CHICAGO — Negotiating and signing a lease is often a key component of starting or maintaining a self-service laundry business, but a store owner may pay a heavy price—literally and figuratively—if he/she doesn’t fully understand the ramifications of an agreement.
This month, American Coin-Op asked three experts to weigh in on commercial leases and offer their insights—and even some warnings—about the leasing process.
Larry Larsen, of Laundromat123.com, is a licensed real estate broker and has more than 30 years of experience in the ownership, management and construction of Laundromats.
Brad Steinberg is co-president of PWS, a 50-year-old California-based company that says it is the largest broker of existing and new Laundromats in the United States.
John Vassiliades, CEO of Chicago-based J. Vassiliades & Co., is a licensed business and real estate broker with more than 40 years of industry experience, having brokered the sales of over 1,000 coin laundries.
Q: In what ways might a commercial lease for a self-service laundry differ? Are there various types of leases in general?
Larsen: Most first-time buyers of Laundromats have never seen a commercial lease. Think of an apartment lease and increase it fivefold. Courts in our country provide guides and restrictions for residential leasing, but when you negotiate a commercial lease, it is presumed you know a lot about business leases. Very few people do. Commercial leases contain many provisions slanted toward the building owner and few benefiting the tenant.
Leases can be gross or net. In a gross lease, all the expenses (except utilities) are included, just like you have in a typical apartment lease. In a net lease, you have a base rent and then the lease tells you what additional expenses the landlord expects you to pay. Building insurance, property taxes, common area upkeep, repairs, parking lot cleaning, security guards and cleanup are common costs paid by net lessees.
“CAM” and “Net/Net/Net” are terms used to describe some of these lease add-ons. Read the lease carefully and if you have any doubt, contact your consultant or attorney to explains things you do not understand.
Steinberg: There are two basic forms of leases: NNN (“triple net”) and gross. In an NNN lease, a tenant pays the base rent plus pass-throughs from the landlord, which include property tax, insurance and common area maintenance expenses (CAM). In a gross lease, the tenant simply pays one, all-in rent amount.
Vassiliades: There is a gross lease, which includes in the monthly rental the landlord’s taxes, some common area maintenance, so they give up only one monthly payment. Then there is the net lease, also known as the net-net-net lease, which is a base rent calculated by the landlord, then a portion of the real estate taxes … and then also a portion of the insurance and a portion of the common area maintenance is added on. There are many different types. There are leases called percentage leases, which are based off the percentage of the income that the store develops. You want to stay away from those as much as possible.
Q: What commercial lease terms hold the most importance for a prospective laundry tenant? Would you say they are the amount of rent and the length of the lease?
Steinberg: When you are buying a Laundromat, you are essentially buying a cash flow. The longer you can protect that cash flow, the better. Additionally, if you ever decide to sell, the multiple you receive on your store will be affected by the length and term of the lease. With that said, the important things to look at when analyzing a lease are the rent amount today, length of lease (base term and options), increases (the lower, the better), options (make sure they are not personal), and assignment language (you need to be able to assign the lease to someone else when you want to sell the laundry).
Vassiliades: Beyond the actual amount that they would be paying in rent, I particularly don’t like to see any Laundromat paying more than 20-25% of their projected total gross for a lease. That being said, the amount of time is very crucial for a Laundromat. I don’t like to see any Laundromat go into a lease with less than 15 years. … Ideally, you want to get as much time as you can.
Larsen: The amount of the rent and the length of the lease are easy to understand; buyers get these two provisions. Other important terms are hidden away in the language of the legal professionals and are the terms that can cause problems for tenants. An example is a lease option. Is it guaranteed or only providing a “first right of refusal” to lease at market rate? Is the option personal or can it be assigned to a new buyer? What about your obligation to replace the roof or resurface the parking lot? Being profitable in the Laundromat business requires a lease that is fair, reasonable and understood by the tenant.
Check back Wednesday for Part 2: Lease flexibility, and some factors that can play a role in negotiations