BUYING AND SELLING A GAS STATION

You’re planning to buy a gas station.  From the outside, it appears to be in good shape with no potential issues. Right? Wrong.  If it’s been operating for a period of time, chances are there will be underground contamination. Even with over 20 years of ever-tightening regulatory release detection and compliance requirements around proper tank operation, there will be spills and releases. It’s a basic fact.

From a business acquisition perspective, it is extremely important to understand just how much routine background contamination exists vs. contamination at the station due to major unreported or undisclosed releases. Both the buyer and seller have liabilities after that transaction from an environmental perspective.

Environmental Assessments – Get One

Most gas stations that are bought and sold will likely have an environmental assessment (EA) performed. The primary reason an EA gets performed is that the bank requires it prior to financing the purchase. Even then, not all EA’s are created equal. Often times the level of due diligence a bank requires may fall short in determining the true level of contamination present at the site. Regardless, this needs to be put into perspective. You may not want to spend more for an EA to identify a cleanup that costs less than the cost of the EA, but on the same note, it doesn’t make sense to spend only  $6,000.00 for a simple EA when buying a $1,000,000 or more for a  gas/convenience store. Just how much is spent on the environmental and property assessments should be dictated by numerous factors including, but not limited to,  the age of the UST system, its compliance history, the level of testing and release detection history and the type of release prevention equipment in place.

When a Release Happens

As a general rule, most releases will often be generally in two places:  around the spill bucket tank pad area and under the fueling dispensers. Confirming the presence of dispenser pans, spill buckets and the integrity of these devices are key in establishing the potential for possible high levels of contaminations.

It’s well known in the industry that spill buckets are prone to fail, sometimes within a few years of installation. This is especially true in areas prone to inclement weather, including frost heaves. For older stations, factor in that most spill buckets are likely to be as old as the UST system itself. Currently only a handful of states require this testing and even then only recently.

Tanks and piping are not the primary sources of ongoing problems that substantially continue to add levels of contamination at a station. It’s the cumulative effect of small releases that can ultimately create environmental problems.

You might not have a catastrophic tank or piping failure that has gone undetected however this is rare as most stations are performing some level of inventory control and release detection. Regardless, the whole system should be tested for “tightness”.

As important as all of this is to the buyer, this is also pertinent from a seller’s perspective. The seller needs to think about the nature of equipment and operating practices, being realistic and factoring in the value of the property from an environmental impact perspective. Often, prices for properties do not accurately reflect its true value.  As a result, the seller is either unrealistically high on the asking price or leaves money on the table having underestimated the integrity and value of the overall fueling system.

Any seller demonstrating strict adherence to compliance requirements, including proper record retention and high level of due diligence, will often get a better selling price.

In general, it’s good business practice to fully disclose adequate representation of the environmental status on the property. This includes all of the testing and adherence to compliance requirements stated above. This way, there will be minimal liability for both the buyer and the seller in the future. If not, there can often be legal issues after the property transaction if proper due diligence was not performed on either end. The state that the gas station is located in may have a cleanup fund that the site could be eligible for. Some states have up to $1.5 million in cleanup funds (per incident) available to gas station owners who can demonstrate that they are in compliance with all regulatory requirements. This can add greatly to the value of the property.

Another issue is a lack of concern around proper fueling system compliance to prevent and minimize leaks and releases to the environment.

Paying attention to fill operations, ensuring that any spill and overfill prevention devices are functioning properly and liquid tight is vital. Spill bucket testing is often the least costly testing, sometimes priced under $50, quite an affordable form of insurance.

Another important component is the dispenser. With new ethanol blends being introduced across the country, and increased pressure from government to introduce higher levels of ethanol in gasoline, there will be an increase in problems around the fueling dispenser. Let’s face it, ethanol is corrosive on soft metals in most dispensers and gaskets and o-rings haven’t been tested for long-term effects. Only since 2007 have major dispenser manufacturers received UL approval for dispensers in production to be compatible for E10 with E15 following in 2010.
Prior to this, there was no guarantee that fueling dispensers could withstand the long-term effects of ethanol on those unproven components in legacy dispensers.

If there isn’t a dispenser pan to catch leaks as well as an electronic sensor for notification of a problem via alarms , one of the best preventive measures is to  routinely take off the dispenser skirt and take a look to see if there is a problem. Once a month may not be too often.

1.    The following is a list of common mistakes seen in most gas station acquisitions and divestments. The buyer and seller do not adequately perform the right types of environmental due diligence.
2.    The expectations of contamination are unrealistic. Any gas station that has been in operation for a period of time will not still be at virgin background levels.
3.    Due diligence data is not used effectively to negotiate the sales and purchase of the property.
4.    Complete integrity testing of the fueling system is not performed. This includes the secondary containment areas of the fueling system.
5.    Not asking for complete operational permits, licenses, registrations, testing history, maintenance records prior to the sale. By law either the current or new owner must be able to show regulators all above paperwork for up to the life of the system. This can heavily affect any state fund reimbursement status going forward.
6.    Get construction “As Builds”’. Showing proper equipment and installation practices adds value to the property.
7.    Not adequately determining the value of the fueling system. A fueling system that’s seven years old is worth much more than a fueling system that’s 20-25 years old. Many states are establishing a life expectancy of tanks systems and that age can be around 30 years old.  To replace a typical three tank system from tank to the tip of the nozzle may cost anywhere from $350,000 to $500,000.. I’m often amazed at how buyers (and sellers) don’t seem to realistically appraise and value the property based around fueling system age and type of construction and release preventative equipment.
8.    Not taking release detection measures. After the purchase, pay attention to release detection measures. There are now third party service providers who have the expertise and the ability to monitor your fueling system on a 24 x7 basis to protect your investment.