Reasons for building a car wash are still compelling. Margins on fuel sales remain low and, if you’ve got a suitable site, a car wash can be a productive profit center. What’s changed in recent years, however, is the availability of credit with which to finance the equipment and installation. Where can you get half a million dollars to build a new full-tunnel car wash, or $150,000 to replace or upgrade an existing facility?
Today, most car wash equipment manufacturers rely on third parties to finance would-be operators. In turn, these third-party lenders have been formulating standards and procedures to meet the needs of car wash operators and the challenges of tight credit.
“Car wash portfolios as a whole performed not as well as other segments” during the recent down economy, reports managing director Chris Santy of Atlanta-based Patriot Capital Corporation. “Because petroleum marketers viewed car washes as nonessential equipment, they were more likely to pay for gas pumps when things got hard. So as the lender, we experienced higher delinquency.”
Then, too, the sky-high fuel prices of 2008 illustrate another risk for car wash equipment lenders. “When fuel prices got out of control, it got harder for petroleum retailers to convince customers to buy a car wash after they just spent $80 to fill up the tank,” relates Santy. So when high fuel prices or a down economy cut into car wash profits, operators are more likely to get behind on their loan payments.
The good news is that “by June 2010 we started to see light through the economic clouds,” says Santy, “and by the beginning of the fourth quarter things started to get much more reasonable. We’re still not in the days of 2005-2007. But credit isn’t as difficult as it was early last year.”
That opinion is seconded by principal Michael Saei of Los Angeles-based First Financial Capital, who allows, “The current credit market for the car wash industry is certainly less than perfect and has been for the past several years, but it is much better than at the peak of the financial crisis.”
One challenge in the availability of credit, Saei notes, is that “many regional and community banks were lenders to the car wash industry and many of those institutions struggled over the past couple of years with a number failing.” On the other hand, he sees a hopeful sign in that “over the past six months the stronger institutions have been coming back into the market, though they’re more selective with their borrowers and more conservative on terms.”
Moreover, loans for car washes have always drawn a certain amount of skepticism from bankers. “These are special-purpose properties,” Saei explains, “so as assets they’re harder to manage and sell than a typical real estate investment—say, an apartment building—in the event of a foreclosure. Also, since car wash equipment is moveable and fungible, a troubled operator could disassemble the equipment leave the foreclosing bank only the land and an empty box.”
Because full-service car washes are historically cash businesses, the valuations that many small operators put on the enterprise may not be supported by the financial statements and tax returns provided. “Such cases,” Saei continues, “are incredibly difficult for a regulated lender, like a bank, to assess.”
From the lender’s view, the inherent seasonality of the car wash adds another risk factor, says Saei. Even a car wash in California, where sunny weather can bring high car wash traffic for eight or nine months out of the year, might have the misfortune of starting up during an unusually wet winter. “We’ve seen new car washes fail, for example, when they opened during the El Niño because they didn’t have cash reserves to make it through a tough season,” he says.
Lenders’ usually concerns have only been exacerbated by the number of car washes launched during the peak period of 2004-07 that subsequently failed and were foreclosed when the economy went south. In its home market of California, Saei reports, “There were a number of transactions during the peak years at very high multiples, with relatively large loan amounts, that subsequently defaulted. Many were good locations but were just over-leveraged.”
The memory of these car wash failures has prompted many lenders to be more conservative, making things “especially difficult for smaller single-site operators and new entrants to the industry,” believes Saei. “Most lenders right now are much more comfortable with the credit profiles of experienced multi-site operators who have stronger personal financial statements and often have other sources of revenue.”
What to Expect
Equipment pricing for new car washes—not including costs for land and construction—can range for $20,000 for a basic two-bay self-serve wash, and between $60,000 and $180,000 for an in-bay automatic wash, up to $500,000 or more for a full tunnel wash, according to Steve Jeffs, vice president of sales for Mark VII Equipment in Arvada, Colo. That is where the manufacturer may really be able to help. And Santy of Patriot Capital pegs the cost replacing or remodeling an existing wash with a newer model at $85,000 to $150,000.
When everything is factored in—land, construction, equipment, zoning, licensing, entitlement—even a small express wash can cost more than a million dollars, while full-service washes can be significantly more. “If you run into approval obstacles—and in some cities, approvals are extremely difficult—the total price tag can skyrocket,” observes Saei. “The length of the tunnel, the equipment used, and the sophistication of the premises can impact the costs by a factor of several times. I have a client who recently constructed a luxury car wash and detailing facility in California that cost approximately $5 million.”
