Automobiles

Site Control For Automobile Dealerships in the 21st Century

10 Mins read

Understanding site control Wide News sometimes referred to as “point protection,” is important concerning the Dealer’s intended use for the property and becomes extremely important if a dealership proves unsuccessful. [A “point” is a location where a manufacturer or distributor (from now on referred to jointly as “manufacturer” or “factory”) either has or wants a dealership.]

dealerships

As explained below, there are many forms of site control. However, there is a distinction between site control, non-dealership real property, and site control regarding new car dealerships. Because of the many forms and the reputation of car dealerships, it would be wrong to generalize that site control per se is either good or bad. Each case must be assessed individually. A right of first refusal almost always chills a landowner’s ability to sell the real estate. The theory is that a prospective third-party purchaser would not be as quickly inclined to spend the time, money, and energy required to compose an offer for real estate, knowing the tenant has the right to accept the offer and obtain the benefit of the third party’s research and bargaining when the option exercises his option. That statement is rarely true in the case of a sale of an automobile dealership.

BACKGROUND

While site control had been around for decades, the surge in real estate prices in the 1970s and 1980s saw many metropolitan dealers selling their facilities for what seemed then to be astronomical sums. Properties that dealers purchased or constructed for a few hundred thousand dollars in the 1940s, 50s, and 60s were selling for millions by the late 1970s.

As real estate prices escalated, so did the cost of replacing the facilities, and manufacturers were finding it difficult to obtain dealers to invest in many of those areas. Consequently, by the mid-1980s, site control began to appear for the first time in the factories’ Sales and Service Agreements. In the 1980s, there was a conflict between dealers and Chrysler Realty Corporation (Realty) when Chrysler sold Realty to an independent, non-automotive company, ABKO.

The situation in the 1980s was an anomaly. Since Chrysler repurchased Realty from ABKO, all factory realty companies have been owned by the factories, which aim to support their dealers. In the mid-1980s, when a few factories began to include first-refusal rights in their service and sales agreements, most people thought the restrictions would affect the sales price of dealerships and their facilities by chilling prospects and diminishing offers.

By the 1990s, every manufacturer’s sales and service agreement contained a right of first refusal, and by the turn of the Century, no one thought anything about it. By 2000, dealers discovered that the manufacturer’s right of first refusal did not affect dealerships’ sales prices or facilities. Throughout the past 20 years, we have never seen or heard of a case where a dealership sold and the Dealer received less blue sky because of site control or the purchase price of the facility was discounted because of site control.

Even in the few instances that the factories have exercised their options, we never heard of an example of a “discounted price” because of the right of first refusal. Generally, the factory exercises its right and hands the existing contract to a dealer of its choice. The new Dealer pays full commercial retail for the business and real estate. Below is an example of the wording in Mercedes-Benz USA’s Sales and Service Agreement:

IX. TRANSFERS
B. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE

RELATED ARTICLES :

1. Rights GrantedSupposef Dealer submits a proposal to sell Dealer’s principal assets or transfer the majority ownership interest in Dealer to MBUSA, or in the event of the death of the majority owner of Deale. In that case, MBUSA has a right of first refusal or option to purchase such assets or ownership interest, including any leasehold interest or reality. MBUSA’s exercise of its right or option under this Section IX.B supersedes the Dealer’s request to transfer its interest in, or ownership of, the dealership. Any third party may assign MBUSA’s request or option, and MBUSA now guarantees the full payment to Dthe dealer of the purchase price by such assignee….[Emphasis added.]

4. Option to Purchase

In the event of the death of the majority Owner or if the Dealer submits a proposal wthatMBUSA determined is not bona fide or in good faith, MBUSA has the option to purchase the principal assets of Dthe dealer utilized in Dealership Operations, including real estate and leasehold interest, and to cancel this Agreement and the rights granted Dealer hereunder. Good faith negotiations between the parties will determine the purchase price of the dealership assets. [Emphasis added.]

Below is an example of the wording in General Motors’ Sales and Service Agreement:

12.3 Right of First Refusal to Purchase

12.3.1 Creation and Coverage

ISupposeDealer submits a proposal for a change of ownership under Article 12.2; in that case, General Motors will have a right of first refusal to purchase the dealership assets or stock and such other rights proposed to be transferred regardless of whether the proposed buyer is qualified to be a dealer.

