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    Where There's a Will, There's a Way

    Financing a convenience store acquisition in today's tight credit market isn't easy, but people like Sammy Virani and Bill Englefield show it can be done with innovative thinking.

    To finance the purchase of 58 convenience stores from MetLife last November, Sammy Virani had to put some skin in the game. Well, more like an arm and a leg.

    The owner of Ashita LLC, then landlord of 121 c-stores and operator of one Coyote Food Store in League City, Texas, Virani didn't want to pass up the chance to buy 37 sites in Texas, 12 in Atlanta, six in California, two in Tennessee and one in Florida. But there was one big complication: no guarantee the current tenants -- Valero, Circle K, Mapco and a few individual mom-and-pops -- would renew their leases, which were up this year.

    "I went to MetLife a year before the leases were up, in January 2008, and educated them," Virani said. "MetLife wanted to sell the sites because they were panicked the leases wouldn't be renewed and the sites would go back to them. They had no way to operate them. They knew if Valero didn't exercise its option for the sites in Texas, and Circle K did not exercise its option for the Atlanta and California stores, they'd be in trouble. I designed a deal."

    The terms: Virani would purchase all of the stores and put up millions of dollars in cash as a nonrefundable deposit and find a bank to finance the rest of the deal.

    "I don't know how I slept at night," said Virani, who came to the United States from Mumbai in 1988 and worked at Circle K Corp. for two years before buying Young's Grocery in Baytown, Texas. He plans to move his headquarters from Texas to the Miami area within the next six months. "If I didn't come up with financing for the rest, I'd have lost my millions. But I knew we had to do something for our communities and not let these stores close. Hundreds of jobs were at stake. I had faith in this. Folks like me can come up with a different business model for financing and keep the jobs in the communities and the stores open."

    Virani approached Sterling Bank, where he once served on an advisory board, to finance the rest of the deal. "We required at least 31 of the 58 sites to be re-leased by their corporate tenants," noted Freddy Hurst, Sterling Bank's market CEO-Westchase, who has worked with Virani for 12 years. "Plus, Sammy had more than 40 percent equity in the deal -- he had to because of the risk of finding operators for the other 27 stores."

    Knowing the corporate tenants were unlikely to renew many of those leases and he'd have to find independents to operate the stores, Virani's business model was based on 30 percent less rental income.

    "I ended up losing more than 25 percent of the corporate rental income," he said. "The leases I did renew, however, I did at the same rents with five-year extensions and a 2-percent increase every year, so that made up for some of the rental loss at the other sites."

    Since then, Virani, who once owned and operated as many as 40 c-stores before leasing them to single-family operators, found independents to take over most of the newly acquired locations. He financed those contract-for-deed deals himself.

    In some cases, the entrepreneur sent a team of 10 of his own employees to keep stores open and in good shape until new operators could be found.

    "I made sure the sites were open so that trash, loitering and crime didn't happen," he said. "I made all the necessary improvements to the sites so that a new independent could come in, hire staff and take it from there."

    The c-store operator and landlord visited each market, "talking to everyone," and looking for potential operators for his sites. He often approached entrepreneurs in the Asian American community.

    "I told them I owned these stores and if they gave me 10 percent down, I would finance the deal for them," Virani noted. "For some, it was their chance to buy their competition down the street. They didn't have to go to a bank for financing -- and the banks weren't loaning money anyway without 30 percent of the purchase price down."

    Virani typically charged the new operators 5 percent to 6 percent interest, depending on the site and the operator's circumstances.

    "Some of them are buying the stores from me on 20-, 25- or 30-year plans," he noted. "If someone wants to work hard, this kind of model will work for them and me."

    In one case, stores in Dallas were sold to independents for 2 percent down, at a 7 percent fixed rate for 30 years, Virani said. "They could never get a deal like that from a bank, even in great economic times," he noted.

    "These sites are still making a profit," he continued. "While a chain may not be able to make these stores work at $15,000 a month rent plus corporate overhead, I can sell the store to an independent in a deal that calls for monthly payments of $7,000. Even if the operator has to hire two additional employees, he could make it work. He knows after 25 to 30 years, the property is his. He can even pay me off early at no penalty."

    Added Sterling Bank's Hurst: "I see this less as a c-store play, more of a real estate play. But Sammy knew this business model would work because he's operated c-stores and had the ability to take over those stores and run them until he found tenants."

    Keeping jobs in the community was a major impetus for buying and reselling the stores, Virani said. "A chain may have 12 people working in a store. When an independent takes over, he may hire eight people and give everyone 40 hours a week. We get a lot of letters from people in those communities thanking us for reopening the sites [which were typically closed for two weeks during the transition] because people lost their jobs."

    Despite the rigors of making the last deal work, Virani said he is still in acquisition mode and plans to take his company public by the second quarter 2010. If all goes well, an initial public offering would be in scheduled for the third quarter.

    Virani is broadening his horizons, considering sites all over the country to buy and then lease or sell to independents. "This way, everybody can benefit," said the entrepreneur.

    For now, Hurst said, most banks are taking a wait-and-see attitude toward financing c-stores deals. "We're not seeing any new construction here. The only activity is some buying and selling of existing stores, but we aren't doing much of that anymore. Sammy's is probably one of the last deals we did in the c-store industry."

