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*warning: very long post… *

I’ve been looking for a commercial property to buy with some people for a while now. I even wrote a tutorial on how to buy commercial property. If you find that useful, congrats. You just saved yourself 5 grand on real estate seminars that teach you bogus junk and upsell you on even more junk.

(If you’re considering on paying for seminars, I would say good for you on taking action. I don’t encourage pessimistic view on life but I do know that you have to take all factors and advices into consideration before pulling the trigger. You might want to read about this guy John Reed and his real estate “guru” ratings.)

3 months ago, I called this commercial real estate broker who I happened to know for a long time. I was looking for deals and he happened to have one that fits my criteria. The only thing was… it was a gas station.

So he sends me the P&L and it looks freakin’ AWESOME. Like this:

		Monthly
Gas	120,000 gallons at $0.18 margin	$21,600
Mini Mart	$25,000 gross @ 35% margin	$8,750
	Gross Profit	$30,350
OpEx		($10,500)
	Net Income	$19,850
Loan Payment	$1,387,500 @ 7.75%, 25 yr am	($10,475)
Cash Flow		$9,375

The seller was asking $1,925,000. According to this, down payment would be $537,500. (By the way, if you are wondering, i do NOT have that kind of money. It’s all about OPM.) The annual cashflow is $112,500, which would make cash-on-cash return of  $112,500 / $537,500 = 21% before taxes. I’ve never looked at gas stations or gas station numbers so I wasn’t sure if this was a good deal or a bad one. But considering how almost every commercial building in California is selling for 5 cap, this is a freaking AWESOME deal. This is almost 12.3 cap!

So I make a trip over to the gas station, which is about 20 miles from where I live. First thing I notice is a huge ass piece of lot it’s sitting on. More than enough for a 4 pump gas station and a mart. Not the greatest neighborhood, but that makes it even better! Lots of blue collar people who need to drive a lot to get to work. On top of it, it’s on a road that connects two of the biggest freeways in that area.  PLUS there’s only 1 real competition in the area AND there’s a road widening project to accomodate increasing traffic flow.

I started getting super excited. I couldn’t stop thinking about the possibilities. There were nights that I could barely sleep.

So I meet the seller (let’s call him “Sam”) and I find out these things

• At one point, Sam owned 35 gas stations. He was liquidating them because he needed the cash to do a bigger deal. Apparently in gas distribution business.
• You make pennies on the gas. In fact, no matter how much gas costs to the consumer, the margin you make on the gas stays FIXED at around 10 to 14 cents a gallon. Margin at the mart is around 30 to 35% and the volume depends on how competitive your gas pricing is. Cheaper means more traffic into the gas station, which means more grocery sale.
• You can’t really lie as a seller because of all the friggin’ gas regulation. There’s this thing called UST (underground storage tax) that basically measures how much gas you bought for a period of time. This tax fund is collected from various gas station owners as a pool fund in case of spills and mishaps because insurance bastards won’t cover it. (If you ask me, there is probably a huge slush fund potential here.) Violating that means automatic felony.
• Gas station owners get the best tax depreciation benefits – 15 years for canopy for example.
• Everything is pretty much automated. The back office system does all the work so owner operation makes no sense unless you like saving $10/hr by physically being there.
• When asked about employee theft and store robberies, Sam said there’s a optical cash reader at the cashier window that makes it impossible to steal AND the neighborhood is pretty safe enough. Sam says that’s not to worry about. (I raise my eyebrow.)
• Sam bought it in 2001 for $2,600,000 when it was a different brand. He ran it for a while and at peak, the gas station was pumping 180,000 gallons per month. (But then again, that was 2001 when gas was 2 bucks.)
• Sam sold to some engineer guy in 2004. He carried a second position mortgage because the engineer couldn’t make the full down payment.
• In 2006, the engineer SOLD to another guy (let’s call him “Schmuck”) without informing Sam, who holds the second mortgage. Schmuck ran it to the ground by giving it to an incompetent manager and DOUBLING his margin. Do the math. In a business where 5 cents can make or break a fortune, you raise the gas price by a DIME, I guarantee you will lose business. In fact, at the worst, the gas station was pumping 70,000 gallons per month.
• During all this, Sam had a gas distribution company. Sam was the supplier for this station despite all the ownership changes.
• Schmuck forecloses to the bank in 2007 and Sam loses his note. As a favor, Sam takes it back from the bank because he has long term relationship with the bank. He puts it back in smooth operation, back up to 120,000 gallons per month.
• Sam still has other operations, including a distibution company, under ONE corporate entity. All the numbers are congregated under one book, so me getting numbers specific to the one I’m interested in buying is not gonna happen. For example, the guys that work at that gas station sometimes work at others, credit card processing is done in bulk, and the insurance is under an umbrella policy. In other words, I gotta do my homework. Not to mention, there’s no 2 year financials he can show me because of the engineer and the Schmuck who kept no records during 2004 to 2007. He can show me what it USED to do when he ran it and the numbers from his gas supply business to the gas station.
• Sam talked to the city official about opening a car wash on the extra land that he has. They didn’t give him an official permit, but they’d be ok with it. It would cost $250,000 to build an automated carwash. Carwashes are super-profitable: 80% profit margin and very low maintenance. In fact, the income from the carwash would pay for the mortgage itself (so he claims.)

