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Charging Market Rent on Your Dealership Can Save You Money and Prevent Unwanted Surprises!

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By Phil Villegas

More often than not we come across stores that are showing rent expense that is far below what the dealership would pay in the open market.  For the most part, this happens because the rent has not been reviewed or adjusted for many years.

However, with increasing industry and commercial property values in many areas, we recommend adjusting the rent charged to your dealerships to market.  This may actually save you money in stores where the General Manager, Controller or other personnel have a pay-plan component that is based off of the bottom line.  Having the proper rent amount also provides for a financial statement that is reflective of the current market.  We have seen dealers severely disappointed when selling their stores to find out their perceived profitability dropped because of a market rent adjustment.

An easy way to determine fair market rent is to take your most recent appraisal, or come up with an estimated market value, then multiply that by 7% (current Dealership Cap Rate).  This approach will give you an annual market rent that you can then divide by 12 for the monthly expense.  Consider the following example:

Estimated RE Value (land and building) Cap Rate % Annual Rent Rent Per Month
$7,000,000 0.07 490,000 $  40,833

If you’re in State that charges sales tax on rent, simply process the market rent adjustment in a standard month-end entry so as to not inadvertently increase your tax liability but yet still get the benefit on your statement.

Keep your financial statements current with market rent to keep compensation in check and prevent any unwanted negative earnings adjustments when selling your dealership!

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