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Finding Common Ground in Lease Negotiations

Real estate experts share mindsets that can aid cleaners looking for better terms

ORANGE, Calif. — The past few months have been a challenge, to say the least, for dry cleaners across the nation. For many facing pandemic-related revenue reductions, expenses such as rent can weigh heavily on their prospects of staying in business. A reduction or abatement in rent can spell the difference between keeping the lights on or closing for good.

Keeping in mind that property owners are also in business, however, can help drycleaners in lease negotiations.

During a webinar held on Nov. 19, sponsored by the Southern California Cleaners Association, speakers Riaz Chauthani and George Ross described what cleaners are facing, both in California and around the country, and ways they can survive this time and come out the other side ready for business.

Chauthani and Ross are co-owners of Rix Business Sales — a brokerage dealing exclusively with the drycleaning industry — and started the session by laying out the grim realities that 2020 visited upon the industry. “I think we'll probably see between 20 and 30% of the smaller dry cleaners close as people continue to work from home,” Chauthani says. “Hopefully, in the next 12 to 24 months, we'll maybe we'll be back to 2019 numbers.” Industry statistics, he went on to say, show that business has been flat for cleaners in the fourth quarter of 2020, staying down between 40 and 50% from the same period in 2019.

While some landlords agreed to rent abatement to help drycleaning companies stay in their properties, many of these deals are set to expire on Jan. 1, 2021 — a date rapidly approaching. When these deals were struck in the spring, the hope was that the pandemic would have run its course and the economy would have started to rebound by now. With the number of coronavirus infections running at an all-time high in November, however, this hasn’t been the case.

It’s in these conditions that many cleaners are facing a renegotiation with their landlords.

The thing to keep in mind, Ross says, is that landlords are businesspeople, just like dry cleaners. While they’d like to see full rent, they dread having vacant properties in a down economy.

“(It’s critical) in negotiating to be transparent, and to be completely honest with your landlord,” Ross says. “And I think in most of your cases, it’s not too difficult to show that you have lost revenue. When you are talking to your landlord, I would suggest providing your sales, even providing your profit and loss statement if necessary.”

This transparency, and some blunt honesty, can give dry cleaners some leverage that they might not be aware they possess. “The key is that the landlord needs to know that if you do not get the right amount of relief that you will not be able to stay in business,” Ross says. “That does not mean you have to do it in a threatening way, but he or she needs to understand that you might have to close your business. To get deferral or abatement, the landlord really has to feel that you're not taking a rent reduction and making a big profit.”

Ross pointed out that, for dry cleaners who have found a way to do business in the current environment and are at or near their 2019 profits, this is a wonderful time to renegotiate.

“You can, perhaps, lock in a long-term lease with a favorable rent and get maybe a 10% improvement allowance to spruce up your store,” Ross says. “Obviously, there are other tenants with different types of businesses who are probably ready to vacate as soon as their PPP (Paycheck Protection Program) loan money runs out, or the holiday season's over. The last thing that a landlord wants is an empty shopping center. So, if you are doing fairly well, now's the time to extend your lease to get a better deal overall. Also, that way, the landlord knows that you're going to be there for the long run.”

“Whatever you do, be sure to get things in writing,” Ross added. While online conversations can help in legal actions, it’s better to get agreements officially drawn up. “Email is considered a written document,” he says. “However, I would not rely on that. I would advise that you or the landlord draft an amendment to the lease. It doesn't have to be anything that's written by an attorney if you're just modifying the rent payments by deferral or abatement.”

Making an Honest Assessment

Chauthani pointed out that hard times can shed light on underlying problems that are more easily ignored in better economic conditions. If a store struggled to make a profit before the pandemic, it’s probably time to make some hard decisions. “If this is the case, you should definitely think about getting out of that lease or selling because it’s most likely not going to be a great store in the future,” he says. “With minimum wage and everything else going up, there's just no way to make a profit.”

Chauthani then explained the options he sees for owners going into 2021. “The best option, I think, is to keep the store, work on training your people, wait for other cleaners to go out of business and then be aggressive to pick up their customers,” he says.

For those who want to sell, however, timing is crucial. “If you sell now, you’re going to take a huge reduction in price,” he says, noting that business evaluations from pre-pandemic times are lower now. “If you can, wait until mid-2022 and get 12 months of better earnings. A good broker should be able to get you closer to 2019 numbers. During this next year, make sure your books are clean, file your taxes on time and show as much profit as you can on your books.” Making the business as attractive as possible, Chauthani said, will help buyers find financing, which will help the seller get a higher valuation.

When times are difficult, people become stressed, and tempers might be short. When dealing with landlords or management companies, Chauthani said that a strategy that often works is taking a genuine interest in how the other side is doing. “Ask questions and really care about what they have to say,” he says. “And, based on what they say, come up with a solution that might be a win-win solution for both sides.”