Ok, sounds fair so far. I put it under contract for 3 months. Here’s what happened on a day-to-day basis during the time of contract

Day 5: I get the UST numbers, some P&L he scribbled up here and there, permit stuff, some EPA test results, and un-verifiable gallonage numbers. Nothing else. (i.e. no sales tax returns, no income tax returns, no payroll info, no NADA.)

Day 6 – Day 90: NOTHING happened. I tried calling this guy probably 20+ times. Sent him countless emails and even SNAIL mail. Who uses SNAIL mail these days?

OK, I understand that he’s a busy guy and that this is his smallest operation… so I guess I’m some shrimp he can just ignore. How f*ckin’ unprofessional is this? Can’t even return one freakin’ phone call? There was a time I went to this office on the day that I was supposed to meet him and he didn’t even bother showing up. Thanks for nothing, you asswipe.

There’s a clause in the contract saying that he’s supposed to give me a 2 week training once the property is under escrow. At week 2, I was having doubts about his commitment to this… or to the deal in fact. The broker didn’t help much either. The broker sold 5 of Sam’s other gas stations (much larger ones) in the past so I guess he didn’t want to piss off Sam. He was a dual agent (i.e. he represented Sam AND me), and it seemed like he was sticking it up for him, making stupid ass excuses like “his phone is off” or “he’s out of town”. Hey, I don’t give a shit if he’s busy or out of town, give me what’s rightfully mine. I’m not asking him to scratch my balls, just give me some numbers so I can verify whether or not this is a good deal.

My investors are getting antsy and want me to tell them something solid. Of course, I can’t and it makes it look like I’m just dicking them along. They are getting pissed.

And there’s the financing part of it.

The broker decides that I’m a newbie and that I should be removed from the entire loan process. He decides to apply for financing at two banks that supposedly he has great business relationship with. My down payment was small (basically half of what was needed) and the subprime meltdown mess wasn’t helping much either. The lenders basically say no because of lack of experience. Even with sufficient down payment, they want me to do some other crazy shit like get personal guarantees from my investors and shit like that.

Hey buddy, me and my investors are taking the risk. It’s going to be OUR loan that WE have to pay. Why the hell are you making all the decisions?

Ok at this point, I’m ready to use that investment money to buy a couple of machine guns and blazing up the place. The deal looks dead. I’ve been trying to be patient but now they’re pushing me to the limit. No financing thing is adding fuel to the flame. I’ve asked the broker to keep trying but this lazy ass mofo gave up. At this point, I want to give up too.

Then… *ah-ha!* How about wrap around seller financing for just one year so I can gain experience and refinance? Brilliant! So brilliant that even the seller agreed.

OK, now the we’re back in game. I get a couple of more pieces of info…NOT from the seller… but from me going around to different vendors and asking info. I meet a buyer (let’s call him “Bob”) who also bought a gas station from Sam recently. A much larger operation on a VERY good corner. It even has a carwash and a fast food joint. He graciously gave me 2 hours of his time to run some numbers and show me what’s up.

Here’s what I found from Bob

• $250,000 to build carwash – The equipment ALONE will cost $250k. I have to add another $750k in labor, permits, fees, and plumbing/electrical to get one dinky carwash up. He agrees that it’s low maintenance as far as people involved, but he said expect the machine to have issues on daily basis. Not to mention, getting EPA approval for carwash that’s too close to a residential property (i.e. like the one I was interested in buying) is going to be close to impossible.
• 18 cents margin – I knew the broker was bullshitting me on this but Bob confirmed. More like 10-14 cents depending on how generous the supplier is with his margin.
• Basically general advice on gas stations – employee theft is ALWAYS there but he overlooks because firing-hiring-training takes too long and too costly, operation with owner presence is always better, suppliers try to sell you gas even when you don’t need, etc.

I usually disregard advices from people who don’t know shit (because they never done it and are trying to dispense their worthless advice), but Bob was different. He owned shitload of gas stations in his life time.

Ok… i’m still not THAT shaken up. Till I met a CPA who does gas stations. Simple math basically.

Gas station credit card fees are 1-2% of gross sales, depending on volume. If you own one gas station, you get the shitty deal of 2%. If you sell a gallon of gas at $5 bucks, your credit card fee is 10 cents. Remember, margin on gas is fixed at 10 cents… then you make NOTHING on gas. If it goes OVER $5 bucks, then you lose money on gas unless you raise your margins. Better pray and hope that your competitor next door doesn’t have deep pockets. He can bleed you to death, put you out of business, buy your station dirt cheap, and have a monopoly in that area.

I feel like shit at this point.

Then he runs the numbers. Nothing matches because there’s no information TO match. WTF.

I feel worse than shit. I feel like shit’s shit. (If shit is capable of taking shit).

Then he tells me 3 of his gas station clients are all selling. Ah crap. I told my investors that this was a great business to get into now.

LORD, TAKE ME NOW!

Deal is dead.

At this point, I’m supposed to write how much I’ve learned from this painful experience. Here it is: next time a deal goes like this, buy a machine gun and a very fast getaway car.

Related posts:

1. Commercial real estate investing 101