If you end up with excess space, you can lease out the extra.
- No set hours of business.
- You can stay at that location as long as you wish.
- Usually requires more initial capital to secure financing.
- Property values may decline.
- Owning real estate subjects the owner to various legal and regulatory risks not associated with leasing.
- It requires the owner to invest time and energy into matters that are not directly business-related. For example, if you have a roof problem, you’re the landlord. You have to fix the roof. There are a lot of inherent issues that you have to deal with when you’re the landlord.
- Inexperienced owners may operate their real estate inefficiently and increase operating costs.
Certainly, these lease-versus-buy factors can only be decided by you. Then again, your financial situation may make the decision for you. Ask yourself just how much money you really have to invest in your coin laundry venture.
Still Thinking About Buying?
Typically, most small-business owners finance the purchase of a building. As a general rule, a loan to purchase a building will require a minimum of 20 percent of the purchase price from the borrower. Consideration should also be given to unexpected expenses and repairs to the building.
If you’re fortunate enough to have the financial means to purchase the land and building for your laundry, bear in mind that laundromats are destination businesses and don’t require the best real estate. They require good parking and a safe environment – but perhaps not cream-of-the-crop property.
Also, some laundry owners who own their property keep the building and the laundry business separate, whereby the operator pays rent to the building owner. Therefore, those two entities are set up in different names.
For instance, if you own the building and the laundromat, you should perhaps consider setting up a corporation for the building and a separate corporation for the laundromat. A lot of store owners lump the two together and, if a lawsuit occurs, they could lose the building, as well as the business.
What’s more, it’s critical to pay yourself a realistic rent (including mortgage, upkeep and taxes – at the very minimum) and to keep complete, accurate records. You can’t simply shift the money from one pocket to the other. If you ever want to sell the building or the business separately and you’re not showing any rent, somebody is going to impute the rent, and you’re going to get a lot less money.
Of course, owning the building can add a considerable amount of value to your laundry business. “We advise store owners and those looking to get into the laundry business to own the building when possible,” Svancara explained. “A laundry owner considering the purchase of a building should assemble a team of experts to offer advice and consultation.”
This team, according to Svancara, should include a leading commercial laundry equipment distributor in the area to offer advice on whether the area the building is located in will support a laundry and whether the building will provide the infrastructure necessary for a laundry. The team should also include a commercial real estate agent to represent them as the buyer’s broker. This broker should have knowledge of the market and value of the building; they will also create the purchase documents for the buyer to purchase the building. In addition, individuals familiar with electrical, plumbing and mechanical should be assembled to evaluate the building’s condition. And an experienced landlord should also be included on the team to provide advice on the process of purchasing a building.
To acquire the property which you now currently lease, you can start by having a simple conversation with your landlord, letting him know that you are very interested in acquiring the property – and, in essence, becoming a landlord yourself.
“If the landlord is interested, then you have easily opened a promising conversation,” Hinrichs suggested. “You never know unless you ask.
“In addition, every time you renegotiate your lease, ask for an ‘option to buy’ to be included in the lease with a fallback position of the ‘first right of refusal’ clause,” he added. “Also, remember, unless it is in writing, it never happened. I have had conversations where an elderly landlord has promised lease extensions and even the first right of refusal; however, when the landlord’s kids start to manage the property, they have never heard of these promises – so, unless it is in writing, it never existed.”
“I’ve always talked about the lowly laundromat owner in the strip center, where – after 25 or 30 years – he’s the guy who ends up with the shopping center,” Vassiliades said. “This is often true, because he’s the last guy standing in most cases.
If you truly want to become not just a laundry owner but a landlord, Vassiliades advises to pay your rent on time, be a good tenant and “have more than just a casual relationship with the landlord.”
“The landlord is eventually going to have an exit strategy, to either sell out or pass it down,” he said. “I think there is a good chance for laundromat owners to wind up with real estate.”
The real question is: does owning real estate fit with your long-term goals? Real estate is not something that is quickly bought or sold.
“It’s not like selling stocks or bonds,” Hinrichs said. “Selling real estate requires a ‘ready buyer,’ and then the entire process of purchasing the property includes the buyer’s due diligence and mortgage acquisition. This process just takes time and cannot be rushed. If you require semi-liquid funds to take advantage of business opportunities as they arise, tying up your money in real estate may not be the best move.
“On the other hand, if you have money to invest in real estate, the location is a good one and you want an investment that will grow over the long haul, there is nothing like owning a laundromat and the real estate, too.”