Written By: Alysha Webb
Why Dealership Real Estate Is a Key Source of Capital
"Fundamentally, a sale-leaseback is a tool to maximize, or provide the opportunity to maximize, the underlying real estate value and allow immediate access to those funds."
Real estate generally represents the largest portion of a dealership’s overall value, and it can also serve as a powerful source of capital. A sale-leaseback arrangement, where another entity purchases the real estate and the dealer leases it back, is a way dealers can unlock the capital tied up in their real estate and redirect it toward other business needs.
There are also tax advantages to a sale-leaseback arrangement, according to panelists on our recent webinar, “Unlocking Capital Through Dealership Sale-Leasebacks.”
“Fundamentally, a sale-leaseback is a tool to maximize, or provide the opportunity to maximize, the underlying real estate value and allow immediate access to those funds,” said Ned Hennessey, VP and Leader of the Dealership Capital and Advisory Group at Surmount.
Hennessey was part of a panel that also featured Dan Garces, president and COO of Capital Automotive (CARS), and Ken Rosenfield, CPA, founder and partner at Rosenfield and Co. The discussion was part of our monthly webinar series, which connects auto dealers with industry experts to share insights on key financial and operational strategies.
Surmount advises dealers nationwide on real estate capital strategy through its brokerage and advisory services. CARS directly provides dealers with growth capital, facilitates partner buyouts, executes balance sheet recapitalizations, and offers estate planning solutions.
The panel explored the impact of the changing economic and lending environments on the attractiveness of a sale-leaseback; how M&A trends are affecting dealership real estate; the various uses for sale-leaseback capital; and when a sale-leaseback might not be the right strategy.
Shifts In Interest Rates and a Changing Lending Environment
"...borrowers must contribute more capital upfront to secure financing, because the lender’s appetite has certainly decreased on the real estate side of things."
Interest rate fluctuations and a tightening lending environment have made sale-leaseback arrangements increasingly appealing compared to traditional sources of capital such as debt financing or private equity, the panelists noted.
Higher interest rates raise the cost of carrying real estate, which in turn puts downward pressure on dealership property values, Garces explained. While rates may begin to decline in the coming months, they remain significantly higher than they were four years ago, and long-term rates have largely held steady, the panelists added.
Meanwhile, banks have tightened their lending practices. In the past, loan-to-value ratios for dealers seeking to finance real estate acquisitions were as high as 90%, but now they rarely exceed 75%, Garces noted.
As a result, borrowers must contribute more capital upfront to secure financing, “because the lender’s appetite has certainly decreased on the real estate side of things,” he added.
Consider the numbers: if a dealer faces a 70% loan-to-value ratio on a $10 million property, they must provide $3 million of their own capital to acquire the real estate. Many transactions involve multiple dealership locations, so even at $10 million per location, a four-store acquisition would require $12 million in upfront capital.
“And some of these dealerships are much more than $10 million, so that number can climb quickly,” Hennessey noted.
When a dealer seeks to acquire a dealership, manufacturers often require the facility to meet their current image program before approving the acquisition. The cost of bringing the dealership up to standard must then be added to the real estate price, resulting in a larger loan, Rosenfield pointed out.
While long-term interest rates have remained relatively steady, short-term rates have fluctuated, and Surmount has observed a slight increase in the 10-year rate, Hennessey said—possibly signaling recessionary concerns.
Banks are generally willing to fund real estate when they can also manage a dealership’s other business needs, including floor plan and working capital, but they are cautious about taking on “tremendous exposure” to real estate relative to their other lending lines, Hennessey added. Even large banks typically limit single-dealer real estate loans to the $50–$75 million range. “Banks are pulling back,” he said.
A sale-leaseback arrangement offers an alternative: CARS can finance both the acquisition and any future construction, Garces explained.
Mitigating the Effects of M&A Financing and Market Trends
"In today’s competitive market, moving quickly is essential. Even for dealership groups with 20 or 30 stores, there’s a lot of buyers out there. Whether they’re from private equity or public companies, you want to be able to act fast to compete against some of these larger groups.”
The desire to acquire additional franchises is “typically a large driver of sale-leaseback activity,” Hennessey said, and not always because a dealer has an immediate need for acquisition capital. Some dealers prefer to maintain a “war chest” to provide flexibility when making acquisition decisions.
In today’s competitive market, moving quickly is essential, Garces noted. Even for dealership groups with 20 or 30 stores, “there’s a lot of buyers out there,” he said. “Whether they’re from private equity or public companies, you want to be able to act fast to compete against some of these larger groups.”
Although M&A activity peaked in 2021, CARS continues to see consistent growth in interest in sale-leaseback transactions, Garces said. In fact, 2024 marked its strongest acquisition activity in seven years.
Garces attributed this trend to more dealers comparing the potential returns on real estate versus investing capital in operations, which often yield 20–30% return on equity, compared with the much lower rates typical of real estate. Dealers are also looking for ways to preserve liquidity and avoid using cash to pay down debt.
