Net Lease Gas Stations Offer Bonus Depreciation Investment Opportunity
Gas stations are unique and attractive assets for investors looking to top off their portfolios. Triple net lease gas stations offer passive cash flow, often with the stability of reputable tenants and corporate guarantees, but there’s one more reason buyers are excited: bonus depreciation deductions.
What’s so exciting about bonus depreciation?
“In many cases, gas stations are eligible for the 100% Bonus Depreciation deduction in year one of ownership. Depreciation-motivated purchasers of gas stations generally seek to offset significant capital gains or other passive income on their tax bills with the generous Bonus Depreciation deduction that gas station ownership affords them,” said B+E broker, Spencer Henderson. “I’m not qualified to speak on the more specific nuances of the TCJA, so investors should always consult a tax professional before making their investment decisions.”
Gas stations in particular have seen a lot of interest. B+E has seen the market close on +/- 282 gas station sales year-to-date, with many buyers motivated to take advantage of the 100 percent bonus depreciation deduction.
Under the Tax Cut and Jobs Act passed in 2017, up to 100 percent bonus depreciation will be allowed through 2022. This rate will phase out by 20 percent each year until 2027, so the rate will drop to a maximum of 80 percent in 2023.
You’re probably wondering exactly what qualifies a gas station to be eligible for the 100% bonus depreciation. The tax code doesn’t provide us with a definition for gas stations, or as the IRS refers to them ‘retail motor fuel outlets.’ However, in the late 90s the IRS released Coordinated Issue Papers (“CIP”) for Petroleum and Retail Industries Convenience Stores, which does provide a detailed definition and qualifying criteria.
As per the CIP paper, a C-store at the gas station will qualify as a ‘retail motor fuel outlet’ if they met any of the three following criteria:
- 50% or more of its gross revenues generated from petroleum sales
- 50% or more of its floor space devoted to petroleum marketing sales
- The C-store building is 1400 square feet or less
“If the C-store passes any of the above tests, the entire depreciable basis (net of land) is eligible for a 15-year recovery period, and 100% bonus depreciation if acquired and placed in service after September 27, 2017,” said Kim Lochridge, Executive Vice President at Engineered Tax Services. “However, if they don’t meet any of the three criteria, the depreciation period for a C-Store building is 39-years. An experienced tax attorney or cost segregation can help you determine if the property or properties you’re looking at will be eligible*.”
Isn’t fossil fuel going the way of the dinosaurs?
One worry about investing in gas station real estate is that gasoline will eventually be a thing of the past. Electric vehicles were touted as the wave of the future, but is that wave a tsunami, or more like a ripple?
“EV’s have certainly sent a ripple through the net lease market but there has been hesitancy in the electric vehicle market,” says Henderson. “Along with supply chain and production issues, there are questions regarding grid capacity. We are seeing investors hold both Tesla service locations and 7-Eleven gas stations in their portfolio.
According to a study from Reuters, electrical grid capacity is already being tested and less than 1 percent of cars on the road are electric vehicles. Even with various states passing legislation concerning the sale of new vehicles, most available projections show that by 2050 more than half of the cars on the road will still run on gasoline.
|ON MARKET DATA**||2022 YTD DATA|
|Number of Properties||229||282|
|Average Sale Price||$4,888,455||$2,897,706|
|Median Sale Price||$4,585,750||$1,826,000|
|Highest Sale Price||$15,225,000||$14,915,000|
|Lowest Sale Price||$370,000||$175,000|
|Average Cap Rate||4.92%||4.85%|
|Median Cap Rate||4.74%||4.50%|
“Gas station real estate continues to sell at high prices and we do not see that adjusting any time soon,” Henderson added.
What are the advantages of gas stations over other net lease asset types?
“Gas stations offer a wide range of prices,” Henderson says. “In 2022 we have seen gas stations sell for a few hundred thousand dollars up to several million. Price depends on location, size, lease term etc., but there is much more variety than the static prices of other asset types like CVS or Walgreens.”
Another distinctive advantage comes from being an integral part of infrastructure, where they are built in prime locations and designed to maximize traffic flow. They also provide an essential service that has proven steady through changing seasons, economic fluctuations, e-commerce upheaval, and even a global pandemic.
While gas station investments offer unique advantages and opportunities, it is always best to consult with a tax advisor before making financial decisions. Investors should also remember that the 100 percent bonus depreciation deduction runs through the end of this year.
*Quote Source: Engineered Tax Services
**Data as of 10/1/2022