My Carwash Appraisal Situation

[BBE]

Hi all-

I'm a second generation carwash operator who's family company has now been in business for 34 years. We recently expanded from 1 to three locations a few years ago, and are now looking to acquire a 4th location. The 4th location is considerably higher volume, higher traffic area, etc..

Purchase price is 3 million. Historical revenue shows anywhere from 730-775k a year over the last 4 years. The appraiser used my projected income of 800k, and a cap rate of 10.5 to arrive at a going concern value of 2,850,000. It's a little lower than purchase price, and not thrilled about that, but understand how he arrived at his numbers. The sales comparison to arrive at an RE value on the other hand is where I take some serious issue. And unfortunately in this instance, the RE value is critical to me as this is what my lender is financing against, not financing against the going concern value.

If you have appraised a carwash then I'm sure you know how tough it is to find good comps. This carwash is on a busy intersection with 40k traffic count, doing very good revenue, and is humming along as a nice solid operation. This is not a duress sale, not a fire sale, or any of the above. None of the comps are even anywhere close to what this acquisition is. None of the 4 sales comps are over a million dollars, and none of them have a traffic count above 15k cars a day. So none of these locations that sold are anywhere near what this location is that we are trying to purchase.

There was recently a portfolio of high volume high income washes that sold about an hour north of this location. They sold earlier this year, a portfolio of 6 washes with traffic counts anywhere from 20-45k, with purchase prices anywhere from 2.4 to 6 million. It appeared as if a company called "mister carwash" was the purchaser of these properties, and I was very adamant that these washes be looked into as being used for sales comps as they are far and away the closest comps to the location I am trying acquire. The appraiser used them in the going concern valuation as comps to arrive at price per sq ft of somewhere between 400-640 per sq ft, and had the location I'm trying to acquire valued at 430 a sq ft and says that it is within the range of what this portfolio sold for. Obviously on the LOWER end.

However they were NOT used in the sales comps. I of course asked why, and the response I got was that all we have are the purchase prices of them, which includes goodwill, so he doesn't know how much is allocated to RE. He followed up and called what we believed to be the buyer of this portfolio of washes, mister carwash, and talked to the director of acquisitions, and asked him if there is a general % that they typically tend to allocate to RE when they do acquisitions. And the guy told him that they don't allocate anything to RE. He says because of this, he could not use them as comps.

After the RE value came back at a value too low for me to obtain financing, I did some more research and talked to the seller of this portfolio of washes, and he informed me that actually mister carwash was not the purchaser, another real estate company purchased them, and leases them to mister carwash. This is backed up by the property records online that state that the buyer is "national retail properties" So we now know that the information my appraiser got was obviously false, and wasn't even coming from the company who bought the portfolio of washes. I brought this to his attention and he said that it may change things for him. And he seemed willing to go back and explore using them as comps with probably some assumed RE values. However now he says that his client (my bank) is comfortable with it as is, and that he cannot make an revisions.

Do any of you appraisers have any thoughts on this? It seems to me that if an appraiser is made aware of new information that he was not aware of at the time of doing the appraisal, that it clearly needs to be revised. I would think he would have a duty as an appraiser, and in the interest of giving an accurate valuation to take into consideration new information that he was not aware of before. And also, I'm not sure if any of you would know how this works from a lender's perspective, but wouldn't this also be the case for a lender?

 

[Terrel L. Shields]

Those of us who have seen the debacle of million dollar carwashes going kaput tend to consider the highest and best use to be something besides a car wash. I can't argue with success but we've had two in my town of 15000 go belly up. One, not 10 years old, was taken down and replaced by a Chinese carryout. In my MSA region I suspect 70% failed between 2010-2014. And most were razed and replaced with something else.

 

[BBE]

Well, I won't get into any debates on that, us long term operators saw the same thing you saw, and we continue to see people who are sold on the idea of carwashes being "cash cows" only to overbuild, overpay, and go belly up. Happens ALL of the time, that's why 90% of carwash sales are distress sales in some form or fashion.

In this instance however it was determined that the best use of the property was as a carwash, so rather than debate the volatility of the carwash business, would like to just stick with the facts of the appraisal.

