Episode 141 - Inside the Deal: Analyzing the 15 Gas Station PetroMax Acquisition!

If you find yourself with $12 million needing a place to put it. I'm your man. I'm your man. I'll tell everyone else to go to hell. All right. What is up and welcome back to your favorite Tulsa based commercial real estate investing podcast. How to invest in commercial real estate and we are back. What's up? Brian's excited again. I'm excited again. Do this, do you know how much it takes for me to work out that intro? Like I turned it on and then, hey guys, what's up? What's up? What's up? All right. Well, interesting show today because we have been saying we're waiting on stuff and we're finally not waiting anymore. So II, I love that, right? But real estate is a game of hurry up and wait. So we're comfortable in that space, but we're done waiting on the closing of the Burleson learning experience. We have that equity raise, um fully funded modeling, super high returns on that deal. I think the IRR is over 30/30. Um super excited about that another learning experience deal. Um ideally, you know, by the time we finish construction and get this thing out to market. We're in a significantly different economy where rates are lower and the 1031 exchange buyers are back.

Um that in Burleson, when do we close that? We closed that today. So if you've seen this, we closed it last week. Nice. Yeah. And then we have been talking about this uh gas station acquisition, the the big sale lease back. We are happy to report that that is now in contract. It is now out to all of the investors on the investor list. You can find the link. I'm sure we can link the the can we link the thing in the video? Yeah, so the the link is up here somewhere. Um It'll go to the website, find out tons of information there and, and that is the show today. We're gonna dive deep into our Petra Max um 15 gas station acquisition sale lease back. I'll call it man. That's a mouthful. Yeah, it's a big deal so we can dedicate the whole show to it. I think so. Getting right in, we'll, we'll put some pictures up of the deal. Um We've got the pitch deck up. Why, why do we, why do we love this deal? I love the deal because it's a, it's a way to get arbitrage on the purchase price by buying in bulk on a sale lease back and then breaking it up and selling it to smaller individual 1031 buyers and getting a premium that's the value add on this deal.

That's the basis of it. So, right. And what is a sale lease bag? Great question. So a sale lease pack and I think Joel may have uh defined it for us before we got on. So he'll probably have a more technical explanation. But really, it's when uh an owner, operator of a business and building typically is trying to f uh trying to fuel growth um and, and fund growth. So they sign a lease on their piece of real estate, they sell the piece of real estate for whatever the market value of that is. And then they take those proceeds and invest it back into the business to, to grow the business, which is why you see all these businesses rent their real estate to begin with, but most businesses don't start out that way. Typically it's, it's, you know, the 125 unit operator, whatever it is, they've owned and operated it for so long and they've been able to do that. But then they think of, ok, you know, I make 20 or 30% margins selling gas and, and, you know, slushies, why do I hold this real estate that, you know, maybe it is worth a 7% coupon to somebody else. I could sell that and then just focus on what I'm good at what I'm good at making money at.

And so essentially that's what this company that we're buying from. Wants to do. Right. They, they want to get more money so they can go out and buy more gas stations essentially. Right. 100% correct. Ok. That makes sense. And it's very similar to the ground lease discussion that we had where we have these companies, they want to open more and more stores and they don't want to get bogged down by having all their capital tied up in land, which is not depreciable at all or into real estate. They'd rather have that money driving their business growth. And so same, same thing with, with a sale lease bag. It can be, it doesn't have to be where the owner uh has uh a free and clear business. They may even have debt on it. Uh but they don't have a rent payment. The rent payment is 100% depreciable. And so they're going to trade uh the cash flow of a rent payment for capital to go invest into new locations in this, in this case. And so it also allows them to maximize the value of the income because uh he can then set that rent payment to as high of AAA point as he can to raise the most capital. Uh And as long as the cash flow from the business can pay for that rent payment, then he maximizes the cash that's held in those buildings and then he goes and buys more locations, uh or, you know, you know, leases more locations, let's say.

So we're buying 15 locations all in, in uh Texas, right? Sort of Dallas Houston, Austin and surrounding areas, correct? OK. And so uh once we put this down together, what kind of numbers are we talking about? What's the raise? What's the cash on cash? I, what's the strategy here? Yeah. So, you know, before we get into the quantitative numbers, the strategy, I mean, the very simple arbitrage is, is we're buying in bulk pricing in what I would consider, not the most favorable economy, right? And, and we're getting a price that reflects that. And our arbitrage is, is by the time we start splitting these off and trying to sell them one by one for what we believe the value to be. Um, we're, we're gonna be in a, we're gonna be in a better environment. Well, I would think that um, the fact that even if it's not a better environment, I think the fact that you're buying sort of in bulk and then piecing these out a few at a time, 100% people are gonna, um buy the, the um, smaller quantities at a higher, at a higher price. Right. So, yeah, hopefully it's a better economy.