Another variable is whether a car wash project “is a new construction, a retrofit, or simply a rebrand,” advises senior product manager David Dougherty of PDQ Manufacturing in De Pere, Wis. “At the same time, manufacturers are working hard to come up with creative equipment packages to help operators meet their needs within their financing capabilities. For example, maybe a facelift for your site can be a good bridge until the lenders are more comfortable with car washes once again.”
Yet with so many dollars involved, says Jeffs, “We’ve seen over the last two years that, because of the banking crisis, the credit market for car washes has become increasingly difficult and lending requirements more stringent. Many times, in order to quality you’ve got to be in business at least five years, have a credit score above 700, show regular profits, and have a higher liquidity than lenders required in the past.”
Saei says conventional borrowers can usually expect to be asked for a down payment of
between 25 and 40 percent. Lenders will request several years of business financial statements and tax returns, corporate bank statements, a personal financial statement and tax returns, and a resume or bio showing the operator’s experience and qualifications.
“And with a construction loan,” Saei adds, “documentation will be much more extensive and require a business plan, construction documents, budgets, and more.” Loan terms of five to seven years are now common with a balloon payment due at the end of term, he says, and amortization schedules vary from 15 to 25 years.
“The lending process can be extremely time-consuming, onerous, and require higher credit scores, more detailed documentation, and longer approval processes than in the past,” affirms Jeffs. “Documentation requirements have increased significantly over the last two years and can include minimum of three years financial accounts, tax records, asset and liability statement and banking records, among others. And down payments can range from three months in advance up to 25 percent or more, depending on the credit approval requirements.”
For car wash financing, Jeffs reports, “Five-year contracts are the norm. Longer periods are available with certain types of loans and are much more dependent on credit risk. Interest rates currently range from six to 10 percent, but can go higher depending on factors like the lender, loan amount, and credit risk.”
Still, all agree that recent months have seen at least a slight easing in the availability of credit for car washes—including additional financing options. For example, Patriot Capital can provide a $150,000 line of credit with only a one-page loan application. “We use personal credit, bank information, and other non-financial information to qualify you—much like applying for a car,” says Santy.
The line-of-credit option is especially appealing to smaller operators. “They often manage their tax returns to reduce tax liability,” Santy points out, “and so financing options that require two years of tax returns mean they probably won’t qualify—because they don’t show a lot of taxable income.”
Patriot requires two payments in advanced, but offers 100-percent project financing for car washes that covers everything from the equipment to the electrical. Loans for real estate are another matter and a bit harder to get, continues Santy, and most lenders will only finance up to 70 percent.
In addition to traditional mortgage financing, another popular form of real estate financing, which likewise appeals to smaller as well as larger operators, is sale-leaseback financing. “Lease rates for sale-leasebacks fluctuate depending on the investor and on the borrower’s credit,” explains managing director Dennis Ruben of Chicago-based NRC Realty & Capital Advisors explains.
“Although banks will only typically loan 60 to 70 percent of the fair market value of the property for 10 years in typical mortgage financing, advance rates in sale-leasebacks are usually significantly higher, with a primary lease term of 15 to 20 years and renewal options,” Rubden adds. By contrast, he says that terms for car wash equipment loans are shorter, usually five to seven years.
“In my experience, people who want to add car washes to a site typically do it out of their own cash flow,” Ruben continues. “The credit crisis has made it harder to get credit. Smaller operators are often reluctant to have much debt and would rather grow conservatively. But on the other hand, the data still suggests that car washes enhance revenue. If the land parcel is big enough, a car wash can bring significant benefit.”
Ruben agrees that, in part because lenders are also recognizing the continuing value of car washes, “Credit has opened up in the last six months and underwriting has gotten a little easier. There are many aggressive and attractive financing options. So this is an excellent time to make a deal.”
Taking note of application-only programs like those offered by Patriot, Jeffs concurs, “Over the last few months there are some encouraging signs of some improvement in lending requirements. The approval process is simplified by obtaining a credit score only, though the score still needs to be above 700 and only certain industry sectors are included. And it seems unlikely that further easing of the credit market will occur in the near future.”
Like others, Jeffs has seen many car wash operators take a go-slow approach on expansion. “The investor market—the people who put up car washes as investments—has felt the effects of the economic downturn more than other car wash industry sectors,” he relates. “But it’s true to say that even the larger petroleum marketers have become more reluctant to borrow money to finance more car wash purchases.”
