Disaster: Insure from the Dirt up
By Anthony Analetto
Are you prepared for a disaster? I recently had the opportunity to speak with Marcus Kittrell, owner of Marc-1 Car Washes. Last month, an F-4 tornado severely damaged his flex-serve wash located in Prattville, AL. Fortunately, the manager closed the wash and left about 10 minutes before the tornado hit and no one was hurt, but it forces every operator to stop and ask the question: Am I prepared for a disaster?
Kittrell entered the car wash industry in 1983, working at a full-serve wash before opening several self-serve locations. In the mid-90s he went to work for a car wash distributor, going on to buy his first full-serve tunnel in 2001 and converting it to flex-serve in 2002. In 2003 he purchased a 35-year-old full-serve and converted it to one of the first express exteriors in
the Southeast. In 2006 he built another flex-serve from the ground up, but it was his first location that the tornado hit. Still in the middle of working things out with his insurance, below are some excerpts from a conversation where Kittrell shares some insights on being prepared for catastrophe.
ANALETTO: People often comment that they pay too much for insurance, how much is enough?
KITTRELL: It’s not that simple. First, I would recommend viewing a rehab and new construction differently. Second, there’s a lot more to consider than just the amount you’re insured for. I originally bought this location for 900K and spent 300K in upgrades. Unfortunately I was way under-insured at only 700K. The policy automatically adjusted up by a fixed percent each year, after five years it’s at 777K, but that’s still far less than I wish I had. The insurance company has estimated it will cost 402K to repair and 419K to completely rebuild the structure. Our estimate is 588K to build brand new because of the electrical, plumbing, and slab/pit work. So you can see the difference in their numbers and mine. Fortunately we can salvage most of the equipment. If
we had to replace the equipment we would come up way short on insurance money.
It sounds like your coverage is reasonably close to your damages, why are you recommending having more insurance?
This was a devastating tornado that knocked out a Wal-Mart, K-Mart, bank, and nearly 800 homes. The problem is that my insurance company is looking mostly at the building, but in car washing, the big money is in electric, plumbing, and pit work. Also, it has been determined that the property is over 50 percent destroyed. In our city that means everything has to be brought up to meet today’s standards. This location was built in 1993. Upgrades to meet new ADA requirements and earthquake building codes alone may involve digging up the original footings and easily add on another hundred thousand dollars or more.
You don’t think about it, but each year adds more ordinances and potential upgrades you might have to do if something like this happens. We actually had damage to our parking lot. You may think that you’ll always have your slab, but it’s not true. Once the building shifts, you might have cracked footings, or even cracked water and sewer lines that you won’t know about until you reopen. Make sure you’re covered from the dirt up. In the future, I plan to insure for 50 percent more than what I think total replacement will cost, just to make sure I’m covered for everything that can go wrong underground. Building and business personal property insurance is relatively affordable. You overlook how little it is because the insurance bill is so huge, but some of that is coming from liability. I can’t recommend upgrading your property coverage enough. You might be fine, but why risk staring at concrete being pulled out with no way to pay for it.
What about loss of income, how does this coverage work?
Fortunately we had a policy for loss of income for 12 months. Even more fortunate is that we had very accurate financial records for the insurance company to use in determining payout. The insurance we have only pays for expenses including some salaries, but not profit. When something like this happens, the insurance company pulls your financial records for the last 12 months. If your bookkeeping isn’t accurate, then you got your work cut out for you.
Another point I want to make regards real estate. In my situation, I have an LLC that owns my buildings and properties, with each wash operating as an S-Corp that owns the equipment but rents the location from the LLC. This is a pretty common structure for many car washes. It’s also normal for the holding company to make a profit on what it charges the car wash for rent. For example, if the holding company pays an $8,500 mortgage payment, the car wash might pay the holding company $15,000 in rent. The reason I’m pointing this out is because it’s the car wash that holds the insurance policy, but you want to make sure that the policy names the holding company as “additionally insured.” This extends your coverage to the holding company so that, in this scenario, you’d receive $15,000 instead of $8,500.
Does your building and business personal property policy cover your equipment and signage?
Equipment falls under our building insurance because it’s attached. Basically, anything fastened down is covered. Our auto sentries got destroyed but since they’re bolted down they will be covered, too. Signage, at least in my experience, functions differently. Our general policy has a very small allowance that wouldn’t even come close to replacing what we had. Luckily we have a separate sign insurance policy that will cover us. I’m sure this kind of detail varies greatly with the different insurance companies out there, but I recommend everyone check exactly what coverage they have. I know guys out there spending 80 to 90 thousand or more on their signage, it’s worth making sure your coverage matches the investment.
Have the government and insurance companies been helpful; are you able to access any catastrophe funds?
No. Although there were 800 houses involved, I’ve heard that 95 percent were insured and that there is no FEMA money available. The SBA is supposed to offer some assistance program but I haven’t heard any details yet. So far, the insurance company has been responsive and put me in the right direction. The city has also been helpful and put us on a fast track plan that is part of their catastrophe program to bypass most construction bottlenecks. Everyone involved seems to realize that we have a shared interest in moving past this event and re-opening as quickly as possible.
What recommendation would you make for other operators out there?
Get with your insurance agent. Check your coverage for loss of income, signage, and make sure coverage extends
to your holding company if you’re using this structure. Then, determine when your building was constructed and
calculate from the dirt up, not the slab up, to rebuild using today’s building codes. Prepare for rising costs, and don’t forget to account for possible sewer and water line upgrades. Insure for the right amount, make sure you have good financial records, and you should be in good shape.
What are your plans for the future?
To be washing cars in 12 months or less before the insurance runs out. Since I got the property, the population has grown significantly, and a lot more retail has opened up in the area. It’s a more desirable location compared to when I first bought it, and the land has appreciated in value significantly. Selling the site is almost tempting. I’m definitely going to be shy on coverage. To rebuild the way I want is going to take an out-of-pocket investment, but long run, I think I can make more money washing cars. I’m trying to look at it positively. In a way it’s like taking a mulligan, or getting a do-over where I can change everything to take advantage of new trends and things that I’ve learned. This site will reopen as a pure express exterior with free vacuums. It’s a great opportunity to explore new trends and formats to maximize the profitability of your property. Not exactly how I would have wanted it to happen, but I guess you have to take what you get and make the most of it.
Questions can be sent directly to Marcus at: firstname.lastname@example.org
Anthony Analetto has over 26 years experience in the car wash business and is the president of SONNY’S The Car Wash Factory’s Equipment Division. Before coming to SONNY’S, Anthony was the director of operations for a 74-location national car wash chain. Anthony can be reached at (800) 327-8723 x 104 or at AAnaletto@SonnysDirect.com.