Petrobanc Finance Blog

CSP magazine highlights changes to economic landscape for commercial lenders and gas station loan borrowers in the C&G industry

In its February 2009 issue, CSP magazine published an article titled Brave New World  that addresses the upheaval in the national economy and its impact on the Convenience & Gas industry.

For the small independent operator, the message is clear – opportunity will abound in 2009-10 for those who are prepared. Major oil companies are selling gas station sites, industry consolidators are buying gas station chains and flipping sites to dealers, and operators that are selling their gas stations are having to accept less. Sale prices are returning to more traditional levels – where sites used to sell for 5x to 7x EBITDA (Earnings before Interest, Taxes, Depreciation, Amortization), they are now selling for 4x to 5x.

What does the independent operator need to do to position himself for acquisitions? As we’ve described previously in this blog post, cash will be the determining factor. Higher down payments – 30% or more – may be required to obtain financing. Finding a lender will be difficult, but operators with strong business plans, strong resumes, and professionally prepared financial statements will have a better chance. For more information, see our recent entries on Looking for financing? Wondering what lenders look for? , How lenders evaluate your gas station business, and What are the steps to approval for your gas station loan?

The CSP article focused on these key factors in obtaining a commercial loan for your gas station/c-store business:

Credit sources will be scarce. This will drive creative financing and attract a new breed of lenders. With the current lack of national lenders, local and regional banks will only be able to absorb so much of the demand. New sources of capital from overseas and non-traditional lenders will be complemented by seller financing, mezzanine structures (multiple lenders) and sale/leaseback.

The industry ‘power center’ will shift toward super-jobbers and industry consolidators, as major oil companies reduce their ownership of retail assets. Jobbers will continue to grow, acquiring not only major-oil chains, but also smaller competitors. With jobbers taking control, the old DTW pricing structure will gradually give way to rack-plus pricing, leveling the playing field for dealers in many markets.

Small operators will see new opportunities. Where the majors and the super-jobbers are buying and selling whole markets, they won’t keep every site they buy, either due to operating parameters or because the jobber needs to stabilize their capital base. In order to keep the supply contract for these sites, the jobber will sell them only to independent operators.

Petrobanc Finance believes that now is the time to establish strong relationships with growth-oriented jobbers and financial institutions, as you prepare your own organization for growth.

Author: Kevin Morley

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If you’re an independent gas station owner/operator, finding financing means you have to go looking for it.  Traditionally, banks and other lenders haven’t come looking for you.

This is not because lenders don’t like your business. It’s because it’s difficult to reach an independent owner/operator.  Mass advertising is too expensive, given the relatively small number of customers being targeted.  Direct mail, phone calls, or visits to the station rarely reach the owner. 

So if lenders aren’t coming to you, and you want to find financing, how do you start?  The best sources are referrals from jobbers, industry brokers, customer references, local or regional trade shows, or the internet.  And of course, the bank where you currently do business.

Local banks usually have limited capacity for loans into one industry segment.  If yours can’t help you, then the best place to start is to ask your jobber and fellow owner/operators who they borrow from.  The advantage here is twofold.  First it identifies a lender who has shown a willingness to lend to the C&G (Convenience & Gas) industry and probably knows your market.  Second, there’s an implicit recommendation for you as a good operator – particularly if your jobber refers you.

Brokers can be helpful in the right situation – see our recent posting on using a broker.  Trade shows have seen a decline in attendance by financial institutions – it’s unlikely that any will be at trade shows during 2009! 

Which brings us to the Internet – a search method increasingly popular for finding financing.  With all things on the Internet, you’ll want to take the standard precautions regarding security of your confidential information.  You’ll also want to make sure you know who you’re talking to.

If you do a search using key words or phrases like “Gas Station Financing”, or “Gas Station Loans”, you’ll come up with a wide assortment of results.  In general, the results can be divided into 1) real banks, 2) specialty finance companies, 3) mortgage brokers, and 4) hard money lenders.  It’s not always easy to tell the difference.

Banks  Some of the search results will be real banks.  Not many these days, and you’ll probably recognize the names as either local or regional brands.  If you’re not sure, take the name and do a separate search on it – you should get enough information to figure out if it’s a true bank.

