"Site control" was originally thought of, and often referred to, as “point protection. "
Manufacturers and distributors (hereinafter referred to jointly as “manufacturer" or “factory") refer to the individual sales locations of their dealer bodies as “points. "
An “open point" is a location where the manufacturer would like to have a dealer sell its product, but where there is not dealership at the present time.
Open points can be (1) “new points" (areas where there has never been a dealer, or areas in which a dealership has been closed for over a year); or (2) they can be “existing points" (locations where a dealer has closed, or gone out of business within a year).
Prior to the 1970s, site control was essentially limited to situations where the factory owned the real estate, or its financing arm such as General Motors Acceptance Corporation (formed 1919), Chrysler Credit (formed 1964), or Ford Motor Credit (formed 1959) carried the mortgage on the facility.
The 1920s - 1960s
On Sept. 13, 1922, Alfred P. Sloan, Jr. , then vice president of General Motors, issued a memo stating the condition of the corporation's real estate was in a “very deplorable state of affairs. " and that “. . . the situation has been found to be anything but what it ought to be. " By way of that memo, it was established that before any property was purchased on behalf of the corporation, the papers had to be submitted to the real estate section advisory staff for approval.
In 1928, General Motors’ executive committee established an independent real estate group, owned and controlled by General Motors. They called it Argonaut Realty Corporation*. The same year, Alfred P. Sloan, Jr. , by then president of General Motors, wrote in a procedure manual:
“It should be distinctly understood that it is not the purpose, in the formation of Argonaut Realty Corporation, to put GM into the real estate business. The fact that the corporation must own real estate and that it can be handled better in a separate organization - all things of the same kind in the same place - justifies the move. On the other hand, recognizing trends that may exist, it provides an effective agent to perform a service for the corporation's dealers and distributors where it is the desirable and constructive thing to do. " CoreNet Global, Michigan Memo, September 2007.
[*Now known as General Motors Worldwide Real Estate, Argonaut states that “its mission is to support the corporation and business units in achieving their objectives, reducing structural costs and building community partnerships through effective real estate and economic development strategies. Today, GM Worldwide Real Estate has 47 employees located in 7 states and 9 countries. Together with our strategic alliance partners, our portfolio manages 406 million square feet, consisting of 359.9 million owned and 46.5 million leased in 56 countries and 735 cities globally. " (Ibid, Global Michigan Memo)]
Ford Realty was also established in the 1920s, but it took another four decades before Chrysler's then president, Lynn Townsend, established Chrysler Realty as a subsidiary, in 1967, to manager Chrysler's 250 company-owned dealerships.
At the time that Chrysler Realty was established imports were not much of a factor in automobile sales. In 1960, for example, American companies built 93 percent of all light vehicles sold in the United States and accounted for 48 percent of all sales in the world.
The philosophy of the factories was straightforward. They were of the opinion that if they were going to lease facilities, or finance the purchase of real estate, they should try and assure the property would only be used to sell their product. They did not want to finance a facility that would distribute competitors’ vehicles.
Through the 1960s and into the 1970s, other than those instances, factories really did not seek site control.
The 1970s - 1980s
By the mid 1970s and early 1980s, however, real estate prices began to soar and manufactures were concerned about losing “points" in urban market areas. It was then they began seeking site control for dealership facilities they did not own and did not finance.
In 1973 the first “oil-crisis" hit the U. S. and sales of imports such as Datsun (now Nissan), Toyota and Honda soared. It was then that dealers began bringing “import" franchises into their facilities on a large scale either by either dualing, or simply terminating their domestic franchises and substituting them with Japanese makes.
With the surge of imports, the crash of the stock market and the rise in real estate prices, the 1970s and 1980s saw many metropolitan dealers selling their facilities for what seem then to be astronomical sums. Properties the dealers purchased, or constructed for a few hundred thousand dollars in the 1940s, 50s and 60s were, by the late 1970s, selling for millions. As the prices escalated, so did the cost of replacing these facilities.
To add to the problems of the period, Lee Iacocca, then president of a struggling Chrysler Corporation, sold Chrysler Realty to an independent, non-automotive company, called ABKO. ABKO Properties was a joint venture between Wichita, Kansas real estate entrepreneur George Ablah and Wichita-based Koch Industries. It was formed specifically to purchase Chrysler Realty Corporation in 1979.
During those times, Chrysler dealers were having problems, the economy was in shambles and lenders did not want to loan against dealership property because site control artificially depressed the rent and lenders were afraid that if the Chrysler dealer went out of business there would not be enough cash flow to cover the second mortgage.
