By James Mitchell, Cushman & Wakefield
You are thinking of selling your dealership, bringing in an equity partner or refinancing your real estate, so you need a valuation. Where do you start? The first step is to decide how close you want the value to be to a number that is likely to have credibility with a buyer, partner or lender.
If you want a “ballpark” number to help you think through whether you even want to do a transaction, the easiest and cheapest approach is to get a broker’s opinion of value (BOV) from a local commercial real estate broker, which typically costs between $500 to $1,500. The BOV should give you a good idea of your property’s worth, based on the agent’s local market knowledge and sales of comparable properties.
If you are pretty sure you are going to do a transaction and want an appraisal that is going to carry some weight in a negotiation, you need to retain a company with automotive real estate experience. The premier appraisers in the automotive industry are Cushman & Wakefield (C&W) and CBRE, Inc. (CBRE). Besides experienced staff, both organizations have a large database. Consequently, when lenders decide to get their own appraisal, they commonly contract with either C&W or CBRE. Each is well regarded; however, C&W also has a team capable of appraising dealership furniture, fixtures and equipment. The per dealership fee for an appraisal ranges from $5,000 to $6,500.
Valuation is more of an art than a science. There is, however, a generally accepted valuation methodology that the national appraisers use, based on a combination of three approaches: Sales Comparison, Cost, and Income Capitalization.
“Sales Comparison” looks at what other similar properties have sold for on a per square foot (psf) basis and then multiplies that metric by your store’s square footage. The national average sale price for dealer real estate is about $280 psf. Under this approach, a 10,000-sf building would be valued at $2.8 million.
The “Cost” approach creates a valuation based on the sum of the market value of a dealer’s land plus the estimated replacement cost to construct the building, including improvements, (lighting, pavement, landscaping, etc.), less depreciation. The replacement costs are derived from Marshall and Swift (M&S) tables that provide the average psf cost broken down by function – showroom, service, body shop, etc. There is a chance the actual cost of your building will be higher than the composite built from the M&S tables, so you may find it difficult to recoup that extra cost. Thus, if you have a 10-acre lot, valued at $800,000 per acre and a 40,000-sf building your real estate valuation based on this approach would be $8 million for the land (10 acres x $800k per acre) and $4.4 million for the building (40,000 sf x $110 psf) for a total valuation of $12.4 million.
Valuation based on “Capitalization” is determined by applying a “cap rate” to the annual rental expense. If, for example, you internally charge your dealership $1 million annual rent and the market cap rate is 7%, then the value of your real estate based on this method is $14,285,714 ($1 million / 7%).
Once an appraiser has developed valuations based on a combination of these methodologies, the appraiser will blend them together to arrive at a fair market value. Because the appraisal process is subjective, it is critical that you retain a company with a good reputation, an experienced stable of experts, and comprehensive, current data.
A BOV from a nationally recognized appraiser gives you an estimated value of your property, but lenders will not use it to determine how much you can borrow. The lender will most likely insist on getting its own appraisal. The good news, however, is that many lenders get their appraisals from C&W or CBRE.
If you are only interested in refinancing your property, don’t waste your money; let the financing institution order its own appraisal. A federally regulated lender will only accept an appraisal from an appraiser possessing a Member of the Appraisal Institute (MAI) designation, which certifies attainment of the highest standards.
Keep in mind, if your real estate is part of a dealership sales agreement, the valuation a lender will use to determine how much it will lend usually will be the lower of the valuation stipulated in the sales contract or the MAI appraisal.
Cushman & Wakefield Dealership Capital Services (DCS) specializes in buy/sell transactions, partner buyouts, equity solutions, debt restructuring and sale-leasebacks. James Mitchell has over 20 years of automotive industry experience. He can be reached at james.s.mitchell@cushwake.com or (202) 407-8120.
