A lot of car wash owners I talk to want to convert their wash to an express model. The desire to do so is based on a couple of factors: to reduce employee headaches, promote monthly memberships, update tired equipment, refresh/modernize the appearance of their car wash, and, of course, to make more money with less work.

The unlimited wash/monthly membership strategy is appealing to both the owner and banks as it helps reduce the inherent cash flow lumpiness of the car wash business. I have express owners joke around with me how they love to look at their bank accounts on the first of the month when all their members/customers get auto billed. Sounds pretty good to me.

But how do you finance these renovations? How can you do so without tying up a ton of cash in your wash? And how do you do it if you currently have an existing mortgage? These and other related questions are what I’ll attempt to answer below. These are real-world solutions that I personally have used on closed car wash loans throughout the country.

COSTS

First of all I’m seeing new equipment costs in the $300,000 to $600,000 range on a typical existing 120’ tunnel. Renovation is also typically the same at around $300,000 to $600,000 — an average conversion cost amounting to $800,000 total. We’re talking about a lot of money, which most operators cannot self-finance. So they need a loan, which also means the deal will have to appraise.

SOLUTION

The best solution is to use the existing equity in your wash as your “down payment” to finance the costs discussed above. A key point here is that you do not need to have enough equity to cover all the costs; you just need enough to cover the typical “injection,” which is normally 15 percent of the total project cost. Said in another way: your max loan to value (LTV) on a renovation project will likely be 85 percent of the total project costs.

Here is an example:
$1,000,000 current as-is value
$600,000 existing loan balance
$800,000 new construction and new equipment

There is $400,000 of equity above which can be used to finance the $800,000 of improvements without you coming in with any more cash. The as-completed value, per an appraiser, would be $1,800,000 ($1,000,000 as-is value plus the $800,000 of improvements) and your total loan balance, after refinancing the existing loan, would be $1,400,000 ($800,000 new construction and equipment plus existing balance of $600,000). The LTV here would be 77 percent. Again, in this example you would not need to bring any cash to the closing table since your LTV is less than 85 percent.

What if you don’t have that much existing equity? Say your existing LTV is 80 percent not the 60 percent used in the above example. Here you can still use your existing equity, but you will likely need to add some cash to make it work, probably around 4 percent of the total project costs.

Here’s another example:
$1,000,000 current as-is value
$800,000 existing loan balance
$800,000 new construction and new equipment

There’s $200,000 of equity. As-completed value is $1,800,000. Max loan amount would likely be 85 percent of the as-completed value, approximately $1,530,000. So you would have to bring to close approximately $70,000 to complete the project or 4 percent of the total project costs.

ESTABLISHING EXISTING AS-IS VALUE

More details. Unfortunately, there is a lot that goes into valuing a car wash and establishing the current as-is value. It seems like each appraiser tweaks their method a bit so it can be tricky to predict how a value will come out. One way to cross-reference and get a feel for what your wash might appraise for is the capitalization rate approach (cap rate). This is one of the methods used in the income approach. Here in the Detroit area we continue to see cap rates at around 12 percent for stabilized car washes. So look at your tax returns to see what you reported as your EBITDA. Take your EBITDA and divide that number by 12 percent to get a feel for what your wash should appraise at.

For example, if your EBITDA was $120,000 then your wash will likely appraise for approximately $1,000,000. Again, valuations are not quite this simple but this should give you an idea.

PROJECTED AS-COMPLETED VALUE

Surprisingly, predicting the as-completed value is easier then establishing the as-is value. Here it is primarily a function of adding up all of the construction and equipment costs. Most appraisers then back up these costs with a projected income approach.

Most appraisers will also do a proforma of the future income, then apply a cap rate to the projected EBITDA to back up the cost approach. They create their projections off of a couple of factors: traffic count, days open per year, capture rate, average ticket, then average margin off of gross sales.

Here’s another example:
30,000 cars per day
260 open days per year
1 percent capture rate
$8 average ticket per wash
38 percent cash flow margin of grosssales

So 30,000 cars drive by the wash per day. It’s open 260 days per year. When it’s open for business, 1 percent of the cars that drive by will get a wash, which means the owner should wash 78,000 cars per year. At an average ticket of $8 that means the gross sales should be $624,000. With a 38 percent margin the wash should produce about $237,000 of cash flow. With the 12 percent cap rate mentioned above the projected value should be $1,976,000 (again from an income approach).

CONCLUSION

Bottom line: If you own an existing wash, you can likely use your existing equity in it to either get 100 percent financing to complete your express conversion or at least reduce your cash injection. You do not need enough equity to cover all the costs, just a fraction of it. Having the right traffic count to justify the projected sales and projected cash flow is critical. Competition continues to increase and the express model with unlimited wash/monthly memberships is a great way to take out the cash flow ups and downs inherent in the business and build some customer loyalty. The financing examples above are real-world solutions that have worked for a lot of owners throughout the country. Best of luck. I hope you got something out of this.

Jeff Rauth has over 15 years experience in the commercial real estate business and focuses on car wash financing. He has worked as a commercial mortgage broker and as a banker. He currently works at a bank that funds car wash loans in all 50 states at up to 90 percent financing, typically on 25-year term and amortization schedules. Call him at (248) 885-8797 or e-mail at jrauth@cfa-commercial.com. See his blog at http://www.cfa-commercial.com. The opinions expressed in this article are entirely his own and do not reflect those of his employers.