It appeared that new ABKO / Chrysler Realty, as a non-automotive, independent company did not care about the dealers and sometimes preferred dealers to default so that it could repossess the properties and make a profit on its purchase of the division from Chrysler Motors. ABKO made millions by liquidating non-performing Chrysler dealership properties via tax-free exchanges and sales. (ABKO paid less than $100 million for about 850 properties, although some were just controlled by leases and not owned by Realty. )
The situation in the 1980s was an anomaly and, since Chrysler repurchased Realty from ABKO, all of the factory realty companies have been owned by the manufacturers whose goal is to support their dealers. [Note: In the short time ABKO owned Chrysler Realty, it liquidated over half of the properties before Chrysler repurchased it. ]
As a result of the facility sales, terminations and duals, factories were finding it difficult to obtain dealers to invest in certain metro-markets. Part of the lack of investors could also be contributed to the fact that that at that time in history, the rules for dealers were entirely different, as there were no “mega-dealers. " Up until the latter part of the 1980s, for example, General Motors forbade a dealer from owning more than three dealerships, and then the dealer could only have a one hundred percent ownership in but one of them. The other stores required dealer-operators that had ownership interests and lived in the city or town where the dealerships were located.
Factory site control expanded exponentially through the 1990s. 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 the 2000s, the site control generally became a condition of becoming a new car dealer. In 2010, for example, one cannot become a new Chrysler Dodge Jeep dealer without giving the factory site control.
Below is an example of the wording in Mercedes-Benz USA's Sales and Service Agreement:
B. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE
1. Rights Granted
If a proposal to sell Dealer's principal assets or transfer the majority ownership interest in Dealer is submitted by Dealer to MBUSA, or in the event of the death of the majority Owner of Dealer, MBUSA has a right of first refusal or option to purchase such assets or ownership interest, including any leasehold interest or realty. [Emphasis added. ]
. . .
4. Option to Purchase
In the event of the death of the majority Owner or if Dealer submits a proposal which MBUSA determines is not bona fide or in good faith, MBUSA has the option to purchase the principal assets of Dealer utilized in Dealership Operations, including real estate and leasehold interest, and to cancel this Agreement and the rights granted Dealer hereunder. The purchase price of the dealership assets will be determined by good faith negotiations between the parties. [Emphasis added. ]
A number of factories provide for reimbursement to the perspective purchaser was exercised out of the transaction.
The following examples are from the Mercedes and Ford Sales and Service Agreements:
IX. B. 3. Right of First Refusal.
If, as a result of MBUSA's exercise of its right of first refusal, 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 fees 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). Dealer shall provide MBUSA with all documents substantiating such costs and fees as MBUSA may reasonably request.
Ford Motor Company
24. (b) Company Right of Fust Refusal to Purchase.
(6) The Company agrees to pay the reasonable expenses, including attorney's fees which do not exceed the usual, customary, and reasonable fees charged for similar work done for other clients, incurred by the proposed new owners and transferee prior to the Company's exercise of its Right of First Refusal in negotiating and implementing the contract for the proposed sale or transfer of the Dealer or Dealer's assets.
Manufacturers want a reasonable rent factor that will support a car dealership and, as long as the rent will not destroy the business, manufacturers can agree to subordinate their recorded protection to allow dealers to refinance their properties or consent to higher rent factors in order to facilitate refinancing. They key to the factory is the continued success of the dealership.
UNDERSTANDING SITE CONTROL
SITE CONTROL IS BOTH AN ASSET AND A LIABILITY
While there are several down-sides to site control, there are also several advantages. The reader must keep in mind that we are not dealing here with a traditional landlord-tenant relationship, or a traditional right of first refusal, or a traditional option to purchase. What is involved in site control is essentially a form of commercial venture - a franchise - for the marketing of the manufacturer's products. Both parties have a common interest in the success of the dealership and both profit from the activities of the other.
The factory is not interested in being a landlord and, if one reads the sandwich-leases, does not intend or attempt to make a profit from the rental. Within industry standards, and sometimes in the case of very successful dealerships, in excess of industry standards, the factory will allow the dealer to charge whatever he or she wants and will pass the rents through to the dealer or the dealer's real estate company.
On the other side of the coin, the dealer's interest transcends that of a tenant. His investment is the business and the facility is but a tool. The dealer's investment and very livelihood depend on his operating a successful franchise.
Among the advantages of site control are:
1. Leverage. Site Control allows a factory to sell a dealer prime real estate that the dealer might not otherwise be able to obtain. If the dealer were not operating the manufacturer's franchise, the manufacturer would not sell the property to him. The property is a means to an end, not the end in itself.
