Contract Site Operations vs. Tenants – What’s the difference?

One of the questions we most often get is: “What is the difference between a Contract Operator and a Tenant or fuel dealer?”  It is a very good question and one that goes to the heart of what we do.

For the purposes of this discussion I am going to treat tenants and fuel dealers as the same thing and refer to both of them as tenants until we get towards the end of this article.  Please keep in mind that this is a general overview and not legal advice.  If you are looking at retail blogs for legal guidance you need a better lawyer.

As you probably know, a tenant enters into a lease with a landlord.  The tenant pays the landlord a rent (which can be fixed, variable, or a combination of the two) and is usually responsible for the repairs and maintenance of the premises.  Tenants usually exit the property for one of two reasons – the lease comes to an end and is not renewed or the tenant breaches the lease and is evicted.  Eviction can be consensual or very messy.

A contractor is an operator who is paid a fee to operate a retail business on behalf of someone else.  For our purposes, let’s say that “someone else” is the land owner who wants to hire the contractor.  The owner and the contractor will enter into an agreement specifying the terms of the arrangement.  The owner pays the contractor a fee to operate the site.  The owner is responsible for the operating costs of running the business and reimburses the contractor for any losses.  The owner is also responsible for the repairs and maintenance of the building and equipment.  The contractor exits the site for one of two reasons – the agreement expires and is not renewed or the contractor breaches the agreement.

Okay, so far it looks like the tenant arrangement may be the better one for a land owner – little cost and a steady income.  But let’s delve a little deeper.  There are four main areas where a contractor can provide a better value to the land owner.

Alignment of interests.  Because of the nature of the relationship of the contractor and the land owner both parties are working closely to meet the same goals.  The contractor becomes an extension of the land owner’s strategy and tactics -implementing programs to drive sales, increase profit margins, and provide outstanding customer service are but a few such goals.  In contrast, the tenant is looking out for his/her best interest and not necessarily that of the land owner.  The most obvious instance we see is with jobbers and dealers where the dealer is not motivated to provide customer service or meet branded image requirements.  In addition to the jobber losing oil company incentive money and retail sales the jobber spends time and energy constantly supervising and arguing with the dealer.  This is especially true if the jobber is trying to establish a branded retail store program where consistency of image and customer service is paramount.

Customer service.  The professional contractor is motivated to provide outstanding customer service on behalf of the land owner.  This is because the contractor’s agreement and/or performance incentive can be tied to mystery shopper results.  The tenant – not so much.  The land owner can’t really do anything about an under performing tenant unless he is in breach of the lease.

Property conditions and capital improvements.  Although the land owner may not have to pay much money out of pocket for repairs and maintenance with a tenant, ultimately a significant investment is usually made at the end of the lease due to the lack of care and preventive maintenance by the tenant.  A contractor, on the other hand, will maintain the property to the level desired by the land owner and provide as much preventive maintenance as the land owner directs.  At the end of the day, the land owner has to make a smaller capital investment due to the better custodianship provided by the contractor.

Profitability.   With a contractor program the land owner keeps the profits generated from the site after the operating costs and contractor fees are paid.  In addition, the jobber gets to keep all the fuel margin, discounts, and incentive dollars generated at the site.  If the site is very successful then there is more upside to the land owner with little hassle.  With a tenant the landowner’s income is fairly static and, even with a variable rent, the tenant gets to keep most of the upside.  The situation for the land owner becomes worse if the tenant is under reporting sales – something that the contractor is not incentivized to do.

Some additional benefits of a contractor over a tenant or dealer is that the contractor is not subject to PMPA legislation so the land owner has more flexibility in regards to fuel branding and site opening and closings, a professional contractor will have the necessary insurance in place to handle liability issues that may come up during the operation of the site, and the land owner has one point of contact in handling any issues that arise.

Overall, our clients have found that the combination of more control of the business at the site, better site operations, less long term capital investment, capturing more profit from the operation of the site (including fuel profits), and having a professional operator to deal with provides a great economic and business value.

If you have any questions about how contractors work drop me a line using the Contact Us tab at the top of the page.