But, but even if it's not, I think we're, you know, we're still in good shape, you're 100% correct. It, it doesn't have to be better, right? Um Texas is a tax free state and, and generally we're assuming we're gonna sell one of these every three months. Um We're gonna go out with, with several listing agents, you know, three or four, we've, we've interviewed and vetted several just getting our brokers opinion of value saying, having those conversations, hey, Mr, you know, guy at, at whatever brokerage or, or girl, if we had this gas station, what would it be worth staying alone? And, and we've been getting tons of those from a lot of different people because those are the data points of our indication of value. So that's really important. And generally speaking, big round numbers, we're buying it at a 9% cap on the noy that's, you know, day one, we, we get the opportunity to write the lease, we already wrote it, negotiated it with the operator absolute triple net lease and we're going out and, and we'll probably put three or four on the market initially. And then as the brokers sell through the product, we'll give them more product. Obviously, we can't go out and put all 15 on the market at the same time, kind of over saturates it.

Um But there was a point that you were getting into about setting the rent um of these stores. And that's a really good point in kind of the, the, the management of the risk of this deal is how do we know how well these stores are performing? How do we know if they're performing at all? What if he's just selling us a bunch of, you know, shitty gas stations. Well, that was one of the first questions we had is, you know, hey, we need financial statements on the personal guarantee and the corporate guarantee. We need to understand this corporate structure. How many employees are there? How many others do you have running? What are you gonna do with capital? So, well, not only the overall financial picture but the picture for the finances for each and individual property, right? And that as well, right to where we can go into each store and say, ok, this store is doing 5 million a year in sales. This store is doing 7 million a year in sales. This one's doing 4 million a year in sales and we can set the rent for each store to get to a healthy occupancy cost for the operator. And that allows us to see which stores are, are killing it and which stores are are doing ok, which stores are doing good. So, and, and we can set the rent accordingly, which is, which is great.

I think it's also important to remind people. I think we probably said it on a previous show, but uh we went and looked at each and every of these 15 gas stations, right? Yeah, that was vlog number one. If you have not seen the vlog, be sure to go check that out. That was a fun one. Yeah, that was a good one. Riding around Texas in a sprinter van. Yeah, we didn't, we didn't share, but when we were dropping off the sprinter van, we definitely pulled into the airport and got stuck in between two pieces of concrete. That was fun. I'm pretty sure Aaron was in the bathroom when that happened on the clearance 7 ft six inch sign and we were higher than 7 ft something like that. Alright, so then uh before what are you, what do you got next? So I was asked about the returns and I kind of danced around it and didn't answer it. Uh over the four year investment horizon, we are targeting on, on selling one asset every three months until four years of those sales, 75% of the proceeds will go to pay down debt. 25% of the proceeds will be released to the limited partner and the amateurization schedule will be reset allowing the cash on cash to actually increase over the whole time, which is really good.

Uh a point here because we're buying these assets and they're covering the debt. Well, right, we're going to pay out and meet the preferred return of 8% on the first year assuming we sell nothing, which is a really good spot to be I think. Yeah, and then uh we're able to increase the cash on cash because we're gonna be selling these for more than we paid for them. Correct? So we're paying the debt down more. And since the AM schedule is resetting the cash on cash will go up as we sell locations. So 48 month IRR is 23.5% with a 1.54 equity multiple. And again, what's driving that IRR is the, the distribution every three months as we sell each one of these assets, the LP will get a, a return of capital by the 13th out of 15th sale. So by the 13th sale, all of the equity will be paid back. And then those last two sales is really where we bring in the gravy. So someone may say, well, normally guys, you're giving me uh A two X multiple over five years, this is a 1.55 or 1.54 over the four years. The reason that is guys is because every time we sell a deal, we're giving you some of your capital back and, and so the risk is going down, but it lowers the, the multiple because we don't have 100% of your capital for four years.

If we did, you know your, your, you know, multiple would be higher. Yes. So that brings us just at a very high level conversation. The difference between uh a return, an equity multiple of like 54% over four years versus IRR because IRR is focusing on the time value of money. So it focuses on the return of that dollar while that dollar is invested in the deal. So as soon as we start paying those dollars out, that reduces that and accelerates the return anyway. What else? Um, I know there's some things on depreciation on the asset we want to get into. What are, what are the ways that uh we're reducing risk on this deal? So, uh I don't, I don't know if you have some thoughts on that. Ok, first of all, so what kind of guarantees do we have on the deal? Yeah, so we have a, a personal guarantee of the owner of the operations company. Um The liquidity statement is, you know, I think $30 million net worth 30 $50 million net worth. I think we're adding. Yeah, I think it is 50 as well. Um Edging on the side of caution, that number will obviously go up with the sale. I think we're looking at $10 million in liquidity being added after the sale.

