Real estate

Auto dealerships face uncertain times, but real estate endures

Some reports indicate that 2022 will likely be the most profitable year for dealerships, but storm clouds are building. Dealerships face extraordinary financial challenges and uncertainty after record years. Inflation, interest rates and the consumer price index are all testing new highs every month, creating headwinds for consumers and making dealerships more expensive to operate.

At the same time, automakers are placing unprecedented demands on dealerships as they scramble to meet ever-changing market challenges. In September, Buick offered to buy out any U.S. dealership that was unwilling to make the infrastructure investments necessary for the upgrade. Ford Motor Co. is offering dealers the opportunity to become a certified electric vehicle under one of two programs – with investments of $500,000 or $1.2 million.

There has never been a less predictable time.

The unsung asset?

Real estate remains the only constant in this mix of uncertainties, and many dealers are beginning to notice this. Although the sale-leaseback model is attracting greater interest, it is not a new concept. It’s a strategy that has been used successfully in almost every industry for decades. Companies such as Taco Bell and FedEx take advantage of the flexibility by withdrawing equity from their real estate and using the capital to reinvest in expansion and other financial priorities. Legacy Automotive Capital, which joined the business in 2019, focuses solely on specialized sale-leaseback capital for the automotive retail industry.

It couldn’t have come at a better time. According to Legacy, most dealerships earn an average of three times more on operating companies than on real estate. “This is an area overlooked by owners and operators,” said Todd Marcelle, chief investment officer at Legacy. “Best run groups like Penske, Asbury and others are all leveraging sale-leasebacks to financially organize more profitable buy-sells and reduce balance sheet risk.”

By engaging in sale-leaseback transactions, dealers can extract up to 140% of the value of real estate when buying-selling, or de-risking their current holdings, Marcelle added.

The timing and market uncertainty make this opportunity ideal. Whether they want to drive expansion, raise capital, or simply take chips off the table, sale-leaseback offers flexibility and autonomy. It allows dealers to maintain control of their property while extracting cash, which is very attractive in today’s market when looking for cash or evaluating estate planning and exit strategies.

Former executives say that from an estate planning perspective, a sale-leaseback can allow the dealership to redistribute the equity locked up in the real estate among multiple family members without disrupting the dealership’s operations. If the concessionaire wishes to sell the real estate and operations, a higher overall value can be realized by selling these entities separately. Real estate monetization also allows dealerships to diversify their family’s exposure to the automotive industry.

No one knows what the next 24-36 months will bring, but the one thing that offers some sense of stability is the real estate piece of the puzzle. It’s the only constant.