When the coronavirus pandemic hit New York, tens of thousands of New Yorkers hit the road. Many are still gone. That means co-op and condo laundry rooms may be getting less use than usual – which translates into less revenue. And that may trigger this little-known provision in a board’s contract with its laundry-room company: if a specified threshold of revenue isn’t being reached, then the company can stop paying monthly fees to the board until it is.
“Some of my luxury buildings are a third or half vacant,” says Ken Jacobs, a partner in the law firm Smith Buss & Jacobs. “These are people who have fled for a while. And the laundry concessionaires are, in fact, invoking that clause from time to time.”
Luxury buildings aren’t the only ones to experience an exodus. Lowered laundry-room use appears to be happening as well in some middle-income buildings, where residents may have relocated to relatives’ homes or where they may be working from home – or not working at all – and washing clothes less frequently.
Alan Warshavsky, a senior account executive at the management company Gumley Haft, reports that at one half-empty building, the longtime laundry room operator made a request: “a 25 to 30% reduction in his rent from April through August.”
It’s not happening everywhere, of course. “Our firm represents about a hundred buildings, from walk-ups to 2,000-unit buildings,” says Michael T. Reilly, an attorney with Norris McLaughlin. “And I work with a lot of outer-borough buildings and affordable-housing buildings. Nobody’s leaving those buildings.”
But managers, attorneys, a laundry-company executive and others surveyed for this story agree that lower laundry-room revenue is a real issue at many co-ops and condos, and therefore boards need to know what to expect and what to do when a laundry company wants to trigger that provision in its contract – sometimes without notice.
“The frustrating part is when they just default on the rent,” says Dennis DePaola, an executive vice president and the director of compliance at the real estate company Orsid New York. “And then we go chasing after it, and then you finally get somebody to respond, and they start their hardship story.”
Contracts Come In Two Flavors
Laundry-room companies generally work with co-ops and condos in one of two ways. After installing washers and dryers and sometimes renovating the room, the companies either pay a monthly flat fee and collect 100% of the machines’ revenue, or they pay no monthly fee and split the machines’ revenue with the building. Some contracts are a mix of both.
Additionally, there are two types of contracts: leases and license-to-use agreements. “It’s easier to terminate a license agreement versus a lease,” says Reilly, the attorney, explaining that a dispute over a lease has to be settled in the landlord-tenant part of civil court. A company that’s licensed to operate a laundry room has fewer rights than a leaseholder. If a dispute arises, the board could seek a declaratory judgment against the licensee as opposed to a time-consuming eviction proceeding.
Most contracts have a provision that if the company’s revenues average less than a certain amount during any three-month period, then the company has the option, after giving the board 30 days’ notice, to terminate the lease or pay a reduced monthly rent retroactive to the first day of the three-month period.
“A lot of these boilerplate leases have provisions along those lines,” says Denise Savino-Erichsen, the president of Automatic Industries, a laundry company (but not the one at Warshavsky’s building). “In very simple terms we cannot pay $2,000 per month if the building is only generating $1,200.”
When a laundry-room company does invoke that provision, a board’s first response should be unequivocal. Orsid’s DePaola tells companies: “If you do have a hardship, you need to document it, and you need to give us proof of your collections.”
What’s the typical response? “You get various stories,” DePaola says. “Some of them provide the collection numbers, and you look at them and see that, yes, there has been an impact in those rooms. In that case, the agreement allows the company to reduce what they’re paying for this period.” If a company balks at providing numbers, contracts almost invariably allow a board to request an audit.
Should the numbers pan out, the board’s next step depends on its relationship with the laundry company. “If the laundry company has been good, then you need to understand where they’re at,” says Warshavsky, the property manager. “You try to make a reasonable business decision and see if you could reduce their monthly payment or make it free for a limited period of time, while you know they’re not getting the income that they expect.”
As with so many business arrangements during the pandemic, boards could also try to negotiate, using creative approaches such as abatements and deferrals. Jacobs, the attorney, cites commercial landlords as a model. “What commercial landlords sometimes do,” he says, “is the tenant asks for a rent abatement and the landlord says, ‘I’ll abate your rent now, but you have to extend your lease term for a year or two.’ A deferral is where the landlord says, ‘Fine, you can reduce your rent, but when we get back to 90 percent occupancy, you can make it up over a year.’ Basically the board is saying, ‘You work with us; we’ll work with you.’ ”
Or as DePaola puts it: “Blend and extend. You cut the monthly payment now, but increase it later in the extended term.”
Amenity or Profit Center?
If all else fails, there’s the unpleasant nuclear option: business leverage. In case of an impasse, as when a laundry company refuses to compromise if circumstances warrant, a board can always announce it’s switching companies when the contract expires. The company could get a “tarnished name” in the insular co-op and condo community, says Reilly, the attorney.
Keep in mind that this works both ways. A co-op or condo board can develop a reputation for being difficult, too, and with the recent wave of consolidation in the laundry-concessionaire industry, there may not be that many companies to choose from in the future. Rather than the nuclear option, Jacobs advises boards to talk with the company about where it wants to be over the longer term in the contract.
One tool in a board’s favor is the fact that managing agents have leverage. Jacobs says, “If your managing agent manages 50 buildings and can recommend laundry companies not just for your building but for other buildings, they can have a private word with the laundry concessionaire, saying: ‘Listen, guys, we’re all trying to get through this. So let’s work something out.’”
There’s a silver lining here. It might not actually cost boards much, if anything, to give the laundry concessionaire a break. “One of the big aspects people forget about,” Reilly says, “is that the buildings almost exclusively pay for all the utilities – the gas, electricity and water. I mean, these are big things.” And, he adds, it brings up a larger question: “Are you making any money on a laundry room? Or are you just providing an amenity?”
Jacobs has an answer: “This is an amenity, not a profit center.”
Savino-Erichsen of Automatic Industries is taking the long view, beyond today’s profits and losses. “I’m a New Yorker,” she says, “and I truly believe that as horrific as this pandemic is, we will be back eventually. It’s a very difficult time to live through, and it’s so sad to see so many businesses failing. But I genuinely believe in my gut that New York will be back.”