If you’re looking to buy a gas station or convenience store, one of the main reasons banks and other lending institutions do not like to lend to this asset class is because of supposed environmental concerns. While it is true that the likelihood of having an environmental issue is greater with buying a gas station than it is with purchasing an apartment building or office building, reality is often clouded by perception.
Gas stations, convenience stores and truck stops can have environmental issues from the following areas: 1) Leakage 2) Spillage and 3) Migration. Leakage occurs when the tank or the lines from an underground storage tank (UST) develop a leak and contamination in the soil occurs. In truth, this happens significantly less because of improvements in underground storage tanks and leak detection equipment. Years ago, a lot more steel tanks were used and even single walled fiberglass tanks. Today, it’s almost a given that a double-walled fiberglass tank will be purchased and the incidence of leakage has gone down significantly. Spillage is either where you have spilled fuel from overflowing your tank while filling up your car or from a fuel truck filling up the underground storage tanks. Again, improved vapor recovery systems have improved so that those incidences have decreased. Migration is where there has been soil contamination on another property and it is migrated to surrounding properties.
In truth, the average cost to “remediate” a gas station (which basically means to clean it up) is less than $50,000 and in most cases, gas stations and convenience stores do not even close down to have the site cleaned up. Most of the time, these costs will be paid by the State’s LUST fund, which is specifically set up to pay for cleanups from leakage, spillage and migration. Not all leakage and spillage are created equal. Spilling a gallon of fuel from the car from overfilling is certainly different than a tanker truck spilling thousands of gallons of fuel, yet they’re both considered “spillage.” From a lenders point of view, they are concerned about liability and the borrower’s ability to pay their note if the site is closed down. Every now and then you hear about a gas station that has had huge leakage from an underground storage tank and it contaminates the neighborhood and the bank is liable for the costs because someone did not pay their premium to have it covered in the State pool or the State pool is insolvent. This is VERY rare. In most cases, most bankers are not experts on environmental issues and concerns nor do many of them take the time to learn other than on a cursory level.
If you are looking to purchase a gas station or convenience store, what should you look for? The first thing you should ask the seller is if there is an open file on the site with the State’s environmental division (called DEP, DEQ among other names). Some sellers will know more than others depending on how long they have owned the property and if they had to finance it. If they have a loan on the property, they most likely had a Phase I done on the property and they will know if there is an open file or if the site has been cleaned up (remediated). Do not make the mistake of simply asking “are there any environmental issues with this site?” That is a nebulous question because an issue to one person is not an issue to another. Ask if there has ever to their knowledge been any environmental issues, leakage, spillage, cleanups, or if the site has ever had or if it currently has an open file with the State. You can ask them if the fire marshall has ever had to visit the site due to a complaint of fuel vapor smells. The gas station may have had an issue ten years ago and it’s gone through two owners since then, so not all sellers will know this information. Many think there is not an issue because the site is in the cleanup fund covered by the State and they have an open file, but because they know they are not liable, they feel there is no issue. Again, ask more questions.
A Phase I Environmental Site Assessment (ESA) is when a company will look online first to see if there is an open file with the State and they will make a site inspection to see if there are any obvious signs of possible environmental issues. For instance, the will go where the underground storage tank is and look to see if there is dead grass (obviously not in winter) above where the tank is. That is a possible sign of leakage. They’ll look at the condition of the property, look to see if batteries, tires, oil are properly disposed of. The generally will not take a soil sample. A Phase II is generally when there is a recognized environmental condition (REC) and will take a soil sample and will go into much greater detail. If the site does not have an open file with the State and the bank wishes to do a Phase II (which cost a LOT more money to do), you probably should find another lender. In most cases, there really is no reason to do a Phase II if there is not an open file and there are not recognized environmental conditions.
You can usually do your homework and find out in a very short period of time if a site is worth pursuing when it comes to environmental issues. Obviously older sites are statistically more likely to have issues than newer ones. Sites with steel underground storage tanks are statistically more likely to have issues than newer ones. If you’re looking at an older site with steel tanks, check around sufficiently because you don’t want somebody else’s problem becoming yours.
Harold Jaynes is with PetroMAC, one of the premier sources for funding gas stations, convenience stores and truck stops.