The Consultant’s Role in Parking Privatization

November, 2009

With the recent financial crisis, many cities and institutions (universities, airports, hospitals, etc.) are looking for creative ways to generate revenue to pay off debt, to fund projects and to pay pension liabilities. This has led some to consider privatizing their parking systems over a defined lease period in exchange for periodic or an upfront lump sum payment.
Privatization not only provides the opportunity for needed funds, it also allows cities and institutions to get out of the parking business and have a specialized and expert private operator manage the system.
In the process of privatizing a parking system, consultants are brought in to advise either the seller or the buyer. Whether serving the buyer (investment firm/parking operator) or seller (city or institution), a parking consultant serves a crucial role in the process, which is to determine the overall value of the parking system over the course of the lease period.
This financial analysis is performed before any deal is agreed upon, and is essential to help prevent the buyer from overpaying or the seller from accepting a low offer. In performing a financial assessment of a parking system, a parking consultant needs to consider a few major issues. These include future revenue potential, capital expenses and necessary upgrades in parking technology for the system.
In determining the future revenue potential, it is essential to understand the market factors that can affect the system’s future parking demand.
For any city or institution, there are a number of unique factors to consider, such as population/employment growth, economic factors (GDP, median income, etc.), journey to work data, alternative modes of transportation, existing utilization of the parking system, available capacity of the parking system, future development projects and the competing parking market.
Another major factor related to the future revenue potential is parking rates. The consultant should perform a parking rate market study to assess the capacity to raise rates. If a consultant is advising the seller, such a study will help determine how the city or institution’s parking rates compare with similar cities. This can be used to develop and justify a fair future parking rate schedule.
Directly related to an increase in parking rates is an “elasticity factor,” which is the change in demand correlated with the increase in price. A limited number of studies have been done that assess the elasticity of demand factor related to parking rate increases.
However, the best method to determine the elasticity factor for a parking system is to assess the decrease in parking demand between prior years where the parking rates were increased and no other significant changes were implemented (e.g., increase in parking inventory, changes in hours of operation, large or small population changes, etc.). This would provide a controlled example to use in determining the unique elasticity of demand factor associated to the parking system.
Another potential increase in revenue is from the implementation of enhanced revenue collection equipment. Whether for on-street or off-street parking, such equipment can improve the accounting program, provide tighter security controls and permit multiple payment options.
For an on-street parking system, the implementation of pay-and-display equipment provides revenue enhancements by increasing the on-street capacity and eliminating piggybacking (parking on the last parker’s extra time). Installation of updated revenue control equipment is advantageous to both seller and buyer.
The seller receives a lump sum payment based on the assumption that the parking system is operated with the implementation of best parking practices and enhanced revenue equipment. The buyer is able to generate extra revenue from the parking system with enhanced revenue control equipment.
Also, the installation of new revenue control equipment allows the seller to maximize the concession payment received and to inherit a parking system with upgraded revenue control technology when the lease period has expired.
Assessing the revenue potential of a parking system is only half of the equation. The parking consultant also needs to perform a conditions assessment to determine the future capital costs associated with maintaining the physical condition of the parking assets (e.g., structural, architectural, mechanical, electrical, fire protection systems, etc.).
By privatizing a parking system, a city or institution is able to avoid capital repairs to the system’s infrastructure (e.g., garages, parking lots, meters, etc.) and instead place that financial responsibility on the investment firm/private operator (buyer).
The city of Chicago, with privatization of its Grant Park/Millennium Park Garages, received $563 million and was able to avoid capital repairs to the four garages. In addition, significant costs could be anticipated for on-going maintenance and repair of the other parking facilities, even though they had been recently constructed and/or renovated.
This would have become a significant financial burden on the city to maintain these garages. By leasing the garages, it placed the repair obligations on the private operator and freed up capital for other projects.
For either a city/institution or investment firm to become involved in the privatization of a parking system, it is important that each party perform due diligence to assess the system’s revenue potential, future capital expenses and necessary technology upgrades. A city or institution does not want to be later accused of selling its parking assets well under value and shortchanging its residents or employees.
Understanding the full revenue potential of the parking system is necessary for a city or institution to ensure that it is being offered a fair price. As with any financial study, it should be the parking consultant’s goal to provide its client (buyer or seller) with the most accurate financial assessment, which takes into account the many issues, factors and nuances related to each individual parking system.
David Taxman, a Parking and Traffic Planner at Desman Associates, specializes in the financial analysis of parking
privatization agreements. He can be contacted via e-mail at dtaxman@desman.com.