By Alysha Webb, Editor and Publisher
Mark Johnson, President
MD Johnson, Inc.
Last week, Capital Automotive Resources announced that it was being acquired by Brookfield Property Partners. The deal is expected to close in the fourth quarter of this year. The agreement is a vote of confidence that the automotive business in the U.S. is on sound footing and that the franchise dealership business model is going to be around for a long time, Mark Johnson, president of M.D. Johnson Inc., told Automotive Buy Sell Report.
Capital Automotive Resources is currently owned by New York-based real estate investment firm DRA Advisors LLC. Capital Automotive buys dealership real estate and leases it back to the dealer. That allows the dealer to use the cash he or she might have put into buying the dealership real estate to a more productive use such as buying another dealership.
Brookfield Property Partners is a New York-based, New York Stock Exchange-listed company that owns, operates, and invests in residential, commercial, and industrial real estate in the U.S. and Brazil. Capital Automotive and Brookfield declined to comment on the deal.
But Johnson said it makes sense for both sides. Brookfield gets a portfolio of long-term leases to balance out its residential, commercial, and industrial real estate investments. Commercial and industrial leases turn over more quickly than dealership leases, said Johnson.
That is because dealership leases are long term and even if an auto dealer wants to move that is often not possible. That makes it harder for the tenant – in this case the dealer – to negotiate a lease rate, said Johnson. So even if the rate is undesirable, “the tenant doesn’t move because of franchise laws limiting relocations that infringe on another dealer’s primary marketing area,” said Johnson.
As for Capital Automotive, it was likely sitting on a lot of leases that are over the market interest rate because rates have been low for so long. But everyone expects rates to begin rising in the near to mid-term. So, for example, if Capital Automotive has leases at 8.5 percent but Brookfield believes 5 percent is an adequate return, then through the sale DRA Advisors profits from the difference in interest rates. “They are monetizing the present value of the spread,” said Johnson.
Factory-owned dealerships are here for the long-term
Capital Automotive has nearly $3.5 billion invested in over 440 dealership facilities and over 16.3 million square feet of buildings over 2,600 acres in 35 states. Brookfield has agreed to pay $4.283 billion for Capital Automotive. The purchase price includes assumption of all existing debt as well as issuance of debt facilities of $400 million to fund the transaction.
This appears to be the first automotive-related investment for Brookfield whose strategy, according to the firm’s website, is “to allocate capital to the most attractive commercial property opportunities around the world.”
When a dealer sells his or her store to another dealer, there is generally a clause in the deal stipulating that if the business fails because of the economy — and the dealer doesn’t file for bankruptcy or voluntarily relocate — he or she doesn’t have to guarantee the lease, Johnson explained.
In the Capital Automotive deal, “the majority of these leases are not personally guaranteed by the dealers,” said Johnson. That means Brookfield would be responsible for the lease if one of the dealerships closed.
Despite the tremors that Tesla’s factory-owned store model is sending through the dealership world, added Johnson, “our clients who own many dealerships don’t give Tesla a second look as it relates to their ability to grow their business or any potential erosion of the franchise system.”
Mark Johnson is President of MD Johnson Inc. based in Enumclaw, Wash. He can be reached at mark@mdjohnsoninc.com or 1-360-825-1756. On Sept. 10 at 1:00pm ET, Johnson will present a webinar on Succession Planning on the NADA website at http://marketing.nada.org/acton/media/4712/sept10.
