How to Maximize the Value of Your Dealership Real Estate
What do the changes in the car-sales business mean for dealership property values?
It’s a cliché we hear in gags, see in cartoons, and read in articles: how to outsmart, outplay, and out-negotiate the car salesperson. But with today’s amenities like fancy coffee bars, bright retail stores, in-house restaurants, free Wi-Fi, and satellite TV, consumers no longer fear the auto-buying experience.
Following the free-fall of the economy during 2008–2009 and its subsequent recovery, the auto sales trade has come back with a resounding bang. The National Automobile Dealers Association (NADA) forecasts that 17.1 million new and 15.3 million used cars and light trucks will be sold in 2017.
Although this is down slightly from the all-time record set in 2016 of 17.5 million, NADA suggests that despite political unknowns going into 2017, the outlook is poised for growth. And the overall economy is expected to improve, with increases in gross domestic product and decreasing unemployment.
Increased revenues have allowed for franchise dealers to improve their real estate to conform with manufacturers’ brand requirements. But how does this translate to the value of the real estate from which these businesses operate?
New demands, more property tax
Today’s buyer has a plethora of resources to research, select, and purchase a car. Online changes to the buying process have created an open market where buyers in Utah, for example, can find their desired car in Indiana. But with the average American holding onto their car longer than ever (an average of 11.5 years, per HIS Automotive), the new-car-buying experience must be memorable.
Automotive brands have caught on to these buying trends. In the anticipation of bringing customers through the door, manufacturers are demanding dealerships be outfitted with the latest in “while-you-shop” entertainment, dining and coffee areas, comfortable lounges, and private offices.
Big brands are requiring uniform architecture components via a reimaging process of building renovation and façade changes on an increased schedule. Unfortunately, this can mean an investment or capital expenditure for the owner and operators of the real estate on items that may not have come until the end of their economic lives (for example, the painting of the showroom from light beige to a more trendy light gray).
For dealerships, this begs the question: What do these kinds of changes mean for property value? Your local assessor relies on building permits to get information about your property, and increases values accordingly.
Therefore, brand refreshes such as replacing light-gray floor tile with smoke-gray floor tile may be necessary, but they do not increase your property value. Alternatively, an addition of building a new service bay to protect customers from bad weather does increase your value.
Having an advocate review these changes can have an impact on the bottom line.
Out with the old, in with the new
The closure of thousands of dealership buildings during 2008–2009 has resulted in continued vacancies and increasing holding costs for owners. The sale of these properties may be considered land sales, and should be analyzed appropriately for use in valuing dealership properties.
Dealership properties are uniquely desirable because they are typically built on level topography, cover five-plus acres, and sit on or near a major freeway, with desirable ingress, egress, visibility, and traffic counts. The redevelopment of these sites into retail use, apartment, mixed-use developments, hotels, and other high-density plans can result in the beautification of an area.
But, what happens to the property as it continues to sit vacant, waiting for the right buyer, and then during the sale as the buyer obtains applicable licenses, necessary zoning changes, and city approvals to come through? These locations become magnets for vandalism, damage, and defacement.
Assessors include the value of buildings on the assessment roll that are vacant and unutilized. Does a building slated for demolition have value? Yes, but it may be minimal.
Additional factors like a change in the highest and best use of a site can affect the value of the buildings. Lastly, the assessor’s mass appraisal process does not adequately address items of deferred maintenance and other property-value issues directly impacting your location.
What about new construction?
With the U.S. economy improving, auto dealers are competing for prime land sites for redevelopment with other retail and multi-use developers. To meet consumer location demands, developers are taking advantage of infill developments and redevelopment opportunities.
With rising land values in high-density areas, however, dealership designers are forced to be more creative to accommodate smaller land parcels. The development of a new property is an exciting process.
One of the greatest fixed costs for any operator of real estate is property tax, however. Appropriate disclosure of hard and soft costs—and review of special-use features and their value in an open—are key to maintaining favorable real estate assessments.
How can dealerships keep an eye on their property values and real estate tax expenses? The following are some important factors to keep in mind.
- Most assessing jurisdictions review property values on an assessment schedule. Depending on state statues, this schedule can vary from one to more than eight years. It’s important to challenge the assessment at the time of revaluation.
- Be mindful of states that differentiate between real property, personal property, and leaseholds. Have a firm understanding of the classification of property, and be sure to avoid duplicates.
- Understand the appeals process. Although mass appraisal is the preferred, and generally accepted, appraisal method used by tax assessors, the particular details of a property will not be addressed.
- Report property changes, renovations, and repairs appropriately. The appropriate, upfront disclosure of a like-for-like facelift can alter how the assessor values a change.
Most importantly, dealers should seek the professional advice and guidance of a licensed property tax consultant who can guide their planning, predevelopment, and year-over-year changes.
Managing director Chris Richter and vice president Steve Graham work at Duff & Phelps in the property tax practice, are located in the firm’s Dallas-Addison office, where they specialize in property tax appeals and compliance for commercial real estate and personal property, as well as utilities. Duff & Phelps is the premier global valuation and corporate finance advisor, with more than 2,000 professionals located in over 70 offices in 20 countries around the world.