There was a surge in buy-sell activity from 2020 through 2022 as dealers looked to put to use the record profits they earned in those years. That resulted in a large amount of debt being issued, Hennessey pointed out. That debt is now beginning to come due. If refinanced, it will carry much higher interest rates. Meanwhile, dealership profitability, though still high, is far off from those peak years.
“I think sale-leasebacks are a way to unlock capital and help mitigate some of that impact,” Hennessey added.
Tax Advantages That Make Sale-Leasebacks Attractive
“If dealership real estate is older, it may already be fully depreciated. In that case, a sale-leaseback provides another way to unlock equity from the asset."
With a traditional mortgage, there are limits on both interest and depreciation, Rosenfield explained. “It’s kind of a simultaneous equation you have to run to see which provides the greater benefit, deducting mortgage and floor plan interest versus how much depreciation you can take.”
A sale-leaseback avoids those limitations. The transaction creates fully deductible lease payments with no cap, Rosenfield said. Additionally, proceeds from the sale can often be deferred from taxation through a like-kind exchange or by selling to a Real Estate Investment Trust (REIT) and receiving shares in return—a non-taxable event.
“If dealership real estate is older, it may already be fully depreciated,” Rosenfield noted. In that case, a sale-leaseback provides another way to unlock equity from the asset. The transaction may also qualify for a 1031 exchange, allowing the dealer to defer capital gains taxes on the property sale.
Other Uses for Sale-Leaseback Capital
A sale-leaseback can also free up capital for purposes beyond acquisitions, the panel noted.
Dealer clients looking to buy out a partner, for example, can use a sale-leaseback, Garces and Hennessey explained. In situations where one partner wants to exit a group of owners, selling the entire business to fund the buyout may be an option, but not all partners may agree, especially if they wish to continue operating.
“Instead, you can liquidate the real estate through a sale-leaseback and maintain control of the business,” Hennessey said.
CARS worked with two dealer partners, one of whom was nearing retirement, Garces shared. The younger partner lacked the capital to buy out his partner and also had a son who was just starting in the business. He wanted his son to take over at some point.
“The solution was a sale-leaseback on the real estate,” Garces explained. The retiring partner received a portion of the real estate proceeds, while the younger partner used his share to purchase the retiring partner’s shares, gaining control of the business. “He preserved the opportunity for his son to eventually operate and lead the family business,” Garces added.
Sale-Leaseback vs. Private Equity: Maintaining Control
“You’re not giving up a piece of your pie, operational equity, or limiting governance of your business."
Private equity is increasingly entering the retail automotive space, but sale-leasebacks offer distinct advantages, the panelists noted.
Using private equity to acquire a dealership is often more expensive than a sale-leaseback, they explained. The key benefit, Hennessey added, is that with a sale-leaseback, the dealer retains control. “You’re not giving up a piece of your pie, operational equity, or limiting governance of your business,” he said.
When a Sale-Leaseback Isn’t the Right Fit
“If a dealership is likely to outgrow the real estate, requires improvements soon, or the dealer is uncertain about the location’s future, I wouldn’t advise a sale-leaseback on that asset.”
A sale-leaseback isn’t the right choice for every dealer. A long-term lease may not make sense if a dealer doesn’t plan to operate the dealership long-term. Similarly, a dealership that isn’t performing at its full potential may need time to mature, or the real estate itself may be too valuable.
“Sometimes, there are sites where a dealer should simply hold onto a piece of real estate that has tremendous intrinsic value beyond the sale-leaseback value,” Hennessey said.
“If a dealership is likely to outgrow the real estate, requires improvements soon, or the dealer is uncertain about the location’s future, I wouldn’t advise a sale-leaseback on that asset,” Garces added.
Dealers should always work with their professional advisors to determine which properties sale-leaseback makes the most sense for, he said. And always, both Garces and Hennessey agreed, have a plan for what you will do with the capital a sale-leaseback unlocks.
Dealers should always consult with professional advisors to determine which properties are best suited for a sale-leaseback. And always have a plan for what you will do with the capital a sale-leaseback unlocks, both Garces and Hennessey emphasized.
“You can create a tremendous amount of liquidity or capital to grow or pursue other opportunities, but having a plan is paramount,” Hennessey said. “Having cash without a plan of what to do with it is risky.”
A sale-leaseback can be a powerful tool for dealers seeking to unlock capital, preserve flexibility, and grow their businesses. By converting real estate into accessible funds, dealers can fund acquisitions, buy out partners, or invest in operational improvements—all while maintaining control of their dealerships. However, like any financial strategy, it requires careful planning and professional guidance to ensure the capital is used effectively. When executed thoughtfully, a sale-leaseback can help dealerships navigate market shifts, optimize their balance sheets, and position themselves for long-term success.
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