12.3.2 Purchase Price and Other Terms of Sale

(a) Bona Fide Agreement

If Dealer has entered into a bona fide written buy/sell agreement, the purchase price and other terms of sale will be outlined in such Agreement and any related documents, unless Dealer and General Motors agree to additional terms…..

12.3.3 Consummation

Dealer agrees to transfer the property by Warranty Deed, where possible, conveying marketable title free and clear of liens and encumbrances. The Warranty Deed will be in proper form for recording, and the Dealer will deliver complete possession of the property when the Deed is paid. The Dealer will also furnish copies of any easements, licenses, or other documents affecting the property and assign any permits or licenses necessary for Dealership Operations conduct. Several factories even provide their Sales and Service Agreements for reimbursement to the prospective purchaser if the factory exercises its option. The following examples are from the Mercedes and Ford Sales and Service Agreements:

Mercedes-Benz USA’s Sales and Service Agreement

IX. B. 3. The right of First Refusal.

If, as a result of MBUSA’s exercise of its right of first refusal, the Dealer is contractually obligated to reimburse the initial buyer for reasonable attorney’s fees, broker’s fees, title searches, property inspections, and other similar costs and expenses that the buyer incurred in connection with the buy/sell agreement, MBUSA shall reimburse Dealer for such costs and fees in an amount up to but not exceeding Fifty Thousand Dollars ($50,000.00). The Dealer shall provide MBUSA with all documents substantiating such costs and expenses as MBUSA may reasonably request.

Ford Motor Company’s Sales and Service Agreement

24. (b) Company Right of First Refusal to Purchase.

(6) The Company agrees to pay reasonable expenses, including attorney’s fees, which do not exceed the customary. Affordable prices charged for similar work done for other clients, incurred by the proposed new owners and transferee before the Company exercised its Right of First Refusal to negotiate and implement the contract for the proposed sale or transfer of the Dealer or Dealer’s assets.

DEFINITION OF AUTOMOTIVE SITE CONTROL

Site control is when a dealer grants to a manufacturer, its real estate company, or its finance company the right to decide the use of a dealership’s real property. In general, site control means that for the duration of the Agreement, a dealer’s interest in the dealership facilities and real property may never be sold, leased, assigned, or encumbered in any manner without the written consent of the factory, or its representative, which permission must be obtained in order before the real estate may be used for any purpose, other than as a new car dealership, for the particular manufacturer which has the control.

Usually, the site control is not only for a specified period but may also be for a specified rent, vehicle, or any combination of those items. There are advantages and disadvantages to a facility encumbered by site control. Site control may affect the value of the dealership’s real property in several ways:

1. Loan Value.

One could find it more difficult to get a 2nd mortgage if a property appreciates and the rent is fixed at a specific rate for several years. The difficulty, if any, would depend upon several factors. For example, the strength of the business being operated on the property would play a large role, as would the entity’s willingness to possess the site control to agree to a change in the rent. Conversely, site control could be a plus when financing a property. A dealer may qualify for a loan that would otherwise be impossible without site control. See Beaudry Motor Company v ABKO; Chrysler Corporation and Chrysler Realty Corporation, 780 F.2d 751, 4 Fed.R.Serv.3d 142 (1986), where a dealer could not qualify for a loan without the benefit of site control.

2. Lease value.

If the Dealer terminates or is terminated, usually, the factory has a right to lease the facility for a specified term and at a fixed rent. In the 1980s, there were a couple of instances where insolvent dealers received offers from competing factories to purchase the dealership facility. Had either Dealer given the factory site control, the requests could not have been entertained as the facilities were in desirable locations. General Motors would probably not have consented to have their facilities become a competing brand’s dealership.p The mere fact such offers could be entertained raised the real property’s value because it brought in competitive bids from strong buyers.

On the other hand, if a dealer fails in his business, the factory can (a) continue to lease the property from him, thus building equity for the former Dealer; (b) return the site control to the Dealer for him to do what he wants with the property, or (c) purchase the property from the Dealer. In many instances, in a cold real estate market (such as the early 1980s, the mid-1990s, and the era after 2008), the factory is the only legitimate buyer for such a particular use property. Through 2008, 2009, and 2010, there has been a glut of vacant dealerships throughout the United States.