Um And then that should be shoveled back into the corporate structure to um fuel new growth and new gas station developments. So we get both of those guarantees. Um And then again, we we got the sales for each of these stores. So in our opinion, just the historic sales will be enough to cover the rent assuming, you know, we never have to go after that guarantee. So you mentioned this before and I think we should go into a little bit deeper you said we're going to set the rent for each store. How do we go about doing that? And, and why is that important? In the beginning? We were negotiating super big round numbers um as if we didn't know anything about the source because it's really hard to set an no I and a rent for each store when you've owned it. Um You're not maybe paying yourself rent or as much or maybe you're paying yourself too much to weight that loss um or weight that entity with losses instead of the other one. So we negotiated a gross net operating income number for the entire 15 sites and negotiated a market cap rate on that number which we believe to be a 9% cap.

Yeah. So II I just got the income at about 4,050,000 if we put a nine cap on the, the purchase price. So what you're talking about is that we look at each individual stores and we allocate a rent payment that's, that's in line with the market and industry standards with the amount of sales that it has. And so that way, you know, if you have a store that's doing really well, they'll have a higher rent payment, higher sale point. And if there's not, then we were able to reduce the rent for that purchase or that sale and make sure that it all lines with the market. Right. Yeah, that, and to be honest, there's some stores that do too well to where, you know, we lowered the rent to lower the purchase price because, you know, nobody wants to buy a $7 million gas station. Of course, can because the rent is so high because they're killing it. It's just like at the end of the day, it's $7 million gas station, of course, can. So that's another benefit where, you know, when we're acquiring 15 sites, we can set a healthy rent looking at the value of the capital markets on on the back end. Ok. And, and that rent's already been negotiated. That was part of the contract. The gross rent for all 15 sites has been negotiated. We've got, you know, 30 or 45 days once we're in contract to come to an agreement with the seller on those numbers and the discussions are happening right now.

We're going through the sales and I think we've made our first pass and it's in their court now to just kind of further mitigate risk. I assume these are gonna be triple net leases. That's another great question. So moreover, they are absolute triple net leases, which means the tenant is paying their own property taxes. The tenant is self insuring their building and the tenant is not only paying for it but facilitating their own common area maintenance. So there is no responsibilities uh for us on an absolute triple net lease, which again, we're doing that purposely for the for the value of the investor on the back end, right? The cleaner and easier we can make this um the better it's gonna be. And we were proactively reaching out to brokers who are selling this type of asset class to help us with that lease. Hey, Mr Broker, you sold $50 million or 100 gas stations. I need, I need a good sale lease back gas station lease that you can sell. You're in this space, right? So that's, that's what we're doing. And I know we preach this shit all the time on the podcast that you should be doing that. But there is a real world example of we have to get indicators of value. So we called a lot of people and, and you know, we're talking to them, hey, you do this all the time and I think people are scared to ask, hey, do you have a lease?

Like everyone's gonna call their attorney and pay them $20,000 to get some half ass lease from an attorney that probably doesn't specialize in retail leases or you could just texted your buddy or me and said, hey, can I see your lease? I probably would have been like, yeah, brand new, 15 year, brand new, 15 year, yearly increases, yearly increases. I think they have three options. 35 year options, which I mean are what they are. Ok. And then what are some other uh some other benefits? Uh you know, one, we already mentioned the tax free state. Uh but also gas stations come with a unique depreciation schedule. 60% you can depreciate the building 60% in year one. Yeah. So just with the current 1, 79 bonus depreciation, we're at 60% in 2024. Now, assuming nothing changes right now, there's a lot of discussion and talk and I think it's already passed the house, the house to bring bonus depreciation back up to 100% for gas stations in specific. And they, they may vary by asset class. But yeah, assuming nothing changes and it doesn't get passed in the Senate. We have uh a 60% bonus 179 depreciation that we'll be able to take this year, which is huge offer buyers, which means what you can, you can depreciate 60% of the value of the property, I guess, minus the land in the first year and then the rest of the building is flatlined over the gas stations versus uh retail shopping center like we do.

Uh, are you able to on the cost? Segregation? Does, is, are there any advantages to gas stations? Yeah, just because inherently they have more working components and equipment specifically related to the sales of gasoline. So they allow you to separate those out from the actual building and depreciate them faster because it, it really is like if you bought a lot of these working components separately and didn't attach them to a building, you'd just be able to depreciate them as equipment significantly faster. So, the IRS is cognizant of that in, in the code. Um So yeah, that's a value for us while we're holding it, we're gonna enjoy those write offs. Heck yeah, sweet. And then um the buyer of these assets again, I've made this um correlation several times off the show. But we hear of people, you know, crazy wealthy people buying like a G 550 or, or a Gulf stream or whatever for like $40 million for a tax write off. It's, you know, their end of year truck, you know, just at a different scale. This, in my opinion, especially if bonus depreciation gets reset up to 100%. This is a, a Gulf stream with a seven and a quarter percent uh bond coupon attached to it, right?

