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Auto article by Dan Fallon, Feb 2010
2009 has been a tumultuous year for gas station owners and the commercial real estate industry as a whole. I don't need to repeat here what you have seen on the news ad nauseam and read in the papers for those of you who still read a daily paper. Odds are if you do read a daily paper, you're over 50! Regardless of the medium, the message has been clear---recession, loss of consumer confidence, unemployment, businesses of all sizes have declining sales and corresponding declining profits. The gas station and C-store businesses have not been immune to these challenges. This economic climate and the corresponding shortage of capital to be loaned to buyers of stations has created more change in 12 months than at any time in my 20+ years in the business. Here are some of the trends we've observed.
Buyers: Yes, there are still buyers in the marketplace. In fact, there are many qualified buyers searching for properties. They are more choosy than in the past and can afford to be. The depressed economy in California and that state's poor treatment of their small business owners has fostered a migration trend of those owners to WA, especially in the East Indian community, the fastest growing segment of the buyer pool. WA is more business friendly than either OR or BC, Canada, so WA receives a disproportionate percentage of those seeking to relocate to the NW. Buyers with school age children appear to favor WA public schools as well. The only impediment for many is their inability to sell their homes in CA. As the residential selling environment improves in CA, we'll see an increase of those buyers coming to WA.
Buyers of Distressed Properties: Given all of the foreclosed stations, there is a perception in the marketplace that there are real bargains out there. It is true---there are bargains, but there are also pitfalls. Buying closed down stations is a high risk high gain proposition. Typically we see a lot of interest in the truly distressed priced gas station real estate. In fact, many buyers are interested ONLY IF they can buy at what they perceive as below appraised value. The trend of distressed properties coming on the market will continue.
Financing: The single biggest hurdle to selling a gas station today is the inability of the buyer to secure financing. Most of the banks who issued gas station loans over the past five years in the Northwest are no longer making loans. There are many reasons for their withdrawal from our particular asset class of business, but the majority of banks suffered either from making poor loans or making too many loans. The federal regulators are particularly sensitive to a concentration of too many loans in one asset class such as gas stations or motels, for instance.
One logical consequence of this lending climate is seller financing. It was very prevalent, although for different reasons, in the mid 1990's when the majority of station deals had, to one degree or another, seller financing. There is risk in seller financing but that risk can be managed and limited. Seek advice from experts. The demand for seller financing will continue.
There are still lenders making loans. The underwriting standards are tougher than before. There is a greater sensitivity to environmental concerns and the ever-changing regulatory guidelines of DOE. Buyers typically need to have a higher down payment than in the recent past. 20% is a minimum for most and we've seen some demand 25% or 30% down---depending on circumstances of the particular purchase or re-finance. On the positive side, rates are low---typically in the 6% - 7% range, sometimes lower. In an article I wrote for this publication in 2006, I predicted that the then current prime rate at 8.25% was at its zenith and it would gradually decline. It has and it is now at 3.25% as of this writing. Therefore, if a bank makes an adjustable rate loan based on the prime rate, their interest rate could be as low as 5%. The lower the interest rate, the lower the payments, which impacts what a buyer is willing to pay for a station. If the interest rate increases and his monthly payments increase, he will pay less for the station. I predict the prime rate will remain below 4% for the remainder of 2010. Overall, financing will improve, but only marginally so in the first six months of 2010.
SBA: I recall when over 85% of gas station loans were financed through banks with SBA guarantees. In an effort to reduce the number of under-performing gas station loans, the SBA in their misguided wisdom, used a hatchet rather than a scalpel to fix the problem. The overreaction resulted in a new set of guidelines put in place in the summer of '08. This was before the financial meltdown which took place in the last quarter of '08. These two events essentially took the SBA out of the gas station lending business. Fortunately, there has been some return to sanity and the SBA has begun easing their restrictions. They want to do loans again. In fact, they have waived the SBA fees temporarily and that has saved many buyers $20K - $30K in closing costs. Some lenders, in their zest for these SBA government guaranteed loans, are long on promises and short on delivery. Remember, the odds are that whoever you speak to at any bank, has little or nothing to say about whether a loan can be made or not and they all promise that they can get it done, when very few can. If the lender you are speaking to has not done at least a few gas station loans in WA in the past 6 months, it may be best to move on.
Litigation: Another trend we are seeing is the increase in litigation involving gas stations, C-stores and car wash transactions. It's logical when you think about it. When businesses and profits decline, there is a tendency to point blame at others for their misfortune. In extreme cases, litigation is the result. Our firm provides expert witness testimony on valuation, eminent domain, and other gas station related disputes and the demand for those services is at an all time high. Seek wise and experienced counsel before a purchase or sale of one of these properties.
Divestment: Although this trend has been years in the making, 2009 was a huge year for oil company divestment of real estate. Shell hired CB Richard Ellis, and they were unsuccessful at selling the Shell assets. Instead, Shell sold its last remaining WA stations to either the dealer leasing the site or one of two jobbers, PacWest, a joint venture between Shell and Boise-based Jackson Oil or Sun Pacific operated by long-time Shell jobber Craig Eerkes based in TriCities. Unlike other regions of the country where Shell is also selling its stations, dealers in WA were provided with a right of first refusal under the Washington Gasoline Dealers Bill of Rights passed by AUTO in 1986. The majority of AUTO members that were formerly leasing from Shell successfully located financing and acquired their sites at substantially reduced prices.
Conoco Phillips sold most of their properties to a CA firm and BP continues to sell off most of their ARCO ampm real estate. This divestment trend will continue, there's not much left to sell. There has been a long standing debate as to whether a dealer is better off with direct supply or jobber supply, one thing is certain---when it comes time to sell a gas station, it is much easier to wade through the process and secure financing as a jobber supplied station.
Hypermarkets: After a rapid growth spurt during which the hypermarkets gained a market share reported to be between 24% and 28% in WA, there is very little growth in this segment. Safeway, in particular, has already built stations everywhere they can. There is some anecdotal evidence and some news on the national scene indicating that the hypermarkets are not quite as profitable as they had hoped and some are cutting back and closing stations including Wal Mart. Home Depot, after announcing last year that they were going to enter the gas station market also seems to have put those plans on hold. Some other grocery store chains are actively searching for sites, but I doubt if we'll see too many new ground-up stations being built in 2010 by anyone in the Northwest.
Inventory of Stations on the Market: This is a counter-intuitive trend. One would think that in a period of limited financing options and reduced number of sales, there would be an oversupply of stations on the market. Not so. Many would-be sellers, seeing the downward pressure on values, simply decided not to sell, choosing instead, to wait for the market conditions to improve. People's lives still move forward---owners want to retire; divorces happen and dealers who wanted to sell last year and didn't will want to sell this year with a little more urgency. Lenders will continue their cleaning out of distressed loans and these properties will continue to come on to the market. My prediction is that we will see an increase of inventory in the coming months.
Economy: Although there are many naysayers out there, I'm probably guilty of being one whose glass is usually half-full. Consumers will be reluctant to embrace gas guzzling SUV's and many car models will have improved gas mileage. However, this is offset by an economy that is growing and will improve in 2010. Convenience will drive customers back to convenience stores and station owners will sell more fuel in 2010.
That's how I see it and, as always, I welcome your comments.
(Dan Fallon, Broker/Owner of McCallen & Sons, Inc. a firm specializing in sales and marketing of gas station properties, is a regular contributor to the AUTO Bulletin and may be contacted at 425 822-9752 or via e-mail at
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