Specialty Finance Companies  These entities have their own funds for lending and, like a bank, have no middle-men asking for additional fees.  In all probability, they will keep the loan on their books and service it for a period of time after funding. Petrobanc Finance is a specialty finance company.

Brokers  It may not always be obvious from the homepage of the website if an entity is a broker, a bank, or a specialty finance company.  They may be ‘captive’ brokers, originating loans for only a few financial entities, such as insurance companies, or they may ‘shop the loan’ to a variety of lenders.  The key is that there will be a separate set of fees, they do not control the decision making on loan commitments, and they will not service the loan after funding.

Hard Money Lenders  These may be similar to Specialty Finance companies in that they lend their own money and service the loan.  However, these are essentially hedge funds looking for high returns.  They focus on very short-term loans (one to three years) at rates 5% or more above average.  They require very little documentation and move quickly.  But it’s very expensive money and should be used as a last resort only.

Author: Kevin Morley 

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A mortgage broker will typically charge one- to three-percent fees for successfully arranging a commercial real estate loan for your gas station.  With conventional loans typically averaging about $1 million, these fees can run from $10,000 to $30,000. The lending bank will also charge a loan origination fee, so now we’re talking about serious money.  SBA loans are even more expensive.

According to the National Association of Convenience Stores (NACS), 62 percent of all gas stations in the U.S. are owned by single-site operators (see the NACS factsheet). If you only own one gas station, getting a million-dollar mortgage is not something you do every day, and can seem to be a daunting task.  The urge to seek professional help is understandable.

A good broker can help you organize your documents, analyze the data and anticipate questions from the lender about potential weak spots in your business, and they will shop the loan with numerous lenders for the best deal.  But how do you know if you’re talking to a successful broker?

Ask for a list of successful deals.  You should focus on deals done after mid-2008 – when the credit meltdown started.  Anybody could get a deal funded in 2007, regardless of their ability.  If the broker successfully closed a deal during the first quarter of 2009, he’s probably a pretty good broker with strong contacts in the financial world.

Ask to see a ‘loan-package’ for a previous deal.  Successful brokers will create binders with tabs for each document group.  Judge it for organization, clarity of writing, and completeness (see our recent entries on Looking for financing? Wondering what lenders look for? and Financing your gas station in today’s tough market.)  Also, ask to see a list of the bank quotes received for each deal.  This will tell if they actually shopped the deal, or took the first offer available.

If you elect to use a broker, here’s some advice:

Beware of non-refundable fees paid up front.  Up-front fees should be minimal – just enough to cover their expenses in preparing a package and shopping it to their list of financial contacts.

Have your attorney review any contract the broker wants to sign.  Items to think carefully about include a request for exclusivity and for how long, confidentiality of your documents, fee structures, and refunds for non-performance.  You may want to limit the broker’s ability to shop your deal through other brokers, as this may mean your confidential data will be spread all over the internet.

Know what a broker can and can’t do for you.  A broker cannot give you a guaranteed commitment for funding.  This can only come from the finance company, and will be addressed in writing from them to you.  Neither can a broker do everything for you.  The lender will want to talk to you.  Especially in today’s tough credit environment, lenders will want to get a sense of how well you understand your business. They will probably visit your site to observe its quality first-hand.

Having read this, you might ask if you really need a broker.  The answer depends on how much you think your time is worth, your ability to present your business (in the way we’ve described in other posts), and in your ability to find a lender that will work with you.  Keep in mind that regardless of today’s market conditions, lenders will want your business if you’re a good operator, and will work with you in much the same way a broker will. 

Author: Kevin Morley

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During the underwriting and approval process for a gas station loan, the underwriter will review and analyze both the borrower’s financial data and the operational information.

The primary analysis will involve cash flow. The first thing the analyst will look at is a cash flow calculation.  Many banks will use different formulas but they all basically are looking to evaluate the same thing which is how much cash does the business generate.  More specifically, how much cash is generated by the station as a ratio of the loan payment for the anticipated loan.  The main question is whether the station generates enough money to pay back the loan with enough left to satisfy the borrower’s needs.  The financial instituition will most likely use a conservative approach to create cushion in the event of a downturn.

