Some reports indicated that 2022 would likely be the most profitable year ever for traders, but storm clouds are gathering. Traders are faced with extraordinary financial challenges and uncertainty after record years. Inflation, interest rates and the Consumer Price Index all test new highs monthly, creating headwinds for consumers and making businesses more expensive to operate.
At the same time, automakers are placing unprecedented demands on dealers as they scramble to respond to evolving market challenges. In September, Buick offered to buy out any US dealer unwilling to make the infrastructure investments needed to upgrade. Ford Motor Co. offers dealers the option to become electric vehicle certified under one of two programs – with investments of $500,000 or $1.2 million.
There has never been a time of less predictability.
The overlooked asset?
Real estate remains the only constant in this mix of uncertainty, and many traders are starting to take notice. While the leaseback model is generating increased interest, it is not a new concept. It’s a strategy that has been used successfully in almost every industry for decades. Companies including Taco Bell and FedEx take advantage of the flexibility — pulling equity from their real estate and using the capital to reinvest in expansion and other financial priorities. Legacy Automotive Capital, which entered the business in 2019, is exclusively focused on specialized sale-leaseback capital for the automotive retail industry.
It couldn’t come at a better time. According to Legacy, most traders make an average of three times more on operating companies than on real estate. “This is an area that is overlooked by owners and operators,” said Todd Marcelle, chief investment officer at Legacy. “The most well-run groups, like Penske, Asbury and others, all use sale-leasebacks to engineer more profitable buy-sells financially and reduce balance sheet risk.”
By executing sale-leaseback deals, dealers can extract up to 140 percent of the value of the property on buy-sell, or to reduce their current holdings, Marcelle added.
The timing and uncertainty of the market make this opportunity ideal. Whether they’re looking to drive expansion, raise capital or simply take chips off the table, leasebacks offer flexibility and empowerment. This allows traders to maintain control of their property while withdrawing cash, which is very attractive in today’s market as they search for liquidity or weigh estate planning and exit strategies.
Legacy managers state that from an estate planning standpoint, a sale-leaseback can allow the dealer to redistribute equity locked up in the real estate among multiple family members without disrupting dealer operations. If the trader wishes to sell the property and operations, a higher overall value can be realized by selling these entities separately. Real estate monetization also allows dealers to diversify their family’s exposure from the automotive industry.
No one knows what the next 24 to 36 months will bring, but the one thing that provides some stability is the real estate piece of the puzzle. This is the only constant.