You write off the whole freaking thing that year. You don't have to buy the Gulf stream. You don't have to pay for the Gulf stream. And in fact, the Gulf stream now pays you 7% of what you paid for. It. That doesn't exist. It's not a time machine like a Gulf stream, but taxes definitely helps. So that's a lot of, that's, that's a lot of uh benefits. I don't, I don't have any more written down myself and a couple of things we did to uh make sure that we're, we're eliminating as much risk as possible, getting brand new surveys on all 15. Uh, we're getting brand new property condition reports to make sure that the buildings are, are in good shape, roof structure, parking lot. Uh What else? We're getting phase ones on all of them? Uh, obviously they're gas stations. So we just, you know, you know, there is issues there but uh hopefully we're doing everything we can to mitigate the risk on these sites, surveys. So we said we're going to our, our plan or uh strategy is to or what we modeled was one unit every three months, I assume as soon as we close and we're ready, we're gonna pick two or three of these to put on the market just as quick as we can.

Yeah, I mean, we hang on to them longer than we want. Right? I mean, between us and our secret group of followers, I've already picked, you know, who's gonna sell these for. I've had a call with a lot of people, you know, I know who I like. I know who I don't like. And, and there's, there's some people, I'm not gonna call back, I'll tell you that. And there's some people that I, I definitely want to call back and it's just the warm referrals we get, um, we work a lot with a lot of brokers in the space and there's just people who are, are better at their jobs. But yeah, we've picked three or four people. Um, we haven't exactly told them, we've been having conversations with them and yeah, we're gonna pick three or four immediately put them on the market as each broker will get one, um, as the broker sells through the product or gets it in contract, that broker will get more product. Some brokers will do better than others and it, and it takes the favoritism out of it for us, for the investors, for everyone else. Like I don't, I want them sold, I want anybody who can sell them to come and sell them. I want anybody who wants to buy them to come and buy them. I'm agnostic about it. I'm acknowledging that's not my stick and not the value I'm adding. And there's tons of industry experts who can do that for us. Well, it's, it's a good way to figure out which brokers are motivated or able to sell them.

And uh if two or three do better than, than the other one or two, then that's, that's who we'll stick with. I'm like, give them, give, you know, three brokers, you know, one or two each and the quicker you sell those you get, you get the next one. I mean, it just creates that competition. Well, ok, so all of this has been pretty positive, but there's one thing that may not, may be a negative for some of the people that are listening because not everybody gets to invest in this deal because we're doing a little bit different offering. Yeah. Always raining on the parade. Yes. So it is what it is. But, uh according to the crowdfunding laws and the sec, when we advertise or generally solicit a deal and talk about it and try to raise money from people. We don't know and don't have an intimate relationship with already because they don't listen to our awesome podcast like you guys do. Um We can only take accredited investors. So typically we get around that because we're only launching them to our intimate group of investors. Um People on our investor list, this one, we're gonna be advertising on Facebook. We're gonna be hiring equity brokers. We're gonna be launching it to our initial list. We're gonna be partnering with anybody and everybody we can because we need to raise like $12 million hairs. Now, I know I said all that.

If you find yourself with $12 million needing a place to put it, I'm your man. I'm your man. I'll tell everyone else to go to hell done. I'm your man. But yeah, accredited only. Um You typically you're allowed to self self accredit that right? You're allowed to just say I'm accredited and I can say sweet this time, we have to have a letter from your CPA or attorney verifying that for every, for everybody, everybody, everybody even, I have to get a letter from my attorney. You're exempt because you're a principal of the offering. That's the only reason everybody else got to have a letter. Everyone else is not exempt and they have to get a letter. The good news is I can keep that letter on file for the whole year and we're gonna be doing a lot more of these. So a lot of these people might already have that letter because they've done it before. But it was for a previous year. So we're going to need a new one. But there's cool websites that um it's like verify investor.com. It's like 10 bucks, you know, if you don't have a good relationship with your CPA or attorney because most of the time CPA is an attorney and you sign up and they can, they can provide you, they can provide you the documentation that we need.

Yeah, you provide them your tax returns proving that you're not poor and then they send us a letter that says you're not poor and then we can take your money. So everyone that's not a credit investor, you're saying that's poor Braden. No, I I just like, I don't know, man, I'm trying to make it more interesting. All right, I think we've gone long enough on this. Uh Hopefully you guys are excited about this deal. It's our biggest deal to date and I think it's gonna be a great opportunity. Hey, it's the biggest deal to date because we're gonna buy another one bigger. Alright guys, we'll see you next week on how to invest the cr.