Greetings Gentle Readers!
Today's topic is one that is of some concern to multifamily apartment owners currently in a laundry lease or thinking about signing a laundry lease.
"Commissions" is a colloquial term used by laundry vendors and property owners alike but in reality "commissions" are legally "RENT" for the space the machines occupy.
Typically the property will receive a percentage of the gross revenue (collections) that the machines generate from usage by the residents on the property.
How that percentage is computed can be confusing. There are 3 very broad categories of RENT payments that are computed and made typically monthly.
First let's look at what variables the laundry vendor will input to calculate any type of RENT payment.
- Capital investment (buying the machines and providing technology payment systems if suitable)
- Operating expenses (installing, servicing, collection, processing, insurance, vent cleaning, etc., etc)
- Term of the lease (Typically, 5, 7 or 10 years)
- Contingency Risk (Occupancy, market risks, competition from in unit hook up)
- Revenue (collections) from historical performance over the past 12 - 18 months
- Condition of the property (new construction or existing)
- Class of Property (A, B, C, D)
- In unit connections
- Competing laundromats in the area
- # of Machines
- Vandalism risks
- Type of Machines (front load or top load)
- Quality of Machines (Factory New or from Inventory)
Once those variables are collected and input the commission or RENT payments can be determined universally done using a Net Present Value, Internal Rate of Return calculation along with other financial metrics. It's no longer a pencil and paper calculation.
So let's look at the aforementioned 3 categories....
- Straight Percentage - This is the simplest of the 3. This calculation is expressed in simple terms of a percentage of the gross revenue (collections) of say, 30%, 35%, 40% , 45% or 50% which are not necessarily what your specific property would receive. If the property generates $500 a month and the lease stipulates a 45% RENT payment it's an easy calculation = $500 x 45% = $225 in rent would be paid less any deductions for refunds, taxes, fees, etc.
- Overage Percentage - This calculation is expressed as a percentage of the gross revenue (collections) in EXCESS of a base amount. To illustrate, let's say a property would qualify for 75% of all gross revenue (collections) above a base amount - which could be expressed in a per machine per day amount like $1.20 per machine per day. So the commission equation in the lease would read: "ZERO (0) percent of all revenue up to $1.20 per machine per day and then 75% of all revenue thereafter". That $1.20 would be multiplied by the number of days in the collection cycle to determine the base amount per machine for the collection cycle. If the cycle was 28 days then the base amount per machine would equate to $1.20 x 28 days or $33.60 per machine. If the gross revenue per machine was $72.50 then the payment would be computed as follows: $72.50 - $33.60 = $38.90 to be paid at 75% or $29.18 per machine. When you multiply the RENT payment of $29.18 x the number of machines installed you'd have the total amount of RENT. To compute the "effective" percentage you'd take divide the $29.18 by the $72.50 to equal 38.7% percent of the total gross revenue.
- Straight Percentage with a Minimum - Here is how it would appear in the lease language: "...50% of all gross revenue from the machines provided however the lessee receive a minimum of $1.20 per machine per day...". Let's calculate that out and see that it is similar to the overage with one big distinction. Again, we need to identify the number of days in the collection cycle to determine the base amount per machine per cycle. Let's use 31 days this time: 31 days x $1.20 = $37.20 per machine per collection cycle. Let's assume the machines gross revenue was $69.75. Here's the calculation: $69.75 - $37.20 (minimum) = $32.55. Now, here's the single distinction between this and the overage - the property would receive 100% of the $32.55 since the minimum was met. The effective percentage on this deal would look like this: $32.55 divided by $69.75 equaling 46.6% in RENT payments. When does the property receive 50%? When the machines gross revenue is $74.40 or anything above that. In that case the 50% payment "kicks" in and until then the minimum is subtracted and the remaining is paid out at 100% up to $74.40.
Are there other variations? Sure but not significant variations. I hope this helps apartment owners better understand what goes into and what comes out of the gross revenue.
As usual, your comments, questions and any feedback is appreciated!
Thanks for reading!
Hey @Michael Calderaro thank you! I have often wondered (for my investor clients) how this might work... One question: some properties have a large number of units and others have only a couple. I assume when dealing with small numbers the supplier would want a contract with a base amount minimum agreement since the machines would be used less frequently. Have you found that there is a minimum number of units a supplier is willing to deal with?
@Teri S. You're welcome and Thank You for reading my post! The number of units (apartments) really doesn't come into play regarding the "minimum" or the "overage" equations. Most vendors gladly work with small properties, in fact out of approximately 800,000 washers and dryers in the national portfolio of one of the largest vendors approximately 325,000 (or 40%) of those machines were in properties with under 5 machines in total.
But you actually asked two questions in one: First, let me address the frequency with which machines are used. Low usage or low collections (same thing) comes from a number of issues: occupancy, condition of equipment, condition of laundry room, vend prices, competition (laundromats nearby), in unit hook ups and ratio of equipment to apartments.
Let me address the last one as the others are self explanatory to a degree. The industry standard ratio for apartments to pairs of machines varies on the type of property, locale and demographics.
One quick example: Let's use a garden style 2 story family suburban property with one or two laundry rooms on the property and let's say 80 apartment units would most likely have an 6-8:1 ratio - meaning for every 6-8 apartment units (depending on the demographics) the vendor would install 1 pair (w&d) . Key driver to usage is kids! Family properties routinely use machines much more than other types of properties.
In a mid - high rise, urban property with one laundry room the ratio would grow to 12-15:1, so for every 12 - 15 apartment units the laundry vendor would install 1 pair. The reason is that the demographics change dramatically.
Urban mid-high rise dwellers tend to be young couples, singles/roommates, and more than likely professional, maybe some senior empty nesters who, all in, do less laundry than their suburban family property counterparts.
Regarding the "minimums", what is more important from the vendor's point of view are these factors:
1. Does the property have a proven collection history of 12 months or more so the laundry vendor doesn't have to "guesstimate" the revenue to be generated from the laundry room based on comparable properties. Solid record keeping can eliminate anxiety on the part of the vendor who is investing capital in the equipment whether for 4 machines or 40 machines. Absent historical records of collections a vendor would assuredly include a minimum for themselves.
2. Does the property have a "safe" room and environment? A laundry room that is free from visible signs of vandalism and a property that is well maintained with no deferred maintenance is a big plus for laundry vendors and again can work to eliminate the minimum. Again, with signs of vandalism and deferred maintenance a minimum surely would be included.
3. Given those two factors the last one is "What does the property want out of the laundry deal, higher cash flow (more percentage of the gross collections) or a lump sum up front payment with a reduced cash flow? An up front payment will certainly warrant a minimum from the laundry vendor who is looking to protect their investment.
But, my last thought is this: a 'minimum' should not deter a property owner from contracting with a reliable laundry vendor. There are many forgotten considerations relative to "owning and operating" laundry equipment.
I hope this helps your understanding further!
Again, thanks for reading and asking the question!