Guest commentary: Dealerships face uncertain times, but real estate endures

As a result of chip shortages, supply chain challenges and pent-up demand, 2021 saw historic dealership profits. J.D. Power reported more than $5,000 in profit per new vehicle in December 2021 — more than triple what dealerships made in new-vehicle sales for the same period in 2019.

2022 has continued strong. According to Kelley Blue Book, average U.S. new-vehicle transaction prices reached a near-record $48,094 in September, slightly less than the previous high of $48,240 in August.

Throughout the late 1990s and into the recession that began in 2008, I owned and managed dealerships in Southern California. The years prior to the recession were remarkable — an economic period characterized by good feelings and a sense it was only going to get better. We felt invincible.

In good times, it is easy to get complacent when it comes to expense control and dealership management. The economic crisis of 2008 left some dealers unprepared for the challenges they faced.

It was a tough lesson for some, a stark reminder that taking your eye off the ball in inventory management and expense control can prove catastrophic. Talking to dealers now, it's obvious many are watching the shifting winds carefully and trying to identify next steps. Especially for those looking to continue their growth objectives, decisions can be difficult. Putting a value on a dealership in today's market can be mystifying.

Some reports indicated 2022 would likely be the most profitable year ever for dealerships, but storm clouds are gathering. Dealerships are faced with extraordinary financial challenges and uncertainty following record-breaking years. Inflation, interest rates and the Consumer Price Index are all testing new highs monthly, creating headwinds for consumers and making dealerships more costly to operate.

At the same time, car manufacturers are placing unprecedented demands on dealerships as they scramble to respond to evolving market challenges. In September, Buick offered to buy out any U.S. dealer who does not wish to make the infrastructure investments needed to upgrade. Ford Motor Co. is offering dealers the option to become electric vehicle-certified under one of two programs — with investments of $500,000 or $1.2 million.

There's never been a time of less predictability.

The overlooked asset?

Real estate remains the only constant in this mix of uncertainty, and many dealers are starting to take notice. While the sale lease-back model is generating greater interest, it's not a new concept. It's a strategy that has been successfully employed in nearly every industry for decades. Companies including Taco Bell and FedEx are taking advantage of the flexibility — pulling equity out of their real estate and using the capital to reinvest in expansion and other financial priorities. Legacy Automotive Capital, which came into the business in 2019, is solely focused on specialized sale lease-back capital for the automotive retail industry.

It could not come at a better time. According to Legacy, most dealers, on average, make three times more on operating companies than they do on real estate. "This is an area overlooked by owners and operators," said Todd Marcelle, chief investment officer at Legacy. "The most well-run groups like Penske, Asbury and others all leverage sale lease-backs to financially engineer more profitable buy-sells and reduce balance sheet risk."

By conducting sale lease-back transactions, dealers can extract up to 140 percent of the value of the real estate on buy-sells, or to de-risk their current holdings, Marcelle added.

The timing and uncertainty of the market make this opportunity ideal. Whether they want to drive expansion, raise capital or simply take chips off the table, sale lease-back offers flexibility and empowerment. It allows dealers to maintain control of their property while extracting cash, which is very attractive in today's marketplace as they search for liquidity or weigh estate planning and exit strategies.

Legacy executives state that from an estate planning standpoint, a sale lease-back may allow the dealer to redistribute equity locked up in the real estate among multiple family members without disturbing dealership operations. Should the dealer desire to sell the real estate and operations, a higher overall value may be realized by selling these entities separately. Monetizing real estate also allows dealers to diversify their family's exposure from the automotive industry.

No one knows what the next 24 to 36 months will bring, but the one thing that offers some sense of stability is the real estate piece of the puzzle. It is the only constant.