FAQ’S: Express Car Wash Bonus Depreciation
An express car wash is commonly defined as a mostly automated car wash that utilizes a conveyor belt system with substantial equipment to transport and wash a vehicle through a tunnel.
- Tax-efficiencies via bonus depreciation (IRC §168(k) amended by the Tax Cuts and Jobs Act of 2017) – 100% of the improvements can typically be expensed in the first year of ownership through bonus depreciation using a cost segregation study. This can translate to 70% to 90% of the purchase price being expensed in Year One depending on the location. The phaseout of bonus depreciation will likely begin in 2023 and continue each year where the maximum amount of expensing in Year One will decrease in 20% increments each year until reaching zero. For example:
- 2022 – 100% bonus depreciation
- 2023 – 80% bonus depreciation
- 2024 – 60% bonus deprceciation
- Consistent and predictable cash flow
- Little to no management ("Mailbox Money")
- Express car washes typically have absolute, triple-net leases
- An absolute, triple-net lease is defined as a lease where the tenant pays the landlord monthly rent and is responsible for all expenses of the property (utilities, property taxes, insurance, maintenance, repairs, etc.).
- A business owner selling their business for a large gain with a spouse who qualifies as a real estate professional
- A real estate professional with a substantial gain
- A married couple with substantial ordinary income where one individual qualifies as a real estate professional
- i.e. Doctor with a spouse who is a real estate professional
- Note: These situations typically involve an individual who qualifies as a real estate professional or an individual with a spouse who qualifies as a real estate professional as defined by the IRS.
- $4,000,000 to $8,000,000
- Current market cap rates vary from 4.50% to 6.50%
- There are several factors that can affect cap rates: experience of operator (tenant), number of locations, macro and micro geographic location (population density, median household income, vehicles per day passing the location)
We would define a strong operator as a company with at least 50 locations, steady growth in location count (not rapid growth in the previous 12 months), an executive team with long-term experience in the car wash industry, and a significant financial backing (usually a private equity group)
- Express car washes usually fall into the specialty retail bucket for most lenders. From a lender’s perspective, specialty retail is often a riskier real estate asset because if the operator vacates the location, the only type of tenant who can fill the vacancy is another car wash.
- Your personal bandwidth and real estate expertise (time, energy, money, knowledge)
- Performing due diligence: coordinating and reviewing third-party reports, negotiating lease terms, traveling to the site, touring the market, etc.
- Strong demand for premium locations with experienced operators (getting your foot in the door)
- Convincing a seller or operator that you are experienced in real estate transactions and that you can provide a high degree of certainty that you will be able to complete the transaction
- Having the ability to close all cash
- You can usually get financing after you purchase the property (depending on your banking relationships, the strength of the location, strength of the operator)
- Working with advisory groups who have strong reputations and experience to source/analyze properties, negotiate on your behalf, use their reputation, provide off market opportunities, and lead the transaction through close of escrow