Fuel has become an ever-more important part of convenience store revenue, leading to environmental concerns for private and institutional investors.

Fuel accounted for 60 percent of the $400 million c-store revenue last year—according to the National Association of Convenience Stores. But the stores make only pennies on the gallon, with average revenue of $80,000 a week, and there is plenty of pressure from competing retail sectors. Moreover, the fuel tanks add what could be an expensive environmental concern from leaking fuel tanks or gas spills.

Are the risks worth it? It depends on who you talk to.

Robert Miller, president of Millco Investments, recently inspected 40 older c-stores in Minneapolis for possible acquisition. Owned by a regional operator, most of the sites were environmentally contaminated. “We came to the conclusion that we weren't prepared to take the environmental risk because we weren't confident that the tenant could take care of the issue," he says.

On the plus side, however, the risk of contamination has decreased as new underground storage tanks slowly replace older fuel pumps. Still, investors must be careful, says Jason Lind, director of acquisitions at Howard & Mills Inc. “The key is the age of the tanks and how long the gas pumps have been there,” he says. Older properties may have new tanks but the property may not have been remediated properly when a previous spill occurred.

Another issue to consider is that The Environmental Protection Agency requires all c-stores with fueling stations to carry environmental insurance, which can be obtained either through a private provider or a state-sponsored fund. The tenant is the responsible party, and the owner becomes an additional insured, says Thomas Kelso, managing director and principal of Matrix Capital Markets Group Inc. "The environmental liabilities are a risk, but not an unquantifiable risk,” he contends.

Many investors agree with Kelso's assessment. "The way the tanks are done today, the environmental issues are less critical, and all the protections you have today are far greater," says Fred Berliner, senior vice president of United Trust Fund. The Miami-based firm usually doesn’t buy environmental insurance because it invests in ground-up c-store development on clean sites with new tanks.

Similarly, U.S. Realty Advisors Inc. doesn't buy environmental insurance. “We do the testing and the due diligence to get our arms around any environmental issues and carefully evaluate the state insurance funds,” says President Laurie Hawkes, adding that the firm works to clarify any ambiguities with the state fund.

In any case, Miller recommends that potential buyers carefully evaluate the tenant's track record. “You need to think about whether or not your tenant can resolve of any environmental issues if something happens,” he says.

--Jennifer Popovec