Laundromat and dry cleaner financing: machines, leases and contamination

Two businesses that share a storefront and share almost nothing else financially. A laundromat is an equipment and utilities business with no labour to speak of and no receivables. A dry cleaner is a labour business with a chemical history attached to the property. Financing follows those differences precisely.

Replace the equipment: 42 washers and 38 dryers at 285,000, financed over 84 months at an illustrative 9.25 per cent. Payment 4,622 a month, total of payments 388,217. Cash after the equipment payment: 4,378 a month.

Note what that sensitivity means. A 10 per cent rise in utility cost is 960 a month, 11,520 a year, and it takes 22 per cent of the remaining cash. There is no labour line to cut and no price increase that customers do not notice immediately. A laundromat's credit quality is mostly a bet on utility rates and a lease.

The lease is the collateral

Washers and dryers are plumbed, vented and often bolted to a slab. Once installed, the argument about whether they are goods or fixtures is live, and the answer decides whether an equipment lender can actually recover them. Beyond that, a laundromat without its location is a pile of used machines; the value is the lease, the plumbing capacity, the gas service and the parking.

Consequences:

• Lease term should exceed the finance term. A seven-year equipment contract against a four-year lease with two options is a mismatch, and lenders will either shorten the term or decline.
• Get a landlord waiver covering access and removal. Without it, the lender's security interest is theoretical.
• Assignment rights matter for exit. A lease you cannot assign is a business you cannot sell, which is also the lender's problem.
• Check who owns the water heater, the boiler and the utility infrastructure. In many older buildings these are landlord property, and replacing one is a capital expense you cannot finance as equipment.

What financing options exist

The contamination problem

Dry cleaning has historically used perchloroethylene, a chlorinated solvent. Releases from older equipment, from sewer lines and from waste handling have contaminated soil and groundwater at a large number of sites, and the cleanup obligation attaches to the property and can attach to operators and to past owners under federal and state environmental law.

For a lender, that means the real estate underwriting starts with an environmental assessment. A Phase I environmental site assessment is a records and site review. If it identifies a recognised environmental condition — and a current or historic dry cleaning tenancy usually does — the lender requires a Phase II, which involves sampling. A positive Phase II changes everything: the lender may decline outright, may require remediation before closing, or may require an escrow, an indemnity and environmental insurance.

Two points worth stating carefully. First, federal law contains a secured creditor exclusion from owner or operator liability under CERCLA, at 42 U.S.C. 9601(20), which protects a lender that holds a security interest primarily to protect that interest and does not participate in management. It is a real protection and it is narrower than lenders would like, particularly around foreclosure and post-foreclosure conduct — which is exactly why they are cautious. Second, a number of states operate dry cleaner remediation funds financed by industry fees, with eligibility rules that differ substantially. Whether a site qualifies for a state programme can be the difference between a financeable property and an unfinanceable one. Check the current programme in your state.

Practical consequence: a dry cleaner that has converted to alternative solvents or to a drop-store model with no on-site cleaning is a materially easier credit than one running solvent equipment on a leased slab with forty years of history under it.

The diligence list before you buy either business

1. Twelve months of utility bills, not an average. Seasonality and rate changes are the whole cost structure in a laundromat.
2. Meter readings against claimed revenue. Water consumption and gas usage are a physical check on a cash business's reported turns. A laundromat claiming 34,000 a month on water consumption that implies 22,000 is telling you something.
3. Machine age, by unit, with maintenance records. A 42-machine floor with an average age of eleven years is a capital plan, not a purchase.
4. The lease, in full, with remaining term, options, escalation, assignment, and who is responsible for plumbing, sewer and mechanical systems.
5. A Phase I environmental assessment on any property with dry cleaning history, before you spend money on anything else.
6. Card system contracts. Payment system providers sometimes have long agreements with revenue-share terms that transfer with the business.
7. Sewer and water capacity, and any municipal surcharge for high-volume users. Some jurisdictions bill sewer on water consumption at a multiple.

What to ask for and what to refuse

Ask the equipment finance company for the end-of-term position in writing — whether you own the machines outright, owe a purchase option, or face an automatic renewal. Ask your landlord for a waiver and for an assignment provision before you sign the lease, not when you sell.

Refuse to buy a dry cleaning property without a Phase I, and refuse to accept a seller's assurance that the site is clean because a previous assessment came back fine. Refuse an equipment term longer than the lease you actually control, including only options you have a real economic reason to exercise. And in a laundromat, refuse to underwrite the purchase on revenue that the utility bills do not support.