Leasing Transactions
Making Sense of Recent U.S. Parking-Lease Transactions
By Michael Benouaich
Many municipalities and local transportation agencies across the U.S. face continuing financial challenges,
including operating budget shortfalls and underfunded pension programs, and are looking for innovative solutions to reduce spending and increase revenue. Publicly owned parking garages, surface lots and on-street
parking,with rates oftenwell belowmarket, are increasingly seen as underutilized assets that can be leveraged to help bridge the funding gap. Since the start of 2009, more than a dozen cities and trans-
port authorities nationwide have announced their intention to solicit long-term lease agreements for their parking facilities. Such agreements generally grant the rights to a private partner to operate and maintain parking assets and collect associated rev- enues for a specified period of time in exchange for an up-front cash payment. Several transactions reached successful financial close, but
not without facing public criticism. However, a few deals col- lapsed after the completion of a competitive selection process and an apparent agreement on lease terms. In recent transactions, when public and private partners have reached an agreement, asset values have varied widely, resulting in prices ranging from $32,200 per parking space to $5,500 per space. While this flurry of activity demonstrates a strong interest
frompublic and private stakeholders alike, thewide range of out- comes can be difficult to interpret, leaving public sponsors to ponder whether or not to engage in such a venture and under what conditions.
Overview of recent transactions On the heels of the high-profile, 99-year concession for the
Chicago Skyway toll bridge that generated an up-front payment of $1.83 billion, inDecember 2006 the City of Chicago let a 99-year concession for its off-street parking, leasing to Morgan Stanley 9,178 garage spaces for $563 million ($61,000 per space) and a commitment from the private partner to invest $500 million over the life of the concession. In February 2009, the city closed a second concessionwith JP
Morgan and LAZ Parking, generating $1.16 billion for the 75-year lease of 36,000 on-street parkingmeter spaces ($32,200 per space) and a commitment to invest approximately $30 million to imple- ment a cashless payment systemby 2011. These two transactions spurred nationwide interest, encour-
aging cities and public transport agencies to take a closer look at their parking assets and their potential formonetization. In early 2010, Pittsburgh andNewHaven, CT, reached tenta-
tive agreements with concessionaires. Pittsburgh negotiated with JP Morgan and LAZ Parking a $452 million, 50-year lease for 18,000 spaces ($25,100 per space). New Haven negotiated a $50 million lease of 2,750 spaces with Gates Group Capital Partners for 25 years ($18,200 per space). However, the Pittsburgh agreement was ultimately rejected in October 2010 by the City Council, mainly over concerns about Continued on Page 18
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Chicago and Indianapolis The following two transactions in Chicago and Indi-
anapolis, which closed 12 months apart, illustrate the rela- tive importance of the value-drivers for parking lease transactions.
Chicago In the case of the Chicago on-street parking meter
transaction, the very high up-front payment received by the city, reflected in the approximate 60 times price-to-EBITDA ratio, can be explained for themost part by the very aggres- sive earnings growth assumptions and a very long conces- sion period. Under the terms of the agreement, the city retained the
rights for rate setting, enforcement and fine collection. The agreement, however, incorporates a city ordinance that fixes rate increases for the next five years equivalent to a five-fold increase in the average hourly rate fromapproximately $0.44 to $2.30 (i.e., a 39% compounded annual growth rate, or CAGR). Subsequent rate increases are capped to the Con- sumer Price Index (CPI) and subject to city approval. The city did its own valuation of the parking assets
prior to initiating the bidding process. Based on the city’s cash flow projections, and using a reasonable discount rate around 10% to 14% (appropriate for a transaction financed 100% with equity such as this one), the price is reflective of revenue growth assumptions directly aligned with the agreement, at around 33% CAGR for the first five years and 3% thereafter, while costs can be assumed to increase at 3% annually. Using the same baseline and lowering the revenue
growth assumption to a more moderate 10% per annum for the first five years would yield a price of $240 million, a price-to-EBITDA ratio of 12 times and a price per space of $6,600, closer towhatwas observed in Indianapolis. The value of the concession is highly sensitive to the
choice of discount rate. One could argue that an appropriate discount rate should reflect the long-term, optimal capital structure for the concession, in which case a lower discount rate around 6%to 10%would be appropriate. To achieve the same value with a 6% discount rate would still require assuming a revenue growth around 20% CAGR for the first five years. The impact of the concession length on value is not as
straight forward, as it depends on the amount of leverage – the higher the leverage, the lower the discount rate, and the more sensitive the concession value is to the concession length. Shortening the concession term from 75 years to 30 years decreases the value by less than 10% with a 12% dis- count rate, while the value of the concession drops by 35% with a 6%discount rate (reflective of higher future leverage). The City of Chicago’s stated goals for the on-street Continued on Page 18
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