Important points
A version of this article first appeared in the CNBC Property Play newsletter with Diana Orrick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large publicly traded companies. Sign up to receive future editions directly to your inbox. Just like the funeral industry, car washing is also a fairly safe practice. Cars get dirty. They always will. The real estate properties in which these assets reside may become an even safer bet for investors, thanks to tax laws that changed in their favor last year. Camille Renshaw, co-founder and CEO of B+E, a technology-driven real estate brokerage that specializes in net lease listings and 1031 exchanges, said the main driver behind the car wash is that investors can receive a 100% depreciation bonus in the first year under the tax law enacted under the Trump administration. Car washes are often triple net lease (NNN) properties, where the tenant pays for taxes, building insurance, and maintenance and repairs. As a result, they pay a lower base rent and have more control over their property. Renshaw does the math: For example, if you purchase a $2 million car wash property with $1.4 million in mortgage financing and $600,000 in equity invested, the bonus depreciation provision could result in a $2 million tax deduction in the first year, if structured properly. This means investors could receive a deduction equal to approximately 333% of their original stock investment. “For some investors, this means getting ‘free’ real estate,” Renshaw explained. At the same time, the car wash business itself has evolved significantly over the past 10 years. “The industry has moved from a mostly cash-based mom-and-pop operation to a highly digitalized business with license plate recognition, app-based payments, and recurring monthly subscription models that create more predictable cash flow,” she said. Private equity firms are attracted to its recurring revenue profile. The industry’s historically fragmented ownership structure has also led to waves of consolidation and M&A activity. Typically, private equity buys a car wash business and sells the real estate to private investors. The private equity firm then leases the space back to the investor on a long-term basis. Real estate investors, often high-net-worth individuals or family-run offices, can enjoy significant depreciation in addition to high-rent tenants, while operators can repurpose capital for expansion. “The combination of strong cash flow, recurring income, fragmented ownership, organizational consolidation, and unusually attractive tax structures have made car wash facilities extremely popular with private investors in recent years,” Renshaw said. Several reports indicate a significant spike in car wash contracts in the second half of last year. “The $10 million deal for Miami’s Biscayne Boulevard represents an acceleration in demand for net-lease car wash facilities fueled by the reintroduction of 100% bonus depreciation,” the Globe St. reported in November. The end of the year tends to be the busiest for this trade, as investors calculate potential taxes and seek relief.