    For any c-store acquisition, Hurst looks at three years of sales history. "We want to know if cash flow will support the loan. We don't finance good will and inventory," he noted. "We loan only for the real estate and building, and then the buyer needs to put 20 percent down at least.

    "If the owner is looking to sell the store for a large multiple of the site's earnings, it's not going to work. You can't buy a store when the appraisal is 60 percent of the price the seller wants. Either there is no deal, or the buyer takes cash out of his pocket and/or the new owner takes a second loan behind us."

    Bill Englefield IV, president of Heath, Ohio-based Englefield Oil Co., heard similar terms when he looked for a way to finance the purchase of 43 BP stores in the Columbus area earlier this year.

    "It was an opportunity that doesn't come along maybe but once," said the fuel marketer and owner/operator of more than 130 ampm and Duke/Duchess Shoppes. "But trying to get financing was horrible. We hit it at absolutely the worst time, trying to put a deal together last September and October when the bottom fell out of the financial industry."

    Englefield's primary bank, National City, was having "severe problems, and couldn't put together a deal," he noted. "They are a very good bank, but the loan was more than they could handle. All the major banks in Ohio were in dire straits then." National City has since been acquired by PNC.

    The c-store operator finally went to a semiregional bank, Park National Corp., a hometown lender on whose board Englefield serves. Park National didn't have the problems with subprime mortgages and toxic assets other banks had. Englefield was able to finance the deal with this lender.

    "We were able to leverage the financial situation to do a better deal with BP, which lowered the price a bit because of the difficulty we had finding a loan and the cost of borrowing today," Englefield told CSNews.

    In the past, interest rates ran 1.3 to 1.5 points over the London Interbank Offer Rate (LIBOR), comparable to the U.S. Federal funds rate, Englefield noted. "Now, it is hard to get much under LIBOR plus 3 percent."

    Also today, lenders are less interested in a property's appraisal and more interested in the balance sheet, Englefield said. "They looked closely at the cash flow-to-debt ratio. Where banks were loaning at 4:1 or 5:1 debt ratios in the past, they are not considering anything more than 3:1 now. If the cash flow is $10 million, then the debt shouldn't be more than $30 million."

    Because sellers are asking for sums much greater than three times the stores' cash flow, buyers must make much higher down payments or renegotiate the purchase price.

    "It's going to be very tough for buyers who do not have strong balance sheets. There will be c-store operators who sit back and say, 'I can't do any growing for a while,'" he said. "But as a buyer, it's a good time to negotiate very hard on the purchase price because there are a limited number of buyers out there. If you are strong enough financially to get a deal done, you are in the position to drive a hard bargain."

    A single bank will likely consider a loan for acquisitions up to $15 million, said Mark Radosevich, president and COO of PetroProperties & Finance LLC, based in Coral Gables, Fla. "For an operator with 20 to 50 stores, that sort of deal is something he should be able to access. Higher than that, a buyer has to look for a club deal or syndication and that gets tricky because the banks are not playing nicely together. Plus they are requiring much more information about a deal and the time to complete a deal is much slower."

    For example, one "pristine deal" -- where a buyer with very strong financials ran a high quality operation and looked to purchase top-notch sites -- nearly fell apart when one bank told Radosevich it didn't have enough underwriters to look at the deal in a timely manner. "Even when they have the perfect deal in front of them, the banks are stepping back and making loans one at a time, slowing the process down."

    Often, banks will argue among themselves about who will be the lead bank on a loan, Radosevich noted. "We had another deal in the Southeast with a very quality borrower with a deal that was just past his threshold for equity. We brought in a mezzanine [secondary] lender who would be subordinate to the lead bank, which was a well-known national bank. At the 11th hour, this bank would not work with the mezzanine borrower because it was jealous of the mezzanine interest rate."

    Still, deals can get done if operators "get creative," said Tom Kelso, managing director of Matrix Capital Markets Group, based in Baltimore. "Two or three years ago, commercial banks were making loans that required essentially no equity. The industry got spoiled."

    Banks are now valuing assets much more conservatively and it is not unusual to see a c-store acquisition requiring the buyer to finance 60 percent of the needed loan as senior secured debt and finance the rest through a subordinated or mezzanine lender and equity, Kelso said. "The use of mezzanine debt was rarely seen in petroleum marketing in the last 10 years," he said.

    In some cases, oil companies looking to divest sites or other sellers are taking on the role of primary lender at interest rates higher than banks are charging, acting as a mezzanine lender or reducing the purchase prices to get deals done.

    "When the market recovers and if the assets are worth it, the buyer can refinance the mezzanine debt," Kelso noted. "Big Oil is offering subordinated financing in some cases, but not making a public program out of it."

    Still, as the cost of debt rises, retailers able to find a lender may discover the higher interest rates will make the loan much harder to repay. "They may find the stores they want are not such a good deal or such a good fit with their company as they initially thought," Kelso noted.

    While there may appear to be an abundance of c-stores on the market now, Kelso said the market is not crowded. "The oil companies are not forced to sell, so some, such as Exxon, seem to be waiting for the financing market to return."

    At the same time, Kelso said he receives calls daily from retailers looking to buy stores. "We are telling potential sellers that now is a good time to sell, even though overall valuations are somewhat down because those valuations are just about at the five-year average valuation and are pretty good compared to the five or 10 years before that."

    There is no "typical deal" now, Kelso said. "What is typical is creativity and devising capital structures to get the deal done."

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