Driving Growth: Sale-Leasebacks as a Catalyst for Transformative Dealership Consolidation

As 2024 begins, mass consolidation in the dealership space continues to be a dominant trend, driven by the understanding that continuous growth is essential for long-term sustainability in the evolving dealer model.  Asbury, one of the six public automotive dealer groups successfully closed on the acquisition of Jim Koons Automotive for $1.2B, Holman Auto announced the acquisition of all 30 Leith Auto Group Dealerships, and Ciocca is set to close on Apple Automotive’s 10 dealerships in Q1.  

In their Q3 Blue Sky Report, Kerrigan Advisors, a premier dealership buy-sell advisory firm noted “The majority of dealers prefer to buy dealership real estate rather than lease.  A growing minority are reassessing this investment thesis given the recent decline in commercial real estate values.” Though the macro commercial real estate market has faced headwinds, retail has remained the golden child of CRE with the least amount of cap rate adjustments compared to other asset classes.   

Sale-leasebacks have proven to be an accretive strategy for dealers looking to fund growth without diluting equity in the operating company or burdening themselves with restrictive debt obligations.  Understanding the dynamics of dealership cap rates, the financial advantages of leasing, and the broader real estate investor market is essential for dealers seeking multi-point expansion.  By exploring sale-leasebacks strategically, dealers can unlock new opportunities, secure favorable lease terms, and position themselves for continued growth.

With this in mind, leasing versus buying dealership real estate is more attractive than it has been in recent memory. Today, an average dealership mortgage payment is 13.4% higher than a lease payment for the same property. As a result, more acquiring dealers are attracted to leasing dealership real estate from a seller, allowing them to deploy a larger amount of capital towards investing in franchises which provide a higher unlevered return (average of ~25% for a dealership franchise versus ~7% for dealership real estate). 

Kerrigan Advisors

To unlock the full potential of sale-leasebacks and maximize the advantages, auto dealers must broaden their perspective by tapping into the full extent of the commercial real estate investor market.  CoStar estimates that in 2023, $58.3B worth of retail properties were sold in 17,175 transactions, emphasizing the abundance of retail investors.  

Strong fundamentals and mission criticality of dealership real estate make it an attractive investment for passive investors seeking long-term cash flow and collaborative partnerships with dealers.  Creating a competitive bidding environment among the top investors in the space leads to the achievement of greater proceeds and favorable lease terms, aligning with dealers’ long-term plans for growth.   

Our team is the premier specialist in providing complimentary sale-leaseback valuations and executing subsequent assignments.  We collaborate with dealers to create dynamic real estate strategies, allowing them to optimize their real estate positions and maximize their capital resources.

NNN Pro’s Dealership Capital and Advisory Team will be at NADA in Las Vegas, NV – Jan 31st-Feb 4th.  Please reach out directly to schedule a meeting during the event.

Ned Hennessey
nhennessey@nnnpro.com
(980) 337-7283

Evan Sterling
esterling@nnnpro.com
(928) 642-0644