Contamination is somewhat commonplace in gas station properties, especially for older properties built prior to the EPA 1998 mandate that required all single wall underground storage tanks (USTs) be replaced with double wall fiberglass tanks (refer to Title 40 Code of Federal Regulations (CFR) Part 280, “Technical Standards and Corrective Action Requirements for Owners and Operators of Underground Storage Tanks”). Contamination and gas station properties often go hand in hand. How are market participants in this sector addressing contamination? Logically speaking, one would assume that a contaminated gas station would sell in the marketplace for less than a non-contaminated site, all other factors considered equal. But is this discount material and supportable in the market? A significant amount of older USTs have leaked with many sites under remediation or “clean” but subject to market perceived stigma. Many gas stations have sold with ongoing remediation, the buyer typically being indemnified by the Major Oil Company who held title at the time of contamination and is the responsible party for remediation.
In the context of gas stations as used by the Major Oil Companies contamination is defined as follows:
Contamination means Hazardous Materials on, at, or in the groundwater, surface water, drinking water, soil or other subsurface strata, sediment, land surface or ambient, workplace or indoor air at, or in the physical buildings, structures, improvements or fixtures on, or migrating to or from the property.
Along these same lines, it would also be logical to assume that a previously contaminated site, now “clean” would sell for less than a site that was never subject to contamination, all other factors considered equal, due to “stigma”. Again, is this discount quantifiable? The Appraisal institute defines stigma as follows:
Stigma is an adverse public perception regarding a property; the identification of a property with some type of opprobrium (environmental contamination, a grisly crime), which exacts a penalty on the marketability of the property and hence its value.
Though most market participants agree some discount may be in order for contaminated or stigmatized sites, the results of our studies are surprising. Contamination and stigma are perhaps the most difficult discounts to prove in the marketplace. We expect market buyers to discount contaminated sites or sites with stigma but to what extent? Several factors may affect this discount, if any.
Having appraised thousands of gas stations, Retail Petroleum Consultants (RPC) has interviewed market participants regarding the purchase of contaminated gas stations. These market participants include buyers, sellers, Major Oil Companies, mid-level oil companies and jobbers, single and multiple unit operators, banks, attorneys, and financial institutions. Their feedback was surprising.
One of the primary factors affecting regarding contamination and stigma discounts is alternate use. Although gas station may represent the highest and best use at the time of sale, it may only be a matter of time before land value exceeds that of the operating station or going-concern. This is often the case in affluent areas, coastal communities, and downtowns like Los Angeles, New York, San Francisco, etc. Fuel supply agreements and remediation often extend gas station interim use given additional costs for demolition, UST removal, and time necessary to remediate. Municipal restrictions and Planning can also extend the interim uses like in San Francisco where the City believes there are not enough gas stations to serve the public, therefore making it very difficult to remove operating gas stations for development to alternate use.
Assuming a gas station site can be re-developed to alternate use, the level of allowable contamination is much different for an operating gas station than would be for say a residential project. Most buyers purchasing contaminated gas stations for continued use tend not to discount their purchase if the responsible party is a Major Oil Company who indemnifies the buyer. These agreements are transferable to new buyers. Without the indemnity agreement these stations may not sell or be leveraged by a financial institution.
We interviewed several major banks that actively lend on gas station properties, hoping to isolate an interest rate or related capital cost increase for contaminated or stigmatized properties. Their comments are summarized as follows:
“…wouldn’t lend on a contaminated property, or increase the rate if the contamination meant there was more work on their part…”
“The interest rate would not be affected. The issue has more to do with future contamination risk and loan sizing. Higher risk, or special purpose properties in general may be priced higher by some lenders.”
“Would not affect the interest rate, but there would be a lot more scrutiny of the gas station and a reluctance to loan.”
“…willingness to loan would be based on if the contamination had been cleaned and certified as such, or the credit history of the borrower was strong.”
“With a history of contamination, it would affect more than the rate. We wouldn’t entertain the loan at all. However, if you meant to say just that there was contamination in the past that was now cleaned up, it would probably not impact the rate. I don’t know of too many stations that don’t have a clean-up record. If there was continued cleanup, again we probably wouldn’t get involved until it was resolved. If ongoing monitoring was only thing left, we might charge an extra half point as we would also need to continue monitoring to make sure nothing else went on. I’d have to consider this situation more carefully.”
“The level of contamination generally wouldn’t affect the rate. If we are comfortable with the clean-up plan and responsible party, then it comes down to the Loan to Value and strength of the Guarantor.”
“If the remediation is completed, then it wouldn’t affect the rate. If it’s ongoing, then we’d need to confirm if there is indemnification from the gas company, such as ConocoPhilips, Chevron, etc. If not, then we mostly won’t be able to do the loan.”
“…the processes of evaluating environmental risk typically do not include loan terms (e.g., interest rates) or worthiness of the deal. The environmental risks (i.e., chemical contamination issues) are part of the considerations credit officers use in evaluating the overall risks of a particular deal.”
The responses varied amongst the lenders surveyed, though it was apparent that none could identify a supportable increase to the interest rate due to contamination (or stigma). More so, the contamination issue was dealt with on a case by case basis with nominal effect on lending rates as long as the site has been remediated or is being remediated by credit rated responsible party such as a Major Oil Company. RPC gas station appraisals includes a caveat assuming a “clean site”, any cost to cure detrimental environmental conditions are to be deducted from the concluded value. However, these costs are rarely known without costly environmental reports and somewhat of a moot point given these cost would be incurred by the responsible party.
What do market buyers have to say? Surveyed buyers of gas stations for continued gas station use do not support a discount for contamination or stigma, unless the responsible party is not a Major Oil Company or the ongoing remediation somehow increases their cost of capital or impairs the utility of the site. In summary it seems as long as there is an indemnity agreement as is the case with most contaminated gas stations and the Major Oil Company is the responsible party, the market does not support a material discount for contaminated gas stations.
What does the market data say? In a perfect market one could perform a paired sales analyses where the only variable between two identical gas stations is contamination or stigma. Unfortunately, gas stations are special use properties with a myriad of variables affecting value. Performing paired sales is simply just not possible with any degree of reliability. Many have tried, but with poor results and little to no correlation of data. The above chart was compiled from the RPC database and cross referenced with contaminated sites as analyzed by Richard Neustine MAI, CRE, FRICS. The data shows the lack of statistical relationship between contaminated gas stations and those not contaminated.
No matter how the data is analyzed, no statistical correlation could be found between sale prices of contaminated gas stations versus non-contaminated gas stations.