The Sale-Leaseback Inflection Point in Automotive Retail

In a challenging market environment due to higher debt service and lower profits, car dealership owners need a liquidity solution – the sale-leaseback inflection point. Sale- leasebacks not only offer liquidity, but also agility. It’s a strategy that allows dealers flexibility for growth without feeling the pressures and limitations of capital constraints and debt covenants.

Dealerships are valued on pre-tax earnings, using a multiple range tied to the dealership’s brand and intrinsic value – this is referred to as “Blue Sky” or goodwill. From 2019 to 2021 dealership profits rose from $2M to over $6.7M – a 335% increase to pretax earnings. Because of that, in recent years many dealers opted for high Loan-to-Value (LTV), variable rate loans to acquire businesses and real estate during a period of record-high valuations.

Fast forward to today, these dealers are facing a stark reality: their businesses are now valued 20-30% lower, debt servicing costs have doubled, and profits are gradually stabilizing back to pre-pandemic levels. This shift reflects the challenging landscape many dealers find themselves navigating – a constrained balance sheet and “negative equity” in their dealerships

A sale-leaseback involves partnering with reliable capital to fund the real estate portion of a buy-sell or purchase the underlying real estate of currently owned dealerships.

Sale-leaseback cap rates – the cost of capital associated with these transactions, is typically at or below the available interest rates from traditional debt providers.  Depending on the operator’s creditworthiness, loan-to-value (LTV) ratios can range from 100-150% of the appraised real estate value. Sale-leaseback capital is highly accretive due to the spread that is often found between blue sky and sale-leaseback multiples. Blue sky typically multiples range from 3-10x, depending on the brand and its recognition. A sale-leaseback can yield multiples between 11-16x, making it a lucrative source of financing, free from financial covenants and other restrictive debt terms.

Key Takeaways:

• Strategic Liquidity Solution: Sale-leasebacks serve as a crucial liquidity solution for car dealership owners, offering strategic agility for growth without the burdens of capital constraints and debt covenants.
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• Evolution from Traditional Financing: Transitioning from high Loan-to-Value (LTV) loans to sale-leasebacks has become essential strategy as dealers cope with reduced valuations, increased debt servicing costs, and gradually stabilizing profits, reflecting a shifting financial landscape.
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• Capital Collaboration through Sale-Leasebacks: Sale-leasebacks involve partnering with trusted capital sources to fund the real estate portion of buy-sell transactions and existing property holdings, ensuring a stable capital structure for dealers to take advantage on growth opportunities.
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• Lucrative Financing Advantages: Sale-leasebacks exhibit competitive cap rates below traditional debt providers’ interest rates, offering highly accretive capital with notable multiples between 11-16x.