A laundry lease exists when a laundry equipment provider leases space in a multifamily property, installs and services laundry machines, and shares the revenue they collect with the property owner.
It’s important to note, especially as a buyer of multifamily properties, that laundry leases are real property leases that run with the land. As the new property owner, you must honor the lease. Also note that these leases automatically renew.
After you read this short article, you will have a greater knowledge about the very often overlooked Memorandum of Lease that could yield you money at closing, money you may have missed otherwise. This is commonly known as laundry lease bonus money.
Why a laundry lease is not recorded
As a multifamily investor you are aware that the leases signed by the residents run with the land. But they are not recorded. The reason is simple: there is too much private information that relates to the counterparties and it may violate a resident’s right to privacy.
Guess what? Laundry leases that encumber a property are not recorded either. Because these leases are not recorded new owners often miss bonus money that is owed them.
What is recorded?
When a laundry lease is executed the laundry operator will record a Memorandum of Lease in the respective county public records. That document is one page and it does not disclose specifics of the lease like how much bonus money was paid.
Here’s how a typical memorandum of lease reads:
Exclusive use and possession of leased premises. Lessor does hereby grant, convey and transfer to Lessee the exclusive use and possession of all common laundry facilities on the property, which facility(ies) is/are presently described as encompassing approximately «XXX» square feet, for its use as a laundry facility(ies).
Term. The term of this Lease is not disclosed herein but is not less than 1 year or more than 20 years from the date of the lease.
Assignment or transfer. This Lease shall be binding upon the parties hereto, their respective heirs, personal representatives, successors, assigns or transferees.
Provisions of the unrecorded lease.Lessor and Lessee have entered into an unrecorded Leasecontaining the provisions included herein and certain additional provisions. The provisions of the unrecorded Lease are incorporated herein by this reference. A copy of the unrecorded Lease is available for persons having a legitimate interest in the property, at the home office of the Lessee located at…
See? There is no useful information other than the instructions in the last paragraph. That is what you and your attorneys should note.
What is laundry lease “bonus money?”
So, what is bonus money? Glad you asked! Here’s the deal: Oftentimes laundry leases include an “upfront” payment often referred to by operators as bonus money. Money paid upfront will be carved out of the rent that would otherwise have been paid over the term of the lease but discounted to a Net Present Value.
Keep in mind that many, but not all deals, include bonus money but you won’t know that until you get a copy of the lease.
How do the numbers work?
Let’s say you’re interested in buying a 120-unit property with one laundry room. Here are the details:
- Laundry room has 12 machines installed and running.
- Revenue equals $90.00 a machine per month ($90 x 12 = $1,080 monthly)
- The previous owner signed a TEN (10) year lease two years prior. (Keep that in mind)
- The original offer from the laundry operator was to pay 60% of the revenue as rent.
- This property claimed to need around $9500 for improvements to the laundry room.
- The Laundry Operator decides to reduce the rent from 60% to 45% in order to pay the “Bonus.”
- The difference in monthly rent is $13.50 a machine x 12 machines x 120 months or $19,440.00 in total cash flow that would otherwise be paid as rent.
- That cash flow would then be discounted to approximately $9,739.00 using a 10% discount rate.
- That amount, $9,739.00, would be paid to the Lessor upon installation of the equipment.
As a buyer, what am I entitled to?
Let’s take our hypothetical example and frame it out. The seller had negotiated that deal TWO years ago and now you are buying the property.
With EIGHT (8) years left on this 10-year laundry lease, you are entitled to the unamortized portion which, in round numbers, would be 80% of the payment or $7,791.00 in cash or credit against the purchase price. That is the money you’ll miss if you don’t get the lease.
What steps should I take to collect?
Be proactive. Be thorough. Get a copy of the lease and any addenda or extensions before you close. Read it and become aware of the terms and conditions.
Insider’s Tip #1:Send the request for the lease including any addenda, amendments or extensions by certified, return receipt requested mail with a time certain to respond well in advance of your closing date.
Insider’s Tip #2:The bonus money typically is spelled out in the Addendum to Lease – NOT in the body the lease.
Insider’s Tip #3:Once you’ve gotten the lease make sure you note the automatic renewal clause notice period and log that into your calendar, so the lease doesn’t automatically renew.
Once you’re properly informed about any bonus money you’re in a position to know how much was paid and when it was paid. Then, at closing, you’ll be on the receiving end of the unamortized portion either in cash or as a credit against the purchase price. Good Luck!
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