As you’ve probably surmised, underwriting is as much an art as a science.  While rules exist regarding minimums for these financial ratios, the underwriters’ judgment plays a role in determining the specific calculations.

For example, a classic judgment call involves “add-backs”.  These are expense items shown in a borrower’s financial statements that may not be recurring items.  Therefore, the analyst has to determine whether to adjust the calculation of cash flow by adding back the particular expense.   A significant loss by theft, documented by a police report, might fall into this category.  There may also be one time gains that will be deducted or situations that are not typical and these will be considered also.

Another judgment call might involve adjusting sales and revenue for loss due to road construction.  For example, a 3-month construction of a turning lane in front of a station might cut sales 50 percent during that period.  The analyst will determine the extent to which the financial statements will be adjusted to compensate for the event.  It will help if a stabilization period of three to six months has elapsed before applying for the loan, allowing new sales and financial data to support the past-period adjustment.

So the lesson to be learned here is: the quality of your financial reporting is critical. From the lender’s perspective, better financial data increase the underwriter’s ability to make the judgments necessary to qualify the borrower and the site for the loan.

Read our related post, What are the steps to approval of your gas station loan?

Author: Scott Poulsen

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In a recent blog entry titled Looking for financing? Wondering what lenders look for?, Petrobanc Finance focused on what borrowers need to do to get funding for their gas stations.  The discussion centered around documents needed and steps to be taken.

Once this information is given to the chosen lender, what happens? 

While the process varies by company, it will include the following steps, usually in this order.

Underwriting and Approval   An underwriter will review the file for completeness and will perform various financial analyses on the data.  Multiple follow-up calls to the customer are normal during this process to gather additional data and resolve deal-specific issues.  In addition to gathering data the underwriter is “getting to know” the potential borrower.    The analyst will write up a credit-approval memorandum, which includes the analyses of the potential borrower and will be the vehicle for approval by appropriate levels of management.  In most financial institutions there are numerous levels of signing authority that are typically defined by dollar amount.  The credit approval memorandum serves as a recommendation from the original underwriter and truly becomes an approval once the necessary management level signs the memorandum.  This usually takes one to four weeks, depending on the lender’s workload and how quickly the borrower responds to additional questions that the other signers may present.

Due Diligence  If the loan is approved, and the borrower accepts the terms of the loan (usually by signing an acceptance document), the lender will move forward with appraisals, environmental reviews and title searches.  If necessary, a feasibility study may be completed for new construction by an independent company to verify the borrower’s business plan assumptions.  Issues surfaced by during the due diligence phase will be resolved before moving to the next step; the most common are old equipment or property liens the borrower was unaware of.  This step usually takes four weeks or more. (In some cases the appraisal and or the feasibility study may be requested prior to the approval being prepared.)

Documentation and Funding   Once due diligence is complete and all outstanding issues are resolved, the loan will move into documentation, where loan documents specific to the proposed transaction are compiled and reviewed by the lender’s attorneys.  Generally, the borrower will be given ample opportunity for their attorney to review and correct as necessary.  Funding will proceed on a schedule determined by the type of loan.  A refinance will be scheduled in accordance with a payoff agreement with the prior lender.  The same is true for acquisitions, but will also include the seller.  Construction funding will be more complex, with payouts for construction progress and ‘term-out’ of the loan when construction is complete.

Author: Scott Poulsen

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As the $787 billion economic stimulus package goes to President Obama today for signature, gas station and convenience store owners wonder what benefit it may bring them.

Reports are that $200 million will go to the Leaking Underground Storage Tank Trust Fund for enforcement and cleanup of petroleum leaks, but will not inject cash into reimbursement programs.

This post, “Our Slice of the Pie” on NPN sheds some light on implications for the gas and convenience store industry.

On a related note, the Internal Revenue Service posted on February 5, 2009, on its website “Petroleum and Retail Industries - Leaking Underground Storage Tank Remediation Reimbursement Program” to address the issue whether “payments received by corporate owners or operators of underground storage tanks from state financial assurance and compensation programs (“financial assurance funds”), or other state or local underground storage tank cleanup reimbursement programs, should be characterized as nonshareholder contributions to capital . . .”

