by Patrick Crowe
Published by Crowe Enterprises, 1997
Copyright © 1997-98 Property Valuation Advisors, Newburyport, MA
ALTHOUGH THE GRAMMAR, spelling, cover, and printing in this step-by-step guide are crude, the information is worthy if you are looking to answer the question: what's a self-service car wash worth? To this end, the author, an experienced car wash owner, presents firsthand knowledge, appraisal methodologies, and case studies of actual operating car washes.
When inspecting a property, the author suggests making note of the number of bays, bay services, the number and type of bill changers, vending machines, and the condition of the buildings and equipment. Note any missing equipment. Also check to see if a working water softener exists of adequate size to service the facility. Additionally, check for coin boxes or vaults, and adequate lighting and floor heat in the bays (in geographic areas that require this feature).
The author estimates the cost for new self-service equipment (as of 1997) at about $10,000 per bay, $15,000 for top-end equipment. An unusually well equipped facility would have two "vacs" per bay, 15 vending machines, four changers, as well as an exceptional video-based security system.
To establish a replacement cost for a building, base it on the number of bays and total square footage. Some of the cost variables include floor heat and wall and roof type. The total cost for the buildings, site improvements, and equipment for an eight bay facility cited in one case study was $200,000 or $25,000 per bay.
The author suggests checking not only with local car wash equipment suppliers for the cost of the equipment, but also with local contractors for the cost of the buildings. Alternatively, he suggests consulting construction guidebooks or building contractors specializing in car wash buildings. The appraiser also should try to find out original costs, which if factored for time, may provide a check against other methods.
Once a replacement cost is established, the author suggests depreciating the equipment based on a ten year life. But don't forget to consider possible obsolescence on certain items as well. Obsolescence can occur quickly though an item may be in good condition physically. Depreciation on buildings and ground improvements should be based on a longer term, according to the author, perhaps 25 years.
To estimate land values, use comparable sales of similarly located commercial land. Corner locations tend to be more desirable than the middle of the block. We are warned, however, that it is possible that over time a car wash location may improve to the point whereby the best use of the land may no longer be for use as a car wash. Therefore, the land value alone may exceed the value of the entire operation.
When performing the income approach, the author suggests looking at three years of operation. If the numbers show a pattern of consistent growth, then the stabilized income estimate should be higher than the three-year average. For comparison, annual, industry, revenue trends are available in two journals: Professional Car Washing and Detailing and Auto Laundry News.
Once stabilized income is estimated, the author suggests applying a Gross Income Multiplier (GIM) or a Net Income Multiplier (NIM). The tricky part is determining a correct multiplier. The author contends that the GIM should be about 2.75, but prefers to state this as a range between 2.50 to 3.00. A facility with gross annual revenues averaging $100,000, therefore, would have a market value of $250,000 to $300,000.
Still, the risks of operating these facilities are high. Most acquisitions involve borrowed money. The cost of borrowed money is higher than for less management- and equipment-intensive real estate based investments. The author claims that since 1990, adjustable mortgage rates have been 11% to 12.5% based on five to ten year commitments.
One of the risks of ownership is weather. Bad weather can reduce business to a crawl. Moreover, a drought may force a car wash to shut down. Car washes once were thought to be recession proof, however, this has proven not to be true. Competition is another risk. The major oil companies have been known to offer deeply discounted car wash prices as a loss leader to sell gasoline. Another risk is overbuilding. Excess profits in a market often can breed ruinous competition. So an investor should be looking for a return on equity in the high teens to as high as 20%.
According to national surveys and the author's research, operational expenses for typical self-service car washes average 45% of gross revenues (not including debt service, depreciation, or income taxes).
Recommended sources for comparable sales data include car wash buyers, sellers, suppliers, and brokers, as well as trade associations and tax assessors. The comparable sales approach, however, typically brings problems of general comparability. Still, the market value of the subject neither should be greater than the highest adjusted sales price of the comparables, nor should it fall below the lowest indicator.
When performing this approach, the author provides a list of differences that should be considered: 1) location; 2) lot size; 3) number of bays; 4) age/condition of the buildings; 5) age/condition of the equipment; 6) extent of bay services provided; and 7) the presence or absence of bay floor heat.
A common mistake made by appraisers is treating the self-service car wash merely as real estate rather than an operational business. The market value of operational self-service car washes always includes some component of personal property (equipment) value, and may include an intangible goodwill value component.
This may be the case when a facility is exceptionally profitable. Two car washes may have identical real estate and equipment, yet as a result of exceptional management, one could have twice the gross income and, therefore, significantly more value. Some of this added value might be classified as goodwill. Goodwill is the difference in value of the overall operation minus the value of the tangible assets of land, building, and equipment (if a positive difference exists). This distinction could be important in determining a value for the real estate-only for assessment purposes.
The author refers to reconciling the three separate approaches using a homemade term, "concertizing". Nonetheless, he favors including all three approaches, but leans toward placing greater weight on the income approach. In the end, however, he concedes, based on the availability of data, the reliability of each approach also should be a factor.
The author also discusses automatic bay car washes. He comments: "Although their risks may be higher than self-service washes ... so too will their revenues."
The booklet isn't very pretty; but despite the atrocious packaging, the reader still will get invaluable information that will prove useful in adding to one's knowledge about these specialized facilities and allow cleaner value estimates.
The book above is available by writing to the: Crowe Enterprises, 600 W. 70th St., Kansas City, MO 64113
Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME, and MA.
To contact the author of this review, e-mail to: email@example.com or contact him at the address above, or call 978-462-4347.
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