Adding a Fuel Facility to Boost Sales

If you have the opportunity to strategize with your client in connection with the site-selection process, you should discuss the need for some basic analysis that should be undertaken at the outset in order to find locations with minimal issues, so that leases can be concluded and facilities can be opened in as short a time frame as possible.

Take a look at the retailer's current store locations and determine which stores will benefit from the addition of a fueling facility.

Once the list of locations has been targeted, conduct a review of the lease documents for each selected location where a primary operating store is located. Check to see if there are any clauses that may have a negative impact on the ability to modify the lease in order to add a fuel facility.

Look at any prior due-diligence materials that may be in the lease file or materials that may have been provided by the potential landlord, including
information on the environmental condition of the property and title information that may indicate other third parties (besides the landlord) that may have some control rights, consent rights or some other impact on the addition of a fueling facility. Due-diligence investigations of these potential sites may reveal issues that will affect a fuel facility. Even sites where a current primary business is operating may have issues impacting a fuel facility that were not issues for the primary business use when the lease was generated for the original store. The sites with the fewest barriers to accomplishing the goal of adding a fuel facility should be the primary target leases.

Once the most favorable leases are identified, spend the time to investigate the zoning and permitting requirements and processes. Again the locations with the fewest zoning and permitting issues and the easiest/shortest permitting and approval processes should be targeted.

Further Issues

In reviewing these four areas, include, as a minimum, a review of the issues discussed below that may often need to be addressed and resolved as the leasing process moves forward. But before getting to those items, determine how to document the addition of the fuel facility, always keeping in mind the path of least resistance in moving the transaction to conclusion.

Documenting the Transaction

If you are working on adding the location to your existing or adjacent premises or even within the same shopping center, you may have the opportunity to document the transaction by executing a lease amendment. Generally, a lease amendment will save time in the documentation area, since many of the lease provisions that are commonly heavily negotiated between landlords and tenants will have been resolved in the original lease and will not need to be addressed. As part of the decision process, you will want to make sure that the proposed fuel facility is located on a parcel owned by the same landlord entity as the landlord under the original lease. Many landlords may own various parcels under different commonly owned entities. Confirmation of the ownership entity of the proposed parcel is needed to determine whether an amendment will be possible. Also determine if the same lender is involved on both the original lease parcel and the proposed location of the fuel facility. If you have different lenders on the parcels, you will not be able to modify a lease because both lenders will want control over any development on the parcel they have financed.

Many tenants entering the fuel-facility arena may want to have a separate lease for the fuel facility itself. The tenant, new to the fueling business and entering it for the primary purpose of boosting sales at the prime retail business, may want an exit strategy to divest the fuel facility if the projected impact on sales is not realized. It may make it easier to sell a lease for a fuel facility, or many leases (if the tenant has opened multiple fuel facilities), if the tenant has a separate lease as compared with an amended lease that now controls the fuel facility and the prime retail store. There are advantages and disadvantages to every document structure. Carefully evaluate the facts of your particular situation when deciding which structure to use.

Restrictions

Due diligence will include investigating all matters and parties that may restrict or have impact on the use of the property. If it is located in a shopping center, any restriction and easement agreements, as well as any memorandum of lease that may be filed in the recorder's office, should be reviewed. The “usual” restrictions found in a shopping center that may not affect the primary business of the retailer may, in fact, have an impact on the fueling use.

A restriction on bringing hazardous materials onto the shopping center ' except for a diminutive amount used in the normal operation of a retail store ' will affect the ability to have a tank full of fuel on the property.

A restriction on the use of a property for the sale and servicing of motor vehicles will have to be read carefully to see if the service of fueling automobiles is restricted.

What is normally thought of as an obnoxious use restriction, such as a restriction on uses not commonly found in shopping centers, may prohibit the fueling operation. Will yesterday's standards of what is commonly found in a shopping center prevail, or will recent trends, such as the addition of fueling facilities in shopping centers, control?

Restrictions that prohibit a change in parking spaces or drive aisles shown on a site plan of the shopping center may prevent the installation. Generally, you may see a loss of spaces in a parking field with the addition of a fuel facility. Fueling-pump aisles and stacking for the cars waiting for available pumps will be necessary parts of the operation and may violate site plan requirements. Is a consent from the occupants benefitting from the restriction available or possible?

