A Lease You Can Live With
A Lease You Can Live With
Marc Stern, May 18, 2011
As the saying goes in the retail business, it’s all about “location, location, location.” But without a good premise lease, the best location has no real value.
In the self-service laundry industry, initial premise lease terms must be on the longer side – usually a minimum of 10 years with one or two five-year options. Lenders prefer to see an extended premise lease term, because it represents the borrower’s stability and a willingness to make a long-term commitment to the business – and it makes it easier to sell the business in the future. For the tenant, a long-term lease is a necessity due to the extensive money spent on leasehold improvements for the business, which cannot be removed. This article will point out the more significant lease provisions that laundry owners should try to negotiate prior to signing a lease.
Acceptable Rent
Putting together a new laundry is very expensive and much different from normal retail stores; therefore, negotiating an acceptable rent and annual rent increases is important. The rent, in most cases, should not be more than 15 percent to 20 percent of the monthly revenues (this will vary depending on your market), and increases should either be tied to the local Consumer Price Index (CPI) or 2 percent annually. In some cases, you may be able to negotiate a rent increase every five years, and if you do so, you should try and limit the increases to 10 percent to 15 percent.
Free Rent
Depending on the size and the location, building a new laundry can take anywhere from 90 to 180 days or more. Since you will be signing the lease before you actually build and open the store, it is important to get a free rent period. Ideally, you will want the free rent period to be at least as long as you think it will take to complete the build-out and get the store open; however, try to negotiate as long a period as possible.
Co-Tenancy Clause to Your Lease
Many laundries are situated in strip centers that are anchored by large retailers, such as big grocery chains or large discount stores. Should the anchor tenant leave the center or go out of business, this most likely will have an adverse effect on the other businesses in the center. The fact is that the tenant most likely agreed to lease the premises because of the anchor tenant and its ability to draw people into the center.
The only way to protect yourself against an anchor closing or moving out is to negotiate a strong co-tenancy clause into your lease. A co-tenancy clause gives the tenant a rent reduction if the anchor tenant closes or vacates the premises, or the replacement tenant does not occupy an equal amount of space. Getting a landlord to agree to a co-tenancy clause is difficult, but not impossible. In fact, the most common problem is that tenants ask for too little in this situation and end up with a weak clause. To get the most out of your co-tenancy clause, work closely with an experienced leasing attorney or qualified real estate broker.
Continuous Operation
Most landlords will require you to stay open and operate continuously. This isn’t a major issue for self-service laundry owners, as staying open and operating continuously is the only way to be profitable. However, you may need to close for legitimate reasons – like retooling – and you don’t want to be penalized for that. To protect yourself, make it clear in your lease that any temporary closings for remodeling or repairs do not constitute a violation. Also, specify that any closings due to an event or natural disaster beyond your control (also known as a force majeure event) don’t constitute a violation. In some cases, you may want to remain open for 24 hours. If not prohibited by local laws, you should have this right written into the lease.
Signage
Your lease should provide for signage. You may want signage on a pylon sign, in your store window or on the façade of the building. You also may want the right to have laminated signs. Whatever you want with respect to signage should be written into the lease. Be aware that signage may be regulated by the local municipality.
Parking
Parking is essential for any successful laundry. If possible, try to get the landlord to provide designated spaces in front of the store.
Assignment/Sublease
It is crucial in any lease that you are able to assign or sublease the space. This is especially important should you want to sell your business. There is a difference between an assignment and sublease.
An assignment is the transfer by the original tenant (the assignor) of his or her rights to the assignee (the new tenant) to use the leased premises. Unless expressly released by the landlord, the assignor will remain liable on the lease. A sublease is a contract used by an existing tenant to lease a portion or the entire premises they are renting to a third party for the remaining term of the lease. In this case, the original tenant remains liable under the lease and is considered a sub-landlord to the third party new tenant.
The lease should give you the right to either assign or sublease the space. The basic wording should state that any assignment or sublease “shall not be unreasonably withheld by the landlord.” In the case of an assignment, the best possible outcome would allow you to be released from any further obligation under the lease.
Tenant Improvement Money
Since the build-out of a laundry is very expensive and the money put into leasehold improvements actually becomes part of the landlord’s property and improves it, a savvy negotiator will ask the landlord to help pay for the improvements. It is not uncommon for a landlord to provide a tenant with tenant improvement money. There is no magic number to ask for; however, if you don’t ask for improvement money, you will not get any.
Landlord/Lender Agreement
Many finance companies require the landlord to sign a landlord agreement, which allows the finance company to assign the lease or remove the financed equipment should the borrower default. While many leases are signed prior to being approved for financing, if at all possible you should contact the finance company and have them send this document to the landlord, who will be much more receptive to signing it before you sign the lease as opposed to after the lease is signed.
I have tried to highlight the basic terms of an acceptable lease for a typical self-service laundry business, but always remember that all markets are different, and the willingness of a potential landlord to negotiate depends on a multitude of factors. Before signing a lease, you should have your attorney review it, and if you plan on financing your project, verify your approval status with your lender.