Investing in Self Service Car Washes

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Based on my predictions about inflation at the time I signed the lease, it seemed very good. Hindsight showed me that the lease was not as good as I had thought. I didn't foresee the economic decline of the neighborhood nor the reduction of inflation rates to below 3%. Had I enticed the owner of the land into selling by offering a premium price I could well own a piece of land worth less today than what I paid for it. I'd bet the owner wishes he had sold. I'm now glad I was the tenant and not the owner.

The one necessary feature of that lease - any proposed lease - is that the terms must be long enough. The lease term should allow the tenant/operator sufficient time to recover his investment while making a profit. Plus, enough time needs to remain on the lease (preferably through options to renew) that the business can be sold and the lease transferred to a new owner without the lease ending before the new owner has time to recover his investment.*

SSCWN: You mentioned a third reason to consider leasing is land which, for one reason or another, cannot be bought. Why wouldn't a potential owner simply keep searching for a comparable site which could be bought?

PC: My third experience with a land lease was just such a situation. It was a run down - but profitable wash - and was already on leased land. It was the land owner's core belief that "We never sell our land!" Obviously (because it was an existing wash) searching for another site was impossible. I had to evaluate the terms and conditions of the lease and see if the project were economically feasible. I did so only after the owner convinced me that his conviction in "never selling" was unshakable. It came from family tradition and his tax situation. He just would not sell at anything close to a reasonable price.

This particular land owner did have a reputation for fair treatment of his tenants. In addition, his reputation for honesty was known to me because I had once taught his son and worked with the lad on some social projects. The owner demanded no more than reasonable rent and would grant almost endless options to renew ... while adjusting the rent for inflation. The owner and son did not want to operate a carwash. They would be perfectly content to collect a reasonable rent on the land for as long as I was willing and able to pay it. But sell the land ... never! Every aspect of the lease seemed fair and reasonable ... and would remain so.

My partners and I signed the lease and rehabbed the carwash. Later we sold it and the land owner was equally reasonable with the new owners. It was clear that the carwash could easily afford to pay the land rent and make a profit. The wash has since gone through a second major renovation (I first owned it 20 years ago) and was put back on the market a year or so ago. I called about it. Same land owner, same reasonable terms. Its statements showed that it remains a good money maker and I believe it will continue to do so ... while the carwash operator will never own the land.

Fair And Reasonable"

SSCWN: Okay ... so there are conditions under which a person should at least consider leasing the land. you've made pretty clear that the land lease must be relatively long term and should include options to renew. How do you determine what's a "Fair and reasonable" monthly rent to pay for land?

PC: I determine the same two basic facts needed to project reasonable sale prices. Namely, what's the Price Per Minute a potential owner can expect to charge, and how many Minutes Per Day can each bay be expected to operate. Once again, the product of these two numbers is projected daily income per bay. Multiply times 365 and you have the projected annual income per bay. Take that times the number of bays, add 20% for the vac/vend income and that is the projected gross annual revenues for the carwash. For example, in an area where washes charge 30¢ a minute and operate 115 minutes per day the product of these numbers gives the projected daily revenue of $34.50 a day. Multiplied by 365, this tell us that each bay has a projected annual revenue of about $12,600 a year. Add 20% for vac/vend and you show a 4-bay with projected gross annual revenues about $60,000 a year.

For an 8-bay about $120,000 a year... IF the additional number of bays reflect traffic volume, neighboring rooftops, and competition. (Remember - more bays do not necessarily mean more income.) In my view, 12% of gross annual revenues is about the limit of what I'll pay for rent. In the case of the example above (4-bay is grossing $60,000) I'd want the land rent to be a maximum of $7,200 a year ... about $600 a month. In some land leases the tenant is required to pay the real estate taxes on the land as condition of the lease. My guideline of no more than 12% of gross revenues devoted to the land lease means the total cost of the lease to the tenant. If I as a tenant had to pay the taxes then I want that to come out of the 12%. There's one other condition I always ask for (but seldom get) in a land lease.

I ask for an option to buy the property at some future point. To entice the owner to grant such an option to buy, I offer a price above what the land is worth at the present time. If land values increase sharply then the option may make an eventual purchase worthwhile. If land values do not increase then I simply do not exercise the option. While few land owners are willing to grant options to buy, most are willing to grant a "right of first refusal". A right of first refusal guarantees the tenant to right to meet the price another willing buyer has offered the owner. It may seem like a minor thing to ask for, but it can be worth a lot ... as you'll soon see.

Lease A Wash...Lose A Wash?!!

SSCWN: But isn't there a terrible risk that when the lease is up the owner of the land will become the owner of your carwash?