Environmental Condition of the Property

The environmental condition of the property must be explored. If the site has existing contamination or is near an aquifer, the chances of getting approval to dig up the site and install a fuel tank are slim. At the least, it will be a time-consuming process and may not be worth the time and/or expense to obtain the approval and comply with the probable conditions that will be imposed by the applicable governmental authorities. However, if the site is otherwise highly desirable, the tenant may want to proceed with the approvals (the end may justify the means)! Make provisions in the lease for the time frame that may be necessary to obtain all required approvals. Both the landlord and the tenant should have joint obligations to seek the necessary approvals and support the effort. Expect lengthy hearings from homeowners and activist groups with concerns over installing gas tanks if a water table, aquifer or drinking water source is nearby.

The lease should contain construction standards that incorporate modern fuel spill prevention technologies so the standard may be presented at the hearings. If prior spills have been remediated, place the burden on the landlord for any further work needed due to a prior spill. A remediation plan that has been in place may not be adequate for the contemplated installation of tanks and the operation of the fuel facility.

Permitting

As mentioned above, zoning and permitting requirements need to be analyzed to determine the probability of obtaining all governmental approvals to proceed. Traffic studies will be needed, and preliminary due diligence review must consider the potential traffic impact of the addition of the facility. The engineering group should be able to advise early on, as to the probability of a requirement for highway improvement work, including traffic signals, turn lanes, stacking lanes, etc.

The lease should address the burden of necessary highway work. Will the landlord or the tenant have the burden? Should either party have the right to terminate the lease if the cost of required work exceeds what is estimated at the time of the lease execution? Should the other party have the right to negate any such termination if it is willing to pick up the additional cost? All these concepts need to be addressed in the initial lease.

In addition, the site may already have a parking count requirement. Many existing shopping centers have a requirement to maintain a certain number of parking spaces for compliance with the original approvals granted. The fuel facility may reduce the parking spaces already existing and/or require additional spaces due to the development of the fuel facility. Again, the initial lease must anticipate the issue and address the “what ifs” associated therewith. Do not forget to check to see if a special permit is necessary for a fuel facility. Often, municipalities require an extra layer of approval for uses they think are parking-intensive or potentially hazardous.

Because a special permit is often discretionary, expect opposition from residences and competitive fuel facility operators. The lease should contain a condition for a special use permit. You do not want to have all your approvals and be ready to sign the lease and then find out you need to obtain a special use permit!

General Lease Issue

No matter how you document the transaction (by an amendment or a new lease), the landlord may raise concerns particular to a fuel facility. At the lease end, the landlord may require that all tanks be removed and the parcel be returned to its original condition.

The landlord may impose a requirement for periodic tank testing and replacement at various intervals. Will periodic environmental testing of the soil be required to make sure the tanks are not leaking? If it is the landlord's responsibility to maintain the parking lot and remove snow, will the landlord be willing to plow the surface areas of the fueling facilities? Many landlords will not want the risk of plowing near the pumps and under the canopy. How will the landlord allocate a share of the CAM costs to the tenant if there is no building or only a small “hut” for the attendant to stay in? Will the area under the canopy be used as building area? Will the share be calculated on land area only? What right will the tenant have to change the use of the fuel facility if it is no longer needed or desired by the tenant? Will the tenant have the right to erect a building in the area? Will the size of the building be limited to the area under the canopy as that should not impact parking? What exit strategy will the landlord agree to? Will the landlord require a termination of the fuel lease if the lease for the retailer's primary store operation is terminated?

Percentage Rent

Be aware of any requirements to pay percentage rent. Many leases may still contain such a provision, and most landlords will expect the gross sales, for purposes of determining the percentage rent due, to include fuel sales. However, it is incumbent on the tenant to have fuel sales excluded from gross sales, because these sales are often made at a loss or at best, a minimum profit. The fuel sales should be excluded based on the same argument for exclusion of any discounted sales from the premises. If the tenant is not making a profit, why should the landlord? Also, the purpose of the fuel facility is to boost sales at the primary retail store. Assuming the landlord is the same or a related entity, the landlord should benefit from the increased gross sales from the “boost” in sales generated by the discounted fuel driving more traffic and sales to the primary store.

Lenders

Is a lender involved? Is consent from the lender required? Most lenders will retain consent rights in their mortgage documents for any lease amendment. If that is the case, can the consent be avoided by negotiating a new lease as opposed to an amendment? If an SNDA will be required by a tenant, the lender will have to be brought into the picture. Most lenders may consent to the addition of a fuel facility, provided some additional rent is being paid; however, if the lender does not think it is getting a fair market rent for the land proposed to be occupied by the fuel facility, it may not be cooperative. The lender may also have restrictive/prohibitive language in its documents in connection with hazardous substances; consequently, any time a lender is involved, anticipate that consent will be required and build into the lease the requirement for the landlord to request and use commercially reasonable efforts to obtain the consent, failing which the tenant will need a termination right.