The answer: they are not.  “. . . amounts from state financial assurance funds or other reimbursement programs are included in gross income under Internal Revenue Code section 61(a).”

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Anyone wanting to delve into the mysteries of retail gasoline prices should look at Energy Information Administration’s (EIA) site, which is bulging with statistics and useful information.

A few days ago EIA posted a useful article explaining why the price of crude oil doesn’t seem to correlate with price at the gas pump. In short, here’s why:

There’s a time lag between refining crude oil and distributing it to retail sites — typically about two weeks, but it can be as long as four to eight weeks. Fluctuations in crude oil price during that timeframe can be significant.

Supply and consumer demand also play a role, and at any point in time, can work in the opposite direction of crude oil prices. So while the price of crude has an impact on retail prices, market factors can mitigate or reverse that impact.

This happened in January 2009, when retail gas prices increased during the first half of the month, while crude oil prices were falling. Given the time lag we discussed above, retail prices should be compared against late December’s crude oil price, which in fact, did increase.

What role do the refiners play in all this? Well, in December, some refiners were selling gasoline at prices less than the cost of crude they were purchasing at that time. They have contracts, however, that require them to produce gasoline regardless of profitability. But refiners change production based on perceived consumer demand, so this profitability gap adjusts over time. Toward the end of 2008, refiners reduced gasoline production, responding to signals from the consumer market. In addition to supply dropping, refinery maintenance in January contributed to the positive uptick on prices at the pump.  

For more details, read the full text at http://tonto.eia.doe.gov/oog/info/twip/twiparch/090204/twipprint.html

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How bad did it get in 2008 for gasoline retailers? Maybe not all that bad.

During the first half of 2008, as wholesale gasoline prices climbed rapidly, the gas and convenience store industry was abuzz with talk of terrible fuel margins impacting gas station owners nationwide. Conventional wisdom is that if wholesale prices rise too rapidly, retailers cannot keep up with price increases at the pump and margins become compressed.

The conventional wisdom may have been wrong, if U.S. Government data are to be believed.

Petrobanc Finance completed an analysis of gasoline margins from 2006 through 2008 at the national level using Energy Information Administration (EIA) data published for wholesale and retail prices. Adjustments were made to account for higher credit card fees as street prices doubled.

Click on image to enlarge.

If we assume 2006 and 2007 represent a reasonably typical retail profit margin picture on average over time, then 2008 did not show a significant decline in margin during the price run up in the first half of the year. However, there was a strong surge in retail margins in the fourth quarter as wholesale prices dropped more quickly than retail. This surge nearly tripled the normal profit margin during October 2008.

What is the lesson here? Operators seemed to have done a good job keeping up with the price increases from their wholesalers. This is capitalism at its best, where one can imagine station owners going into overdrive to monitor their street prices versus their competition, trying to ensure they price adequately to cover the NEXT load of fuel, not the prior one. They were less quick to drop their prices during the decline, building reserves for future price fluctuations.

Why is this important? In a time when commercial credit to the industry is limited (to say the least), lenders are wary of financing independent operators that already suffer from dubious credit reputations on top of environmental concerns.

In my conversations with good operators, I’ve learned that their business models accommodate the peaks and valleys of gasoline margins. They bank the profits from high-margin periods to provide liquidity during low margin periods. They also have multiple profit centers, including c-stores, fast food and car washes.

So what really happened in 2008? There was some pain, but it came from reduced sales of gas and ancillary offerings. Simply put, consumers have changed their driving habits and aren’t stopping at gas stations/c-stores as often. We await a more complete analysis on store profitability that will be released by NACS in their State of the Industry report in summer 2009.

In the meantime, top operators will continue to watch their street prices daily, always capturing the most margin possible and improving their bottom line.

Author: Kevin Morley

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Here’s a quick list of the most important things that prospective borrowers can do to ensure they merit financing for their gas station.

Use a CPA, not a bookkeeper. You need financial statements that meet GAAP (Generally Accepted Accounting Principles) standards so that your lender will feel they can rely on the numbers they’re looking at. They’ll be more inclined to give you a better deal and the money you will save in the long term will pay back the cost of a CPA many times over. A ‘tax preparation firm’, or your spouse using QuickBooks, won’t work.

