Auto Dealership Assignment - Also Requested Opinion Of Rent Amount

[Maineiac]

I’ve been asked to do an appraisal on a auto dealership for estate tax purposes. That’s all well and good and I’ve found some sales comps, but I’m in a quandary on the additional request to provide an opinion of rent amount (likely to be used between related parties for accounting purposes).

Because franchise-level auto dealerships are owner-occupied properties, not investor-owned, there are no arms-length market leases to consider. (Any leases that may exist between related parties/entities are not arms length and usually private.)

In the alternative, I’m considering applying a capitalization rate to my opinion of property value, to calculate an annual rent income amount. Is that a crazy idea? Any advice? Thanks...

 

[Gobears81]

I have also found the income approach to typically be the least reliable of the three approaches, or at least less reliable than the sales comparison approach for this type of property. With that said, there are leases out there. I have seen numerous leases that are over market, which is often related to non-realty assets, as well as some that are under. There is a lower degree of market efficiency in this type of lease than say, warehouses. But, they can be found, and if memory serves me correct, every auto dealership that I've appraised in the past 3-4 years included the income approach.

Naturally, I would be inclined to deter from multiplying a cap rate on the property value to determine rent. If you don't have rent support, then you probably don't have cap rate support. With that said, I typically use a lower cap rate on this type of property than say, office or Class B/C retail buildings. But there are always exceptions to the rule and given the variance between our two markets, I'd take the aforementioned statement with a grain of salt.

 

[Red Flint]

Apply an office lease rate for offices/showroom and a rate for light manufacturing/industrial/warehouse rate to vehicle service areas, paint booth, and parts inventory. Easiest to apply a triple net lease scenario to avoid a detailed accounting of reimbursements within the rent opinion, especially CAM.

 

[nstanbru]

Naturally, I would be inclined to deter from multiplying a cap rate on the property value to determine rent.

I agree with this statement especially in light of the definition of an OAR.

 

[nstanbru]

I have appraised auto dealerships that were leased facilities. It might be different in your area, but the leases were ground leases. The annual base lease rate, per the terms of the lease, were based on a % of the opinion of value of the underlying land. I don't know if this will work for your situation, but it might be worth a look.

 

[hastalavista]

Apply an office lease rate for offices/showroom and a rate for light manufacturing/industrial/warehouse rate to vehicle service areas, paint booth, and parts inventory. Easiest to apply a triple net lease scenario to avoid a detailed accounting of reimbursements within the rent opinion, especially CAM.

(My bold)

Question: Assuming a vacancy rate is applied, how does the analysis account for the expenses that are not reimbursed during the vacancy period?

 

[Howard Klahr]

especially CAM.

So what CAM applies to single tenant facilities?

In the alternative, I’m considering applying a capitalization rate to my opinion of property value, to calculate an annual rent income amount. Is that a crazy idea? Any advice? Thanks...

Where would you derive your cap rate? If based on surveys and sales there would be lease comparables. If you are using a band of investment or other similar methodology all the resulting rent would be is the result of your calculation as opposed to "market" derived.

(likely to be used between related parties for accounting purposes)

Have you inquired specifically why the client needs the rental amount? If your suspicion is correct, then the calculation/allocation may be all that is needed.

 

[Michael S]

I appraised a proposed auto dealership about a year and a half ago and included an income approach. I looked at it three ways: rent comparables, return on construction cost, and occupancy cost.

The rent comparables were best analyzed on a total amount per month. No dealer will say they pay $15.64 per square foot they'll say they pay $20,000 per month. I found rents ranging from $12,000 per month for a 13,000 square foot former Saturn dealership in a small city to $90,000 per month for a 10-year old Toyota dealership that was almost 40,000 square feet. ($11 - 28/SF approximately). A BMW or Mercedes dealership will have a higher rent than a Ford dealership all things being equal. That's due to higher sales per square foot (more expensive cars and services) as well as generally have more expensive buildings due to higher standards from the franchisor.

Rent based on a percentage return of construction cost will probably fall between 7-10%, possibly lower with interest rates and cap rates still so low. Not a lot of data on this but a developer isn't going to build a multi-million dollar auto dealership to get a 4% return, nor will they be able to get a 13% return if there's any sort of competition in the market.

Occupancy costs can be found in the latest NADA Dealership Financial Profile (Google it, they put out monthly reports and I believe they're free - may require registration). At the time it was 0.95% of total sales (new and used cars, parts, service, etc.). So a dealership with total sales of $20 million a year will typically have an occupancy cost (i.e. rent) of $190,000 per year or $15,833 per month.

Cap rates were few and far between but at the time were generally in the 8-9% range for 10-15 year leases with annual escalations of 1-1.5%.

Good luck, I'm just about to appraise another auto dealership but luckily they aren't requiring an income approach, just cost and sales.

 

[DREA Dean]

I have appraised numerous car dealerships in three markets, and can count on one finger the number of arms-length leases I've seen. I never do the income approach when I appraise car dealerships. I would have a discussion with the client about what they need and what you might need to do to arrive at an answer. Looking at NNN rent as a percentage of property value or as a percent of business sales are both valid techniques, but you would have to analyze the dissimilarities when looking at retail and industrial properties compared to a dealership. I would include some extra limiting conditions, as well as explanatory verbiage in the scope of work section so that everything is apparent and disclosed in the report.

 

[Michael S]

Just a follow up to my post above. I placed pretty much no weight on the income approach, it was simply a requirement of the client. I've had other clients ask me to come up with an opinion of market rent only just as a test of the viability of the dealership based on occupancy cost.