Anytime a c-store acquires an existing property, there are various items to consider—from the environmental pollution that might exist in ground, to the traffic patterns on the corner, to the competition down the road.
By David Bennett, Senior Editor
A popular saying touts that the three most important considerations of a real estate deal are location, location, location.
That especially holds true for a convenience store that is looking for a prime parcel, which could be a boon to its operation.
Of course, depending how due diligent the buyer has been, the result might be an excellent location, a mediocre location or a lousy location, depending on whether issues arise.
Since he became executive vice president and chief operating officer of Beaverton, Ore.-based Plaid Pantry three years ago, Jonathan Polonsky has incrementally expanded his knowledge of real estate acquisitions and the issues that can determine whether a site will likely be a complementary part of the company’s growth strategy, or a cumbersome liability.
Currently, the c-store chain operates 110 stores in Oregon and Washington State.
BY THE BOOK
Of those 110 locations, a majority of them have been acquisitions—a common means in which most c-stores grow their operational footprint. In fact, Plaid Pantry is now planning its first new-to-industry (NTI) project in a decade, meaning most of Plaid Pantry acquisitions are existing c-stores or gas stations.
To quickly assess the viability of a site, Polonsky has developed three models he can quickly reference to determine if a real estate parcel meets the type of c-store development project the company develops today. They are: 1) the neighborhood store—often a c-store located in a residential area, and often without fuel service, that the company can refurbish; 2) a store that can operate in a footprint commonly found in light industrial areas; 3) a location found in a high-traffic, arterial area, often at busy intersections.
However, trying to convert a site that is different from the company’s model structure is usually not worth the capital investment, nor Plaid Pantry’s time, Polonsky said. For example, converting a gas station site into a small residential c-store location, or vice-versa, usually isn’t a worthwhile endeavor, the vice president explained.
“We’re not going to try to put a round peg in a square hole and cross our fingers,” Polonsky said.
If a location seems to be a suitable fit, Polonsky will engage “the book,” a binder labeled ‘site selection,’ which has a researched checklist of criteria that helps distinguish if the existing building or property is worth taking a closer look.
“There are boxes I check: traffic drive-by, (surrounding) competition, the size of the site, and if it meets some of those high-level requirements then we get into the minutiae,” Polonsky said.
The minutiae Polonsky refers to isn’t trivial, but includes detailed aspects of the next stage of the company’s development processes once Plaid Pantry has committed to leasing the property, or buying it outright. Such a phase often includes applying for zoning permits and beginning environmental assessments if needed.
BUYER BEWARE
Not surprisingly, commercial properties that present the most environmental challenges are gas stations, whether they are currently operated in that capacity, or the land was once home to a gas station. Either way, the property—currently or in the past—had underground storage tanks (USTs). Because USTs are prone to leaks, newly acquired sites can be environmental land mines subject to stiff environmental fines mandated by either federal or state agencies if the property presents a pollution problem.
Polonsky said gas stations require meticulous investigation and often consultation with environmental contractors. Otherwise, the risk and potential cost can be enormous.
“If there’s pollution in the ground, and you didn’t find it, and then you went in and operated behind somebody, you become joint and several (liable) with that pollution,” Polonsky said. “You will never in your life make enough money at that site to pay for the cleanup. We’ve spent a couple of million dollars at some sites rectifying pollution. There’s not enough margin in 10 lifetimes that you’re going to generate at the site to come out ahead.”
MINIMIZING MISSTEPS
Ron Freeman, president of Jay Petroleum Inc., based in Portland, Ind. also oversees the company’s c-store chain Pak-A-Sak. Within northern Indiana and western Ohio, Pak-A-Sak operates 33 c-stores, which include 12 Subways and a Taco Bell at 13 of those locations.
About 20% of the c-store’s portfolio comprises NTI locations. The remainder of Pak-A-Sak’s growth has come through acquisitions.
Freeman concurs with Polonsky that whenever a company exposes itself to liabilities when acquiring property as part of a site strategy, the outcome can be significantly detrimental.
“I highly recommend finding a reliable environmental firm to assist in all assessments and evaluations of environmental issues,” Freeman said. “While it’s important to be well informed regarding environmental law, only a qualified environmental firm can stay on top of the ever-changing issues related to the liability a (company) faces.”
When analyzing commercial real estate property, whether for purchasing or leasing, various issues can arise. Some that commonly arise include:
- Buyers and tenants are often surprised that the property’s utilities or HVAC must be upgraded for their use.
- Permits for tenant improvements can be conditioned on upgrading an entire building’s fire or other systems.
- Buyers and tenants are better off if their signage plans are endorsed by the city, landlord or other approving authority before committing fully to closing on the property.
- The cost and availability of insurance should be investigated. The claims history of the seller or landlord or the previous tenants may have some effect on closing the deal.
Depending on the issue, the outcome can be expensive.
“As the operator of a relatively small convenience store chain, we cannot afford to make a mistake on our selection of a good site when millions of dollars are involved,” Freeman said. “It’s so important for us to do our homework before we pull the trigger and buy a site for development.”