Build your cash reserve. The days of 90% financing are gone. At best, you’ll get a loan for 80% of the appraised value of the land, building and equipment – nothing on business value. Many lenders are holding the line at 75% or less, knowing that the more of your equity you have in the game, the less likely you are to default (and if you do, the less they’ll lose).

Clean up your credit score. Scores of 680 or more for each loan guarantor are the minimum today. Get professional advice on how to improve your score. Tragically, many prospective borrowers fail because of old cell phone charges or doctor bills that insurance failed to pay. Better to address these problems before seeking financing. The money you’ll save by getting better loan terms will most likely cover the cost of fixing these problems.

Brand your station with a major brand image. The lender will infer that your site meets image and operational standards that improve attractiveness to customers and make your site more competitive. Many lenders will visit your site personally to verify the quality of the site.

Establish a long-term supply agreement with a reputable jobber. Lenders want to have confidence in the supply of your most important product.

Understand and operate your business. Absentee owners are one of the most common reasons for business failures. If a lender calls you and hears the cash register ring in the background, your involvement in the day-to-day management will become obvious.

Have your paperwork ready. Lenders are inundated with commercial loan requests. They’re time-constrained, so if your submission is organized and substantive, they’ll move your request to the top of the pile.

Organize the following documents in a folder:
- A summary of your loan request (how much, what is it for)
- Your resume, including a summary of your company’s organizational structure, and of your experience in the industry.
- Corporate tax returns (signed) for the last two years (unless you are a sole proprietorship)
- Personal tax returns (signed) for each owner for the last two years
- Financial statements for each site for the last two years, plus through the most recent quarter of the current year. Revenue and Cost-of-Goods-Sold (COGS) should be broken out for fuel, C-store and other revenue generators. Balance sheets for each year, and the current quarter should be included.
- Gasoline sales (in gallons) month-by-month for the last two calendar years, and the current year. Lenders who understand gas stations will want this information, and you’ll want to have a ready explanation for any declines in volume. If your jobber provides this information, even better as it offers a third-party verification of your performance.
- Personal financial statement: you’ll need to show you’ve got the cash to close the deal
- A copy of your supply agreement: from a reputable jobber
- References: contact names and numbers for your jobber, your banker, and any major supplier
- Pictures of your site: while not mandatory, may have sufficient Wow! to gain more attention

Above all, ensure you hire a CPA that understands your business. This list starts and ends with this, because your CPA is absolutely critical to your success in securing financing.

Author: Kevin Morley

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If you’re an independent gas station dealer who has tried to buy or refinance a site recently, you’ve gained firsthand experience of the stark new reality of the financial markets.

In the past you had choices. At the national level, major institutions like Citigroup provided competitive options on conventional mortgages and had virtually unlimited funding capacity. At the local or regional level, small banks could help with either conventional or SBA loans. Numerous brokerage firms, some locally based, many internet based, promised to ‘shop’ your loan for the best terms. Reflecting the excess of liquidity in the financial markets, rates and terms were highly competitive. Floating rates at or below prime were common. Because the yield curve – the difference between short term and long term interest rates – was so low, fixed rates were also available at attractive levels.

Less-than-stellar borrowers found themselves in the enviable position of having lenders fight over them, while those who were more stable could expect terms once reserved for only the best of the blue-chip players in the industry. All because there was too much money chasing too few deals. How times have changed.

Despite today’s business environment, the good news is that financing is still available for independent dealers in the Convenience & Gas (C&G) industry. The bad news is, you have to know where to find it and how to qualify for it.

With credit standards tightened considerably, obtaining a loan requires you to put the best face on your business and management. You will need to work hard to ensure your lender is comfortable with the underlying financials for your business. Solid financials presented in a professional format, strong references from suppliers and bankers, a proven track record for your business operations, and excellent personal credit are crucial elements. Equally important is the brand image of the retail site(s) being funded.

And remember, your lender will evaluate everything in light of the risk involved. Regardless of how promising the deal appears, the lender will want to protect itself with an exit strategy that details how it will unload your store without taking a hit.

Author: Kevin Morley

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