Making Sense of Recent U.S. Parking-Lease Transactions from Page 16
price increases and the length of the agreement. Similarly, inNew Haven, the agreement was tabled by its Board of Aldermen in September 2010. InNovember 2010, in Indianapolis, theCityCouncil approved
an agreement with Xerox Co.’s Affiliated Computer Services (ACS), by a 15-14 vote, to lease approximately 3,650 spaces for 50 years for an up-front payment of $20million ($5,500 per space) and a commitment byACS to upgrade themeter system. Hartford, CT, and Las Vegas have also issued Requests for
Proposals (RFPs), and three other U.S. cities have made announcements but do not appear to be ready to move forward at this time. In October 2010, New Jersey Transit issued a Request for
Qualifications (RFQ); the RFQ, which was scheduled in March, was delayed due to the complexity of the due diligence process for public and private parties alike. Most recently, in February 2011, the LosAngeles City Council unanimously voted to end the city’s (otherwise promising) pursuit of a proposal to lease nine public garages. In all cases, private interest for these transactions has been
tremendous: In Chicago, 10 teams submitted qualifying state- ments for the on-street meter lease; and 11 teams responded to the RFP in Pittsburgh, six in Hartford, seven in Indianapolis, and 19 initially in LA.
Taking a closer look While the capitalmarket environment has been quite volatile
over the past 24 months, the wide discrepancy in prices seen between the Chicago on-street parking meter transaction and the more recent Indianapolis transaction (see sidebar) reflects not just the swings of the market, but also in great part the wide range of policy decisionsmade by the public sponsors. To understand the nature and impact of these decisions, one
needs to take a closer look at the underlying economics of such transactions. The value of a long-termlease agreement is basically derived
by discounting future forecast earnings, i.e., calculating the pres- ent value of the forecast annual revenue, minus the assumed operating costs and capital expenditures. Thus, the primary val- ue drivers are growth rates in earnings resulting from price, demand and operating cost assumptions; the discount rate cho- sen by the bidder, driven by its own cost of capital; concession length; and capital investment requirements. The price paid for such lease agreements is also, closely relat-
ed to the profitability of the assetmeasured by its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and is often expressed as amultiple of
EBITDA.Asimple EBITDAmul- tiple, however useful as a proxy for valuing an operating entity that has reached a steady state, cannot capture the complexity of transactions with fast-changing operating costs structures, rates and growth profile. The public sponsor can exert control, through the concession
agreement, on price increases, share of revenue allocated to the private partner, concession length, and to some degree, the desired level of capital investment to replace or upgrade current systems. The private partner generally bears the risk for parking utilization, while operating efficiencies can be expected from a competent operator in combination with investment in technolo- gy, such as a new multi-space, cashless meter system. Last, the cost of capital is a direct reflection of the bidder’s sources of funds Continued on Page 20
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Chicago and Indianapolis from Page 16
parkingmeter transactionwere tomaximize the present val- ue to the city, promote newtechnology and improve level of service. Viewed through that lens, the transaction can prob- ably be considered a success. However, the transition toward private operations was
problematic and an overall source of discontent for resi- dents, due to a significant initial price increase and the fact that existing coin-operated meters could not handle the increased quantity of coins, leading to inoperable meters and users receivingmore tickets. The city also was criticized for its short-term vision on
the use of the proceeds, more than half of which were used to fund budget deficits, instead of investments benefiting the city in the long-termas initially planned.
Indianapolis The City of Indianapolis made very different policy
decisions, leading to amuch lower price-to-EBITDAratio of seven times and a price per space around $5,500 for a 50- year concession. First, the Indianapolis agreement sets forth a schedule
of rate increases that is much more modest than what is allowed in Chicago.Hourly prices are to increase from$0.75 to $1.00 or $1.50 in 2012, depending on location. After two years, the rates increasewith the CPI. This is in sharp contrast with the five-fold increase in
five years allowed in Chicago. Aligning the Indianapolis revenue projections tomatch such rate increases and assum- ing a 12% discount rate would yield a concession value approaching $50 million, corresponding approximately to a price-to-EBITDAof 16 times and a price per space of $13,600. Second, the Indianapolis lease agreement includes a
revenue sharing clause very favorable to the city, which receives 30% of the first $7 million in revenue each year (indexed on CPI), plus 60% of revenue over that amount. Without sharing revenue, the value of the lease could be esti- mated at around $40 million, corresponding approximately to a price-to-EBITDA of 13 times and a price per space of $11,000. Compounding a five-fold rate increase in the first five
years with no revenue sharing would yield an estimated concession value close to $100 million, corresponding approximately to price-to-EBITDA of 33 times and a price per space of $27,800. The final terms of the agreements were settled only
after several months of negotiations during which the city increased its revenue share and added a termination for con- venience clause to the contract. The initial price offered was $35million and landed at $20million after negotiations. The city reportedly intends to invest the proceeds tomake street improvements. These choices reflect the emphasis of the City of Indi-
anapolis towardsmoderate rate increases, the desire to keep a long-term revenue stream from parking operations with- out having to manage the assets, and retain flexibility in decision-making over long-term. The tradeoff is a lower up- front payment received.
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