3. Resale value.

Again, back in the 1980s, there were instances where dealers had purchased offers for the ddealership’sreal property from non-automotive buyers. Still, they were precluded from accepting them because the factory had recorded point protection. Today, however, many of ose limitations imposed by public and private entities limit dealership facilities to new car dealerships.

Use Limitations

An OAssingle-point dealer intending to deal with another manufacturer would require the manufacturer’s prior written consent to possess the right site control. Additionally, a chain dealer (owner of several brand dealerships) would require the manufacturer’s approval before rearranging nameplates and facilities. Two things that have substantially changed the effects of site control in the 21st Century, however, are:

(a) City government and Auto Mall Association attitudes.

In 2010, if a property is being used for a new car dealership, it will probably stay a new car dealership. Many dealerships have moved to “auto malls” where city zoning ordinances, auto mall association bylaws, and CC&Rs (Covenants, Conditions, and Restrictions) prohibit the properties from being used as anything other than a car dealership, even if the factory does not have site control. See, for example, the Elk Grove City Council Staff Report of August 26, 2009, prepared by Heather Ross, Senior Management Analyst, reporting that both the city and the auto mall association restrict the use of dealership property.

Locally, the Automall lots are zoned A.C. (Auto Commercial) and can only be used for “motor vehicle sales, leasing, repairing and servicing.” Other prospective uses would require a zone change… The Elk Grove Automall Design Guidelines also specify the benefits restriction, so a text amendment would also be needed. There may also be restrictive covenants governing the uses of the automobile properties that the property owners would have to address. In some states, such as Texas and Colorado, sales tax from car sales goes mostly to the city where the BUYER resides. In others, like California, however, the sales taxes go mostly to the town in which the car DEALERSHIP lives.

On June 6, 1978, California citizens passed “Proposition 13,” limiting how property tax cities could charge their citizens. The United States Supreme Court held the proposition constitutional n Nordlinger v Hahn, 505 U.S. 1 (1992). Since the mid-1990s, California cities began feeling the economic pinch from Prop 13’s limitations on property taxes. Consequently, cities have been striving to restrict dealership properties for dealership use only because the monies collected from dealership sales taxes usually make car dealers the largest income source for the city.

The Oakland Tribune reported how the “steady flow of income” from new car dealerships “provides 50 percent… of the city’s sales tax revenue every year, but city officials are worried about its future. The article quotes the Burlingame City Manager as stating, “My concern is how to keep these (auto dealerships) viable long term…” More importantly, it relays the intention of cities to limit dealership property to dealership use. “Auto dealerships on California Drive sit on the prime real estate from Peninsula to Howard avenues. Auto dealerships were the city’s savior when hotels faltered after September 11, 2001, said Councilwoman Rosalie O’Mahony.” [Emphasis added.] “We certainly need the auto dealers more than any business in the city,” she said. May 6, 2006.

See too: The Sacramento Business Journal, March 14, 2008, where auto mall members were against using property within the auto mall to sell used vehicles unless the business was part of a new car dealership. “It’s (a used car lot) just not something we’d like to see,” said Maggie Tadlock, president of the Elk Grove Auto Mall Association… Sales of used cars only are “totally different from our expectations for the mall” and “defrays from what we’re trying to do” at the auto mall.

Throughout the first decade of the 21st Century, many articles were written concerning “taxes, cities, and dealerships.” See, for example, San Francisco Business Times, November 23, 2003; The Palo Alto Weekly, June 2, 2004; Palo Alto Weekly, September 21, 2005; The Contra Costa Times, January 12, 2006; Los Gatos Weekly Times, March 29, 2006; Sacramento Bee, March 10, 2007; The Oakland Tribune, January 2, 2008; and Ward’s Dealer Business, April 1, 2009. The above articles have the same themes: (a) several monies automobile dealerships bring to cities and (b) cities prohibiting dealership properties from being used for anything except automobile dealerships.

(b) State laws.

On March 22, 2010, Donna Harris reported that there are currently forty states in which franchise legislation has been proposed in 2009 and 2010. Automotive News. Even with the restrictions many state laws impose upon site control, it is important to remember that it is more difficult to challenge site control if the Dealer has been compensated for it by the factory – and factories will generally state that all dealers are paid. A quid pro quo universal claim grants the Sales and Service Agreement to sell the factory’s vehicles’ brand.

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