The Beginning of a Beautiful Friendship?

Just in case you’re one of the few SCMers who haven’t heard about it, RM Sotheby’s set a new world record for the highest automobile sales price ever achieved. On May 5, it auctioned a 1955 Mercedes-Benz 300SLR Uhlenhaut Coupe that was part of the Mercedes-Benz Classic Collection, selling it for €135,000,000 ($142,668,000). This sale far eclipsed the previous public-auction world-record holder, the $48,405,000 paid for 1962 Ferrari GTO s/n 3413 at RM Sotheby’s Monterey sale in 2018. And it doubled the widely reported $70m David MacNeil paid for his GTO in a private transaction earlier that year (“Collecting Thoughts,” September 2019).

Behind the scenes

SCM’s “Buy, Sell, Hold,” featured an exclusive interview about the sale with Peter Haynes, RM Sotheby’s Director of Public Relations and Marketing, Europe. Haynes explained how the auction, an invitation-only event, was orchestrated.

Mercedes-Benz wanted to be assured that the winning bidder “wasn’t just someone who had the money necessary to buy the car, but was also the right type of person for the car,” said Haynes.

It was seeking a candidate whose character matched a long-term partnership with the carmaker. Haynes said a criminal history would disqualify even a well-financed bid. Invitations went only to bidders cleared through background reviews and compliance sign-offs.

Partners

Mercedes’ efforts to assure that the buyer would be a good partner took an unusual turn. According to a confidential source, prospective bidders received a letter from Mercedes the week before the auction. An amendment to the bidder’s contract introduced several new terms to the deal, and bidders had to accept the terms to be allowed to bid. The key provisions were:

The buyer would have to hold the car for at least 10 years from the date of sale. A violation would incur a penalty in the amount of 25% of the hammer price.

In addition, all sales of the car would be subject to a permanent right of first refusal on the part of Mercedes, giving it the option to buy the car at the deal price. The right of first refusal would carry over to any subsequent purchasers of the car.

The buyer had to hire Mercedes to perform all annual maintenance and service work on the car, including the cost of travel and accommodations for its personnel.

The buyer had to make the car accessible to the public in high-profile cities and museums, in recognition of its cultural icon status. All of this would be at the buyer’s expense, including the cost of technical support provided by experts chosen by Mercedes, again with all attendant travel and accommodation expenses.

The buyer had to lend the car to Mercedes at no charge, including up to 10 days of display and 150 kilometers of driving each year.

These terms give interesting meaning to the “partnership” between the buyer and the automaker. They also carry some potentially undesirable consequences.

What if you have to sell?

The obvious problem is the illiquidity of this investment. If the buyer’s circumstances change and he needs to sell the car before 10 years pass, the penalty is €33,750,000 ($36m). That means there has to be a whole lot of post-auction appreciation in this car for the buyer just to come out even.

But the right of first refusal still applies after the 10 years. That has a depressive effect on value. 

Pretend you are the prospective buyer who is willing to pay, say, $200m for this car. First, you have to commit to buy the car at that price. That involves the cost of negotiation, legal fees for documentation, inspections and due diligence performed by experts, arranging any financing you may need, and keeping funds available for the purchase.

Once you’ve completed all of that, the seller has to give your contract to Mercedes to see if it wants to buy the car at the same price. If it decides to do so, you’re out, and you’ve lost everything it cost you to get to the point of the binding contract. Aren’t you going to want to hold back some of the money to cover your costs and efforts? If Mercedes chooses not to exercise the right to buy the car, aren’t you going to wonder if you’re paying too much?

This means you aren’t going to offer to pay the full $200m. Maybe it’s $190m, but maybe it’s $160m. Either way, the seller is leaving money on the table because of the uncertainty of the right of first refusal.

In our law practice, this often comes up with real estate and businesses. We advise our clients to never give a right of first refusal. Instead, we advise a right of first opportunity as a way of avoiding the hit to value. Under this approach, you offer the property to the option holder at the price and terms you are willing to accept. If they don’t take the offer, you are then free to make the same deal with anyone you want. That reduces the uncertainty and enables you to make a deal with a real purchaser who knows they will be able to buy the property.

Taxes

The illiquidity problem can really put a serious crimp in your estate planning. At this level of value, we are dealing with a buyer whose estate exceeds all applicable estate tax exemptions under any formulation of the estate tax law. Under current law, that means a 40% federal estate tax that has to be paid within nine months of death. Keep in mind that there has been pressure in Congress to increase that rate.

We also have to think about the 17 states plus the District of Columbia that impose their own estate or inheritance taxes. Most tax you at a 16% top rate, but maybe you live in Washington or Hawaii, which impose a top rate of 20%. The state tax is deductible against the federal tax, so you’re looking at a combined rate of between 49.6% and 52%. At the $143m purchase price, that could be $74m of tax your family has to pay from other estate assets. If the value of the car increases, that increases the tax obligation.

Mercedes did advise it was aware of difficulties that might arise at a buyer’s death, and that was something they would need to “work on,” which seems, at most, minimally comforting for the buyer. It may be the case that this problem made the car a more difficult purchase for an American than a purchaser in a country without a significant estate tax.

Maintenance and use

The maintenance, display and factory-use provisions can all add a substantial amount to the cost of ownership of the car. Sure, it’s easy to say that anyone who can afford to pay this much for the car shouldn’t be worried about those items — but that is perhaps too easy.

I’ve had plenty of experience with wealthy clients, and most of them have enough respect for money that some minimum amount of expense is always significant to them. If the buyer doesn’t care so much about these costs, it is fair to assume that a future purchaser might, which could have a depressive effect on the resale value of the car.

Conclusions

Haynes pointed out that this car is the eighth most expensive collectible of any kind ever sold at an auction. That is a huge accomplishment. Once a car crosses into nine figures, another may not be far behind. So is the Uhlenhaut Coupe worth as much as two or three GTOs? Probably not, which makes the previous world record look like a smart buy.

We don’t know what the buyer thinks of this “partnership relationship” with Mercedes. Maybe he thought it would be an asset, and Mercedes did say that it was willing to “work things out.” But the written agreement gives Mercedes complete control over what they work out, so the potential for conflict is somewhat high. It’s best to always read the fine print and believe what it says, because you may have to live with it.

All the bidders were sophisticated collectors, fully aware of the restrictions placed upon their ownership. Most of us would view these as value negatives. What if the bidders thought the same and factored these uncertainties into the amount they were willing to pay? 

Although this was a record breaking sale, did Mercedes really get all the money? ♦

John Draneas is an attorney in Oregon and has been SCM’s “Legal Files” columnist since 2003. His recently published book The Best of Legal Files can be purchased on our website. John can be contacted at john@draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.