Dealers turn to governments for incentives -- There may be strings, but also a payoff
Automotive News (2014-10-13) Jamie La Reau
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, El Cajon City Council
A small but growing number of dealerships are obtaining tax breaks or government funds in connection with their facility improvements.
Through August, about two dozen such arrangements have been negotiated and approved nationwide this year. While that's only a handful, industry observers say that's noticeably more than has been common in recent years.
Local and state governments say the incentives benefit local economies because dealerships create jobs and contribute to a strong tax base. Dealers benefit financially while spending on pricey improvements. But the deals require upfront investment by dealers in time and legal fees, and they often come with strings.
"The typical dealer wants less government involvement in their business, not more," said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers and chairman of the Automotive Trade Association Executives, a body of state and local dealer groups. "While free money is nice, most money attached to the government comes with strings and might not be worth the aggravation."
Local governments are usually eager to invest "in the future," said Michael Hastings, principal of Direct Point Advisors in Burbank, Calif. "We are busier than we've ever been doing these kinds of deals in Southern California, Utah and Arizona."
Hastings' firm specializes in economic development arrangements. He has won approval for 15 tax incentive deals for dealerships in those three states this year, and four more are in the works. He did two deals in 2012 and six in 2013, he said.
Government subsidization has been an occasional topic of conversation among Appleton's peers recently. Mostly, Appleton said, it reflects dealers learning from Tesla Motors Inc. "how to shake government down for some money."
Earlier this month, Nevada's governor signed tax breaks worth as much as $1.3 billion -- and a measure allowing Tesla to sell directly to state residents -- to bring Tesla's giant lithium ion battery factory to Reno.
On a smaller scale, in August, the Michigan Economic Development Corp.'s Strategic Fund authorized a so-called tax increment financing for George Matick Chevrolet to make various property improvements.
The project to renovate the 50-year-old building and property will cost $9 million, said Karl Zimmermann, owner of the dealership in Redford Township, a Detroit suburb. After completion of the project, the improved property's tax assessment will rise, pushing up the dealership's property-tax bill. But over a period of more than two decades, Matick Chevrolet will be reimbursed for part of those higher property taxes. Zimmermann says he expects to get $719,528 in tax reimbursements eventually.
Tiff over TIF
The deal created a minor stir. Some board members questioned whether it gave Matick Chevrolet an unfair advantage over competing dealerships in its local market, said Mike Finney, CEO of the Michigan Economic Development Corp. in Lansing, Mich.
But Finney said Matick Chevrolet had local government leaders' support, so "we discussed all the options. The Brownfield TIF has unique purposes it can be used for, and it fit this project. We decided to move forward with it."
To earn the tax increment financing, Zimmermann agreed to make various infrastructure improvements on the property such as better storm drainage, to hire 55 more employees with an average annual salary of $43,000, and to buy a vacant Goodyear Tire store on adjacent property, which he would convert into a car wash.
"In hindsight, I probably would have been better off just letting the township demolish" the Goodyear store, Zimmermann said. "I thought I might be able to retrofit a car wash in it. I probably ended up overpaying for that property, and now I have to pay for the demolition."
The application process was arduous and expensive. By Zimmermann's estimate, he spent $200,000 on legal fees and other expenses over the 10-year process. Most of these deals take just a few months to negotiate and get approved, experts said, but his circumstance was unique because of ownership changes and General Motors' bankruptcy in 2009.
All in all, Zimmermann said, it was well worth it.
"This is a great example of creative legislation that is a win-win," Zimmermann said.
Team Kia of El Cajon in California received nearly $1 million in redevelopment funds from the city. The dealership had to agree to stay in El Cajon for a specified time to get the incentive.
Consultant Hastings said the cost to secure government incentives depends on many factors. It costs more if the company is seeking more in incentives or if it's a complex tax-reimbursement arrangement.
His firm charges a monthly retainer from $2,000 to $7,000 to put together a deal, then a success fee of $10,000 to $85,000, he said.
At Tipton Honda in El Cajon, Calif., a suburb of San Diego, the process to receive a sales tax break was fairly straightforward, said Mike Peterson, the general manager.
Peterson spent about $45,000 in consultant and other costs during the process. In July, the store won approval for a tax rebate on half of the future additional sales taxes the store generates during the next 15 years, he said. The exact amount he'll recoup is hard to estimate because it depends on sales growth. If sales double, the tax rebate could "be huge," he said.
Peterson looked to the local government after seeing the help a rival, Team Kia of El Cajon, received. In 2012, the Kia store got nearly $1 million from El Cajon in redevelopment funds, said Chris George, Team Kia's general manager.
Both dealerships had to agree to stay in El Cajon for a specified time to win the government incentives.
"Holy cow! What a great way to facilitate growth in the community, improve the customer experience and help out the small businessman," George said.
"We're going to add pre-owned automobiles across the street to expand our footprint, so we have the potential to sell more cars and create more jobs."
Grappling for money
In July, Nortz & Virkler Inc., a Ford dealership in Lowville, N.Y., won approval from the local county exempting it from tax on certain materials it buys for its renovations. Co-owner Nick Nortz said he expects to save about $50,000 by the time a $1.5 million renovation is complete by March 2015.
That additional $50,000 might allow Nortz to add an extra service lift and hire a new technician, he said.
Lowville is a small, rural community about 80 miles northeast of Syracuse with few industrial businesses, so the county was eager to help a local business thrive, Nortz said.
Industry observers believe dealers do not do more of these arrangements with local governments because they do not know about them. Nortz said he had to dig around and do a lot of paperwork to ultimately secure his tax deal.
"It's something you have to ask for. They sure as hell aren't going to offer it to you," Nortz said. "This is a small community, so everyone knew we were grappling with this idea of an upgrade. Luckily, most of the board members are my customers, and they said, 'Hey, we got something that might help you out.'"
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