We Sell Stations - McCallen & Sons, Inc

As we head towards the end of 2006, the marketplace for the purchase and sale of gas station properties remains active, but values have leveled off. There are some bright spots on the 2007 horizon, but don't expect any dramatic changes.

Many of the trends, outlined in previous issues of the AUTO Bulletin in what has become my annual "State of the Market" article, have continued. For example, hypermarketers have decreased (not eliminated) their expansion and therefore their marketshare growth has slowed, but still remains over 24%. Marginal stations, most of which pump less than 40K - 50K gallons per month, are closing down. Amortization loans from major oil companies are rare. The influx of Korean and East Indian buyers continues. California has re-emerged as the source of an ever-increasing share of buyers. The oil companies continue to divest of company owned properties. Perhaps the single biggest challenge to selling a gas station today is the buyer's financing.

Over the past five or six years, dozens of lenders were burned on bad gas station loans and have withdrawn from doing any gas stations sector loans. Many ne banks, or those wanting to expand into our region, have stepped up to fill that void and are aggressively soliciting that business. But there's a catch....perhaps a few catches. First, these new lenders are aware that gas station loans are in a higher risk class---there really were a lot of foreclosures where banking institutions lost a lot of money. Therefore, these banks are only interested in SBA loans, where we taxpayers guarantee the loan and significantly limit the risk of the bank. SBA underwriters tend to have higher qualifications, higher fees, less flexibility and there is little chance of getting an SBA loan if there is any environmental clean-up going on at the property, even if one of the major oil companies is responsible for cleaning it up. Furthermore, SBA will not make a loan where the seller, i.e. a major oil company, requires a long-term supply contract, which is quite common. They also avoid business-only loans---SBA is only interested in loans where the buyer is acquiring the real estate.

In addition to these financing challenges, we have had rising interest rates. As of the writing of this article, the prime rate is 8.25%. Unlike residential rates, SBA commercial lending rates are tied to prime and typically range from Prime + 1.5% - Prime + 2%. That translates to 9.75% - 10.25%. On a $1M loan at 10% vs 7.5% of just a few years ago, the monthly payment is $1697 more. If the cost to finance a station costs the buyer over $20K more annually, the value of that commercial property declines. There are some creative ways to address these issues. Choosing the right lender is a big challenge but critical to the process. If they haven't funded a lot of gas station loans in the past 24 months, look elsewhere. The lenders will pressure the sellers to consider seller financing, which was commonplace back in the mid 1990's in our industry. Seller financing adds another level of complexity and risk to the transaction, but may be the only way to get the deal done.

There is another disturbing trend for dealers of stations owned by oil companies. Real estate values continue to increase in the Puget Sound Region---at a faster rate than most of the rest of the country. That's good if you own a home or property, but not such good news for leasee dealers. The philosophy of most oil companies is that if the underlying land is increasing in value, the corresponding rent should also increase. What they and their out of town and out of touch appraisers fail to understand is the correlation between the value of the land if vacant and the value of land in it's present use as a gas station. Rarely does the increase in the value of the land on which a gas station sits translate into an increase in sales or profitability for the dealer. One argument for why they increase rents beyond what one might think is reasonable is because they can. I believe we will see significant rent increases from oil company landlords over the next few years, which will feed our existing trends of marginal stations closing. The strong Puget Sound economy will also put upward pressure on labor costs over the next few years. We can hope that fuel prices do not spike again---that tend to drive, if only temporarily, customers to the hypermarketers and to increase the ever increasing credit card fees on the profit and loss statement.

So, where are the bright spots for 2007?

1. Strong Economy: We are lucky to be in a marketplace that is strong---more jobs, more housing, more people moving into our area. This will keep the demand for fuel and related services high. 
2. Gas Station Sites Converting to Alternate Use: Many gas station properties have been sold to alternate users such as condo builders or retail and commercial developers. It has become part of the routine analysis for us when we value a gas station property.
3. Fewer Stations Benefit Others: Regardless of why a station closes their doors, those remaining stations, especially those nearby, benefit.
4. Alternate Profit Centers: Many dealers have successfully improved their inside sales or added espresso to dramatically improve the bottom line. One enterprising dealer in Juanita converted his bays to a dry cleaners. I know dealers who make more from their espresso kiosk than they do from either their inside sales or from fuel.
5. Interest Rates: I believe we are at or near our peak in the prime rate. Interestingly the residential interest rates have remained in the 6% - 7% range. For every prime rate reduction, your station effectively increases in value.

If you are leasing a station from an oil company, it may make sense to sell it prior to any further rent increases that are surely to come. If you wait until the announcement, the projected cash flow and the corresponding value will go down. If you own the land at your station and do not have too heavy a debt load, focus on increasing sales and reducing expenses to show a stronger P&L. That will generate a higher value. If you do that and position yourself to come on the market in the 2^nd quarter of 2007, and interest rates come down a bit, you should achieve the highest value.

Dan Fallon, Broker/Owner of McCallen & Sons, a firm specializing in gas station properties, is a regular contributor to the AUTO Bulletin and may be contacted at 425 822-9752 or via e-mail at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .