Chrysler and GM Update To Automotive Dealers

The following is the most pertinent information available today regarding Chrysler and GM as it relates to our dealer, attorney and CPA clients. The information is from multiple sources and groups, plus interaction we are currently having inside active transactions as we work with banks and their work out groups as well as the sales divisions of multiple manufacturers.

• The consensus is that GM will not have any additional strength, authority or support to terminate dealers outside of a bankruptcy filing. The talk, discussions and saber rattling about decreasing dealer counts is a form of placation to those in government who really know how the car business works. A termination proceeding will literally take years and the only way to get the termination count to go their way is either go bankrupt or follow a traditional process of paying the dealers to resign. We have heard nothing regarding dealers receiving compensation to resign.

• If you are considering leaving the business and own your real estate, redevelopment of the property normally entails getting nothing for the actual improvements. Any deal you make needs to take into consideration that the ultimate value of your property will be the value of just the actual raw land, minus carrying costs through redevelopment. Bake in 2 to three years for a redevelopment sale to be on the safe side, unless you are willing to auction the property off for 50 percent of just the land value.

• It has been discussed that if you are a Chrysler dealer or a GM dealer and your sales and services agreement is rejected (terminated) in bankruptcy, that you would have a damages claim. If the blue sky of your store is 1 million dollars and you get a proper blue sky damages claim valuation, that you should be able to recover this amount in the unsecured creditor's class in "bankruptcy dollars". This means if you have a one million dollar claim and the unsecured creditors get ten cents on the dollar, you get a hundred thousand. If you want to know what a proper blue sky damages claim valuation is, send me an email at mark@mdjohnsoninc.com. I will help you find the right people to produce this document for you. Cost of litigating such a claim is probably prohibitive.

• If you are a Chrysler dealer and you have a resignation pending, you are going to be added to the unsecured creditor class. If you negotiate a resignation now which is post filing, you are in the administrative class and will get the amount you agree to. If you are a GM dealer and you make a deal to resign, and then GM goes BK before you get paid, you are going to get added to the unsecured creditors class. Do not negotiate a resignation with GM now, wait. According to Seattle Automotive attorney James Aiken (jwaiken@aikenfine.com) if you resign or are terminated by GM, make sure they show up at the dealership with a check for your parts and your cars. If you release your collateral and then GM files for bankruptcy before you are paid, you will find yourself in no mans land, fighting to get your cars back and owing money to the floor plan lender. This will do you little good without a sales and service agreement.

• If you are going to resign, remember that GM will not purchase any vehicles with accessories added or removed. Same with your parts, they have to be in original packaging, no broken packs.

• Start working on your end game now. Develop an "exit strategy" if you think you will be terminated or you are going to be terminated or if you want to resign or sell. E-mail me (mark@mdjohnsoninc.com) and I will send you an "exit strategy" check list. It is where you start. Don't wait to figure out what your mortgage says or your sales and service agreement says, or what your computer contract says after you decide to resign or are rejected in the bankruptcy or resign.

Site Control and Property Taxes: Outline

• (i) Have someone familiar with your property determine whether your property is encumbered by some form of a site control/option agreement. This will be recorded against your title, but you should have a copy and know about it. If you have a site control agreement that for some reason is not filed, you will still be liable for damages to the manufacturer, but you will most likely have been able to sell for the highest and best use.

 Here are some common reasons you may have this document and what it says.  With Chrysler/Chrysler Realty, you may have one of 5 or so different versions of a site control/option document. Generally, Chrysler has (makes) the dealer enter into a site control agreement if the dealer is given anything from Chrysler. This could be money for a re model, it could include being awarded an additional brand, but is most common when the dealer purchases the real estate from Chrysler.

• (ii) The agreement usually states that the property can only be sold to another seller of company products, (another dealer). The idea is that the factory wants to secure locations in desirable areas. Unfortunately, a lot of dealers don't get what they bargained for.
• (iii) Option agreement; this is usually embedded in the site control agreement. It basically says that if you become insolvent or attempt to sell the property to someone other than a seller of company products, that the factory can purchase the property from you for the same amount that you paid the factory for the land. In some cases we have seen, this is half of value ten years later.
• (iv) Economic damages: This basically says that if you resign, they can sue you for impairing the market. This says that you could be sued for damaging a market the manufacturer could not get back into. This could be millions and millions of dollars.

• When you resign, make sure that you get this clause cancelled, it isn't always automatic.

• If one of your brands gets cancelled, say Pontiac or Chrysler, our contacts tell us most of the agreements never contemplated the factory breaching the agreement and you may have a chance of getting it cancelled. You need to get with your lawyer and start working on getting the site control agreement terminated if you ever want to do anything with the property in the future.

Site Control and Property Taxes:

This information is directly from a county assessor.

• Property tax is broken into two components. The building and the land. Generally, assessors use a book to determine the cost of a building and then grade it, which sets the structure value. The real estate is normally valued by a sales comp. The problem is that comps in this market are hard to get and NEVER take into consideration a site control document.

• The question was posed: If I cannot sell my land for the highest and best use, can you still assess me for highest and best use. The answer was no.

• The process: Get your site control agreement printed and start an assessment hearing to contest the findings of the assessment. You have a limited amount of time to do this. The answer we received was that if the property could only be sold to another seller of company products, in today's market, the property would sell for as little as half the highest and best use number. In that case, your assessment should take into account a decrease on the land value of your site, which should significantly impact the overall assessment of your property.

In this scenario, a fifty percent decrease in the land value for the purpose of assessment should generate a significant decrease in property taxes to those individuals who cannot sell to anyone other than another seller of company (GM, Chrysler) products.