Turning a Troubled Parking By Mike Nichols and Rebekah Carlson
The Maryland Street Garage, an 800-space, seven-story parking
facility on the southern edge of the central business district of Indianapolis, is a prominent, well-located structure that also iswell-positioned in themarket. The facility, next to Conseco Field-
house (home of the Indiana Pacers NBA team) and a downtownmall, is owned by a NewYork firmthat leased the garage to a local operator on a “triple net lease” (NNN) basis. In late 2009, the owner con- tracted with Next Parking to provide asset management services for its portfo- lio of parking properties (12 individual assets in eightmarkets). Next Parkingwas directed to focus on
the Maryland Street Garage in particular because of pending issues. It evaluated the facility and the operator, and immediately confirmed the owner’s concerns.
Contractual Stress Under terms of the NNN lease, the
lessee was required to pay taxes, insur- ance and structural maintenance in addi- tion to the fixed rent. There also was a requirement for additional percentage rent to be paid to the owner should cer- tain revenue thresholds bemet. The owner was quite concerned with
the financial position of the lessee. The lessee was defaulting on its financial obli- gations, including rent. Certain of the facility’s vendors communicated that theywere not being paid for services. The owner was further concerned that the les- see would not have the funds to pay the upcoming tax bill,whichwould cause the garage to fall into tax default. The vendor defaultswere indicative of
significant additional problems.WhenNext Parking performedthe original site analysis, the garage had a number of issues, among others: filthiness (the facility had not been cleaned regularly), non-functioning eleva- tors, structural deterioration, inability to pass a fire suppression inspection, and non- functioning access control equipment. The lessee’s failures were degrading
the asset. Because the lease term was not near
expiration,Next Parkingworkedwith the owner to take the property back through provisions outlined in the lease. The material (physical maintenance) and financial (unpaid rent) defaults required notice and “cure”
periods.As anticipated, the lessee did not remedy the situations within the cure periods; a settlement was reached, and the lessee removed itself fromthe premises.
A Time of Transition Next Parking managed all aspects of
the transition fromthe defaulting parking lessee to the new management firm. Con- current to the notice and cure periods, Next began the process of finding a new parking operator. Through intensive review of local parking operating compa- nies, Next selected themost credible local operator, Denison Parking. Because of its strong local reputation,
Denisonwas best-positioned to reverse the facility’s bad impression with consumers and vendors more quickly than any other
operator.Next installed the newoperator as the old operator was leaving, procuring administrative records and overseeing the personnel transition in a single night.
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Working elevators and renovated elevator lobbies attract new customers at Maryland Street Garage.
Next Parking advised ownership in
structuring the agreement with the new operator. Because the occupancy and the facility had suffered somuch degradation with the previous operator, a new lease could only be obtained froma newopera- tor at ~75%of the prior lease. This significantly decreased payment
had the potential to put the owner in the position to default with their lender and lose their investment in the facility entirely. Locking into a lease based at the low-
er revenue was contrary to the overall consulting goal – to raise occupancy and revenue to benefit the owner. Any rev- enue increases would have solely benefit- ted the operator. Next’s solution was to recommend a
management contract instead of a lease. In this arrangement, the owner pays the oper- ator to provide management and staffing for the facility, andall revenues are returned to the owner, less operating expenses. A lease would have required the
operator to pay an annual sum to the owner and retain the revenue themselves. To make the management agreement more appealing to the operator, Next rec- ommended building in an incentive fee, providing a percentage of all revenue over a certain dollar amount (prior year operating income) to the operator.
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