Since 2000, the number of fraudulent
lending cases involving commercial and federally-insured lenders with convenience stores and gas stations as the collateral
has increased significantly. In the last few years, the Small Business Administration has lost millions of dollars in mortgage
and asset-based loans on convenience stores. Loan fraud within the convenience industry is becoming so prevalent that all
parties should exercise extreme caution.
Typically, the fraudulent loan schemes involving convenience stores and gas
stations use fictitious profit and loss statements, false federal tax returns, and sales "flips" to create the illusion of
higher collateral value, when in fact none exists. Sales flips involve straw buyers and phony capital injections or down
payments, where in fact none existed. Sadly, even certified public accountants, bank employees and loan closing officers
have received criminal convictions in these schemes. When this activity involves a federally-insured lender, the FBI and
U.S. Attorney's Office are often involved in the investigation.
Because we are in a unique (and hopefully short) era
of this type of fraudulent activity involving convenience stores, we are incorporating the following actions into our appraisals:
We will place less reliance on sales of convenience stores. Today, it is becoming increasingly difficult to adequately determine
whether a sale is legitimate, even when interviewing parties to the transaction. Often the parties are related, or the sales
involve paper transactions between related corporations or partnerships. Sales occurring since 2002 are especially suspect.
Related to the above action, it is more prudent to look at a broader range and higher number of sales, rather than a limited
number of transactions in a local market. In other words, we will place more emphasis on the indications of hundreds of sales
across a state or region instead of five to 10 local sales.
3. The fee simple value does not rely on the operator's
historic (actual) profit and loss statements. The fee simple value is based on how a typical operator would perform with
the subject's assets at that particular location.
Because fraudulent activity often involves phony profit and
loss schedules, we will place less emphasis on the owner's submitted records, and instead, rely more on our own operational
projections. For example, it is common today to find the owner's profit and loss statements showing labor cost that are half
of the national average published by the National Association of Convenience Stores. This may result from employees working
off the clock, or employees being paid less than the minimum wage, or tax fraud.
4. Our value estimates will
be based on the realistic ability of the assets to provide a reasonable return on investment, rather than the operator's statement
of value or stated historic earnings. This analysis includes a specific estimate of the business's ability to service debt
as an investment vehicle.
5. We are asking for title reports, when available, to search for unreasonable sales
Although it may be impossible for the appraiser to detect and counter all potential fraud, these measures
help insure that the negative affects from fraudulent activity, if any, do not compromise the opinion of value.
An FBI Case:
Washington Mutual Bank
a commercial real estate broker, operated a company called Certified Commercial Real Estate. Hussain recruited individuals
to assist him in the perpetration of multiple, fraudulent land flips involving convenience stores. As part of the scheme,
it was alleged that Hussain recruited Middle Eastern borrowers to purchase convenience stores with no money down. This scheme
resulted in false statements by borrowers regarding their personal assets as well as the amount of equity (down payment) they
would pay during the convenience store purchase. Banks and the Small Business Administration (SBA) approved loans to the
purchasers based on these false representations. Bank United and the SBA loaned millions of dollars to borrowers that worked
with Hussain as their broker. There were indications that the scheme was so well known in the Middle Eastern community that
honest brokers could not complete legitimate transactions that required borrowers to pay the down payment.
transactions were actually land flips, where the value of the property was fraudulently inflated through multiple sales for
the purpose of obtaining financing at the inflated value. Washington Mutual Bank, which purchased Bank United, lost $9 million
on a single flip transaction by Hussain. Hussain conducted numerous flip transactions with SBA loans totaling well over $100
The investigation has led to the convictions of Hussain as well as five co-conspirators. The FBI investigation
was conducted jointly with the SBA and U.S. Department of the Treasury.