Car Wash Lease Negotiation Tips for Tenants and Landlords
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If you're considering adding one or more car washes to an investment portfolio, or a property owner leasing to Commercial Real Estate (CRE) investors, you could be part of one of the fastest-growing retail businesses in the nation.
This article presents valuable information for both car wash investors and their landlords alike.
Before we discuss topics like rent structure, maintenance, and leases, let's take a closer look at the booming car wash industry.
Customers, Start Your Engines
There are currently around 60,000 drive-through or “tunnel” car washes in business, with this number expected to double by 2030…just six years.
America's car and truck owners have gradually given up the traditional hose and bucket style of cleaning their vehicles. As of 2023, around 80% of these owners are saving time by visiting local car washes.
Some investors have turned visits to car washes into family events, complete with dining options and children's playgrounds. These mega-washes are considerably bigger than previous models.
Recently, a Virginia mega-wash was named the largest car wash in the nation. The 65,000-square-foot facility houses two side-by-side wash tunnels. A full-service wash takes around 13 minutes from pre-wash to drying.
No matter what size car wash an investor may be visualizing, an important first step is to research the leasing options for your business location. This is defined as ground leasing.
Ground Leasing Basics
Whether an investor locates a prime site for a car wash or purchases a fully operational business, a ground lease may offer a more economical entry than purchasing land.
This lease creates a long-term, binding commitment between the investor operating the car wash and the owner of the site, aka the landlord. It's critical to ensure that this type of lease is structured properly and contains the following:
- Initial term: The length of time the lease will be in effect.
- Base rent: The price the tenant pays to occupy the land.
- Rent increases: Often structured as annual increases or increases that occur every five years (7.5%-12%).
- Extensions or options: These are usually available to the tenant if they wish to continue the lease beyond the initial term.
- Use definition: this will clearly state what the property can be used for.
Like most retail businesses, the investor/tenant owns the actual car wash building, while the landlord only owns the land on which it operates. The investor/tenant holds the building on a balance sheet and may use it as loan collateral.
While these guidelines apply to many ground leases, car wash owners/tenants and landlords may have other concerns.
Car Wash-Specific Lease Considerations
Investors planning to create a high-tech car wash or purchase a fully operational business will have different considerations when signing a lease. Here's why.
When an investor buys an established car wash on leased land, the landlord doesn't have to be concerned with the condition of the property, as this is the seller's obligation.
However, investors who will develop the land and build a carwash will need to negotiate the state of the property with the landlord.
For example, if the property is currently home to an abandoned building or isn't prepared for new construction, who covers the costs of ground preparation?
Some landlords may be prepared to finance preparation before construction begins. In this case, the tenant will want to oversee progress to ensure construction may begin on time.
Other landlords may prefer to charge less rent in exchange for the tenant managing and financing pre-construction preparation.
However, not all investors prefer to start from scratch and will be shopping for an existing car wash.
Here are some additional factors for tenants and landlords to consider.
Assumable Leases for Existing Car Wash Businesses
When considering buying an existing car wash, an investor should research the lease's remaining term, as it plays a big role in determining the business value.
Car washes and similar businesses are often valued using a discounted cash flow model. If the remaining lease time is short, the terminal value will be affected.
Here's an example of how ground lease terms affect business value.
How Ground Lease Terms Affect Business Value
Let's say an investor is considering two car washes. They're both producing around $800,000 annually. However, one of them has 19 years remaining on its lease, while the other's lease only has about four years to go.
Since determining future cash flow is vital when assessing value, the car wash with plenty of lease time remaining will be more valuable than the one that doesn't.
This may also impact the investor's ability to obtain financing, depending on its source.
Ground leases may also contain clauses for the maintenance of shared areas, especially if the lease is within an existing shopping area.
Requirements for Business Owners Within Common Areas
Many retailers draw more visitors with attractive landscaping, walkways, and similar areas. Tenants often pay a portion of the maintenance costs, which is described as Common Area Maintenance charges (CAMs).
Since upkeep is vital for a shopping center's success, the landlord may require tenants to share maintenance costs.
In addition, the area may be covered by casualty insurance that tenants help finance. In this case, a tenant should be aware of who receives insurance proceeds in case of a claim.
Another section of a lease—its expiry—will affect both parties, so let's look at it now.
When It's Time to Break Up
Like many other businesses, a car wash has a lifespan. One that offered state-of-the-art cleaning during its first years of operation may eventually become less profitable, losing business to new competitors.
If an investor/tenant decides to carry out a major overhaul with an acceptable return on investment (ROI), the lease may be renewed. But what happens if the investor prefers to move on?
Ground leases often require tenants to restore the property to its original condition if not taken over. This means that a tenant will be obligated to cover the cost of demolishing the car wash and/or reselling sections of the building.
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