P.C.: Yes. I know of a case where the owner of a particular carwash discovered that his competitor was on leased ground. Claiming to be just a real estate investor interested in acquiring commercial ground he went to the owner of the land and made a very attractive offer. Now owning the land the new buyer simply waited for the lease to expire and acquired his competition. Most leases allow the tenant to remove anything he can from the property at the end of the lease. But the used equipment is worth only a tiny fraction of what it cost and removing a brick building clearly isn't feasible. And, of course, if the tenant had gotten a right of first refusal, the wash would have not changed hands.

As I mentioned the first carwash I built had to be on leased ground because of my lack of capital. I got a 10 year lease and long before it was up I negotiated a lease extension at a reasonable increase in rent. Before this extension was up I offered the owner considerably more than the land was worth. He refused my offer and discouraged any future offer. He said in his family, "We do not sell our land!" I continued as a tenant for 20 years. Then - just 30 days before that 20 years was up - the owner of the land sent me a letter telling me I had to go. To this day I think of him as eccentric.

There was to be no negotiating. He didn't even want to hear offers of higher rent. He had acquired the land under the adjacent filling station and he had given that other tenant the same notice. He was firmly convinced that the two pieces of land together would bring much more rent than renting each to a separate tenant. And that was that ... period. I was disappointed and hurt to be treated that way. And what made losing my wash of 20 years even more painful and exasperating was that it was because of a faulty theory: that one large tenant will necessarily pay substantially more rent than two tenants on the same divided property.

Fortunately, a few years earlier I had bought a piece of land in the neighborhood ... just in case I was ever forced to build a new wash ... and move I did. But that 20 year lease did get me started in the business and the self serve wash there generated a good profit every one of those 20 years. There is now a single tenant on the site ... finally ... a Wendy's fast food. But that land sat vacant, subject to taxes, and not generating any income for 3 whole years - tens of thousands of dollars tossed right out the window! I'm glad to say that my new location has proved to be superior to the old one. Still ... my being on leased land did cause me to lose my first carwash.

Financial Feasibility

SSCWN: We've all heard more than a few anecdotes about how difficult some city planners can be. Of course, It's the "Horror stories" that everyone remembers ... and talk about. All those projects that slide right on through the system Ñ like grease through a goose Ñ aren't candidates for conversation. So let's assume the zoning is in place, there are no problems with city approvals, and the price of the land is below your maximum. Now, what's next?

P.C.: Now it's a matter of establishing financial feasibility - which really all comes down to the question: will the projected income from the operation justify the required investment? it's a matter of total costs versus projected revenue and profit. I'll give my own "Quick and dirty" rule first: After making your best estimate of the gross annual revenues for the proposed carwash, do NOT spend more than 3 times projected gross annual revenues for the entire project. That's for all the costs - the land, building, equipment, landscaping, paving, lot lighting, legal fees. My bottom line is that if the project costs more than 3 times gross annual income (after the net profit is figured out at the end of each year and the final return on investment is calculated) that rate of return is apt to be below what is a reasonable rate of Return On Investment ... involving the risks which are inherent in self service carwashing.

I realize there are exceptions. I'm sure there are readers out there saying, "I spent more than that and I'm doing well". There are all sorts of ways to define "doing well". There are many different reasons to own a business. Let me put the rule in gentler terms: investors spending much over 3 times the expected annual revenues for a carwash should have solid reasons to believe that they can operate more efficiently than most of us. Or be prepared to settle for a rate of return below what veteran carwash investors would find acceptable. I'll grant there are owners - successful, happy, prosperous owners - who are bored by calculations about final rates of return on investments. Some of these owners may even feel all these "numbers" take the fun and adventure out of building a new wash. So be it. What follows may not interest them. it's an effort to explain the details of how the above conclusion was reached. And indicates how I might depart from my rule ...

Here's how I arrive at that maximum cost for a proposed carwash. Once again the two basic numbers are the Price Per Minute and the estimated Minutes Per Day each bay will operate. These are key factors in determining the projected Gross Annual Revenues ... which in turn determines anticipated Rate of Return. Multiply the MPD each bay will operate times the PPM of wash time. that's the daily revenue per pay. Take that product times 365 and that's the annual revenue per bay. If the cost per minute is 30¢ and the bays are expected to operate about 120 minutes each day then 120 x .30 x 365 gives a projected annual revenue of just over $13,000 per bay per year. Adding 20% for vac/vend income would give a total approaching $16,000 - a per bay, benchmark indicator as to how much to invest in the building ... just as it would determine how much is reasonable to pay for the land.