 

[Howard Klahr]

In lending transactions, the lender is the appraisers client and the report is prepared for them. As a result, the appraiser is somewhat bound to their direction in regard to the appraiser making changes to the report and continuing to work on the report. Based on what you've indicated so far the level of comunication between you as the borrower and the appraiser has already gone beyond that of what is allowed under government regulations.

Keep in mind that the value of the real estate will always be less than the value of the going concern. Having said that you may want to look for another lender and go through the process again in hopes of achieving a better result.

 

[Gobears81]

Hi all-

I'm a second generation carwash operator who's family company has now been in business for 34 years. We recently expanded from 1 to three locations a few years ago, and are now looking to acquire a 4th location. The 4th location is considerably higher volume, higher traffic area, etc..

Purchase price is 3 million. Historical revenue shows anywhere from 730-775k a year over the last 4 years. The appraiser used my projected income of 800k, and a cap rate of 10.5 to arrive at a going concern value of 2,850,000. It's a little lower than purchase price, and not thrilled about that, but understand how he arrived at his numbers. The sales comparison to arrive at an RE value on the other hand is where I take some serious issue. And unfortunately in this instance, the RE value is critical to me as this is what my lender is financing against, not financing against the going concern value.

If you have appraised a carwash then I'm sure you know how tough it is to find good comps. This carwash is on a busy intersection with 40k traffic count, doing very good revenue, and is humming along as a nice solid operation. This is not a duress sale, not a fire sale, or any of the above. None of the comps are even anywhere close to what this acquisition is. None of the 4 sales comps are over a million dollars, and none of them have a traffic count above 15k cars a day. So none of these locations that sold are anywhere near what this location is that we are trying to purchase.

There was recently a portfolio of high volume high income washes that sold about an hour north of this location. They sold earlier this year, a portfolio of 6 washes with traffic counts anywhere from 20-45k, with purchase prices anywhere from 2.4 to 6 million. It appeared as if a company called "mister carwash" was the purchaser of these properties, and I was very adamant that these washes be looked into as being used for sales comps as they are far and away the closest comps to the location I am trying acquire. The appraiser used them in the going concern valuation as comps to arrive at price per sq ft of somewhere between 400-640 per sq ft, and had the location I'm trying to acquire valued at 430 a sq ft and says that it is within the range of what this portfolio sold for. Obviously on the LOWER end.

However they were NOT used in the sales comps. I of course asked why, and the response I got was that all we have are the purchase prices of them, which includes goodwill, so he doesn't know how much is allocated to RE. He followed up and called what we believed to be the buyer of this portfolio of washes, mister carwash, and talked to the director of acquisitions, and asked him if there is a general % that they typically tend to allocate to RE when they do acquisitions. And the guy told him that they don't allocate anything to RE. He says because of this, he could not use them as comps.

After the RE value came back at a value too low for me to obtain financing, I did some more research and talked to the seller of this portfolio of washes, and he informed me that actually mister carwash was not the purchaser, another real estate company purchased them, and leases them to mister carwash. This is backed up by the property records online that state that the buyer is "national retail properties" So we now know that the information my appraiser got was obviously false, and wasn't even coming from the company who bought the portfolio of washes. I brought this to his attention and he said that it may change things for him. And he seemed willing to go back and explore using them as comps with probably some assumed RE values. However now he says that his client (my bank) is comfortable with it as is, and that he cannot make an revisions.

Do any of you appraisers have any thoughts on this? It seems to me that if an appraiser is made aware of new information that he was not aware of at the time of doing the appraisal, that it clearly needs to be revised. I would think he would have a duty as an appraiser, and in the interest of giving an accurate valuation to take into consideration new information that he was not aware of before. And also, I'm not sure if any of you would know how this works from a lender's perspective, but wouldn't this also be the case for a lender?

I may have misread, but am I understanding correctly that the appraiser used a set of comparable sales to value the real estate, but considering additional sales such as that mister carwash for the going concern value?

