Every Deal Is Different When Financing
January 16, 20236 minute Read
By Joan Tupponce
When Tom Hoffman Jr.’s parents were expanding their business rapidly in the late 1990s, they had to take out a mortgage on their home to provide operating capital for the family business.
Today, there are a variety of options for funding for everything from construction and renovations to additions and technology. But, sorting through those options can be a daunting task.
“There are hundreds of ways of financing and every deal is different,” said Hoffman, ICA member and CEO of Hoffman Car Wash, which is based in upstate New York. But he has some suggestions, based on his first-hand experiences when it comes to securing funds for a car wash — in the last 10 years, the company has opened nine new loans. The company has three full-service locations, 20 exterior tunnels and four stand-alone touchless/self-service locations. It also owns a car wash manufacturing company (InnovateIT Car Wash Equipment, LLC) and Byrider franchise.
- Decide if you want to go big or stay local. Hoffman prefers to work with local community banks rather than large national banks that may not be as flexible. There is a catch-22 that applies to small community banks, however. “They may have a lower dollar limit that they may be able to lend whereas a bigger bank can do larger lending, which may allow for a longer relationship,” he said. “One of the smallest banks in town may decide it only wants some of your locations in the portfolio. They may not want a lot of exposure and risk.”
- Establish a relationship with the bank that has longevity. “That gives us the opportunity to work with them for a few years,” he said.
- When you’re looking at loan terms, it’s important to have a good attorney who can look over and review loan documents.
- Don’t take the fees for granted. “We have been able to negotiate bank fees and attorney fees. You want to try to cap those fees,” Hoffman said.
- Secure an appraisal. Hoffman said you may need to order the appraisal before the loan is approved to ensure you meet the loan-to-value ratio. “Hopefully, you can work with the appraiser to encourage higher values to support the financing you need,” he said.
- You’ll also want your business to look good and run well when you are trying to attract a lender who will give you favorable terms on your loan. It’s easier to get a loan when your business is healthy, he said. “You don’t want to get into an emergency situation where you need money in 30 days. You always want your facilities and employees to look nice. Also, your image in the community is important when you are approaching a lender in the community,” Hoffman said. “Always keep your car wash up to date with new equipment and keep it running well. That’s important.”
Depending on the type of project you have in mind, your financing options may vary, with some offering considerably better terms than others.
For renovation projects that may involve upgrading equipment, a specialty lender may have equipment finance programs designed to be straightforward and simple. One example is Eastern funding’s Xpress-App program where the borrower can access up to $250,000 in equipment financing with a quick and easy credit application, driver’s license and equipment order.
“This is a one-page credit app and you can get funding quickly, usually with a 48- to 72-hour turnaround,” said ICA member Jon-Michael Tinney, loan officer for Eastern Funding LLC.
More complex renovations, such as construction to expand the wash, can benefit from direct financing from a lender or SBA loans.
“With lower rates than conventional loans and typically longer financing terms, the SBA 504 loan is a good option for a smaller outfit looking to add a location that may include construction or purchase of the real estate,” Tinney said. “It’s also a good option if you are looking to build or acquire.”
SBA 504 loans have a fixed interest rate for the term of the loan, a definite plus with rising inflation rates. “There is no personal collateral. It’s usually a 20% cash investment,” Tinney said.
When buying a car wash business, owner/seller financing may be an option as well. “It can be for the entire purchase price or part of it,” Tinney said. “Owner financing typically requires a large down payment as the down payment would help compensate for the risk for the current owner.”
This type of financing may be an option for a seller looking to move on from something quickly. “Seller financing allows the buyer and seller to get creative in their negotiations,” Tinney said. “There are several variables when it comes to owner financing, and all deals are different.”
One Foot In, One Foot Out
Sale-leasebacks are an exit strategy for owned real estate assets where you operate your car wash.
“Selling your real estate while still maintaining your car wash business on the same site can be used to unleash capital to fuel growth, or to supplement operational cash flow,” said Austin Blodgett, senior vice president, investment sales at RealSource Group. “You essentially are selling your land to a buyer, with a contract in place to lease the land back to you so that you can continue operating your business onsite. Thus, you will now be paying a monthly rent to the buyer, aka your new landlord.”
Sale-leasebacks are an alternative to traditional bank financing and can be used to fuel an expansion.
“It can take advantage of the current number of investors looking to acquire single-tenant net-leased car wash investments. This allows operators to extract the value of their owned real estate and focus on running their business,” Blodgett said.
There are many advantages to doing a sale-leaseback for an operator (seller) as well as for the buyer (new landlord). Some of the benefits for both parties include the following:
>> Capitalize on favorable market conditions affecting current value (big multiples on real
>> Liquidate real estate capital at 100% of its fair market value
>> Avoid restrictive debt covenants with off-balance-sheet financing
>> Negotiable lease terms with 100% rent write-off and tax savings (refer to your accountant)
>> Real estate multiples exceed business earnings multiples
>> Risk-adjusted returns based on credit and collateralized asset value
>> Generate a possible rate of return greater than the financing cost of capital
>> Predictable and relatively secure cash flows
>> Low operating burden as the leases are long-term and triple-net
>> Deploy large sums of capital into portfolio transactions
>> 100% Bonus Depreciation benefits in 2022 (Bonus Depreciation tax benefit is going to 80% in 2023 - refer to your accountant)
“In terms of what is involved, an investment sales broker (such as RealSource Group) will work side by side with the operator to create an exit strategy for the operator’s real estate assets,” Blodgett said.
One of the key points to remember when doing a sale-leaseback transaction is the potential tax liabilities associated with the capital gains you may be responsible for after selling your property.
“This can be avoided in a number of ways, including a 1031 exchange, which is why it is essential to work with an experienced investment sales broker to mitigate this risk as much as possible,” Blodgett said. "Another disadvantage is that you are giving up the ownership of the property and you are no longer able to leverage depreciation benefits. On the flip side, you are currently allowed to write off 100% of your rental payments, which is a big tax advantage (however, consult with your accountant).”
Whatever type of financing you choose going forward, make sure to always reinvest in your business.
“A lot of people don’t seem to reinvest in their washes frequently enough,” Hoffman said. “You need to be constantly reinvesting in your facilities and your people.”
Important disclaimer, please note that the information in this article is for educational purposes and cannot be construed as specific financial advice. Please consult with your accountant and/or attorney before proceeding with financing.