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2020 MEMBERSHIP DIRECTORY & SERVICES GUIDE HOT TOPICS

THE ‘WHY’ OF OWNING REAL ESTATE IN YOUR DEALERSHIP BUSINESS

These questions arise often; Do I rent the dealership facility to the business, keep the facility in the business or lease a facility from a third party? For most privately held dealers, owning the real estate inside the business makes a lot of sense. The appreciation of the property adds value to the overall business. No complicated leases need to exist, or rental factors need to be considered, especially in challenging times when a lease can feel like a noose around your neck.

What are the drawbacks of real estate in the dealership? There can be many. If you add partners to the business in the future, you need to consider if you want them to participate in the future appreciation/risk of the property and add the value of the real estate to their acquisition price. You also want to consider if they will share in the tax benefits stemming from depreciation, whether accelerated, in the cases of bonus depreciation, or not. Also, keeping the real estate out of the dealership business is a great way to spread the estate value to children or spouses that are not involved in the automotive side of the business, but, keeps them active in the estate planning. In such cases, great care should be taken in the crafting of the lease agreements to account for dynamics such as family disagreements, the option to move facilities in the future, manufacturer site control, lease abatements in economic downturns and other challenges that may occur. It would also be essential to carefully draft the operating or partnership agreements among the family members to deal with the hardships and challenges up front, rather than expensive litigation later. From a legal perspective, most attorneys fear real estate in the automotive retail business from a liability standpoint. Injuries caused by faulty equipment, a slip and fall on site or other problems can create additional exposure to the valuable automobile franchise and the lawyers prefer that the real estate be held in a separate entity, such as a Family Partnership. Some states also impose sales tax on rents, which could add additional costs to owning the real estate. These additional costs provide no real value increase to the property, and this could change the decision-making direction of where to hold the real estate. Additionally, if the real property is owned in the retail side of the business, it is possible that the mortgage could encumber or fall ahead in other liabilities in the event of a default. For large dealership groups, particularly the publicly held or those owned by private equity groups or institutional investors, the long term appreciation aspect may not fit in well with the overall investment strategy or liquidity

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