Gas Station Rules May Hurt Families But Could Help Investors
Written by Yudislaidy Fernandez on December 3, 2009
By Yudislaidy Fernandez
Gas station owners say those unable to get financing to meet new Florida environmental rules have their hands tied, many are preparing to shut down and others are already out-of-service.
The shakeout is going to affect families dependent on mom-and-pop stations that face closing down, gas station owners say, but it will also create investment opportunities for fuel suppliers looking to grow and other retailers in expansion mode.
But with financing scarce and the economy still hurting, it’s going to take a while for an already depressed commercial market to absorb the almost 800 gas stations at risk of shutting down in Miami-Dade, a commercial investments analyst says.
Gas station owners in Florida have until Dec. 31 to meet new rules that require them to install double-walled storage tanks to prevent fuel leaks.
The Florida Department of Environmental Protection says it’s not planning to extend deadlines and enforcement is to begin immediately. Out-of-compliance stations that aren’t shut down by Jan. 1 are to face $10,000 daily fines.
Gasoline supplier and station owner Maximo Alvarez says he has already upgraded 141 gas stations in Miami-Dade, Broward and Collier counties.
Mr. Alvarez, owner and president of Sunshine Gasoline Distributors, says in the last couple of years he’s purchased new gas stations, some earlier this year including Shell and BP locations, and now he has about 40 stations in need of upgrades before the deadline.
"We are running into a bit of trouble in compliance with those particular locations," he says. But Mr. Alvarez, who’s been in the gasoline business since 1971, says he’s already been communicating with the state and is working as fast as possible to get contracts in place to perform the upgrades.
"We continue changing tanks as we speak," he said Monday night. "We are doing on average three to four tanks at a time."
Mr. Alvarez’s gas station network reaches over 350 locations, mostly in South Florida, with the largest concentration in Miami-Dade. The company is a gas station operator and a distributor for Shell, BP, Chevron, Texaco and Citgo.
Banks aren’t lending to station owners to make these improvements, he said, and a drop in gas sales triggered by the recession has worsened the situation.
Another obstacle is that some local governments aren’t issuing permits for the work as expeditiously as possible, Mr. Alvarez said, and some are even requiring additional changes or upgrades that become more costly.
"We are in a very tough economy and we are already spending a lot of money," he said.
It does help that the state is giving owners with contracts or permits in place 90 days to get their stations under compliance, Mr. Alvarez noted.
But even extra time won’t save some owners from an inevitable closing because they simply can’t afford $200,000 to $400,000 in upgrades.
Many of those stations already closed or at risk of shutting down are run by single owners, often as a family business, Mr. Alvarez said, because many don’t have the financial backing to make the required improvements.
For now, Mr. Alvarez said he’s focused on getting his remaining stations under compliance but doesn’t discard the possibility of buying additional outlets in the near future at the right price.
Choices are many.
Miami-Dade has 794 out-of-compliance gas stations that could face closings, many in Miami, North Miami, Hialeah and Homestead, followed by Palm Beach with 337 and Broward with 335, according to a November list from the Florida Department of Environmental Protection.
Owners with underground storage tanks, making up the majority of stations in South Florida, have until Dec. 31 to comply. The deadline to upgrade aboveground tanks is Jan. 1.
Because Florida relies on groundwater for about 92% of its drinking water, it has some of the most stringent environmental rules in the country, the environmental protection department says. It also has some of the toughest laws for owning and maintaining underground fuel tanks, such as mandating the use of double-walled tanks.
One factor drying up hundreds of gas stations is the cost of upgrading storage tanks to prevent leaks.
Ashley Bosch, managing director of Blok Urban Development, got involved in the fuel tank repair business about three years ago because one of his business partners owned several gas stations.
Seeing the work opportunities in this field — at a time developers began to see the end of the building boom nearing — Mr. Bosch started landing contracts to make repairs to bring stations up to code.