Signage

Signage will be controlled by the lease terms, but it may also be controlled by language in any reciprocal easement and operating agreement, other tenant leases and municipal requirements. When negotiating the lease, build in a condition, for the necessary approvals from all parties for the signage the tenant may desire. The signs will be wanted not only for the trade name for the fuel facility, but also to inform consumers that the fuel facility is participating in the discounts awarded by the tenant's primary business.

Ties to the Primary Lease

Will any provisions in the primary lease need to accord with the terms in the fuel facility lease? Most tenants will want the term expiration date and any option periods to match such periods in the primary lease. If the store closes, the tenant will more than likely want to close the fueling facility, unless the tenant opens another primary store nearby. Will the landlord allow one operation to continue without the other? What about closures for periods of rebuilding due to casualty? If the primary business is closed, should the tenant have the right to close the fueling facility temporarily for the same period of time? Many landlords will want to cross-default the leases. Tenants should always resist any type of cross default because such a provision makes it almost impossible to execute an exit strategy for one facility without the other.

Conclusion

This brief review of some of the issues that may be encountered in leasing a fuel facility clearly establishes that adding a fuel facility to a retailer's portfolio of properties is anything but easy. It is incumbent upon counsel for both the landlord and the retailer to understand the time frames involved in satisfying conditions for zoning, permitting, third party consents and to provide language in the leases that will address the issues unique to the fuel use as well as accommodate all time frames that may be necessary to satisfy all conditions necessary to allow the transaction to move forward. Remember to advise your retail client to take the path of least resistance when selecting sites!

Steven J. Roberts, a member of this newsletter's Board of Editors, is Vice President of Real Estate Law for Ahold USA, Inc.

Many retailers are adding fuel facilities adjacent to or near their retail stores as a mechanism to drive sales of their primary business. The retailer rewards its customers with discounts on fuel if the customer spends a certain amount of money on merchandise at the primary retail business. The location may be “on site” as part of the retailer's primary operating store site. It may be within the shopping center where the primary store is located. It may be across the street or down the road at a location convenient for the primary store's customers. Wherever the location, the retailer wants to open the fueling facility as soon as possible so it can drive sales at its primary retail business.

Adding a fuel facility to a retailer's portfolio of properties may at first appear to be a simple task; however, whether adding the facility to the current lease by an amendment of the lease or entering into a new lease for space within the shopping center or down the road, the landlord and the tenant will need to address several issues that can slow down or completely prohibit what is thought to be an easy, simple transaction for a site for a fuel facility.

Strategize

If you have the opportunity to strategize with your client in connection with the site-selection process, you should discuss the need for some basic analysis that should be undertaken at the outset in order to find locations with minimal issues, so that leases can be concluded and facilities can be opened in as short a time frame as possible.

Take a look at the retailer's current store locations and determine which stores will benefit from the addition of a fueling facility.

Once the list of locations has been targeted, conduct a review of the lease documents for each selected location where a primary operating store is located. Check to see if there are any clauses that may have a negative impact on the ability to modify the lease in order to add a fuel facility.

Look at any prior due-diligence materials that may be in the lease file or materials that may have been provided by the potential landlord, including
information on the environmental condition of the property and title information that may indicate other third parties (besides the landlord) that may have some control rights, consent rights or some other impact on the addition of a fueling facility. Due-diligence investigations of these potential sites may reveal issues that will affect a fuel facility. Even sites where a current primary business is operating may have issues impacting a fuel facility that were not issues for the primary business use when the lease was generated for the original store. The sites with the fewest barriers to accomplishing the goal of adding a fuel facility should be the primary target leases.

Once the most favorable leases are identified, spend the time to investigate the zoning and permitting requirements and processes. Again the locations with the fewest zoning and permitting issues and the easiest/shortest permitting and approval processes should be targeted.

Further Issues

In reviewing these four areas, include, as a minimum, a review of the issues discussed below that may often need to be addressed and resolved as the leasing process moves forward. But before getting to those items, determine how to document the addition of the fuel facility, always keeping in mind the path of least resistance in moving the transaction to conclusion.

