What’s a Parking Operator Worth?
September, 2017
Parking Management and Incentive Fees:
Typical management agreements between owners and operating companies for the operation of parking facilities provide for the reimbursement of specified operating costs (pre-approved by the owner), payment of a management fee to the operator for managing the facilities under the agreement, and conditions for the payment of an added incentive fee for exceptional performance.
The management fee is paid for successful management of the parking facilities, exhibiting clear compliance with operating clauses of the agreement. The incentive fee provides an opportunity for both the owner and the operator to earn additional revenue.
As management agreements for parking operations began to replace lease agreements, a parking operator’s management fee was most often calculated as a percent of gross revenue. Considerably fewer fees were based on a percent of net revenue. However, as parking operating companies consolidated, more garages were financed with tax-exempt funds, parking rates increased, and owners became somewhat more sophisticated, this “rule of thumb” about management fees as a percent of gross revenue fell by the wayside. Those procuring parking operating services simply allowed companies to compete through the management fee they would propose.
This resulted in positive and negative outcomes.
Results of Competing on Management Fees
The positive aspect of the change to competition on management fees was that owners often paid less for what was identified as “Parking Management Fees.” The negative aspect was that parking operators ran management fees “into the ditch,” bidding increasingly low fees to get the business. The difficulties with these low management fees include the following:
Often the low management fees are accompanied by higher insurance rates, benefit rates, and other costs. These higher costs often are not allocated as labeled, since the excess amounts go to the operator in lieu of higher management fees. For instance, the cost of unemployment compensation or liability insurance may not be appropriate for a specific garage location, but is averaged across the entire company or is a percentage of the entire cost paid by the company. What is not actually spent on specific operations becomes, by default, part of the management fee. The larger the operation, the more profitable these hidden charges become to the operator.
Another example is that payroll processing costs and earned paid time off may not be calculated just for the on-site staff at a facility. The costs might also include accrued paid time off of an employee who was transferred to a new facility, and the new facility is charged when the time is taken. Other activities that may become cost items are human resources processing of new employees, background and drug testing, driver’s license record review, and initial training. How those costs are attributed to a specific facility is a difficult issue to analyze.
If the management fee is low, operating companies often do not devote a significant amount of off-site management to overseeing the on-site manager, the budget, compliance with the contract, or operations. Since operations in any city depend primarily on the quality, experience, ethics, and work habits of the on-site manager, strong oversight by representatives of the company is essential to the client receiving proper on-site management. When the management fee is low, the company may not devote resources to monitoring and mentoring of the on-site manager to achieve a high quality of service.
These characteristics associated with low management fees often negatively affect the performance of the operator, and thus the incentive fees may not be gained either – depending upon how they are calculated.
The truth of the matter is best expressed by the old saying, “You get what you pay for.” When bids or RFPs are judged primarily by which operator proposes the lower management fee, the owner is more likely to receive lower quality performance. Operating parking garages and lots depends upon, at a minimum:
a quality on-site manager that will remain for the length of the contract, or at least for a minimum number of required years;
good standard operating procedures for each management and operating position;
an appropriate strategy for ensuring compliance with the management agreement;
excellent reporting on transactions, trends in occupancy and use, revenues, expenses, and ideas for optimizing revenue and customer service;
a suitable plan for oversight/evaluation of employee performance;
strong internal financial analysis and controls, in addition to the owner’s financial oversight;
a desire to exceed expectations by the on-site manager; and
an owner’s process and personnel for contract management.
If an owner is primarily concerned with the lowest management fee, the likelihood that high performance will accompany it is doubtful. The quality of the local manager, standard operating procedures, staff training, and references will tell more about the company’s potential than will the management fee.
So – the question becomes: “What should an owner expect as a reasonable management fee in a proposal?”
Several variables apply:
Will the operating company be prevented from operating any other facilities (not just directly competing ones) in the local jurisdiction, and are opportunities available?
Is the location close to other cities where the operator manages facilities, in order to foster economies of scale, ability to trade employees in emergencies, or ability to have one regional manager for multiple locations?
Does the contract call for the operator to pre-fund operating expenses, parking taxes or fees for one month or more, and if so, is the interest on borrowed money to fund the operating costs a billable expense to the owner?
Does the contract require the operator to purchase or lease specific equipment, and are the lease and the maintenance billable expenses to the owner?
Does the operator have other reasons to try to win the contract, such as: other services to offer, work for related agencies, and the desire for an “outpost” in a new city for new clients?
All of these issues affect the bottom line (at proposal time or in the future) for the parking operations company, and they likely will affect the management fee proposed as well.
This “rule of thumb”
about management fees as a percent of gross revenue fell
by the wayside.
If the RFP provides the existing operations budget, it should not simply be the previous operator’s budget, which may or may not be accurate. It should be what the owner or the owner’s financial analyst has determined are the actual and correct operating costs after the budget has been audited and corrections made.
What is needed is a “zero-based budget” that is not built on the previous operator’s costs, but is created new and justified for the needs and costs.
Advice on Management Fees
There is no rhyme or reason to the management fees bid in the current parking market. Owners often feel that they are too high, and operators often believe that competing on the management fee becomes an unrealistic struggle to pay for the real costs.
The management fee bid by an individual company is a business decision (and a highly protected “trade secret” by operators). It is often related to other potential opportunities, the degree of business expansion possible, and other internal reasons.
Often, the management fee simply becomes the “what the market will accept” fee, and whatever is bid is negotiable.
The management fee should encompass all city, regional and corporate costs for off-site managerial, executive, and financial support, and the level of profit the operator expects to earn.
The decision about which company to hire should be based on all the variables listed above, with the proposed management fee being only one and not the most important variable. It should be compared among vendors, as should other desired characteristics.
Advice on Incentive Fees
The incentive fee should be based on the net operating income (NOI), as projected by the operator but reviewed and adjusted by the owner. For instance, if the NOI is calculated given a certain set of expenses, and some of those expenses do not occur (e.g., a new sweeper is not purchased), the NOI will be higher and not as projected. However, if the NOI is projected quarterly in advance by the operator and reviewed and approved by the owner, then an incentive fee can be calculated on an appropriate NOI figure and the operator rewarded for performing better than expected.
The incentive fee should not be in excess of the management fee, no matter how it is calculated.
It is a “bonus” for performance above the expected, based on benchmarks of revenue above what
was anticipated.
Increasing the NOI (while meeting the contract requirements) should be a goal shared by the operator and the owner, and aligned to achieve a better financial condition for both.
The management agreement should specify the operator’s responsibility to suggest improvements that will increase the NOI, ensuring that operations and customer service requirements are met.
All of the above items are controllable by the owner, based on the language used in the management agreement to engage the services of the operator. Owners should never accept the operator’s “Standard Form Management Agreement,” nor should they use an old agreement, a colleague’s agreement, or a procurement agreement for other goods as models.
Buying pencils is not the same as buying management expertise. Owners have to be smart about what is in the management agreement, how it protects them as owners, and how it protects their assets – physical and fiscal.
That, however, is the subject of another article
Barbara Chance, Ph.D., CEO of CHANCE Management Advisors. You can contact her at
Barbara.chance@chancemanagement.com.
Dennis L. Cunning, CAPP, CEO of DLC Consulting,
can be reached at dlcparking@gmail.com.
