Another Look at the Current Project

Currently the project on the table concerns a West Edmonton location for the New Concept Truck wash along with a national truck parts manufacturer. The issue at hand is how best to structure this deal for maximum benefit. As previously noted, the typical return would be around 10% - which is hardly ideal.

Another method to structuring this deal may be to hold the Truck Wash and the lease with the Parts Manufacturer together as one operating entity. This operating entity would then own a series of Truck Washes with and without other tenants possibly through an umbrella style structure where a monthly royalty payment is paid to a central holding company for advertising and chain development. I preface this discussion with the normal disclaimer - I am not a professional and this is posted primarily for my own benefit as a path to explore an idea, not as a plan or as sound advice.

First some assumptions:

1. Truck Parts Manufacturer (TPM) requires 6000 square feet and an additional canopied area exterior to thier shop measuring 1800 square feet.
2. TPM pays rent directly reflective of the cost involved (plus a small profit of 10%) and signs a long term lease (20 year total length, in 5 year terms)
3. New Concept Truck Wash (NCTW) requires 5500 square feet based in two bays each measuring 22' Wide x 110' long with an additional area (660 square feet) for a customer lounge.
4. Land costs are between $2-$2.50 per square foot.
5. 30% Equity is required
6. Construction cost = $85 per square foot for built up areas
7. No Financing is available from the Truck Wash Equipment Manufacturer

Analysis:

This method would allow for a total cost of approximately $2,200,000 for the construction and development of this site plus all tenant improvements. This figure allows for paving of a majority of the site as well as project management costs and the required equipment necessary for the successful operation of the NCTW. Annual mortgage payments on this amount (20 year amortization period, 5 year term, 7.00% interest) would be approximately $150,000 per year or $12,500 per month. At this level, the NCTW requires approximately 16 washes per day to break even with minimal staffing allowances ($1,000 per month). As a separate entity, this wash would be fully viable at this level of financial liability.

However, TPM also pays rent to the holding company. Based on our assumptions this rental should be $12-$14 depending on their interior requirements. Using an average value of $13 per square foot, this equates to an annual payment of (6000 square feet x $13/ square foot =) $78,000. An additional amount, similar in magnitude, would also be paid for the exterior area yielding (1800 square feet x $10/ square foot =) $18,000 per year. This would yield an annual payment of ($150,000 - $78,000 - $18,000 =) $54,000 or $4,500 per month. This relates to approximately 10 washes per day.

To put this all in perspective, 20 washes per day would relate to an occupancy of ((20 washes x 20 minutes/wash)/(24 hours/day x 60 minutes/hour) / 2 Bays =) 17 % occupancy and a net annual profit of $360,000. 10 Washes per day would then relate to approximately 7.0% occupancy with 2 bays in operation. A typical car wash will achieve 10-15% occupancy in it's first year in a rural location. By it's third year, occupancies higher than 25% are typically achieved. 25% occupancy at the NCTW relates to 36 washes per day for a gross income of over $50,000 per month.

Equity in this case would be around $650,000 with our current assumptions. At 10% occupancy this would relate to 430 washes per month (15 washes per day) or a net annual return of $90,000 - 14% CCR. However, assume for a second that financing is available from the equipment manufacturer - how does this change things?

• Total development value would reduce to $1,700,000.
• Annual mortgage payment would decrease to $125,000 (approximately).
• The equity requirement would decrease to $500,000.
• NCTW's base payment would decrease to $2,000 per month.

Seems like a win-win all around. Or does it? The equipment worth $500,000 would then have to be paid back to the manufacturer at a minimum of 10% interest. Amortized over 5 years as is normal industry standard this relates to a monthly payment of $9,200. Amortized over 10 years yields monthly payments of $4,600. The normal industry standard would probably rule in this case.

The primary reason for doing this would be to allow for two separate operating companies - one for the NCTW and another for the building itself. To allow the building a modest 10% return would require a $14 per square foot lease rate from the NCTW in addition to it's additional payment of $9,200 would yield a total monthly payment of $15,600. While this relates to a break even occupancy of 12% - 18 washes per day; for a new concept this may prove to be a difficult sell. Mind you, the only people in the know would be ourselves and the equipment supplier....

And it may even be possible to get the land in exchange for some tenant improvements.

Here's to tomorrow.