Documenting the Transaction

If you are working on adding the location to your existing or adjacent premises or even within the same shopping center, you may have the opportunity to document the transaction by executing a lease amendment. Generally, a lease amendment will save time in the documentation area, since many of the lease provisions that are commonly heavily negotiated between landlords and tenants will have been resolved in the original lease and will not need to be addressed. As part of the decision process, you will want to make sure that the proposed fuel facility is located on a parcel owned by the same landlord entity as the landlord under the original lease. Many landlords may own various parcels under different commonly owned entities. Confirmation of the ownership entity of the proposed parcel is needed to determine whether an amendment will be possible. Also determine if the same lender is involved on both the original lease parcel and the proposed location of the fuel facility. If you have different lenders on the parcels, you will not be able to modify a lease because both lenders will want control over any development on the parcel they have financed.

Many tenants entering the fuel-facility arena may want to have a separate lease for the fuel facility itself. The tenant, new to the fueling business and entering it for the primary purpose of boosting sales at the prime retail business, may want an exit strategy to divest the fuel facility if the projected impact on sales is not realized. It may make it easier to sell a lease for a fuel facility, or many leases (if the tenant has opened multiple fuel facilities), if the tenant has a separate lease as compared with an amended lease that now controls the fuel facility and the prime retail store. There are advantages and disadvantages to every document structure. Carefully evaluate the facts of your particular situation when deciding which structure to use.

Restrictions

Due diligence will include investigating all matters and parties that may restrict or have impact on the use of the property. If it is located in a shopping center, any restriction and easement agreements, as well as any memorandum of lease that may be filed in the recorder's office, should be reviewed. The “usual” restrictions found in a shopping center that may not affect the primary business of the retailer may, in fact, have an impact on the fueling use.

A restriction on bringing hazardous materials onto the shopping center ' except for a diminutive amount used in the normal operation of a retail store ' will affect the ability to have a tank full of fuel on the property.

A restriction on the use of a property for the sale and servicing of motor vehicles will have to be read carefully to see if the service of fueling automobiles is restricted.

What is normally thought of as an obnoxious use restriction, such as a restriction on uses not commonly found in shopping centers, may prohibit the fueling operation. Will yesterday's standards of what is commonly found in a shopping center prevail, or will recent trends, such as the addition of fueling facilities in shopping centers, control?

Restrictions that prohibit a change in parking spaces or drive aisles shown on a site plan of the shopping center may prevent the installation. Generally, you may see a loss of spaces in a parking field with the addition of a fuel facility. Fueling-pump aisles and stacking for the cars waiting for available pumps will be necessary parts of the operation and may violate site plan requirements. Is a consent from the occupants benefitting from the restriction available or possible?

Environmental Condition of the Property

The environmental condition of the property must be explored. If the site has existing contamination or is near an aquifer, the chances of getting approval to dig up the site and install a fuel tank are slim. At the least, it will be a time-consuming process and may not be worth the time and/or expense to obtain the approval and comply with the probable conditions that will be imposed by the applicable governmental authorities. However, if the site is otherwise highly desirable, the tenant may want to proceed with the approvals (the end may justify the means)! Make provisions in the lease for the time frame that may be necessary to obtain all required approvals. Both the landlord and the tenant should have joint obligations to seek the necessary approvals and support the effort. Expect lengthy hearings from homeowners and activist groups with concerns over installing gas tanks if a water table, aquifer or drinking water source is nearby.

The lease should contain construction standards that incorporate modern fuel spill prevention technologies so the standard may be presented at the hearings. If prior spills have been remediated, place the burden on the landlord for any further work needed due to a prior spill. A remediation plan that has been in place may not be adequate for the contemplated installation of tanks and the operation of the fuel facility.

Permitting

As mentioned above, zoning and permitting requirements need to be analyzed to determine the probability of obtaining all governmental approvals to proceed. Traffic studies will be needed, and preliminary due diligence review must consider the potential traffic impact of the addition of the facility. The engineering group should be able to advise early on, as to the probability of a requirement for highway improvement work, including traffic signals, turn lanes, stacking lanes, etc.

The lease should address the burden of necessary highway work. Will the landlord or the tenant have the burden? Should either party have the right to terminate the lease if the cost of required work exceeds what is estimated at the time of the lease execution? Should the other party have the right to negate any such termination if it is willing to pick up the additional cost? All these concepts need to be addressed in the initial lease.

In addition, the site may already have a parking count requirement. Many existing shopping centers have a requirement to maintain a certain number of parking spaces for compliance with the original approvals granted. The fuel facility may reduce the parking spaces already existing and/or require additional spaces due to the development of the fuel facility. Again, the initial lease must anticipate the issue and address the “what ifs” associated therewith. Do not forget to check to see if a special permit is necessary for a fuel facility. Often, municipalities require an extra layer of approval for uses they think are parking-intensive or potentially hazardous.

