Digital Dealer - January 2018 - 11

...FOR EACH 1% INCREASE IN CAP RATE, THE
AVERAGE DEALERSHIP REAL ESTATE VALUE
WOULD TYPICALLY DECLINE
~10%
ON10%AVERAGE."
7%
8%
9%
11%
12%
$10,567,943

Chart 5)
Concern over rising
interest rates is yet
another reason dealers
are considering a sale of
their properties. Leases
are valued much like a
bond. When interest rates
rise, the value of a seller's
lease income stream
declines. Chart 6 demonstrates that for each 1%
increase in cap rate,
the average dealership
real estate value would
typically decline ~10% on
average. Also, if a property needs to be refinanced,
the seller may experience
a reduction in income if
mortgage rates rise.
Finally, dealers are
concerned about the
single purpose nature of
their real estate. Single
purpose properties are
inherently riskier real
estate investments.
Not only are dealership
properties single purpose,
they are built for a specific
franchise. The conversion from one franchise
to another usually costs
millions of dollars. Rather
than retaining dealership
properties, sellers are increasingly choosing to sell
their real estate and 1031
exchange into lower risk
real estate investments.
An exchange usually allows the seller to maintain
their tax basis and avoid
the payment of capital
gains taxes, minimizing
the tax consequences of
a sale.
While sellers are

$9,246,950
-13%

CHART 6

$8,219,511
-11%

$7,397,560
-10%

$6,725,055
-9%

$6,164,633
-8%

Estimated Average Dealership Real Estate
Values at Differing Cap Rates
$10,567,943
$9,246,950

7%

8%

$8,219,511

9%

$7,397,560

$6,725,055

10%

11%

$6,164,633

12%

Cap Rate
Source: NADA and Kerrigan Advisors Analysis

RATHER THAN RETAINING
DEALERSHIP PROPERTIES, SELLERS
ARE INCREASINGLY CHOOSING TO
SELL THEIR REAL ESTATE AND 1031
EXCHANGE INTO LOWER RISK REAL
ESTATE INVESTMENTS."
increasingly choosing
to sell their real estate,
buyers are often eager to
acquire it. This is in large
part due to today's low
interest rate environment
and attractive mortgage
financing terms. Buyers
also appreciate owning
real estate, primarily to
facilitate financing when
the inevitable OEM image
upgrade is required. If a
buyer does not wish to
acquire dealership real
estate, a REIT, such as
Capital Automotive REIT,
is often eager to step into
the buyer's shoes.

So, to sum it all up, the
buy/sell market remains
as active as ever, with
perhaps a bit more
motivation on the part of
sellers who are stressed
about the imminent future
of auto retail. And, given
those changes, more
dealers seem inclined
today to exit both their
business and their real
estate at the same time.
RYAN KERRIGAN is
Managing Director at
Kerrigan Advisors. Kerrigan Advisors is a leading
advisor to sellers of
higher value dealerships

and dealership groups
throughout the U.S. Ryan
works with Kerrigan
Advisors' private equity
clients advising them on
their auto retail investment strategy and works
with sell-side clients
seeking private equity
exit. Ryan has extensive
experience in both private
equity and auto retail,
having run his family's
dealership. He started
his career at McKinsey &
Company as a management consultant, advising
Fortune 500 companies
on growth strategies,
organizational issues,
pricing and business
valuation. EMAIL: ryan@
kerriganadvisors.com.

D I G I TA L D E A L E R . C O M

JANUARY 2018

11


http://www.DIGITALDEALER.COM

Table of Contents for the Digital Edition of Digital Dealer - January 2018

Digital Dealer - January 2018
Contents
The Art of Handling Mistakes
Motion and Commotion – The Buy/Sell Market Intensifies
You Don’t Have to Be Blood to Be Family in the Dealership
Shifting From Crisis to Opportunity
Warning! Your Customers Know More Than Your Salespeople. But Not for Long.
Advertising Your Tech-Spertise!
From the Show Director
Drawing the Curtain Back
Digital Dealer Workshops Chicago
Cover story
Interview with the 2018 Chairman of the Chicago Auto Show
Ready… Fire!...Then Aim
Turning Cash Buyers into Auto
Need a Tech – Keep a Tech or Other Staffer?
The New Car Buyers’ Clinic: A Case Study in How to Royally Mess It up!
The Pros and Cons of Building a Dealership Facebook Page
Is Your Dealership's Advertising Stuck in the '60s?
4 Ways to Sell More Cars in 2018
Digital Dealer - January 2018 - CT1
Digital Dealer - January 2018 - CT2
Digital Dealer - January 2018 - Digital Dealer - January 2018
Digital Dealer - January 2018 - Cover2
Digital Dealer - January 2018 - 1
Digital Dealer - January 2018 - Contents
Digital Dealer - January 2018 - 3
Digital Dealer - January 2018 - The Art of Handling Mistakes
Digital Dealer - January 2018 - 5
Digital Dealer - January 2018 - 6
Digital Dealer - January 2018 - Motion and Commotion – The Buy/Sell Market Intensifies
Digital Dealer - January 2018 - 8
Digital Dealer - January 2018 - 9
Digital Dealer - January 2018 - 10
Digital Dealer - January 2018 - 11
Digital Dealer - January 2018 - You Don’t Have to Be Blood to Be Family in the Dealership
Digital Dealer - January 2018 - 13
Digital Dealer - January 2018 - 14
Digital Dealer - January 2018 - Shifting From Crisis to Opportunity
Digital Dealer - January 2018 - 16
Digital Dealer - January 2018 - 17
Digital Dealer - January 2018 - Warning! Your Customers Know More Than Your Salespeople. But Not for Long.
Digital Dealer - January 2018 - 19
Digital Dealer - January 2018 - Advertising Your Tech-Spertise!
Digital Dealer - January 2018 - 21
Digital Dealer - January 2018 - From the Show Director
Digital Dealer - January 2018 - 23
Digital Dealer - January 2018 - 24
Digital Dealer - January 2018 - Drawing the Curtain Back
Digital Dealer - January 2018 - 26
Digital Dealer - January 2018 - Digital Dealer Workshops Chicago
Digital Dealer - January 2018 - Interview with the 2018 Chairman of the Chicago Auto Show
Digital Dealer - January 2018 - 29
Digital Dealer - January 2018 - 30
Digital Dealer - January 2018 - 31
Digital Dealer - January 2018 - 32
Digital Dealer - January 2018 - 33
Digital Dealer - January 2018 - Ready… Fire!...Then Aim
Digital Dealer - January 2018 - 35
Digital Dealer - January 2018 - Turning Cash Buyers into Auto
Digital Dealer - January 2018 - 37
Digital Dealer - January 2018 - Need a Tech – Keep a Tech or Other Staffer?
Digital Dealer - January 2018 - 39
Digital Dealer - January 2018 - 40
Digital Dealer - January 2018 - The New Car Buyers’ Clinic: A Case Study in How to Royally Mess It up!
Digital Dealer - January 2018 - 42
Digital Dealer - January 2018 - The Pros and Cons of Building a Dealership Facebook Page
Digital Dealer - January 2018 - 44
Digital Dealer - January 2018 - Is Your Dealership's Advertising Stuck in the '60s?
Digital Dealer - January 2018 - 46
Digital Dealer - January 2018 - 47
Digital Dealer - January 2018 - 4 Ways to Sell More Cars in 2018
Digital Dealer - January 2018 - Cover3
Digital Dealer - January 2018 - Cover4
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