United States: Keeping Dealership Assessments In Line And Favorable

Last Updated: August 11 2017
Article by Chris Richter

It's a cliché we hear in gags, see in cartoons and read in articles: how to out-smart, out-play and out-negotiate the car salesman. Nowadays with comfortable amenities like fancy coffee bars, bright retail stores, in-house restaurants, free wifi and satellite TV, consumers no longer fear the auto buying experience.

Following the free-fall of the economy during 2008-2009, and its subsequent recovery, the auto trade has come back with a roaring bang. The National Automobile Dealers Association (NADA) forecasts that 17.1 million new and 15.3 million used cars and light trucks will be sold in 20171. This is down slightly from the all-time record set in 2015 of 17.3 million new cars and light trucks. NADA even suggests that despite political unknowns going into 2017, the outlook is poised for positive growth. The overall economy is expected to improve with increases in gross domestic product and decreasing unemployment2. Increased revenues have made way for franchisees to improve their real estate to conform with manufacturer requirements in order to continue carrying a brand. But, how do dealership owners and operators gain their share of the market? How does this translate to the value of the real estate from which these businesses operate?

New look, new demands, increasing property tax

Today's buyer has a plethora of resources to research, select and purchase a car. One does not even have to step in the door of a dealership to purchase or negotiate a sale. Online changes to the buying process have created an open market where a buyer in Utah, for example, can find their desired car in Indiana. However, with the average American holding onto their car longer than ever (an average of 11.5 years3), the new car buying experience must be memorable.

Auto brands have caught on to these buying trends. In the anticipation and hope of bringing customers through the door, manufacturers are demanding dealerships outfitted with the latest in "while-you-shop" entertainment, dining and coffee areas, comfortable lounges and private offices. The big brands are requiring uniform architecture components via a "re-imaging" process of building renovation and façade changes on an increased schedule. Unfortunately, this can mean an investment or capital expenditure for the owner and operators of the real estate on items that may not have come to the end of their economic lives. For example, the painting of the showroom from light beige to a more on-trend, light gray.

What do these kinds of changes mean for property value?

The local assessor relies on building permits to get information about your property and increase values accordingly. Therefore, brand refreshes such as replacing light-gray floor tile with smoke-gray floor tile may be necessary, but they do not increase your property value. Alternatively, adding a new service bay for customers to keep out of weather conditions does increase your value. Having an advocate review these changes can have an impact on the bottom line.

Out with the old, in with the new

The closure of thousands of dealership buildings during 2008-2009 has resulted in continued vacancies and increasing holding costs for owners. Many dealers, particularly in areas where land values have increased, are seeing old, functionally obsolete buildings purchased for land value and tear-down. The sale of these properties may be considered land sales and should be analyzed appropriately for use in valuing dealership properties. Auto properties are uniquely desirable as they are typically built on level topography, cover five-plus acres, and sit on a major freeway with desirable ingress, egress, visibility and traffic counts.

The redevelopment of these sites into retail use, apartment, mixed-use developments, hotels and other high-density plans can result in the beautification of an area. But, what happens to the property as it continues to sit vacant, waiting for the right buyer and then waiting for the sale as the buyer obtains applicable licenses, necessary zoning changes and city approvals to come through? These locations become magnets for vandalism, damage and defacement. Alternatively, what of the older, abandoned, general-use buildings that have been purchased for the development of shiny new auto dealerships? Do you know what this can mean for property value?

Assessors include the value of buildings on the assessment roll that are vacant and unutilized. Does a building slated for demolition have value? Yes, but it may be minimal. Additional factors like a change in the highest and best use of a site can affect the value of the buildings. Lastly, the assessor's mass appraisal process does not adequately address items of deferred maintenance and other property value issues directly impacting your location.

What about new construction?

As the U.S. economy improves, major cities across the U.S. are seeing a renewal of industry in urban and metropolitan areas. Residents moving to these areas for proximity to their work places need access to shopping and entertainment venues. Auto developers are competing for prime land sites for redevelopment with other retail and multi-use developers. In order to meet consumer location demands, developers are taking advantage of infill developments and re-development opportunities. However, with rising land values in high-density areas, dealership designs are forced to be more creative to accommodate smaller land parcels.

New build design typically includes amenities not previously found in older era auto dealerships, including coffee shops, immense consumer lounges and high-traffic service departments. The creative concept has resulted in a dealership building inclusive of these features that is futuristic and aesthetically pleasing, meant to draw in the consumer. New dealerships may feature a multi-level parking garage that houses the service department as well as new inventory. Showrooms have moved to a high-gloss/glass front, sometimes multi-level, to showcase top brand models.

The development of a new property is an exciting process. However, one of the greatest fixed cost for any operator of real estate is property tax. Appropriate disclosure of hard and soft cost and review of special use features and their value in an open market is key to maintaining a favorable real estate assessment value to keep the property tax expense at appropriate levels.

Accessory buildings, repair shops and site improvements

A dealership should be a one stop shop for buyers and their car needs. Once the buyer purchases an automobile, they are ideally returning for scheduled maintenance, general repairs, body detail, body work and even their weekly car wash. By offering complementary services, it keeps the brand and business top of mind for the customer and increases the chances of their referral. As locations add accessory buildings for storage, detail, paint and body, either on site or at separate locations, the same considerations apply. It is necessary to ensure assessor offices and property tax offices have these buildings adequately sized and classed. Storage and car wash structures will depreciate much more quickly than the main dealership office and showroom; and review and appeal is necessary to keep these assessments in line.

How can dealerships keep a keen eye on property values and real estate tax expense?

  • Most assessing jurisdictions review property values on an assessment schedule. Depending on state statues this schedule can vary from 1-8+ years. It is important to challenge the assessment at the time of revaluation and keep up with changes that can affect property value.
  • Be mindful of states that differentiate between real property, personal property and leaseholds. Have a firm understanding of the classification of property and be sure to avoid duplicates.
  • Understand the appeals process. While mass-appraisal is the preferred and generally accepted appraisal method used by appraisal districts and tax assessors, the particular details of a property will not be addressed. Generally, once a bill is received the opportunity to appeal value has passed.
  • Report property changes, renovations and repairs appropriately. The appropriate, up-front disclosure of a like-for-like facelift can alter how the assessor values a change.
  • Seek professional advice and guidance of a licensed, property tax consultant who can guide the planning, predevelopment and year-over-year changes.

Footnotes

1. http://www.nada.org/steven-szakaly-auto-sales-forecast-2017

2. http://www.nada.org/nadadata

3. HIS Automotive, July 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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