The Appraisal of Car Washes

When the first mass produced car rolled off the assembly line, it wasn't long before the first car wash opened for business: about six years. The first car wash was called an "automobile laundry." It took a while before that morphed into "car wash." The first car wash was what we now call a "tunnel wash," where a car moves down a line through a series of stations, from soap to wiping, rinsing, and drying and to applying wax. Car wash styles have expanded. Some are still tunnels, while others offer individual stalls with manually operated wands or "touch free" machines, and others offer additional services like detailing of the interior.  

It takes an average of 36 gallons of water to wash a car. It takes that and a variety of chemicals. Once, it all went down the city drain. Today, at a state of the art facility, car wash effluent is elaborately filtered and treated, with the water recaptured for re-use as "gray water." The process is much more environmentally friendly.  

The appraisal of a car wash raises all the same issues that are raised in the appraisal of any property where a business is wrapped up intimately with the real estate: a gas station, a restaurant, or a hotel. Each consists of real estate, equipment, and a going concern. The appraiser's assignment may be to appraise the real estate only. Or, it may be to appraise the going concern, which may or may not include the real estate. The real property and the going concern are different things. The appraiser who is skilled in appraising real estate may not be skilled at valuing the going concern. Exactly what is to be valued needs to be determined at the start.  

Every appraisal is made from raw data, and the raw data available to the appraiser may be only partially defined. The raw data consists in large part of the information concerning what other car washes have sold for. That can be a source of inaccuracy. When a car wash sells, the buyer and the seller agree on a total price, which typically includes the real estate and which may include the car wash equipment, the accounts, and the going concern. For the sake of this discussion, let's say it includes all those things in a single package. When the day of the closing comes along, it is necessary to allocate the purchase price among those parts.  

Let's say that the total price is $2,000,000. Let's say that the depreciated cost of the car wash equipment is $500,000, and the value of the intangibles is another $200,000. That leaves $1,300,000 as the value of the real estate, and that is the selling price that is recorded at the Registry of Deeds. It is also the price that is reported by the data services that appraisers use. In this example, $1,300,000 is probably a reasonable allocation to the real estate.  

But what if the buyer wants to show a larger number for the real estate, in order to be able to finance a larger mortgage on the real estate? Let's say the parties allocate the entire $2,000,000 to the real estate. This can happen. Let's say that two very similar car washes sell, and the reported prices are $1,300,000 for one and $2,000,000 for the other. Which is the more realistic price? To answer that requires knowledge of the larger price for the entire package in each case and knowledge of how the allocation was made. Without that information, the analyst's knowledge of how the price for the real estate came about is less than complete.  

The first method of valuation for the real estate is the standard method of sales comparison, with the reported prices for the real estate in several sales of car washes forming the basis of the analysis.  

A second method of analysis is the standard Income Capitalization Approach, in which a rental rate is applied to the land and buildings, expenses are deducted, and the resulting net income is "capitalized" to produce the indication of value. This method works well when the car wash facility is subject to a long term, arm's-length lease. It works less well when there is no lease, because comparable rental comparisons for car washes are scarce.  

A third method is to consider the income and the expenses that result from the operation of the car wash, to use that to derive the net income to the real estate, and to capitalize that to derive the value of the real estate alone, which is usually the appraiser's goal. This method can work. The necessary information is readily available in the annual accounting of the car wash. But this method also has its pitfalls.  

Let's say we are given an income and expense statement from last year with gross revenue of $1,000,000 and a long list of operating costs that reduces the net income to $0. What next?  

We start by removing a couple of line items from the operating costs: mortgage interest and depreciation. Our valuation supposes a purchase by a new owner who would not inherit the mortgage, so we eliminate that. We eliminate depreciation because it is not a real world number that relates to actual costs. And if the owner of the operation has been drawing an exorbitant salary (or has been drawing only a small salary, for whatever reason), we remove that as well.  

Then we start adding items back in. Again, let's say we are looking at an entire operation that includes the real estate, the equipment, and the business, all owned by one person, Fran. Then we start adding items back in.  

If Fran has been paying a manager to manage the car wash, then the manager's compensation, including benefits, is a legitimate expense and an appropriate line item. If, instead, Fran has been serving as the manager and we have eliminated Fran's salary, then we need to insert a line item for a manager's salary and benefits. Why? Because someone has to do that work. When Fran has sold out and gone, that work will not be done for free.  

We have eliminated depreciation, but that doesn't mean that the facility - and especially the equipment - is not running down. Anyone who has seen the level of rust that eats away at a place as humid as a car wash can see that the equipment has a limited life. If the cost new of the mechanical equipment is $1,000,000 and it has a life, on average, of 15 years, then the owner needs to be putting away $65,000 or so as a reserve for replacements every year, or the facility will grind to a halt. That $65,000 becomes a line item.  

Last, someone needs to be compensated for managing the real estate. Fran may have been doing that, but that is a manager's function, and it will require a manager when Fran is gone. Just as in the valuation of an apartment building, a manager's compensation is a legitimate cost. The idea is to come to a bottom line number that doesn't require the investor to do anything other than oversee the investment.  

The pitfalls come in when we forget to remove certain line items and to insert others. Without that, we come to a bottom line that is unrealistic.  

A final method of analysis is to forget the car wash entirely and to think about what else can be done with the place. In the Boston urban area and others where construction is booming, recent car wash sales are likely to include some that were sold as the sites for development with multi-family buildings, hotels, and life science buildings. New uses can produce land values that far exceed the value from continued car wash operation.  

That is four ways to find the value of a car wash. It is best for the appraiser to consider them all and then to apply those that are likely to do the best job of getting at the value of the facility.