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 management
- Asset management