Out of Gas
Many factors drive fueling station owners to default.
Gas prices increased 20 percent during the first half of
2012. Lower oil prices decreased the pump price earlier this summer, but in
late July, prices started climbing once again.
Paradoxically, one of the businesses most negatively
impacted by higher gas prices is the gas station. When consumers pay more at
the pump, they might think that gas station owners are flush with profit. Yet
many unexpected variables can affect the profit margins of gas stations.
Coming off the recession, lenders are faced with an
increased number of defaulted or distressed loans on gas stations. Commercial
real estate and other professionals who encounter these troubled assets should
understand how various factors, including current ownership trends and
valuation practices, affect the profitability of gas stations.
A common misperception is that the major oil companies own
and operate the majority of American gas stations. In fact, of the more than
100,000 U.S. fueling stations, less than 1 percent is owned by the oil
companies. The vast majority belong to independent operators who are subject to
the whims of an extremely volatile marketplace and are in no position to share
in the record profits enjoyed by their suppliers.
Most gas station owners find that higher prices mean less
profit for them. As gas prices rise, owners must purchase increasingly
expensive fuel, and, depending on their fuel supply contracts, they are often
forced to sell it at a loss in order to stay competitive.
Unlike other types of income-producing commercial real
estate, gas stations are valued using the gross profit multiplier, which is the
sale price of a going concern (or value of a proven property operation) divided
by gross profit. A going-concern value takes more into account than the value
of the real estate; it also includes the intangible enhancement that an
operating business enterprise provides, according to Stephen J. Morse,
president of Retail Petroleum Consultants.
Why are so many independently owned gas stations suffering
now more than ever? The answer is complex. First, there are macroeconomic
factors at work. Global politics impacts fuel prices and operators have no
control over the actions taken by OPEC and foreign countries. In the U.S.,
higher unemployment rates mean less disposable income in consumers’ pockets,
which leads to decreasing levels of fuel consumption.
Microeconomic trends also come into play. There may be an
increase in competition from new gas stations opening nearby. Surrounding
businesses may have laid off workers, decreasing the potential customer base.
Infrastructure changes, such as commercial development or road work, may have
diverted traffic away from the gas station.
In addition, a higher sales tax or new mandatory government
regulations may have added expenses for which the station owner is unprepared.
Such requirements can be costly, and operators may not have the financial
resources to meet them.
While all these variables are contributing factors, higher
gas prices remain the No. 1 factor in the downfall of many gas stations. As gas
prices climb and consumers are forced to spend more on fuel, they are less
likely to make other purchases. Convenience store products sold at most gas
stations provide the highest profit margin of all goods sold. Fewer c-store
purchases, due to a decrease in income and fewer visits to gas stations,
negatively impact operators’ bottom line.
When gas prices soar, consumers are also more likely to
comparison shop, using the Internet to find stations with the least expensive
fuel. They may opt to drive less, or even invest in more fuel-efficient
vehicles, resulting in less gas sold. Credit cards are also a more popular
payment method and credit card fees can cut into a station’s gross profit
All of these factors have lead to gas station owners
defaulting on their loans, leaving lenders with few avenues for financial
One option for a lender dealing with a defaulted gas station
loan is to sell the note to a third party, often at a tremendous discount. This
is a quick fix for getting a bad loan off the books, but it may not be the best
solution for every lender.
Another option is to foreclose on the property, seize it,
and operate it as a bank-owned asset. This solution works best for properties
that are already in good working condition and are not in need of costly
improvements. Lenders who choose to operate the gas station themselves must
keep in mind that they will become the owner, with all of the attendant risks and
liabilities of operating a business.
If the lender has concerns, another option is to appoint a
receiver, which will shield the lender from ownership liability. The receiver
is then responsible for protecting and preserving the property, troubleshooting
as necessary, and often marketing and selling the property in receivership.
Finally, the lender may choose to modify or extend the
existing loan, deciding on new terms with the interests of both borrower and
lender in mind.
As America continues its uneven path to recovery, troubled
gas stations are a commercial real estate trend that cannot and should not be
Stephen J. Donell, CCIM, CPM, ARM, is a state and federal
court-appointed receiver and president of FedReceiver in Los Angeles. Contact
him at email@example.com.