How to analyze a gas station (commercial asset series)?

So you want to buy a gas station, huh? If you want to find great gas station deals, you have to talk to many owners and offer! This guide isn’t for the business per se, but the actual real estate! You have two choices to make revenue from the real estate, lease the gas station or operate it yourself. Operating the business itself will probably generate the most income if you know to operate a gas station. But if you don’t believe you could operate yourself, you should lease it out! Leasing it out will probably generate less income than actually operating it yourself, but less work on your side.

The things in order I look at when buying gas stations.

  1. Location
  2. Tanks
  3. Demographics
  4. Competition
  5. Gas
  6. Cap Rate

 

  1. Location

For every property I look at, I always look at the location! Is development occurring in the area? What are some key organizations near the station, like university, hospital, or a corporation? I love gas stations next to universities for example. If I don’t believe in the location, such as the property is in the middle of nowhere or too hood, I won’t even continue anymore and will throw the lead away!

How many cars are passing down the road? You can check Transportation Planning Maps for the annual average daily traffic (AADT), which is the number of vehicles that go through that point on the road per day.

https://www.txdot.gov/inside-txdot/division/transportation-planning/maps.html

How is the frontage of the property?? If the land is worth a lot, then the property is at least worth the land, but there is always an exception. For gas stations, it is very costly to buy it if the tanks are bad and could cause an environmental spill. You must take that into the account!

  1. Tanks

Understanding or guessing the lifespan of tanks is very important. Gas Tanks usually have only a warranty for 30 years. Two types of gas tanks exist, steel and fiberglass.  Most new gas stations have fiberglass tanks, but gas stations build before 1990 probably still have steel tanks. Check the history and description of the tanks from the Texas Commission on Environmental Quality (if any other state, check respective environmental agency for the tank history and description).

Texas Commission on Environmental Quality

https://www15.tceq.texas.gov/crpub/

Gas tanks’ environmental problem is when the tank corrodes in the ground, mainly due to contact with water. Since many parts of Houston have 100 meters or less of elevation, the water probably comes in contact much more than other places like Oklahoma City where elevation is above 300. Flooding will also be an issue! If the area is prone to flooding, then the chances of water being in contact with the tanks are more likely. Check Federal Emergency Management Agency Flood Map. If the gas station is in the area where flooding may occur, I would be worried!

Elevation Map

https://www.advancedconverter.com/map-tools/find-elevation-of-address

FEMA FLOOD MAP

https://msc.fema.gov/portal/home

I am just breaking the ice on gas station tanks and will post a full blog on just gas tanks alone.

  1. Demographics

Demographics is key, check city data of the zip code. Also, go to the map and actually look at the specific area (deeper than the zip code) at where the gas station is. The best gas stations are in A and B locations where the income level of the neighborhood is 30k-45k which are mainly blue-collar workers. White-collar workers do not spend as much money into the gas station as blue-collar workers. Younger the population, think 20-40, the more likely they would spend money in a gas station than a population older than 60. A gas station near a university, filled with college students, would be a perfect example of great demographics!

http://www.city-data.com/

  1. Competition

Competition matters a lot in the gas station business. The better your competition is, the worse you are! Multiple Product Dispenser (MPD) has two pumps on the opposite side for cars to be filled up with gas. If you are buying a name brand gas station with 5+ MPDs where the rest of the competition is small, you will have an advantage. But vice versa, buying the small gas station with 2 MPDs will be in a disadvantage. Is the gas station c store you are buying is branded?

There is always an exception to this rule. For example, if you buy a gas station with 4MPDs, competing with 8MPDs+, you might be able to get away if that 4MPDs gas station is closer to the target neighborhoods. If you provide great food and design of the store, even a 4MPDs gas station could compete with 8MPDs+ gas station. If your nearest competition is a mile away, you do not really have to worry about it unless that gas station is massively big (think 10+ MPDs) and is big national c-store that comes along (think Buc-ee’s).

  1. Gas

Most branded gas stations have contracts and a number of years depending on the gas wholesaler. You must know what contract that gas station has, such as is the gas branded or nonbranded? Nonbranded is typically cheaper than branded by 6-10 cents. Branded gas does usually attract customers, but nonbrand gas can attract as much too if the c store itself looks great. Gas Stations do not make money on gas, about 1-2% only, but huge volumes allow it to at least pay for some of the expenses.

  1. CAP Rate

You must understand the revenue and expense of the property. Most sellers provide info such as gallons, inside sales and lotto sales. Lotto, gas, and EBT (Electronic Benefits Transfer) or food stamp is more commonly known, attract people to the gas station but do not make the majority of the profit. Most of the profit lies in inside sales, such as grocery products, deli, alcohol, tobacco and more. The summary of revenue and expenses is below. Revenue minus expenses equal net income. Net income divided by total project cost equals the capitalization rate (CAP Rate). Gross margin is net sales revenue minus its cost of goods sold and does not include other expenses like labor, property taxes or insurance.

 

Revenue includes

Inside Sales (25%-45% of total sales is gross margin)

Gas (1-2% of total sales is gross margin or 2-15 cent profit per gallon)

Lotto (5% of total sales is gross margin)

EBT

 

General Expenses includes

Labor

Property taxes

Property Insurance

Water

Waste

Electricity

Landscaping

Tank insurance

Tank CAP EX
CAP EX

Merchandise Inventory

Gas inventory

Tank Inspection

Tank Maintenance (cost depends on what type of tanks you have)

Conclusion

As you can see, gas stations have many variables to take account and should not be taken lightly as you can lose a lot of money if you do so. I quickly underwrite (analyze) the gas station and give an offer. Only when I believe the seller is motivated, is when I do much deeper research into the gas station. Due diligence is totally different from underwriting a deal. Underwriting a deal is to see the potential of the deal and what you could offer to the seller. Due Diligence is actually confirming the underwriting of the deal. I will release a post on the due diligence of a gas station and an excel sheet on the underwriting of a gas station asset. Never believe the words of a seller or agent, always do your own due diligence after you believe the seller is motivated to sell at a discounted price!

 

 

Sameer Bhalesha

CEO

Best Quality Investment

Sam.Bhal@BestQualityInvestment.com

832-718-2295

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