His target market has mostly been the independent stations, such as Valero, as well as Sunoco and Citgo, he says. Mr. Bosch recently completed upgrades on a station in Hialeah and is about to start excavation on a station in Caribbean Boulevard in South Miami-Dade.
But with station owners rushing to complete upgrades, Mr. Bosch says manufacturers are taking longer to deliver tanks. With the rise in demand, it now takes eight to 10 weeks to get the petroleum tanks, he said, when before the wait was six to eight weeks.
The permitting process, depending on the municipality, can also cause delays, although he says generally these permits are ready within four to six weeks. The actual construction can take one to two months, Mr. Bosch said, during which time the owner must shut down.
With operators forced to close during installation, Mr. Bosch explained, many often decide to make other aesthetic enhancements, such as upgrading pumps, resurfacing the parking lot and adding landscaping.
Costs can range from $180,000 to $250,000 just to upgrade the storage tanks and fuel lines, he said. A cosmetic makeover for the station shoots the cost up to the $400,000s, and owners wanting to add amenities, such as a convenience store, face a price tag of $800,000 to $900,000, he said.
Some underperforming gas stations with loans coming due next year are to run into trouble because those purchased in the past seven years were probably overpriced, says Javier A. Rodriguez, an experienced analyst in commercial investments with a concentration on gas stations.
"Are many stations going to be closing? Yes," he said. "How many will be closing? We don’t know yet."
Purchase loans coming due won’t renew for the same value because appraisals are likely to show a decline in value, leaving many borrowers to put down additional money to renew the loan, explained Mr. Rodriguez, director of investment sales at NAI Miami.
"That is becoming a major threat," he said. "How that will be resolved? We’ll see what happens."
Some stations have already been notified of foreclosure proceedings, he noted. And some banks, Mr. Rodriguez said, are selling those promissory notes to investors, one reason why not all stations are going to go down.
"The ones buying are suppliers who are taking over, picking up (notes for the) properties at 30 to 60 cents on the dollar," he said.
Mr. Rodriguez forecast that suppliers will be a major buyer market for closed-down stations next year.
"Some of those suppliers are getting loans from banks because they have good equity because of existing gas station businesses," he said. The cost of upgrading the tanks and making aesthetic improvements could run around $800,000, he said, significantly less than the estimated $2 million needed to build a gas station today.
Ten years ago, before international investors started buying gas stations, the major operators were suppliers, he said. Now, he added, we are returning to those days.
Mr. Rodriguez also pointed out that station owners who have not completed the upgrades or contracted services to get storage tanks up to code also face losing their insurance. About three insurance companies handle tank insurance, he said, and only one of them will agree to renewal insurance if the new tanks aren’t already installed.
Mr. Alvarez, of Sunshine Gas Distributors, says many of the abandoned station sites are attractive corner locations for other businesses, such as pharmacies, fast-food chains and banks, which "are in the position to pay more for the real estate."
But Blok Urban Development’s Mr. Bosch warns those who plan to buy stations for other uses have to be aware of possible environmental issues.
"When you buy a gas station to do something else, you have to deal with environmental concerns regarding the soil," he said. "If everything is OK, there’s no problem. But if there are issues, there could be significant remediation costs."
The best option, Mr. Bosch said, is to sell the site to another station operator in the position to perform the work and upgrades.
"If you have the money right now, you can get a great deal," he said, because buyers can get major discounts on out-of-compliance stations.
But while some are running out of gas, others are filling up their tanks.
That’s the case of businessman Rodney Barreto, who has recently finished building five up-to-code gas stations and has three more under construction, all flagged Valero, in Miami-Dade, Fort Myers and Palm Beach.
Mr. Barreto, co-owner with Warren Sands of Floridian Petroleum, said he is looking for additional locations to buy but some have a small footprint and he eyes bigger locations. The stations he is currently opening, he said, are all large gas stations with an adjoining convenience store and fast-food establishment.
It’s unfortunate but inevitable that many gas stations are going to close down, Mr. Barreto said. "They’ll be absorbed in the marketplace over time."