Car Wash Underwriting – Commercial Real Estate
Have you ever wondered how to evaluate a coin-operated car wash? Today we’re going to underwrite a car wash. Someone called me and asked me to give them an opinion of value on their car wash.
I always start by evaluating the financial statements. In this case I requested their last two year’s tax returns, in this case Schedule C’s. My goal is to arrive at the NOI. Remember, generally tax returns are drafted to minimize tax liability, so often they are inflated, or include things such as travel and deductible meals that you likely wouldn’t include on an operating statement. Here you see my revision of the Schedule C’s–depreciation and mortgage interest are both non-operating expenses that we’re going to remove from the operating Statements.
Then I’m going to create a pro-forma, which is my guess as to the actual operation of the car wash. You can see here that I’ve added some expenses–lawn care and utilities, and taken the average of the actuals on some of the other items, and then I look across the three different lines to get a guess of what a potential buyer might expect.
Then I’m going to call a few lenders and get their guess on what financing assumptions will look like. I want to know what the term, interest rate, and LTV might be for a loan on this asset. In this case, two lenders I called, both guessed that at 75% LTV is likely, 5.65% interest, and 15 year term, and target DSCR of 1.5.
I enter these loan assumptions and then I review the value indicators. How does the property cash flow?
Now I review industry specific resources–you can use the Business Reference Guide or similar resource. It tells tells me a general rule of thumb is that car washes trade at 4 times gross sales–that would put this car wash at between $160,000 and $215,000. Another guideline is “cost of real estate, equipment, improvements, plus 2 to 3 times EBIT“. I’m also told that a market average is that operating expenses should be between 25 and 40 percent of Gross Sales (our numbers put it between 18% and 37%).
Another consideration on this property would be the value as a development site. What are land comps selling for? Is it suitable for commercial development? If so, there is a chance the land is worth more than the car wash–keep that in mind.
So now I have a pretty good ballpark guess on this car wash. If I set the price down under $200K, the cash on cash-on-cash is between 26%-60% (obviously too high), and the Cap Rate is between 22% and 14%. At $300K, the cash-on-cash is too low–7.55%, and DSCR is tight at 1.25. My guess on this is that 250K is about right. Remember, this is higher than the rule of thumb from the Business Reference Guide–but still leaves a decent margin for a potential buyer.
What are your thoughts? Have you ever owned or sold a coin-operated car wash? Do you have any questions? Feel free to comment below!
Additional info:
Car Wash Underwriting Spreadsheet