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City brace for shutdown of auto dealerships

A wave of closures by GM and Chrysler is likely to leave many car lots sitting empty. Dozens of cities also depend on sales tax revenue from the dealerships to balance their budgets.

May 14, 2009|Roger Vincent

With struggling automakers expected to announce the shutdown of thousands of dealerships starting today, cities are bracing for a wave of blight.

The closings will dump thousands of large, oddly configured parcels into an already reeling commercial real estate market. Many are likely to remain empty for a long time, monuments to the decline of the U.S. auto industry and the intensity of this recession.

Chrysler is expected to tell a Bankruptcy Court today that it will break its contracts with as many as 800 dealerships nationwide.

General Motors Corp. will tell 1,000 to 1,200 dealers Friday that it will not renew their franchises. The automaker plans to eventually close a total of 2,600 operations.

In California, the moves will have far-reaching implications for dozens of cities, which depend on sales tax revenue from the dealerships to fund substantial portions of their budgets.

The dealerships join a growing list of retailers felled by the dour economy: Sites that once held Mervyn's, Circuit City and Linens 'n Things stores remain empty except for a few locations. And as difficult as it has been to sell or lease those properties, at least they can be easily adapted for other uses. Car dealerships, on the other hand, are special-purpose properties that are hard to adapt.

"There are not a lot of uses that can go right back into a dealership," said Jodi Meade, director of the automotive properties group at real estate brokerage CB Richard Ellis. "Usually they have to scrape it" and start over to make way for another business.

San Bernardino, for example, had 12 dealerships when the economy was booming. Now there are just seven -- and it's unclear whether more will be felled with the GM and Chrysler announcements.

At an abandoned Cadillac dealership, weeds poke through cracks in the asphalt. Vandals have painted graffiti over the Chevrolet logo at another site. Windows are broken and dead grass from a once-tended lawn covers the ground.

One of the car lots, now called Arrowhead Motors, is operating only because a credit union had so many repossessed vehicles that it decided to go into the auto business.

"The whole model of auto sales through dealership networks is open to question," said Jim Morris, chief of staff to San Bernardino Mayor Patrick J. Morris.

Finding a car seller for the Arrowhead Motors site was a coup for the city, which is struggling to figure out what to do with its empty car lots, Jim Morris said.

Auto dealership sites have lost a third to half of their value compared with the peak about three years ago, Meade said.

Battered by the poor market for new cars, 145 California dealerships closed last year, Meade said, dropping the total to about 1,590. Closures included dealers for imports such as Toyota and Kia, as well as the U.S. Big Three of Ford, Chrysler and GM.

Many of the sites are zoned for retail uses, which subtracts from their appeal at a time when most the nation's retailers are struggling to hold their ground or closing stores.

It's not clear how many GM and Chrysler dealers will close in California, but experts say the empty storefronts will most certainly be difficult to sell or lease.

"It's the worst time to sell," said commercial real estate lender Jeff Friedman, co-chief executive of Mesa West Capital. "The challenges are enormous."

Throughout the state, local governments are struggling to keep their auto dealerships alive, because most have become reliant on the big-ticket sellers to provide a steady stream of sales tax income.

Since Proposition 13 limited California property taxes in 1978, many cities have encouraged the construction of malls and other retail uses that bring in sales taxes to fund the municipal budget.

Car dealerships are now among the biggest generators of tax revenue.

Cerritos, which boasts that it is home to the world's largest auto mall, with 24 franchises, relies on sales taxes to provide a third of its $98-million annual budget, City Manager Arthur Gallucci said. Although its dealerships still operate, sales tax revenue in Cerritos fell 21% in the fourth quarter compared with a year earlier.

In Glendale, car dealers kick in up to $4 million to the annual budget. Tustin receives about $5 million, a quarter of the Orange County city's budget, and late last year Director of Finance Ronald Nault said there had been a "frightening" drop in collections.

Although Chrysler and GM won't shut all their dealerships on the same day, the fact that so many are coming onto the market is going to make it even harder to resell and reuse them, said Andrew Sobel, co-founder of Los Angeles real estate investment firm Brentwood Capital Partners.

Sobel's company owns a property that is an example of another problem with trying to sell or lease an auto dealership: It can be difficult to convert the site to another use.

Brentwood Capital bought a former Mazda dealership in Culver City in 2005 but has been unable to get approval from the city to build the housing and retail complex it hopes to erect.

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