As always, check out the local real estate brokers, advertising places, and websites for commercial properties. In addition, look for properties with signs of distress, which might have motivated owners to sell. Depending on your local laws and prevailing opinions, a convenience store that does not sell alcoholic beverages may have some sort of problem obtaining a license. Pumps that seem to be frequently out of order or a number of lights that do not work at night indicate an owner who cannot afford a maintenance contract or repair bills.
Sparsely-filled shelves mean the owner's vendor cut off the credit, and will only deliver items cash on delivery (COD). Develop a relationship with the independent oil and gas providers, because they will know all the gossip all over town. If anyone wants to sell, his or her gas supplier will know it first.
Convenience stores sold as operating businesses are typically priced as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Basically, that means a certain multiple of the annual cash flows, such as three times annual cash flow up to around seven times annual cash flow. The value of the underlying real estate and the condition of the building, tanks, and pumps does not add or subtract from that number, it simply determines if the sales price is closer to 3 x EBITDA or 7 x EBITDA. Convenience stores sold strictly as real estate, with a tenant in place who owns and operates the actual store, are sold based on the NOI and cap rate evaluation method.
I am assuming that you will buy a convenience store as a real estate investment, not as an operating business. In other words, you will have a tenant who will run the business. Some of the items peculiar to other types of properties are also relevant here. They are reprinted below. Additionally, you will need to investigate the following. Anything and everything having to do with the underground tanks. A specific state agency in every state is devoted to this critical area. The seller can tell you how to get in touch with it. It will tell you if there is any history of spills or non-compliance. You will also need a specialists' property inspection report. It should be someone with extensive experience in gas station properties. Even if you did not cause the spill, even if it occurred before you purchased the property, you could be liable for all cleanup expenses.
Copies of all environmental insurance policies, proof they have not been canceled for nonpayment or other reasons, and the cost of those policies. The local highway or streets/roads department can tell you if there are any plans to change nearby roads. A change in traffic patterns can be deadly for a convenience store. Simply taking away a traffic light or widening some lanes can make entering and exiting the property more difficult and affect sales. If your tenant goes out of business, you might not be able to find another one. Read the agreement between the convenience store owner and its jobber - gas supplier. The jobber may have early warnings in place for the possibility of default, or may have remedies that affect your cash flow. Read all leases, especially those for fast-food companies that operate at the site.
The risk is in the ground - the gas tanks. Leaking underground storage tanks can cause massive cleanup expenses, not just for the gas station operator, but also for the owner of the property. Insurance is very expensive and will need to be maintained by the property owner if the operator goes out of business. Related to that risk is the possibility of expensive new government requirements regarding the tanks or the pumps. Not too long ago, all underground tanks in the country had to be replaced with newer, double-walled tanks that minimized the risk of leaks. Property owners had a certain time limit to complete the replacement or to fill in the old tanks with concrete and cease operations. Something similar could happen in the future.
Aside from the rapid tax write-offs, I think the most exciting thing about investing in convenience stores is the possibility of very large resale profits in the near future. Yes, the smaller operators are facing tremendous pressure from the national and regional chains and the efficiencies they enjoy because of their size. But, the industry is still largely fragmented into smaller owners and operators. The big players are buying up the smaller ones, engaged in something called industry consolidation. Every time an industry undergoes consolidation, sellers with good locations can command premium prices because of their strategic value.
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