Key Points
- The 100% bonus depreciation passed by the Trump administration is delivering a boost to car wash real estate.
- The car wash business has evolved markedly over the last decade as private equity investors flock to the recurring revenue.
- Typically, private equity buys the car wash business and then sells the property to an individual investor.
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox. Much like the funeral business, car washes are a pretty safe bet: Cars get dirty. They always will. The real estate that these washes sit on may be an even safer bet for investors, thanks to tax laws that were updated in their favor last year. The main driver behind the car wash play is the 100% bonus depreciation benefits investors can receive in the first year under the tax laws enacted during the Trump administration, according to Camille Renshaw, co-founder and CEO of B+E, a tech-driven real estate brokerage firm specializing in net lease properties and 1031 exchanges. Car washes are often triple net lease, or NNN, properties – agreements where the tenants pay the taxes, building insurance and maintenance and repair costs. As a result, they pay lower base rents and have more control over their properties. Renshaw sets up the math like this: In an example of a $2 million car wash real estate purchase, with a $1.4 million mortgage financing, so $600,000 equity invested, that’s potentially $2 million in tax write-offs during year one through the bonus depreciation provision — if structured properly. That means an investor may receive deductions equal to approximately 333% of their original equity investment. “For some investors, this means they get a ‘free’ property,” Renshaw explained. At the same time, the car wash business itself has evolved markedly over the last decade. “The industry has shifted from mostly cash-based, mom-and-pop operations to highly digitized businesses with license plate recognition, app-based payments and recurring monthly subscription models that create much more predictable cash flow,” she said. Private equity firms have been attracted to that recurring revenue profile. There was also a wave of consolidation and M & A activity, due to the industry’s historically fragmented ownership structure. Typically, private equity buys the car wash business and then sells the property to an individual investor. The private equity firm then leases the space back from the investor long term. The property investor, which tends to be a high-net-worth individual or family office, gets a high-rent tenant plus major depreciation deductions, while the operator recycles capital into expansion. “That combination of strong cash flow, recurring revenue, fragmented ownership, institutional consolidation, and unusually attractive tax treatment has made car wash properties wildly popular among private investors over the past several years,” said Renshaw. Several reports have shown a strong surge in car wash deals in the second half of last year. “A $10 million deal on Miami’s Biscayne Boulevard is emblematic of the accelerating demand for net lease car wash facilities, propelled by the reintroduction of 100% bonus depreciation,” according to a November report by GlobeSt. The end of the year tends to be the busiest for this trade, as investors are tallying their potential tax bills and looking for relief.
