An Investor’s Guide to Coin Laundries | Lease Negotiations | Chapter 7
We are proud to bring you this comprehensive book, ‘Investor’s Guide to Coin Laundries‘, compiled by Jay MacDonald, Vice President, Distributor Sales for Alliance Laundry Systems.
Alliance Laundry Systems is the largest manufacturer of commercial laundry equipment in the world and has over 50 years of experience in helping investors just like you, get started in the coin laundry market. This book is a compilation of experiences, ideas and input from hundreds of successful coin laundry owners and distributors from all over the world.
Taking data and industry knowledge, it is a road map to help you succeed. At the end of it, you will have a general understanding of the industry and what it will take to operate a successful business.
Chapter 7 : LEASE NEGOTIATIONS
If you aren’t buying the property or building your laundromat is going into, the most important document you will be working with is the lease. This legal agreement allows you to occupy and define the business space, but to protect yourself and your business, it’s imperative that you have the right lease. It comes down to more than just negotiating the terms, but understanding what terms and clauses are contained inside the document as well.
ANATOMY OF A LEASE
Before you start to get down to business, it makes good sense to learn and understand the anatomy of a lease. There are many different types of leases and within each of them there could be negative clauses that could affect your plans. It’s important that you familiarize yourself with the components and kinds of leases out there. Below is a break down and definition of the different leases you could be asked to look at:
A lease arrangement in which the tenant (the lessee) pays only a fixed fee or rent and the owner (the lessor) is responsible for the associated general expenses such as insurance, maintenance, and taxes. In case of property leases, the lessor may also pay for garbage collection, security, and utilities.
MODIFIED GROSS LEASE
A type of real estate lease whereby the tenant begins to pay more of the property’s expenses as time goes on.
EXPENSE STOP LEASE
This lease represents a cap on the operating expenses that a landlord or tenant will pay. This type of provision is often included in a lease or addendum and agreed upon by involved parties. The provision may require the renter to pay certain fees up to a certain level and then anything beyond that ceiling will be covered by the landlord.
A type of long-term lease characterized by variable payments which are adjusted from time to time in order to reflect current value. Payment amounts can also be tied to an economic benchmark rate, such as the consumer price index.
A lease arrangement in which a tenant (the lessee) pays not only the rental but is also responsible for the associated general expenses. In case of property leases, the lessee may pay for garbage collection, security, and utilities. In case of equipment lease, the lessee pays all maintenance, operating, repair costs associated with the use of leased equipment plus insurance and taxes. A capital lease is a net lease whereas an operating lease is not.
A commercial lease in which the rental amount is computed as a certain percentage of the sales generated at the leased property. There may be an option where you can negotiate the type of lease that would work best for you and your business. If this is a possibility, it’s strongly recommended that you use your business plan to guide you. What type will fit best into your plan, your budget and your goals? Once you know the kind of lease you will be utilizing, you need to understand what the lease makes up. The most common clauses and line items include:
OPTION TO RENEW
This is a provision in a contract under which the buyer, lessee, or obligor has the choice to renew or reinstate the ended-contract for an additional term.
USE OF PREMISES
The terms in the lease where the lessor designates what the commercial space can be utilized such as: a dentist’s office, a coin laundry, a book store. It’s important to make sure when you are looking at this particular clause that it doesn’t bind the lessee into a specific business, instead, it should have a broader definition of permitted uses.
This section of the lease covers improvements performed on the property such as additions, alterations, remodeling, or renovations. For accounting purposes, all leasehold improvements are capitalized (recorded as an asset with a corresponding liability) and amortized over the remaining life of the lease term or the life of the improvement (whichever is shorter). Upon termination of the lease, such improvements normally become the property of the owner (lessor) without any cost or obligation.
SURRENDER OF PREMISES
This covers the abandonment or premature termination of a lease by the tenant or with the consent of the landlord. There are two types of surrender. The first is where the tenant signs a written surrender agreement, while the second happens when both the tenant and the landlord show that the lease has ended. For example, the tenant leaves and the landlord reoccupies the space.
ITILITIES AND MUNICIPAL SERVICES
Under this section, it will be laid out and defined who is responsible for any utility costs of the property. It covers everything from water and sewer to garbage and snow removal.
SIDEWALK, STREET & WINDOW ADVERTISING
Everything from window to building signage is highlighted in this section. It covers the do’s and dont’s of what is acceptable not only by city code, but by the landlord. Many get specific about things like color and font, how long the light can be on, the brightness of a sign, size of promotional window displays, etc. It’s often this way to protect the integrity of a neighborhood or to hold a cohesive look throughout a strip shopping mall.
ASSIGNMENT OF LEASE
Under this clause, details of subletting are defined. Assignment of a lease is where the original tenant transfers his or her rights to a sub-tenant to use the lease property. Keep in mind that in most cases, the assignor or original tenant is still liable under the original lease terms unless released by the landlord.
SALE OF PREMISES
Should the landlord decide to sell the commercial space, this section of the lease will lay out the terms of what the sale will mean for the tenant. These terms are generally negotiated into the sale of the premises. You want to make certain that the terms laid out in this section are designed to benefit you and do not leave you open to another lease negotiation with the new landlords.
Most commercial leases contain a contingency clause to offset any potential and unexpected economic hardships. To offset any risk, lease negotiations should include a contingency clause to ensure that those involved aren’t held to obligations that aren’t economically feasible.
