Anyone in the 1970s will surely remember Rose Royce's hit titled "Car Wash" as it was one of the most notable hits of the 1970s disco era and was featured in the 1976 film of the same name. In recent years, however, the term “car wash” has achieved new success, especially in the commercial real estate industry – especially in the area of net rental agreements – with both private and institutional investors.
Until a few years ago, the property associated with a car wash was generally bundled into the combined sale of business operations and equipment to a new user or business owner. However, wise operators today are realizing that the best way to maximize their investment is to take out a long-term lease on the underlying property and sell it to a net private lease investor looking for a long-term passive investment.
More than 2.0 billion cars are washed in North America each year, according to the International Car Wash Association, and in 2019, 83.0 percent of Americans who own or lease a car used a professional car wash and had retail sales in excess of 11.0 Billion dollars.
Additionally, the recent impact of COVID-19 has further strengthened the industry as touchless car washes garnered "Essential Business" awards in a number of markets across the country. As investor demand has focused on service-minded retail tenants who are recession-proof and internet-resistant, single-tenant car washes are an attractive alternative to more traditional net rental properties such as fast food restaurants, car dealerships and drug stores and dollar stores. Here we discuss five main reasons net leasing investors are becoming aware of this emerging asset class.
- Recession-resistant = inexpensive / subscription-based service model
Today, many of the net car washes sold in the market are express car washes compared to the full service model. Prices range from $ 3.00 to $ 10.00 per customer. This has proven to be an inexpensive way for consumers to maintain a clean vehicle. In addition, there is a growing trend for operators to offer their customers loyalty programs. If customers can purchase a monthly subscription service that allows unlimited washing at a fixed cost, it means “sticky” revenues for operators, making car washes even more recession-proof.
- Multiple sources of income Strong balance sheets
Many of the full-service car washes have multiple sources of income and revenue in addition to the car washes. For example, some full-service locations offer gasoline or fuel, convenience stores, and in some cases a quick service restaurant option that is built into the overall operation. Taken together, the additional income generators strengthen an operator's EBITDA – a number that is typically assessed in determining the tenant's ability to meet their future rental obligations.
- Attractive coverage ratios overshadow credit profile
In most cases, car wash rental coverage is between 2.0x and 2.5x EBITDA, which in turn helps investors and lenders to familiarize themselves with the renter's ability to continue to meet rental obligations. This is especially true in cases where the tenant is a tenant or operator with a lower credit profile. Strong coverage ratios help reduce credit risk and show both investors and, most importantly, lenders the success of the tenant in a given location.
- Location, location, location Strong residual value
The underlying residual value of the car wash location has also become increasingly attractive. As a rule, car washes are generally well-located locations – at or near signalized intersections where there are high traffic figures and the surrounding population. Additionally, the actual facility upgrades, including washing equipment, can be expensive, making it more difficult for the renter or operator to pack and move around the road – an option many traditional net lease retail uses when choosing their locations to have.
- Long-term rental contracts with fixed annual rent increases create synergistic relationships between landlords and tenants
Aside from fast food restaurants and a handful of other types of tenants, there aren't many retail options with a term of 15-20 years for investors, especially those looking for a passive net rental investment with fixed annual rent increases. In today's market, investors are seeing fewer and fewer 20-year leases. However, the 20-year rental period has almost become the industry standard for car wash offers, creating a synergetic relationship between landlord and tenant. From the landlord's point of view, it offers an investor the opportunity to acquire a long-term, uncomplicated investment with annual rent increases that are typically between 1.0 and 2.0 percent, thus helping to hedge against inflation risks with a return of 6.0 to 7.0 percent at. On the other hand, selling the underlying real estate via a sale leaseback gives the tenant or operator quick access to additional capital that can either be used to service existing debts or to scale their business by opening additional locations.
These features will help make car washes increasingly popular as powerful alternatives to other traditional net lease retail investments. We anticipate that demand for this emerging asset class will increase as net lease investors seek well-located, recession- and e-commerce-safe, service-minded retail investments with long-term leases, attractive rental growth and high risk. adjusted returns.