Put another way, projected gross annual revenues tell a potential owner how much he can take in each year. Out of those revenues the owner can anticipate a net profit. That net profit (when divided by the total cost of the project) tells the potential owner his Rate of Return On Investment (cost of the project). If the rate is too low (compared to the risks in carwashing and the returns and risks of other investments) then the project isn't financially feasible. More about that in a minute. But first ... One needs to know about land costs as a separate item in order to search for a site that is within reasonable range. we've determined those already. The next figure that's really needed is what is it going to cost to design/build, pay fees, equip, pave, and landscape the carwash.

All these costs plus land are the total projected cost. From projected gross annual revenues the costs of operating the carwash have to be deducted in order to arrive at the yearly operational profit. About how much of the gross revenues are to be used for operational costs? Operational Costs Recent national surveys of owners report operational costs (not including debt service or depreciation) which ranged from about 35% of revenues up to around 45%. There are notable exceptions to that spread. In a wash that's about to "belly up" the costs could be 100% (more or less) of revenues. Of course, for a wash with higher than average revenues the operational costs are a lower and lower percentage of the revenues because as revenues go up the fixed costs (like insurance) remain constant and the percentage of revenues devoted to operational costs declines.

For purposes of determining financial feasibility of a projected wash these extremes are not considered. The operations I own are within the range reported by the survey. My gross revenues have been steadily increasing. But increasing as well is the percentage of gross revenues devoted to operational costs. In recent years a good portion of the increase in gross revenues is due to the increase sales of vending items. that's been true industry wide. Most operators have 3 or 4 times as many vending machines as they did a few years back. Of course, the 40% - 50% profit margin on vendor sales is not as "fat" as is the 60%-70% margin on bay services and far less than 1/10 that of those good old vacs. I'm in no way slamming vendors.

I'm only pointing out that in terms of overall profit-to-cost ratio the vendors represent a greater percentage of cost than do vacs and bays. For this reason my overall operational costs are now up as a percentage of gross revenues compared to years when I sold very few vending items. That's part of the reason I find holding operational costs below 40% very hard to do. There's another reason I'm hesitant to project operational costs as less than 40% of gross annual revenues. I do see financial statements of carwash I consider buying that have low operational percentages of gross revenues ... perhaps 30%. I look carefully to see how much cost is included for management. Often none is. Especially for owners who do most of the work themselves and do not charge the business for their time. Their operational profit is high, the operational costs low. But that's not exactly correct ...

Free Management?

All owners know how much time it can take each day to fill machines, fix pumps, emptying vacs, clean up/pick up, and miscellaneous repairs. Then There's the paper work - ordering supplies and bookkeeping, tax reports, and licenses ... on and on. And don't forget the frozen bays, stopped up sewers, burned out bulbs, vandalism, changer maintenance, vault dumping and bank deposits. At times it seems almost endless.

The point is that some modest cost for a part time attendant will never cover the time it takes to do all the things necessary to the successful operation of a self service carwash. There needs to be a projected cost for management which will include some or all of the above mentioned items. To realistically project the cost of operating a carwash management cost should be included. Personally, I consider 45% to be a safe bench mark for operational expense ... provided average gross revenues. If gross revenues are well below average, operational costs as a percentage of revenues shoot up and could hit 65%. But it does vary, so in the table below you'll see operational costs from as low as 35% to as high as 65%.

What's a fair and reasonable Return On Investment for a self serve carwash? Folks are likely to disagree on the exact number. But at the same time, let's agree that fundamental economic theory does state that the return should be proportional to the risk - higher the risk, higher the ROI. If asked, "Is self serve carwashing risky?" The answer would have to be "as compared to what?" The factors to be weighed are the rates of return on other investments and the actual risks inherent in carwashing. Rate Of Risk The "safety factor" in carwashing is nothing like that on a investment in an insured bank CD ... which are paying less than 5% lately. The returns on stocks through mutual funds have been great these last few years ... typically 20% to 25%. Of course, the stockmarket does flatten and on occasions crash.

How much of a risk of a "crash" does the typical carwash run? There is a litany of risks that can slam a wash: government regulations - such as pit dirt being classified as "toxic waste". Drought conditions - which may be a boon in some areas can severely washes in others. Unfavorable weather patterns - lots of rainy weekends and little snow, as witnessed a couple years ago throughout much of America. Economic downturns - we now know self serves may be recession resistant, but certainly not "recession proof" as many were led to believe. And last, but by no means least, competition - there's no guarantee that the market you have all to yourself today won't be whacked in half by some foolish interloper building right down the street.