 

[Elliott]

Portland, Oregon had a car wash king, Kaddy Kar Washes. He was a successful businessman, probably had 12 to 20 of them in Portland. Then some out of town sharpies said, hey, here's a deal, we will buy them for $12 million, or whatever, and it was the biggest mistake he every made. Totally busted his business, his business partners were full of debt, made him go through bankruptcy, and he was left with one car wash. Be careful out there. Everything I know about car washes I learned from Breaking Bad....I like the cash flow aspects.

 

[Terrel L. Shields]

I'm a second generation carwash operator who's family company has now been in business for 34 years

so rather than debate the volatility of the carwash business, would like to just stick with the facts of the appraisal.

Your superior management cannot be quantified within real estate alone. I might argue that the value of the land "as if vacant & available for its highest and best use" is not supported by market evidence although your management can support paying for it. Your willingness to pay that much aside, the appraiser is working for a bank that probably prefers a more conservative approach and the appraiser is assuming typical, not superior, management.

 

[leasedfee]

Do any of you appraisers have any thoughts on this? It seems to me that if an appraiser is made aware of new information that he was not aware of at the time of doing the appraisal, that it clearly needs to be revised.

I throw out all portfolio sales in my first screening. There's too much going on and too little proprietary information available to relate it specifically to a subject. It's just mushy nothingness.
. . . . .
I tended to rely heavily on the cost approach minus physical depreciation to isolate the real property elements as I could directly see what was going on . . . . . Income approaches are notoriously unreliable. Hearsay said some operator in Kansas skimmed 33% of the cash to avoid taxes. It is impossible to gather data unless an appraiser does a steady business of car wash appraisals. When I was with a 15 person firm, I appraised nearly all of the car washes for this firm, so I built up a great spreadsheet of data. Today, as a lone-wolf appraiser, I haven't done a car wash in nearly a decade and have zippo data.

Car washes in strong locations may have a huge business value premium because there is no competition -- yet. For example, in a small town a 4-bay wash generated going concern value of 6 bays. Free money of 2 bays worth of demand -- and only they knew it. Nobody was going to build another wash until somehow they perceive that the other guy was makin' a killin' and that the town's demand supported 8+ bays. Being a small town, supply came in increments of 4-bay facilities (two bay facilities have a bad economy of scale here, and 1 bays at c-stores are a different psychographic). However, once that day arrives that economic demand is for 8 or more bays and another 4-bay wash is built, then the demand will be 8-bays with a supply of 8-bays. The going concern premium is now zero. Heaven help them if a third-party miscalculates and builds a 4-bay facility when the town demand only supports 7 bays. The person with deeper pockets wins. The same dynamic holds on a busy thoroughfare in metro-Denver. The wash owners were doing awesome but were furious that my colleague didn't capitalize in perpetuity this going concern.

 

[Michigan CG]

I am going to move this to the commercial section of the forum as there will be a lot more responses.

My initial response would be to agree with the below:

I throw out all portfolio sales in my first screening. There's too much going on and too little proprietary information available to relate it specifically to a subject. It's just mushy nothingness.

Today, as a lone-wolf appraiser, I haven't done a car wash in nearly a decade and have zippo data.

I am a one person business in Michigan and the amount of time to research is not worth a fee I could attain. If contacted for such an assignment I would refer it to someone else.

On a side note, we have a 6-bay car wash on the busiest street in town, about 30,000 cars per day ADT and it has been for sale for a couple years. My guess is the Highest and Best Use is to be vacant land for this one.

 

[Gobears81]

I remember disagreeing with a poster a few months ago on a mixed-use car wash facility, as he felt that the business income shouldn't be considered, due to concerns that it could overstate the value. A few weeks after that discussion, I appraised a self-service car wash that had been marketed for about 15-months at less than 10% higher than the contract price. When analyzing the characteristics of the sales comps, relative to the subject, the price stacked up, but the financial performance suggested a considerably higher value. In particular, it sold for roughly 2x gross and 4x EBITDA, while the metrics that I had suggested a much higher value based on the analysis of business value performance. I thought about all of the potential issues (equipment going bad, broker marketing to the right people, is there another car wash coming in, etc.). But, everything seemed to check out. This business keeps you on your toes sometimes. That is an example where I still believe that I am fundamentally correct in the original discussion, but maybe the person that I disagreed with would have come out right at the selling price by disregarding the prior performance.