Getting a car wash loan closed can be complicated and filled with technical landmines. Common issues include value, environmental problems, title, reported cash flow, age of equipment, deferred maintenance, etc.
If borrowers do not understand the potential issues they leave themselves at the mercy of banks and their loan officers, which often results in wasted time, money, and dead deals. But many issues can be overcome and do not have to terminate transactions if handled correctly from the start. The information below can help protect you from the biggest deal “killer” out there in the auto wash industry.
Appraised value is by far the most common issue in the industry. Most conventional banks want to be at less than 70 percent loan to value and most SBA lenders want to be at less than 85 percent loan to value (though a few will go to 90 percent). If your loan to value is higher than what your bank wants, your transaction is dead.
Car washes, like hotels, gas stations, or bowling centers are unique in that the building itself is directly tied to the business. You have to run a car wash business out of a building specifically designed to be a car wash. So the point here is that the business value should be tied to the land, building, and equipment value. Unfortunately, a large number of unsuspecting borrowers do not realize that many banks do not look at it like this. Many banks leave out the business value.
Most wash owners do not understand the technicalities of how appraisal reports are completed. Here is a quick overview: There are basically three different approaches to appraising commercial real estate — cost approach, income approach, and comparable recent sales approach. All three approaches are tied together, but values on a wash can range widely based on the approach used.
Further, in most transactions banks dictate how they want the report to be completed, i.e., they tell the appraisal company which approach to use. Often, the cost approach comes up with the lowest value because it only includes the “as is” value of the land, building, and existing equipment. What the cost approach does not include is the value of the business, also known as goodwill or blue-sky. Blue-sky is normally reflected in the income approach. Most car wash asking prices are based off an income approach.
The difference in value based on the approach used can be staggering, especially on washes that are doing really well and producing a lot of net income. The higher the net income, the higher the value of the wash should be.
For example, imagine if you and a seller had a wash under contract for $1,000,000 and this price rightly included land, building, equipment, and goodwill, but the bank you are working with ordered the appraisal report just on the cost (again, just land, building, and as-is value of equipment) of the wash resulting in the value coming in short at $800,000.
Unless you came up with an additional $200,000, on top of your down payment, you would have a dead transaction. This is the point: you need to understand how your bank orders appraisal reports specifically on car washes, and you need to get your bank to commit to how they will order the report before you pay for it. Otherwise, you will be at their mercy.
INTERNAL WORKINGS OF BANKS
Banks are like most businesses. They are busy, understaffed, have turnover, have communication problems, make mistakes, and can be disorganized. This is true of small and huge banks. Many banks that do not focus on car wash financing can be unaware of how they even order the appraisal reports on car washes. They will make the decision on a case-by-case basis, and the individual that actually orders the report can have a say in how they are ordered.
So in essence they might be “winging it.” This might be hard to believe, but it is true. Perhaps they do not have a set policy on whether they will go for cost or an income approach. Maybe they haven’t approved a car wash loan in years and, as a kneejerk reaction, go with the more conservative approach because they are afraid of making a mistake. Again, if the report is ordered in the most conservative way, it will most likely result in an unfair valuation and a dead transaction for you.
Bottom line: on a special-purpose property like a car wash, do your research. Make sure the lender you pick has a real understanding of your industry and is actively closing car wash loans. Many borrowers go with the lowest rate they can find without giving more thought about the overall deal and likelihood of closing. Do not make this mistake. Work with an industry expert and your closing should be smooth and successful.
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 email@example.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 employer.