Case Study – Bonus Depreciation

Case Study

Summary: $5M Gain to Offset with Tight Timeline


Car Wash 1

Purchase Price: $4,775,000

Equity: $1,767,000

Year One Depreciation: $3,820,000

Cash Flow plus Principal (Yr. 1): $215,727

Free Cash Flow (Yr. 1): $156,306

Cash-on-Cash Return (Yr. 1): 8.9%


Car Wash 2

Purchase Price: $4,665,000

Equity: $1,665,000

Year One Depreciation: $3,732,000

Cash Flow plus Principal (Yr. 1): $207,000

Free Cash Flow (Yr. 1): $147,741

Cash-on-Cash Return (Yr. 1): 8.9%

Client: Technology Entrepreneur

Transaction: Acquisition

Granite Capital was approached by a client who incurred a five-million-dollar gain on the sale of a speculative real estate holding.  The client’s primary objective was deferring the gain.  The secondary objective was to provide cash flow with little management needed in a lower-risk asset.  A 1031 exchange was not viable to defer paying taxes on the gain. Engaged in the latter part of the year, the Granite team had a tight window to devise and execute a strategy.  Understanding the client’s risk profile, short-term objectives, and long-term objectives, Granite narrowed down the options to real estate that allowed for a significant amount of the purchase price to be written off in the first year using bonus depreciation rules.  Granite recommended the client purchase one or two institutional, long-term, NNN express car washes. 

Because express car washes require a substantial amount of equipment, 70% to 80% of the purchase price could be depreciated in Year One.  Additionally, express car washes are subscription-based providing the business with more predictable and consistent cash flow.  In terms of operating margins, the business is mostly automated and self-serve for customers, so labor is minimal – operating margins are high.  Through its network, Granite identified two high-quality, well-located car washes with experienced operators and closed on both before year end.  The properties have absolute, NNN leases with 20-year initial terms and four options to extend the lease for successive 5-year terms.  The rental rates increase by 1.0% each year during the initial term.

Services Rendered:

  • Assessing real estate asset classes for depreciation potential
  • Sourcing properties
  • Underwriting/Analyzing properties
  • Property touring
  • Broker engagement
  • Letter of Intent creation
  • Purchase and Sale Agreement negotiation
  • Performance of due diligence
  • Debt sourcing, analysis, and recommendation
  • Escrow management
  • Cost segregation
  • Asset management