Investing in Fuel Stations

Fuel stations, convenience stores, and travel centers are an interesting asset class to invest in because they are an essential service, offer strong annual cash flow, and can also be broken up and sold in different parts, offering investors a wide array of exit strategies. In this Investor Education Post we will explain the different components available for purchase, how they are typically valued, and their risks and profit potential.

1. Fuel/Gas Station Business & Real Estate: Fuel/Gas Stations can be purchased in their entirety, meaning the investor can buy the operating business that includes all sales at the site along with the real property. Under this scenario, the investor would be responsible for running the convenience store, managing the delivery of fuel to the station, keeping up on maintenance, paying operating costs, and managing employees & payroll.
   • Strategy:  This is considered an “active” and not “passive” investment
   • Valuation: When sold with real estate, fuel stations typically sell at valuations that range between 9x – 13x EBITDA. As expected, the stations that are located in high traffic areas sell the most fuel, therefore have higher EBITDA and also trade at the higher range of the market multiple
   • Risk/Reward: High. When compared to the other ways in which an investor can invest in fuel stations, the business & real estate strategy is considered high risk and high reward. Investors can outperform their peers through operational efficiencies & sales growth which can make this strategy highly profitable  
2. Fuel/Gas Station Business Only: Fuel/Gas Stations can be purchased with the business only. Under this scenario, the investor would be responsible for operating the station but does not own the building or the land. Instead, the operations of the station would be subject to a lease for the building and land.
   • Strategy: This is considered an “active” and not “passive” investment
   • Valuation: When sold without real estate, fuel stations typically sell at valuations that range between 3x – 6x EBITDA. As expected, the stations that are located in high traffic areas sell the most fuel, therefore have higher EBITDA and also trade at the higher range of the market multiple
   • Risk/Reward: Highest. When compared to the other ways in which an investor can invest in fuel stations the business-only strategy is considered highest risk and highest reward. The purchase price is the lowest since it doesn’t include real property, and the profit and loss potential are the highest on a percentage basis.
3. Fuel/Gas Station Real Estate Only: Investors can purchase the real estate only in a fuel/gas station investment. Under this scenario, the operations of the station are managed by a business owner which signs a lease for the property and land. The investor buys the building and land and receives lease payments from the business owner.
   • Strategy:  This is considered a “passive” and not “active” investment
   • Valuation: A real estate-only fuel/gas station typically sells at a market capitalization rate between 4.5% – 6.5% based on the annual lease payments. As expected, the stations that are located in high traffic areas sell the most fuel, therefore have higher lease payments and also trade at the lower range of the market cap rates
   • Risk/Reward: Low. When compared to the other ways in which an investor can invest in fuel stations, the real estate-only strategy is considered low risk and low reward. Lease payments are often fixed for long periods of time which make profit potential relatively low, however, the maintenance and upkeep of the station is typically the responsibility of the business owner so the risks are muted. However, it is important to consider the environmental risks for fuel stations.  It is also difficult to change the underlying use of the property once it is built as a fuel station so land use optionality is limited.
4. Fuel/Gas Station Ground Lease: Lastly, investors can purchase ground leases for fuel/gas stations. Under this scenario, the operations and upkeep of the station is managed by the business owner which signs a lease for the land. This situation often comes about when a developer doesn’t want to build a fuel station themselves and just leases the land on a long term lease to a fuel station operator who then builds and operates the station.
   • Strategy:  This is considered a “passive” and not “active” investment
   • Valuation: A land-only fuel/gas station typically sells at a market capitalization rate between 4.0% – 5.0% based on the annual ground lease payments. As expected, the stations that are located in high traffic areas sell the most fuel, therefore have higher lease payments and also trade at the lower range of the market cap rates
   • Risk/Reward: Lowest. When compared to the other ways in which an investor can invest in fuel stations, the land-only strategy is considered the lowest risk and lowest reward. Lease payments are often fixed for very long periods of time which make profit potential relatively low, however, the maintenance and upkeep of the station is typically the responsibility of the business owner so the risks are pretty low. It is important to understand the tenant’s occupancy cost which is calculated as a percentage of overall sales.  We typically like to see 10% – 20% occupancy cost, depending on the strength of the tenant.

Despite the emergence of electric vehicles, fuel stations remain a ubiquitous element of our everyday lives.  By some accounts, IE engines still represent 95% of the cars on the road, so the threat of EVs appears to fuel stations may be misunderstood.  In addition, with the sunset of the EV federal tax credit, there is less incentive to own an EV so the demand for EVs has reduced significantly as evidenced by recent carmaker sales data.  Despite the waning demand for EVs, many new fuel stations have adjusted their business to include EV charging stations in case more EVs hit the road.  Travel centers are also a new phenomenon that we see gaining a lot of attention and interest from investors.  Travel centers offer more services/amenities than your typical fuel station.  Often, travel centers have quick-serve restaurants (QSRs), offer expanded amenities like showers/lounges for long haul truckers, and larger convenience store footprints selling alcohol and expanded food & beverage options.  Travel centers are located on larger acreage than typical fuel stations so they are more expensive to build and are typically not located in urban areas due to the land size requirements.  Travel centers tend to be a more convenient place to stop since they offer a one-stop shop for all your needs during a long travel.