Why Invest in C-Store Property?
- Jun 19, 2013
C-store properties offer significant value to investors who may overlook the assets based on appearances or liability misconceptions.
The idea of owning a gas station or convenience store may not be appealing to all investors upon first glance. The properties are often less glamorous than other retail sector assets – sitting on smaller plots while catering to a broad clientele. Despite the rugged appearance of such properties, convenience store assets offer significant profit potential for the savvy investor who is able to look beyond first impressions to see the value of each location as it stands.
Don’t Overlook C-Stores
Corner convenience stores and gas stations are the largest sector of retail space within the United States. There are currently more than 149,200 C-stores across the country, compared to about 40,727 drug stores, 33,192 supermarkets, and 24,075 dollar stores, which demonstrates the demand and necessity of such properties to local communities.
Located on small plots of land traditionally at major intersections, C-stores offer a high value based on the price of the asset with a limited risk of vacancy due to strong tenant demand high quality real estate. Any C-store property that generates more than 50 percent of its revenue from petroleum product sales allows investors a 15-year accelerated depreciation compared to a typical 39 years. This means investors will enjoy tax-free income as they write off depreciation. Furthermore, the affordable pricing of C-stores make them easily attainable properties without sacrificing long-term profitability.
The C-store sector has consistently performed well despite economic uncertainty when compared to other retail assets. Approximately 80 percent of C-store properties distribute gasoline, which is a high-demand commodity with a continual flow of customers throughout the week.
Currently we are seeing operators starting to consolidate, which is leading to a compression of cap rates as the operators become larger and their balance sheets improve through growing revenue.
Breaking Down The Value
Many investors may have chosen to bypass C-store assets when expanding a portfolio due to a perceived environmental liability. As a result of the heightened state regulation however, the overall liability is minimal.
Most states have underground storage tank funds, which the store operators (tenant) are required to pay into. The fund acts as insurance should anything go wrong, and, in most cases, limits financial liability to between $10,000 or $50,000 deductible, which would be the tenant’s responsibility.
When explaining the benefits of investing in C-store properties, three main perks are often ignored:
1. Residual Value Benefits
C-store residual value is typically stronger than other retail sectors on similar quality real estate. While other assets such as drugstores are located near busy intersections in the same areas, the cost of the property per square foot of land is often much higher than what is paid for a C-store. Investors may pay a 60 percent premium of price per square foot of land for drugstore space compared to C-store transactions.
I think the misperception comes from what appears to be a high price per square foot for the physical building, which are significantly higher than most other retail sectors. But investors profit from the gas pumps in front of the store, making the price per square foot of the building an inaccurate measurement of what is being purchased and how the tenant generates revenue.
2. Credit Benefits
When investing in C-store properties, buyers have access to a wide credit spectrum of tenants. The assets are often housed by some of the largest retailers in the country such as 7-11 and Circle K with very strong S&P credit ratings, while others may be filled with smaller private companies that trade for premium cap rates such as quiktrip and Sheetz. On the other end of the credit spectrum, there are tenants that are often traded for above-average cap rates, but still have strong balance sheets much like the franchise restaurant space. The variety offers increased opportunity for buyers in the sector.
3. Accelerated Depreciation
The accelerated depreciation for properties that generate more than 50 percent of revenue from gas enables investors to receive more tax savings by reducing the tax burden on the passive income stream or increasing write-offs for owners.
In some cases, the accelerated depreciation can lead to investors protecting an additional 70 percent of their taxable cash flow from the asset.
What To Look For
When reviewing available C-stores for purchase, investors should consider properties requiring minimal improvements while offering built-in amenities to support long-term profits. The ideal C-store acquisition will provide an investor with property with immediate access to an interstate or a high-traffic roadway.
It is also important for the appearance of the property to portray cleanliness and modern amenities. Because many locations will have several C-store properties a short distance apart, any differentiating factor will help increase customer counts and profits.
Is This Right For You?
The majority of investors will likely profit from a C-store purchase, whether they are looking for premium credit, residual value or tax savings from each portfolio addition. Many investors are also looking to purchase a bit more C-store land than they may initially feel is needed to allow for expansion projects such as food service additions. These add-ons not only drive in new revenue potential, but typically help cover overhead costs for tenants, making it easier to compete on retail fuel pricing for prolonged success.