Why would a dealer want to sell and lease back an important operating property?
When looking to raise cash for expansion or other purposes, a dealer has a number of alternatives, including selling its real estate and leasing it back to the dealerships through CARS’ sale-leaseback. This allows the dealer to access the capital currently invested in dealership real estate and reinvest it in higher returning investments, while still maintain long-term site control for the dealerships’ operations.
From an estate-planning standpoint, a sale-leaseback may allow the dealer to redistribute equity locked up in the real estate among multiple family members without disturbing dealership operations. Monetizing the real estate also allows dealers to diversify their family’s exposure from the automotive industry.
Additionally, should the dealer desire to sell the real estate and operations, our experience shows that a higher overall value may be realized by selling the real estate and the operations separately.
What types of properties do you purchase?
Capital Automotive acquires new and used automobile retailing sites and related business such as automotive storage lots, body shops, auto auctions, heavy truck, motorcycle and RV locations.
Do you have a minimum transaction size?
Although we primarily focus on transactions involving at least $10 million in real estate, we will consider properties in the $5 million range.
How does Capital Automotive underwrite its acquisitions?
Capital Automotive performs complete due diligence on each acquisition, including a review of the real estate, dealership financials, environmental and structural condition, and a local market analysis.
Do your leases have financial covenants, like my bank loan agreement?
Our leases generally have cash flow and capitalization or leverage covenants that are individually tailored to meet a client’s specific financial situation.
How do you value properties?
Properties are acquired at their fair market value. CARS considers several methods of valuation in arriving at fair market value including review and analyses of comparable property sales, review of MAI appraisals, the alternative uses for the properties, and the financial strength of the prospective lessees.
How are rents determined?
Initial base rents are determined by applying a “Cap Rate”, or rent factor, to the value of the real estate being purchased. Cap Rates are determined by market conditions and various other factors including:
- Current yield on the 10-year Treasury
- Dealer profitability
- Franchise strength
- Lease term
How are rent increases determined?
Rent increases are linked to either increases in the Consumer Price Index (CPI), which may include increase caps or floors, or are established as fixed changes.
Do you require personal guarantees?
No, as a general rule personal guarantees are not required of a dealership’s owners. This feature is significant benefit over traditional forms of financing for owners. Leases are either co-tenanted or cross-guaranteed by the aggregate operations of the dealership group.
The corporate guarantees are unsecured, so they should have no effect on financing with other banks or captive finance companies.
What lease term do you require? Are there renewal options?
Initial base lease terms are generally 20 years. All leases have renewal options exercised at the dealer’s election. Including renewals, the total lease term can be 40 years or more at the dealer’s option. This provides dealers the security of knowing they can remain in their location for the long term.
Can you finance new dealerships and improvements?
Construction financing may be provided concurrent with or subsequent to an acquisition. Similar to a construction loan, Capital Automotive can fund costs as they are incurred or simply fund the entire cost of a project upon its completion.
Will you buy properties that are subject to existing ground leases?
Subject to a satisfactory review of the economics and conditions of the existing lease and the financial condition of the tenant, CARS will acquire properties that are subject to in-place leases.
Will you buy properties that already have a lease in place and how would you value that property?
Yes we buy properties with existing leases in place. Valuation would be determine by looking at many factors including, rental income, escalations, credit on tenant, remaining term on lease, structure of lease (NNN), location of property, condition and age of buildings and improvements.
What is a NNN lease?
A lease where the tenant is responsible for the property taxes, insurance costs, and regular maintenance costs related to the property.