Should a dealer own or lease the dealership's property? Investment in real estate can involve time, expertise, lots of capital and a degree of risk.
I pose the own-lease question to a client who has traditionally been an investor in his dealership's real-estate locations.
I also ask it of Jay Ferriero, senior vice president and director of acquisitions at Capital Automotive, the largest landlord of auto dealerships, with more than $3.5 billion invested in North America. Often, firms such as Capital buy land on which dealerships are located, and lease it back to the dealers.
My client says he prefers to own his dealership land for several reasons. Among them:
- It is part of the American dream to own property.
- He has always done well with real estate investments.
- He is in tune with the market conditions and locations of his dealerships so he does not see much risk.
- He feels it is a useful estate planning tool.
- He likes the ability to move ownership to children easily due to owning the real estate. He feels it is more difficult to move dealership ownership to them because of factory approval constraints.
- Capital or equity for investment has not been a concern for him due to his conservative growth strategy. He concedes a more aggressive franchise-growth strategy would probably require some leasing.
- He likes the level of control ownership offers him.
Ferriero touts the pros of leasing, citing these advantages:
- There is a reduced risk of total dealership investment.
- It strains capital demands less.
- It allows dealers to focus on franchise operations.
- It frees capital to invest in more dealerships or other business operations.
- Acquiring more franchises allows for diversification, which reduces risk of one franchise losing value and bringing down the entire group.
- It is an easier exit strategy if real estate is not involved. Many times real-estate problems can stop a buy-sell transaction.
- You should consider your investment options. If the average dealership property is several million dollars, is this the best investment for you at this time? Or would another investment make a better business plan?
- Most real estate loans generally require the dealer's personal guarantee or other liens on business assets that can tie up borrowing capacity.
Like all business decisions, there is no clear-cut, one-size-fits-all answer. Seek advice of your closest advisors such as your attorney and accountant. Some of the questions you should ask yourself are:
- What is my tolerance for risk?
- How flexible is my capital and debt availability? Generally, financing of real estate requires up to 20% equity. Is this within my reach?
- What is my growth strategy? Conservative or aggressive? Do I plan on numerous dealership investments or only a single point?
- Understand the local real-estate market of your dealership. Has it peaked in value? Do the demographics indicate a growth opportunity? Single-purpose buildings, such as a dealership, can become difficult to market in a down turned economy.
- What is my exit strategy? It is not too early to think about the exit plan as you are acquiring.
- Consider factory requirements. With auto makers demands for updated facilities, costs escalate. How does this affect my investment decision?
- Is the real estate location sustainable for my dealer business? Leases have expiration periods where you can walk away from a property that is too small or no longer a good location or because your facility is obsolete.
Final words of wisdom:
Do your due diligence and only lease from a qualified landlord.
If you prefer ownership, seek professional advice on the proper structure. Get it right on the front end of a transaction rather than try to fix it later.
John A. Davis is a CPA with Dixon Hughes PLLC. He's at 404-575-8910 and [email protected].