Asset Class Spotlight: Gas Stations, C-Stores, & Collision Centers
Chelsea Mandel
Real Estate Sale Leasebacks for Private Equity, Family Offices & Business Owners
Key Takeaways
There are key differences between underwriting methodologies for gas stations/convenience stores and collision centers.
Bonus depreciation is a key consideration for gas stations and convenience stores.
Main drivers for collision centers are the caliber of technicians and their insurance relationships.
Unit-level economics are critical to sale leaseback underwriting and valuations.
If you had a chance to review last month’s Ascension Journal, my last post focused on sale leaseback (SLB) strategies and financial metrics for car washes and auto dealerships. This month, we’ll take this one step further and dig into SLB strategies for two more very active sub-sectors of the automotive services market, gas stations/c-stores and collision centers, each with their own unique appeal and valuation/underwriting nuances.
1. GAS STATIONS/C-STORES
I am often asked about the types of assets that are best suited for the sale leaseback, and gas stations/c-stores are almost always top of mind. Between their significant bonus depreciation benefits and large private-buyer universe fueled (pun intended) by attainable price points and mission-critical appeal, sellers can unlock substantial value through the sale leaseback that might even result in what I have coined the “SLB Free Roll”.
Tax Benefits
If there is one defining tax benefit to consider in the gas station and convenience store space, it is bonus depreciation. Since the passage of 2017 legislation (“Tax Cuts & Jobs Act”), gas stations, convenience stores, and car washes have received special tax treatment allowing their owners to take very aggressive bonus depreciation…from year one!
To qualify for this bonus depreciation, your gas station or convenience store must:
Generate fifty percent or more of its annual revenue from fuel sales, or
Use fifty percent of marketable floor space to market sales of petroleum products, or
Be less than 1,400 square feet in size
Until this year, you could depreciate 100% of the building basis in the first year. As of 2023, this has now been reduced to “only” 80%, and will continue to reduce each year by 20% until it is phased out in 2027. In other words, now is the time to take advantage of this tax benefit!
Buyer Universe
Because of the tax benefits mentioned above, there is an especially robust private buyer universe who specifically targets gas station and convenience store assets. This, in turn, benefits our clients who receive considerable premiums for these types of sites.
Furthermore, at an average transaction size between $2 and $5 million, gas stations and c-stores fall right in the sweet spot for our expansive private-buyer network. These less institutional private buyers are also more likely to be interested in an M&A deal where the funds to complete the acquisition are entirely capitalized through the sale leaseback proceeds.
I’d also be remiss if I did not share the findings from Professor C.F. Sirmans of Florida State University, whose study comparing sale leaseback transaction prices for commercial properties to non-SLB sales found the average SLB transaction commanded about a 14% premium. This is before taking into account the additional benefits I shared above. These premiums can be even more pronounced for gas stations and convenience stores given the pricing premium buyers may place on assets that generate additional tax benefits.
Candidates for the Sale Leaseback
The gas station/c-store space is a highly fragmented market, and over 60% of locations are independently owned and operated. Many owners are hard-working immigrants looking for capital partners to help fuel growth. While the larger operators are typically private equity backed platforms pursuing a rollup strategy and growing through add-on acquisitions. In either case, a sale leaseback is a great tool for the business to fund their footprint expansion without taking on dilutive capital, and typically doing so at sale leaseback cap rates that are cheaper than traditional debt financing.
Case Study
A longtime client of Ascension’s owns and operates a rapidly expanding footprint of gas stations and convenience stores in South Florida. The operator has utilized the sale leaseback strategy to successfully fund all of their acquisitions while also generating millions of dollars in pure profit on top. With no equity invested, these acquisitions are essentially a free option for our client. Our favorite “SLB Free-Roll” case study.
Our client is not the only group benefiting from the sale leaseback free roll strategy. In fact, the Director of Real Estate for a national convenience store chain recently attributed the sale leaseback as the sole reason for 17 out of their 20-store expansion in a single year!
Here are recent examples of how we’ve helped gas station/convenience store owners unlock capital within their real estate to help fund growth.
2. COLLISION CENTERS
The second category we will explore – collision centers -- is not one that takes much convincing of its mission-criticality. After all, haven’t we all had to make the unfortunate, unplanned visit? These sites are another common asset where our clients can leverage the sale leaseback strategy to unlock significant value.
Buyer Universe
Our network of private and institutional sale leaseback investors is drawn to the automotive service and repair industry. They recognize that, no matter the state of our economy, car accidents will occur and customers will require repairs. This increased demand and lack of cyclicality results in highly competitive processes among net lease investors, with positive outcomes for our clients.
Candidates for the Sale Leaseback
Multiple-shop operators (MSOs) have been expanding their portfolios in recent years, acquiring mom-and-pop auto shops across the country. Oftentimes, small shop owners do not realize the value in their real estate, or take full advantage of the market, losing out on potentially significant value.
However we see the value in this asset class, and collision centers are growing in popularity among net lease investors. One driver is that auto body repair shops require special permitting and carry high construction costs due to the specialty services. This inflated cost causes investors to seek out existing locations instead of developing shops from the ground up, helping fuel demand for existing repair centers.
Case Study
Our team is happy to represent many owner/operators of automotive collision and repair centers in the United States and abroad. One of our European clients, the largest privately-held automotive repair company in the UK, has engaged our team to run a sale leaseback process of 11 repair centers that they recently acquired through an add-on acquisition. The add-on was critical to expanding the company’s reach into a previously underrepresented market.
Add-ons of existing automotive repair centers continue to grow in popularity. With special permitting and zoning requirements, alongside high construction costs plus a growing number of independent shops whose owners seek to exit their businesses and retire, these sites are ripe for picking. To unlock the full potential of these sites, a sale leaseback is an ideal solution for business owners and sponsors looking to generate liquidity.
As technological advancements in the automotive space continue to develop, our clients and others like then will be well-suited to acquire existing businesses, and modernize them with the necessary talent, equipment, and resources.
Valuation Methodology
Valuing gas stations and collision centers is comprised of a few key metrics mainly focusing on the credit of the underlying business and the unit-level economics of the individual locations. To understand the ability of the location to service its new rent burden, there are 2 key metrics to look at when evaluating a specific location: the health ratio (rent/sales) and rent coverage (EBITDAR/rent) of the site.
For example, let’s say the gas station has a revenue of $1 million and an EBITDAR of $200K. Most sale leaseback buyers like to see rent coverage between 2x and 3x. Let’s assume applying this coverage range we generate an annual rent of $80k. Once rent is decided, we divide the rent by the appropriate cap rate which ultimately determines our sale leaseback valuation. To solve for the cap rate, we use our underwriting methodology that focuses on the credit of the underlying guarantor, the mission criticality of the specific site, and the strength of the real estate asset.
Why Ascension
The automotive services space is comprised of multiple asset types – from auto dealerships, to car washes, to gas stations and c-stores, to repair centers. These asset types are unique and require a nuanced approach when underwriting opportunities and structuring sale leaseback transactions, especially if these sale leasebacks are completed alongside M&A transactions. Don’t go at it alone – our team is here to help!
Conclusion
If you’re an owner-operator or private equity owner of gas stations, convenience stores, or collision centers, let’s discuss how we can help you monetize your real estate through a SLB transaction.
Chelsea Mandel
Founder & Managing Director