Laundry Room Issues - How commissions are paid to your property

[Michael Calderaro]

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....

1. 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.  
2. 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.
3. 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!