As Dougherty sees it, the recession “may not have shrunk the investor segment, but it has quite possibly limited its growth. In my view, the economic downturn has really had the greatest impact on the small business investor. Lenders have tightened their qualification requirements so tight that even many financially strong investors are not able to get the necessary funds to grow their business, which in turn can shift lending dollars to larger petroleum marketers.”
Dougherty joins others in confirming that “the credit market has been very tough for the car wash industry as many operators struggle to get funds either to grow their business or replace outdated equipment. Although we’re seeing a slight improvement in the financing of car washes, we still have a long way to go before we’re back to pre-recession levels. Lenders are still much stricter and careful with every dollar they lend.”
Getting to Know You
Nevertheless, since survival requires growth over the long-term, petroleum retailers on the lookout for financing should consider not only the deals they get today, but the relationships they build with lenders for the long haul. “Ask yourself if the lender will be around in a couple of years,” advises NRC’s Ruben. “You need someone who has the capacity to grow with you, so that you don’t end up outgrowing the bank.”
Choosing a lender who knows the industry is also important, adds Santy of Patriot Capital. “There are lots of lenders out there,” he contends, “but only a few understand the car wash business—even fewer also understand the needs of petroleum sites. Make sure you work with a lender who has a high level of experience in both.”
Many specialty lenders attend major industry events, such as the Car Care World Expo, notes Saei. “Another way to identify lenders who know the car wash business is to research what lenders have historically been active in your market. If you have a relationship with a title company, give them the addresses of the car washes in your area, and they can find out from public records who were the lenders on those facilities.”
Accountants, lawyers, brokers, and others who service customers in the car wash industry can refer knowledgeable lenders. “And ask your car wash equipment manufacturer,” Saei counsels. “They often take payment for new equipment directly from the lender or finance company, so that they know who’s active.”
At Mark VII, confirms Jeffs, “We maintain relationships with a number of lenders across North America who specialize in car wash financing programs. So if you check with your equipment manufacturer, we can try to find you a lender suited to your needs. Long-term relationships with lenders are extremely important in assisting customers with increasingly stringent lending requirements.”
Finding a knowledgeable lender is especially helpful for operators who are new to the car wash business, adds Santy of Patriot Capital, because “if you’re getting into it for first time, you need a professional to help you understand all the costs.”
Unless you can finance new car wash construction and upgrades to existing sites through your own cash flow, “then having a good relationship with lenders is paramount for ensuring that you have access to capital,” says Ruben, “and maintaining that relationship requires good communication on both sides. Lenders don’t like surprises. So especially when an economy is tough and credit is tight, it’s important that your lender understands what’s going on in your business.”
Even if things get tough, Ruben continues, “Don’t hide it if your business is taking a downturn. Instead, providing timely information can help you get ahead of an adverse consequence. Lenders will generally work with you if they’re convinced you’re not hiding anything. Viewing them as a partner and not an adversary will keep the kind of relationship that will make it possible to go back to them for more money when you need it.”
Santy says his best customers “are the ones who are clear in what they need and the timeframe in which they need it. It’s important for everyone to have the same expectations going into the transaction. The lender is working diligently to put the capital in their hands. Having a good plan—and for example, taking care of details like zoning—can help you and your lender know how much money you need with more accuracy.”
Being prepared for the loan process, continues Saei, “and presenting a well thought out, complete, and accurate loan package is really critical. Lenders see this as a reflection of how organized and professional you are, which will then be seen as an indicator of your potential to be a good, long-term customer. So if numbers aren’t your strong point, I highly suggest you seek assistance from a professional such as your CPA or an experienced broker with strong industry knowledge.”
Starting and then maintaining a relationship with a lender on a strong footing “has become much more important since 2007,” states Saei. “During the peak before the financial crisis it was common to see multiple lenders chasing a deal. Today, lenders are tending to their existing, established customers first. This is especially true if the lender is a bank. They don’t just want to make a loan, but to also establish a depository relationship and offer lines of credit and other services.”
For that reason, Saei advises petroleum retailers who are potential borrowers to “establish a broad relationship with their lender. Possibly move some of their personal accounts to the bank and get to know your banker on a personal basis if possible. Then make sure they have a good understanding of your business by taking the time to educate them about what you do.”