As we have continued to acquire existing, cash flowing express car wash assets, our interests have also turned to ground-up development. For the last 6 months our car wash acquisitions team has been vetting dozens and dozens of potential land development sites in various markets to launch our new development side of the car wash business.
Is Ground-Up Development a Right Fit For You
Ground-up development plays are not for every investor. If you want cash flow, then development is not the investment tool for you. If you want depreciation benefits, then development is not the investment tool for you. If you want the potential for huge, outsized returns, then development may be the right tool for you.
Take some time to read this article to see if ground-up development is the right play for your investment portfolio.
What’s The Overall Exit Plan?
Our goal with acquiring and developing these express car wash sites is to get to where we have 100-150 locations over the next 3-5 years. This will provide us with great opportunities for exit including a potential private equity roll-up which will provide a much higher equity multiple than selling them one-by-one. With revenues being above $100mil with 100-150 locations, this also opens us up for a potential IPO which would provide an even higher equity multiple.
While we will push really hard for the PE roll-up or IPO option, when we underwrite these car wash assets, we are only projecting for a standard, market-rate equity multiple exit. So, the PE or IPO option would just juice the returns even more.
Ground Up Development Plan
The development plan is to bring on development-minded investors that don’t mind having zero cash flow with a higher return on the backend when the asset is sold.
The buyer will already be selected with a pre-negotiated sales price based on 2–3-year proforma numbers. The buyer will be us. We will raise funds in a different syndication offering to acquire these newly developed sites to begin the operations.
So, the development investors put up money to get the project built and then once the certificate of occupancy (CO) is issued, the asset is immediately sold to the buyer (which is us in a different syndication offering) to cash out the development investors.
There is no risk of trying to find a buyer or needing to operate these for a certain period of time before we sell them to the eventual buyer.
The sale price has already been negotiated and the returns are locked in pending finalized construction costs and timing.
If you ask one of the contractors, they will tell you it will take 4-6 months to build out a new turn-key express car wash site. However, this does not include the time it takes to acquire the land, get it entitled, permitted, etc.
Our analysis shows that we can get these built within 12 months since we already have the land under contract and city approval for the use type. As usual, to be conservative, we are projecting an 18-month turn around time to give us more of a cushion from the execution standpoint.
What About Depreciation for Development
The one downside for development is that there is no depreciation benefit available. According to the IRS, depreciation can only start after an asset has been placed into service. We will be selling prior to placing the asset into service.
For developers, since we will be constructing this property from the ground up, there will be no benefit from a depreciation standpoint. However, this is typically made up with the higher-than-normal returns in a shorter timeframe since it is a development play.
Return Metrics on Development
Our first development fund has already been released and it filled up within a matter of hours after talking with a select number of our investors. The projected equity multiple on the 18-month hold was a 1.63x with a projected average annualized return of 31.65%.
The first development fund was only a $5.2mil raise so we did not end up releasing this to our entire investor network so you may not have heard about it. Not to worry as we are already working on our next express car wash development site.
If you are interested in hearing about our next PIC Development opportunity that will be available in the next 1-2 months, then let someone from our team know and we will make sure you get a first look at the next one. Minimum investment is $100k and you must be accredited.