How do car dealers finance the construction of new dealerships?
Curious how they get the financing to do such large developments. One dealer in my city started in a small location and recently bought a $11,500,000 vacant land on a corner to start constructing his new dealership which will cost another $7 million. How does that work? Are they borrowing equity from the previous dealership to put a DP on the land? Then financing the construction loan separately with receivables as collateral?
[{"id": "fgd8dmv", "text": "If it is a franchised dealer from a manufacturer then from what I've seen, a lot of the time the financing for the improvements come from the manufacturer's finance arm and the land is usually a % of equity from the dealer and the balance from a local financial institution.", "replies": [{"id": "fgfvihh", "text": "This is 100% correct.  I represent the finance wing of a major automotive brand on their real estate and construction lending.  Some dealers will use traditional bank financing, but they often have much higher leverage with the manufacturer's finance wing because they place the dealer relationship above all else.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fgdb7rz", "text": "It's only fair that the manufacturers use their superior access to capital to help finance these projects since they require the dealers to participate in some pretty ridiculous capital improvement plans. I've seen so many nice dealerships get white boxed or even demolished because the manufacturer thinks they need to implement some new branding strategy. \n\nThe demo projects are a real bad deal if the old improvements weren't really that old. Sec. 280B is ruthless (all the adjusted tax basis becomes nondepreciable land).", "replies": [], "depth": 1}, {"id": "fge595a", "text": "Owner occupied loan provided by a commercial bank would be the most likely source of financing. I have only seen the manufacturers involved in floor plan financing {financing the cars}.\n\nThese dealership loans are usually done when an existing dealer grows out of their location and have the historical performance to support the loan. Although the actual property will likely be in the name of a separate entity, the lender will make its decision based on the cash flow of the dealership.", "replies": [{"id": "fggaaqw", "text": "This just goes to show that the only limits to how any deal gets done is the imagination of the parties to it.  The only time I've ever seen a development structured this way was for a non-franchised dealer, but obviously you've seen it, so it happens.  \n\nThen again, I am aware of a particularly successful Ford dealership that self-finances everything (loans from the owner to the S-Corp. operating entity for TI's; straight cash (i.e., a contribution) to the LLC real estate holding entity for the structure). Still not sure why they didn't want to take advantage of low rates available to them coupled with interest deduction and take the cash to the market, but I guess some people really hate debt.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fgeojm4", "text": "Occasionally they\u2019ll be financed through landlords that own the lots, though this isn\u2019t as common. There are a couple firms that specialize in automotive retail real estate and instead of providing a loan like a bank, pay for construction at a certain cap rate which gets capitalized to the rent. This is more common for continual improvements like dealership imaging if the manufacturer\u2019s guidelines ever change.", "replies": [], "depth": 1}, {"id": "fgezl6j", "text": "Is this a real question? A bank, a private lender, etc. there\u2019s multiple ways.", "replies": [], "depth": 1}, {"id": "fgf506s", "text": "SBA 504", "replies": [{"id": "fgfuiov", "text": "... has a $5mm limit.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fgh0prf", "text": "Another thought, I believe it is also common for them to lease the property under medium term contracts", "replies": [], "depth": 1}]