To me that kind of risk warrants a 20% return. Some might say that's "greedy". I say it's fair and reasonable. you'll have to decide for yourself. Lets consider some variations on a carwash cost/profit scenario. Take a wash with some typical numbers - gross annual revenues of $100,000 and operational costs of 45% ... generating an operational profit of $55,000 a year. If the total investment in that project was, lets say, $100,000,000 the wash is showing a 5.5% return. If it cost $500,000 the investor would get an 11% return. For it to meet my expectation of a 20% annual return, it could cost no more than $275,000. For those expecting a 25% return their money the total cost of the carwash can't be over $220,000. Those satisfied with a 14% return on their investments could pay about $400,000 for such a wash. I'd say the numbers bear out my very simplistic guideline about not paying more than 3 times gross revenues for a wash - assuming that 20% benchmark ROI.

Let me recap... From the section on land costs, the reader had to determine how many Minutes Per Day each bay could be expected to operate and what their Price Per Minute would be. From these we determine daily/monthly/yearly gross revenues. Next I made the case for using 45% as a benchmark operational cost estimate. And then I explained why I consider 20% an appropriate Rate of Return On Investment. So what does this tell me about carwash costs? it's all in the table at the bottom of the page. Table The Costs To use the table - select the figure in the left hand column which is your best estimate of the monthly per bay income.

Then select what percentage of gross revenues you can reasonably expect to spend on operating the carwash ... these percentages are found at the top of the table. To the right of the expected per bay monthly gross income and below the expected percent of operation will be the number representing the maximum amount which I would spend for each bay of a carwash project ... including all costs. You can abuse the table guidelines. By picking the highest monthly income and the lowest percent of operational costs and you could, for example, "justify" a project costing $62,400 a bay and pay about $375,000 for a 6-bay. You would need very favorable circumstances all way "round - volume, price, market, management - to warrant such a projection.

For areas of the country where land and construction costs are so high that a carwash could not be built for less than $62,400 a bay, the table indicates that gross incomes over $1,600 a month per bay are required to make such costs financially feasible. The table also has clear implications for building and equipment costs. All that has to be done is deduct the land costs from the total cost and the remaining number is what's left for building and equipment. Using the example of a 6-bay wash that's going to gross $1,200 a month, operate on 40% of gross, and has a total cost of no more than $260,000 - I would look for land priced under $10 a square foot. A 6-bay is going to need about 12,000 square feet of land - no less than 9,000 for a very tight location, perhaps as much as 15,000 for a generous location. what's quite clear is that a 12,000 square foot site at $7 a square foot will use up $84,000 of the overall budget and leave only $175,000 for building and equipment - just under $30,000 a bay.

Would that be sufficient to build such a wash? Yes, in some areas. No, in others. Not only do construction costs vary widely across the country, but some areas must have bay floor heat and others don't need it. Some very hot and sunny areas must put in shaded drying areas while others don't need them. Potential owners and investors should reach a balance between land costs and building/equipment costs while staying within the overall guidelines set out in the table. What's it cost to build and equip a self service carwash today?

Rick Marvel, the owner of Pendleton Carwash Contractors in Goodlettsville, Tennessee has built hundreds of carwash buildings from one end of this country to the other. He specializes in turnkey operations and often works in conjunction with suppliers of carwash equipment. I asked Rick for a ballpark figure to build a carwash. He said, "$15,000 a bay is a good approximation of what it will cost for a building made of split face block". But, he pointed out, it's very easy to run the costs up from that figure. He also noted that it's difficult to predict some local costs.

Typically Rick sends a generic plan to a local architect for modification to meet existing codes and when he gets the modified plan back he can pin the costs down still further. But ordinarily the costs do not get much over $15,000 a bay. The figure is for the building only ... neither the site improvements (paving, curbs, landscaping, etceteras) nor the equipment (pumps, heaters, lights, etceteras) are included. Some of the many factors that could bump up that $15,000 figure are things such as his 75 foot limit on how far he'll be able to run the sewer and water lines at that price. More than 75 feet, more cost, but in most cases the distance is under that limit.

Lighting and electrical are an option adding another $2,500 per bay. Still, it's pretty clear to me that decent self service carwash buildings are being built under $20,000 a bay ... provided the owner does not want a lavish unit. Of course such things as a wildly sloping lot, unreasonable building inspectors, or trade union abuse can drive the cost out of sight. Equip And Pave The remaining costs are for equipment and paving. I have a recent equipment quote showing costs (including one vac per bay and all the usual services) of almost $12,000 per bay.

That includes bay floor heat, freeze protection, two bill changes, vaults, foaming brushes and spot free rinse, water softener, heater ... plus 10 drop shelf vendors. In areas where bay floor heat and freeze protection is not needed, the per bay cost for this equipment would drop to about $10,000 a bay. Of course, I've seen quotes that are much higher, but there may be quotes that are even lower.

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