Dealer Ralph Martinez's recent attempt to buy a $4 million Subaru dealership suddenly collapsed when the bank rejected the deal.
"It's not about equity," says Martinez, a multifranchise operator in Portland, Ore. "I was going to put down 66 percent. If that's not strong enough, how do you get a deal done?"
The reason: Dealership real estate values have crashed in the last three years.
Martinez learned the hard way that lenders have grown skittish about financing dealership properties. As balloon mortgages come due for renewal some lenders are telling dealers to look elsewhere for financing. Other lenders are requiring dealers to cough up six- or seven-figure amounts to boost their equity in the properties.
They're often raising mortgage rates and requiring dealers to guarantee the note with personal assets.
"Commercial real estate is the next Achilles' heel," says Nicholas Stanutz, senior executive vice president of dealer services for Huntington National Bank. He said dealers often don't have sufficient working capital to comfortably operate their business "or they burned through their capital over the last 15 months."
Jonathan Gengras, CFO and co-owner of Gengras Motor Cars Inc. in East Hartford, Conn., lost his mortgage lender when the bank stopped providing commercial loans to car dealers a year and a half ago.
"It was difficult to find banks willing to work with us," Gengras says. "Banks were unwilling to return our calls."
Some of the lenders who agreed to finance the dealerships required the owners to sign a personal guarantee allowing the banks to seize the owners' personal assets if the loan goes bad.
"Either you sign it or you don't get the loan," Gengras says.