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For many dealers, real estate packs a big punch on the asset sheets.
Especially those considering a sale.
But, it’s often the most neglected, which makes now (not during the sell) the time to start protecting that valuable slab of Earth.
With that: Here are three real estate best practices every dealer should implement to better protect, structure, and unlock the full value of their property portfolio.
Accurate appraisals can offer millions more at closing.
Furnitures, fixtures, and equipment. Inventory. Manufacturer approval.
So much goes into evaluating a dealership’s value that it’s understandable some dealers can overlook the actual land below. A great first step is getting a proper valuation.
Formal real estate appraisals often look backward. But they can miss what's happening tomorrow.
James Mitchell, executive vice president of the auto dealership capital markets division at real estate/investment firm CBRE, ran into this on a deal in Alexandria, Virginia.
Amazon's second headquarters was going into Arlington, right up the street from a Toyota dealership his team was selling. His team believed the property was worth $35 million. Another appraisal came in at $26 million.
"Appraisals look backwards at what things had sold for in the past and tell you what your property is worth today based on what happened yesterday," Mitchell said. "The problem was with this property, we all knew what was going on tomorrow."
James Mitchell
CBRE
Knowing the neighborhood matters because zoning shifts, major employers moving in, and alternative use potential can all affect value.
Because of their knowledge of the appraisal process, Mitchell's team was able to intercede with a different appraiser to justify the $35 million.
The seller recovered $6 million, Erin Rice, vice president of the auto dealerships team at CBRE, told us in a joint interview with Mitchell.
The signal: Get a land evaluation before going to market based on up-to-date intel, not just historical comps. Rice also said to make sure whoever does it has access to local brokers with boots-on-the-ground knowledge of what's actually trading and happening, and not just relying on public record.
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Charging the right rent today helps protect blue sky tomorrow.
Dealers who own their own real estate often pay themselves rent. Sometimes, paying a lower rent feels like a smarter move to free up more coinage now.
But that could backfire if and when a dealer decides to sell.
The average cap rate for car dealership properties in the U.S. is approximately 7%, according to Mitchell.
The numbers: A $20 million property at 7% should carry roughly $1.4 million in annual rent. A dealer charging himself $500,000 could see that gap deducted straight from his income at closing.
"That extra $900,000, I'm deducting from your income," Mitchell said, describing a hypothetical conversation from seller to buyer. "Because that's the rent I'm going to have to charge going forward after buying the store."
On the flip side: Above-market rent can create an add-back at closing. At a Toyota store, for example, where multiples can reach eight times earnings, every dollar added back returns $8 in blue sky.
"You can't optimize your blue without understanding what the value of your real estate is," Rice said.
Erin Rice
CBRE
A 2024 Presidio Group analysis found real estate represents roughly 30% of the total dealership investment equation.
Despite that: It’s consistently the most overlooked component.
Presidio President George Karolis said the 30% still holds up in deals today, though domestic stores may skew higher since lower blue sky means real estate carries a larger share of the total investment.
The same analysis found rent as a percentage of gross profit is reasonable at 10% or less, with 8% as best practice.
Looking ahead: Pull the internal lease today. Compare the rent against a 7% cap rate. If there's a gap, start closing it.
Mitchell recommends 12 months of market-rate rent before going to market if there's time. For dealers not charging themselves enough rent, it could be worth delaying the sale to rework the payments and get extra months on the books at the better rate.
Real estate neglect has a way of surfacing at the worst possible time.
Running a successful dealership keeps a dealer busy, and often, a sale isn’t even a consideration. But that could change fast, making it even more important to stay on top of what’s happening down below.
Mitchell described a situation where a health crisis forced a quick sale. The real estate wasn't in order and they were undercharging themselves in rent. There was no time to fix it.
"In those situations, we will happily move forward with providing value and solutions and everything we have done, we're just very careful in setting expectations as to what that would be up against," Mitchell said. "Make sure you're losing the least amount of money, and controlling the deal process as much as possible so no one takes advantage."
Other real estate considerations:
Environmental reports. Many mortgages require them, so they're often current, but not always. Buyers at platform scale will require a Phase 1, and so will their lender.
Third-party leases. Term, renewal options, purchase options, and rent escalators all feed directly into blue sky value. A prospective buyer may not stick around.
"You can't give these stores away, because no one's going to want to take over these terrible property leases," Mitchell said.
OEM image compliance. Karolis said it's always important, whether or not a sale is on the horizon.
"The number one thing is making sure your facilities are image-compliant and updated and there's no defects and material defects with them," Karolis said. "It's very similar to selling a house."
George Karolis
The Presidio Group
The catch is that OEMs often treat a buy-sell as an opening to push for more costly changes.
"It's their chance try to get their pound of flesh," Karolis said.
His advice: Aim to have it as up-to-snuff as possible going in, then push back on anything that isn't legitimately required.
The 2024 Presidio analysis also found buyers sometimes discount blue sky by as much as 50% of estimated improvement costs, a figure Karolis said still reflects what he sees in deals today.
The takeaway: Start a folder today. Pop in those environmental reports, OEM facility correspondence, and an up-to-date lease with term and option dates flagged. The time to pull this together is well before anyone is asking for it.
Bottom line: Does anyone remember shaking out pants pockets or couch cushions for extra change as a kid? Think of real estate maintenance like that.
The more effort put in now will pay off when it’s time to shake the extra change out of the land below the store.
