Getting a car wash loan closed can be complicated and filled with technical landmines. Common issues include value, environmental problems, title, reported cash flow, age of equipment, deferred maintenance, etc.
If borrowers do not understand the potential issues they leave themselves at the mercy of banks and their loan officers, which often results in wasted time, money and dead deals. But many issues can be overcome and do not have kill transactions if handled correctly from the start. The information below can help protect you from the biggest deal “killer” out there in the auto wash industry.
Appraised value is by far the most common issue in this industry. Most conventional banks want to be less than 70% loan to value and most SBA lenders want to be less than 85% loan to value (though a few will go to 90%). If your loan to value is higher then what your bank want’s, then your transaction is dead.
Car washes, like hotels, gas station or bowling centers are unique in that the building itself is directly tied to the business. You have to run a car wash business out of a building specifically designed to be a car wash. So the point here is that the business value should be tied to the land, building and equipment value. Unfortunately to many unsuspecting borrowers, most banks instruct the appraisal companies to leave out the business value.
Most wash owners do not understand the technicalities of how appraisal reports are completed. Here is a quick overview: There are basically three different approaches to appraising commercial real estate – Cost Approach, Income Approach and Comparable Recent Sales Approach. All three approaches are tied together, but values on a wash can range widely based on the approach used.
Further, on most transactions banks dictate how they want the report to be completed. I.e. they tell the appraisal company what approach to use. Often times the Cost Approach comes up with the lowest value because it only includes the “as is” value of the land, building and existing used equipment. What the Cost Approach doesn’t include is the value of the business as known as Goodwill or Blue-sky. Blue-sky is normally reflected in the Income Approach. But most car wash asking prices are based off an Income Approach.
The difference in value based on the approach used can be staggering, especially on washes that are doing really well and producing a lot of net income. With the income approach, the higher the net income, then the higher the value of the wash.
Here is how declined loan typically go: imagine if you and a seller had a wash under contract for $1,000,000 and this price rightly included land, building, equipment and business value but the bank you are working with ordered the appraisal report just on the costs (Again, just land, building and as is value of equipment) of the wash resulting in the valuing coming in short at $800,000?
Unless you came up with an additional $200,000, on top of your down payment, you would have a dead transaction. Point being: you need to understand how your bank orders appraisal reports specifically on car washes and you need to get your bank to commit to how they will order the report before your pay for it. Otherwise, you will be at their mercy.
Internal Workings of Banks
Banks are like most businesses. They are busy, understaffed, have turn over, have communication problems, make mistakes and can be unorganized. This is true in small to huge banks. Many banks that do not focus on car wash financing can be unaware of how they even order the appraisal reports on car washes. They will make the decision on a case by case basis and the individual that actually orders the report can have a say in how they are order. And often the person that orders the report is lower level and doesn’t really understand the difference.
So in essence they might be “winging it”. This might be hard to believe, but it is true. Perhaps they do not have a set policy on if they will go for Cost or via an Income Approach. Maybe they haven’t approved a car wash loan in years and as a knee jerk reaction go with the more conservative approach because they are afraid of making a mistake. Again, if the report is ordered in the most conservative way, it will most likely result in an unfair valuation and a dead transaction for you.
Bottom line, on a special purpose property like a car wash, do your research. Make sure the lender you pick has a real understanding of your industry and is activing closing car wash loans. Many borrowers go with the lowest rate they can find without giving more thought about the overall deal and likely hood of closing. Do not make this mistake. Work with an industry exert and your closing should be smooth and successful.