Digital Dealer - January 2018 - 11

...FOR EACH 1% INCREASE IN CAP RATE, THE
AVERAGE DEALERSHIP REAL ESTATE VALUE
WOULD TYPICALLY DECLINE
~10%
ON10%AVERAGE."
7%
8%
9%
11%
12%
$10,567,943

Chart 5)
Concern over rising
interest rates is yet
another reason dealers
are considering a sale of
their properties. Leases
are valued much like a
bond. When interest rates
rise, the value of a seller's
lease income stream
declines. Chart 6 demonstrates that for each 1%
increase in cap rate,
the average dealership
real estate value would
typically decline ~10% on
average. Also, if a property needs to be refinanced,
the seller may experience
a reduction in income if
mortgage rates rise.
Finally, dealers are
concerned about the
single purpose nature of
their real estate. Single
purpose properties are
inherently riskier real
estate investments.
Not only are dealership
properties single purpose,
they are built for a specific
franchise. The conversion from one franchise
to another usually costs
millions of dollars. Rather
than retaining dealership
properties, sellers are increasingly choosing to sell
their real estate and 1031
exchange into lower risk
real estate investments.
An exchange usually allows the seller to maintain
their tax basis and avoid
the payment of capital
gains taxes, minimizing
the tax consequences of
a sale.
While sellers are

$9,246,950
-13%

CHART 6

$8,219,511
-11%

$7,397,560
-10%

$6,725,055
-9%

$6,164,633
-8%

Estimated Average Dealership Real Estate
Values at Differing Cap Rates
$10,567,943
$9,246,950

7%

8%

$8,219,511

9%

$7,397,560

$6,725,055

10%

11%

$6,164,633

12%

Cap Rate
Source: NADA and Kerrigan Advisors Analysis

RATHER THAN RETAINING
DEALERSHIP PROPERTIES, SELLERS
ARE INCREASINGLY CHOOSING TO
SELL THEIR REAL ESTATE AND 1031
EXCHANGE INTO LOWER RISK REAL
ESTATE INVESTMENTS."
increasingly choosing
to sell their real estate,
buyers are often eager to
acquire it. This is in large
part due to today's low
interest rate environment
and attractive mortgage
financing terms. Buyers
also appreciate owning
real estate, primarily to
facilitate financing when
the inevitable OEM image
upgrade is required. If a
buyer does not wish to
acquire dealership real
estate, a REIT, such as
Capital Automotive REIT,
is often eager to step into
the buyer's shoes.

So, to sum it all up, the
buy/sell market remains
as active as ever, with
perhaps a bit more
motivation on the part of
sellers who are stressed
about the imminent future
of auto retail. And, given
those changes, more
dealers seem inclined
today to exit both their
business and their real
estate at the same time.
RYAN KERRIGAN is
Managing Director at
Kerrigan Advisors. Kerrigan Advisors is a leading
advisor to sellers of
higher value dealerships

and dealership groups
throughout the U.S. Ryan
works with Kerrigan
Advisors' private equity
clients advising them on
their auto retail investment strategy and works
with sell-side clients
seeking private equity
exit. Ryan has extensive
experience in both private
equity and auto retail,
having run his family's
dealership. He started
his career at McKinsey &
Company as a management consultant, advising
Fortune 500 companies
on growth strategies,
organizational issues,
pricing and business
valuation. EMAIL: ryan@
kerriganadvisors.com.

D I G I TA L D E A L E R . C O M

JANUARY 2018

11
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Table of Contents for the Digital Edition of Digital Dealer - January 2018