2. Retirement Package. There is also a substantial up-side in that if the dealer runs a successful business for 25-years, there is a strong likelihood that the dealer will end-up with a very valuable piece of real estate, in a strategic location that he could make the cornerstone of his retirement.
3. Mortgage Security. In a number of instances site control has provided lenders with the security they need to make a real estate loan to a borrower that might not otherwise qualify.
In a number of instances we had new dealers enter into sandwich-leases with the factory, or the factory's real estate division, and then took those leases to lenders and obtained loans to purchase the real estate when the dealer could not qualify for the loan on his own.
See, for example, Beaudry Motor Company v ABKO; Chrysler Corporation and Chrysler Realty Corporation, 780 F.2d 751, 4 Fed. R. Serv.3d 142 (1986) where lenders refused to finance the property without a sandwich lease. The Court recites in part:
“lenders refused to finance the full amount needed without the additional security of a “lease/sublease" agreement between BMC and CRC. Such an agreement was reached and BMC borrowed the necessary funds. Thereafter, CRC deeded the property to BMC, with BMC executing a twenty-five year note and a deed of trust to the lending bank. CRC and BMC also entered into a leasing arrangement whereby BMC leased the property to CRC and CRC in turn subleased the premises to BMC. The lease and sublease were for twenty-five years with five options of five years each. Rent obligations for the lease and sublease were identical. BMC assigned its right to rent payments to the bank in order that CRC would become obligated to make rent payments to the bank in the event that BMC became insolvent. "
See too: statements such as those made by James Carlyle of General Motors would support the desire of lenders for site control. In speaking about how General Motors retains control of a site,
“Mr. Carlyle said GM's investment in a site for a dealership is not taken lightly. They retain site control for 25 years. If this applicant cannot maintain his business, GM will find someone who can keep it going. He said GM is committed to the site and is providing assistance in several ways to this business including financial. " City of Danbury (Connecticut) Zoning Commission, Minutes of July 27, 2009.
3. Discounted Purchase Prices. In a number of other instances, we were able to buy real estate from the factory or the factory's real estate division for values substantially below market price simply because they wanted our dealers to be representing their brands.
4. Illusionary Liability. In the 21st Century, site control does not usually inhibit a dealer from selling his or her facility.
If a dealer operates a successful business and wants to sell it, we have never seen an instance where the factory did not approve a sale to a qualified third-party dealer candidate that wanted to be the seller's replacement dealer.
Furthermore, of the facilities we have seen sold with the business, all sold for fair market value because when a candidate thinks it through, if the factory just gave him the “point, " he would have to pay fair market value to buy the land and to construct the facility.
We have talked to numerous lenders and have seen hundreds of appraisals and have never witnessed the fair market value of a dealership facility discounted because of site control.
GENRE OF SITE CONTROL
As dealers grew and laws protecting them changed, so did the forms of site control used by the factories.
Originally, when a manufacturer owned the real estate it would place clauses in its lease that required the dealer to use the facility to sell only the manufacturer's products. Also, when the manufacturer's captive finance company was the mortgagee, the finance company would require in its loan documents that only the manufacturer's products be sold at the facility.
There are several methods employed by the manufacturers to acquire site control:
- through the factory leasing the real estate from a third party and then and subleasing it to the dealer;
- if the new dealer is the real property owner, the factory could lease from the dealer and sublease to the dealership, this method is called a “sandwich lease";
- by originally selling the real estate to the dealer and reserving the right to point protection in the deed;
- by virtue of signing the Service and Sales Agreement.
- Exclusive Use Agreements (Side Deals)
- Restrictive Covenants in Leases
- Restrictive Covenants in Loan Documentation
- Re Purchase Option Agreements
- Rights of First Refusal. The holder of a “right of first refusal" does not have the right to purchase the property before, or upon the expiration of the “right", unless the owner decides to accept a bona fide offer, from a third party; and then the right exists (i) only to the extent of meeting the third party's offer (ii) within the period of time allotted in the original lease. Once again, the prospective purchaser should review the lease and any “right of first refusal", with an attorney admitted to practice in the state where the real property is located. Many times we have come across dealers who believed they had a right to purchase, when all they had was a right of first refusal. As with the lease itself, any right of first refusal should be recorded with the county, or parish recorder.
When assessing site control, both the factory and the dealer should keep in mind the purpose of site control. Site control exists because the factory is seeking to protect a distribution system for its products, not to establish a real estate portfolio.
For a discussion of how to terminate site control, see: “Challenging Site Control on an Automobile Dealership Property ”
For a discussion of site control in the 21st Century, see: “Site Control for Automobile Dealerships in the 21st Century "