The Best Way to Finance your New Car Wash Project?
All of us in the industry know that car washes are undeniably a great business to open…. Good money, relatively easy to operate, and a steady long-term return on your investment. That’s why so many people new to the industry want to open one, and experienced operators want to open more locations. However there is one big problem as of late… Getting capital investment to finance them. Unfortunately low interest rate bank loans are now gone and likely will not be coming back for quite some time… and way too many banks have been burnt by car wash projects lately, so it will likely be much harder to secure a loan. And unlike the last several years where we all witnessed a massive influx of investment capital flooding the industry, most investment groups have now soured on the car washes and have moved on to bigger and better pastures elsewhere. Bottom-line: The days of cheap and easy-to-find money are over.
But many of you throughout the county and Canada still want to develop new car wash projects, so what do you do? Is there another viable financial option to pursue? Fortunately there is one, and it is known as “Sale-Leaseback”. And for those who have not heard of it before, these types of financial transactions have become very common in commercial real estate over the last 25 years. Many large national chains, such as Walgreens, Home Depot, Wal-Mart, Target, Albertsons, Brinker International (Chili’s Grill & Bar and Maggiano’s Little Italy), Darden Restaurants (Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen), Time Group Holdings, and Bed Bath & Beyond, utilize it as a key component in their business strategy. Over the last decade this type of financial transaction has started to become much more popular in the car wash industry as well. Many big chains, such as Mister Car Wash, see it as a great advantage to rapidly grow their business.
Simply explained, a Sales-Leaseback method of finance is when an owner who owns the real estate (property, building and equipment) of a business, sells the real estate to a third-party investor while continuing to control and operate the business itself. He does this by leasing it back from the investor who purchased it (now becoming his tenant for a designated period of 15 to 20 years), allowing the business owner to free up his original investment capital on very favorable terms to either keep it, reinvest back into the existing business, or to utilize it for new investment opportunities elsewhere.
FINANCIAL ADVANTAGES
A Sale-Leaseback financial transaction can offer several advantages for car wash businesses compared to traditional bank loans when it comes to financing new projects. Here are some potential benefits:
1. Liquidity and Capital Preservation: Sale-Leaseback transactions provide an immediate injection of capital as the business sells its property and then leases it back. This can be advantageous for funding new projects without tying up capital in real estate.
2. Flexible Financing: Sale-Leaseback transactions offer more flexibility in terms of financing structures. Lease terms and conditions can be negotiated to suit the specific needs and cash flow of the business, allowing for greater flexibility compared to rigid bank loan terms.
3. Off-Balance Sheet Financing: Through a Sale-Leaseback, the real estate is taken off the company’s balance sheet, potentially improving financial ratios and making the business more attractive to investors or lenders for other purposes.
4. Mitigation of Market Risk: By monetizing the property and leasing it back, the car wash business can transfer the risk associated with property value fluctuations to the new property owner (the lessor). This can be particularly advantageous in volatile real estate markets.
5. Tax Benefits: Lease payments are typically considered operating expenses, and the business may be able to deduct them from its taxable income. Additionally, the sale of the property can result in potential tax benefits, depending on the jurisdiction and specific circumstances.
6. Focus on Core Business: Car wash businesses can focus on their core operations without the burden of property ownership responsibilities. This allows them to allocate more resources and attention to improving and expanding their core services.
7. No Loan Covenants: Unlike traditional bank loans, Sale-Leaseback transactions often come with fewer or no loan covenants. This can provide more operational freedom for the business without strict financial performance requirements.
8. Quicker Process: Sale-Leaseback transactions can often be completed more quickly than securing a traditional bank loan. This speed can be crucial when the business needs to move swiftly on expansion plans.
Note: It’s important to note that the specific advantages will depend on the individual circumstances of the car wash business, market conditions, and the terms negotiated in the Sale-Leaseback agreement. Additionally, potential drawbacks and risks should be carefully considered, such as the long-term cost of lease payments and the potential loss of property ownership.
COST SAVINGS
The cost savings associated with utilizing Sale-Leaseback financing for a car wash business can vary depending on several factors, including the terms of the Sale-Leaseback agreement, the business’s financial situation, and market conditions. Here are some potential areas of cost savings:
- Capital Release: By selling the property and leasing it back, the business can release capital tied up in real estate. This capital can be used for various purposes, such as funding new projects, expanding operations, reducing debt, or improving liquidity.
- Reduced Upfront Costs: Sale-Leaseback transactions typically involve lower upfront costs compared to traditional property ownership. This can result in immediate savings for the business, as it avoids the need for a large down payment that would be associated with a property purchase.
- Off-Balance Sheet Financing: The transaction removes the property from the business’s balance sheet. While this doesn’t directly reduce costs, it may improve financial ratios and make the business more attractive to lenders, potentially lowering the cost of future financing.
- Tax Deductions: Lease payments are often considered operating expenses and may be deductible from the business’s taxable income. This can result in tax savings for the business, depending on the tax regulations in the jurisdiction.
- Mitigation of Property Value Risks: The business transfers the risks associated with property value fluctuations to the new property owner. If property values decline, the business is not directly impacted, potentially saving it from losses.
- Flexibility in Lease Terms: Sale-Leaseback transactions offer flexibility in negotiating lease terms. The business can potentially secure favorable terms, such as fixed rent or options for lease extension, which can provide stability and potential long-term cost savings.
It’s important to note that while Sale-Leaseback financing can offer cost savings in certain areas, it may also come with costs, such as lease payments over time. The overall financial impact will depend on the specific terms negotiated in the agreement and the business’s ability to leverage the released capital effectively. Before proceeding with a Sale-Leaseback transaction, it’s crucial for the car wash business to conduct a thorough financial analysis, considering both short-term and long-term implications. Consulting with knowledgeable financial and legal professionals can help the car wash owner understand the potential cost savings and make an informed decision based on its specific circumstances and goals.
This concludes a quick overview of Sale-Leaseback financing and its advantages and specific requirements and issues. Obviously we could discuss this topic in considerably greater detail, but my intent was to simply introduce it as an alternative financial method for car wash projects. For those interested, I suggest conducting more research on this financial method on your own and speaking to a qualified financial service company who deal with this kind of transaction.
Christopher Crawford is with Car-Wash-Architect.com. He has written numerous feature articles for this magazine over the last 15 years concerning the design and construction of new car washes projects. You can visit his company’s website for more information about the services they offer, or call them at (561) 212-3364.