RIGHT OF FIRST REFUSAL
This provides the tenant with the option to decide whether or not to purchase an asset before anyone else. If it is refused, then it can be sold to another party but can not be done before the right of first refusal is completed.
THE ART OF LEASE NEGOTIATION
As you begin to look at property and you’ve found a location to meet the needs of your coin laundry, it’s time for the lease negotiation. There is a very distinct and subtle dance that takes a basic understanding of what is covered in the lease. As we covered some of the more common lease terms above, it’s now time to focus on making sure you get what you want out of your lease. Just like a dance, there are steps that need to be followed.
Prior to meeting with your potential new landlord, you’re going to want to do some research on them or the rental company. Find out what their needs are. Are they looking for a long-term, reliable business to anchor their location? Are they looking for a tenant with greater stability? Generally, we find that many landlords really like to have leases with laundromats. This is because our industry is a mature one with proven staying power in good times and bad. Laundries like long term leases and so do landlords.
Schedule a meeting and sell them on your business. Take along your business plan, a ProForma, a utility usage report, the design of the laundry and how you will be utilizing the space. Show them why having a coin laundry as a tenant is not only good for them, but the surrounding businesses as well.
Hire a lease or real estate attorney to review the lease. Make sure you are fully aware of the terms and what they mean to your business. It’s at this point you can prepare to negotiate additional terms. A typical lease for a coin laundry may be for an initial ten year term with two five year renewals. When building your store, you will be paying for leasehold improvements to turn an empty building shell into a vended laundry. It will take time to recoup that investment as well as to ramp up your customer base and business. You need the peace of mind that you will not be forced to vacate the location just when things are getting good. By the same token, a long term lease will legally bind you to long term payments. Because of this, we highly recommend you have an expert in this field on your side.
The negotiation. This is where you will present the additional clauses you’d like included and work out the final language of the contract. Again, this is when your attorney will play a pivotal role. Some of the clauses to consider adding include:
- A construction period clause. Since your business won’t be generating revenue during this time, look at negotiating a rent-free construction period. Make sure to include a time limit on this.
- Renewal option clause. While this is standard, make sure you look at the terms. You are negotiating for a long-term contract, not a year-to-year. This will lower the risk of you being forced to move and be put out of business by the landlord.
- Cancellation option. Again, this is standard in most lease terms, but you’re going to want to pay close attention to this clause as well as the Assignment of Lease clause. If you are planning on closing your doors and subletting the space, you want the Assignment of Lease clause to be as general as possible.
Just like buying a house, you can’t be too emotionally involved in the process of lease negotiation. If the landlord isn’t giving you the terms that will best meet your business objectives and are coin laundry friendly, be prepared to walk away and begin the process over. And again, before you sign any lease, we suggest having a lease attorney or real estate attorney look over the terms so that you understand what is laid out before you, giving you the option to develop additional clauses to protect yourself.
TIPS FOR CHOOSING AN ATTORNEY
Ask friends, family, even business associates who they have used. Find out about their experiences with the attorney. Pay attention to what they are saying. Listen to both the positive and negative, this will give you a well rounded view point.
When choosing an attorney, cost often becomes a deciding factor of who you choose as each tends to charge a different fee rate. Keep in mind however that sometimes you get what you pay for. Balancing service with the budget you have to spend on attorney fees, as well as the knowledge and experience the attorney has will all play a factor. Does the attorney offer a flat fee or will you be billed by the hour? You might not be able to afford the most expensive attorney, but consider maybe just hiring an hour or two of their time.
3. Area of Practice
You are going to want to pick an attorney who not only understands your business but is specialized in the art of leases. As your business presents unique opportunities, choose an attorney who will take the time to understand your business and legal knowledge is only good if it can help your bottom line.
4. Know what it is you Want
Before you first meet with a potential attorney, figure out what it is you want them to help you with. Is it to go over the lease and explain the terms or do you want their input on additional terms that could be added to help protect you and your business?
5. Contrast and Compare
Just like going to the doctor, there are times when you are going to want a second opinion and this is one of them. Make sure that you meet with at least two attorneys. Get their view points on what they can offer you. Listen to them and choose the one who makes you feel most comfortable and will provide you with the protection you are looking for.
6. Be Prepared
In addition to knowing what it is that you want, go into the attorney’s office prepared. Prepare a list of questions about their experience, ask them for a few referrals of people they’ve helped, double check their credentials. Bring along a copy of your potential lease as well and any other information they might need. Be open and honest with them.
Choosing the right attorney to be your ally throughout the lease process is the best way to assure that you and your business are protected. By hiring one with successful experience in lease negotiation, you will be on the right track to ensuring the success of your coin laundry.
ABOUT THE AUTHOR
JAY McDONALD has been active in the laundry industry for over 30 years. He is the Vice President, Distributor Sales for Alliance Laundry Systems, the largest manufacturer of commercial laundry equipment in the world. He also served on the board of directors for the Coin Laundry Association and received the Distinguished Service Award “in appreciation of his leadership in furthering the welfare and best interests of the coin laundry industry” in 2009.
As your equipment distributor — the most important partner and most valuable resource you will ever have — we encourage you to get in touch so that we can help guide you through the exciting and financially rewarding industry of coin laundry ownership.