Because a special permit is often discretionary, expect opposition from residences and competitive fuel facility operators. The lease should contain a condition for a special use permit. You do not want to have all your approvals and be ready to sign the lease and then find out you need to obtain a special use permit!

General Lease Issue

No matter how you document the transaction (by an amendment or a new lease), the landlord may raise concerns particular to a fuel facility. At the lease end, the landlord may require that all tanks be removed and the parcel be returned to its original condition.

The landlord may impose a requirement for periodic tank testing and replacement at various intervals. Will periodic environmental testing of the soil be required to make sure the tanks are not leaking? If it is the landlord's responsibility to maintain the parking lot and remove snow, will the landlord be willing to plow the surface areas of the fueling facilities? Many landlords will not want the risk of plowing near the pumps and under the canopy. How will the landlord allocate a share of the CAM costs to the tenant if there is no building or only a small “hut” for the attendant to stay in? Will the area under the canopy be used as building area? Will the share be calculated on land area only? What right will the tenant have to change the use of the fuel facility if it is no longer needed or desired by the tenant? Will the tenant have the right to erect a building in the area? Will the size of the building be limited to the area under the canopy as that should not impact parking? What exit strategy will the landlord agree to? Will the landlord require a termination of the fuel lease if the lease for the retailer's primary store operation is terminated?

Percentage Rent

Be aware of any requirements to pay percentage rent. Many leases may still contain such a provision, and most landlords will expect the gross sales, for purposes of determining the percentage rent due, to include fuel sales. However, it is incumbent on the tenant to have fuel sales excluded from gross sales, because these sales are often made at a loss or at best, a minimum profit. The fuel sales should be excluded based on the same argument for exclusion of any discounted sales from the premises. If the tenant is not making a profit, why should the landlord? Also, the purpose of the fuel facility is to boost sales at the primary retail store. Assuming the landlord is the same or a related entity, the landlord should benefit from the increased gross sales from the “boost” in sales generated by the discounted fuel driving more traffic and sales to the primary store.

Lenders

Is a lender involved? Is consent from the lender required? Most lenders will retain consent rights in their mortgage documents for any lease amendment. If that is the case, can the consent be avoided by negotiating a new lease as opposed to an amendment? If an SNDA will be required by a tenant, the lender will have to be brought into the picture. Most lenders may consent to the addition of a fuel facility, provided some additional rent is being paid; however, if the lender does not think it is getting a fair market rent for the land proposed to be occupied by the fuel facility, it may not be cooperative. The lender may also have restrictive/prohibitive language in its documents in connection with hazardous substances; consequently, any time a lender is involved, anticipate that consent will be required and build into the lease the requirement for the landlord to request and use commercially reasonable efforts to obtain the consent, failing which the tenant will need a termination right.

Signage

Signage will be controlled by the lease terms, but it may also be controlled by language in any reciprocal easement and operating agreement, other tenant leases and municipal requirements. When negotiating the lease, build in a condition, for the necessary approvals from all parties for the signage the tenant may desire. The signs will be wanted not only for the trade name for the fuel facility, but also to inform consumers that the fuel facility is participating in the discounts awarded by the tenant's primary business.

Ties to the Primary Lease

Will any provisions in the primary lease need to accord with the terms in the fuel facility lease? Most tenants will want the term expiration date and any option periods to match such periods in the primary lease. If the store closes, the tenant will more than likely want to close the fueling facility, unless the tenant opens another primary store nearby. Will the landlord allow one operation to continue without the other? What about closures for periods of rebuilding due to casualty? If the primary business is closed, should the tenant have the right to close the fueling facility temporarily for the same period of time? Many landlords will want to cross-default the leases. Tenants should always resist any type of cross default because such a provision makes it almost impossible to execute an exit strategy for one facility without the other.

Conclusion

This brief review of some of the issues that may be encountered in leasing a fuel facility clearly establishes that adding a fuel facility to a retailer's portfolio of properties is anything but easy. It is incumbent upon counsel for both the landlord and the retailer to understand the time frames involved in satisfying conditions for zoning, permitting, third party consents and to provide language in the leases that will address the issues unique to the fuel use as well as accommodate all time frames that may be necessary to satisfy all conditions necessary to allow the transaction to move forward. Remember to advise your retail client to take the path of least resistance when selecting sites!

Steven J. Roberts, a member of this newsletter's Board of Editors, is Vice President of Real Estate Law for Ahold USA, Inc.