Turning a Troubled Parking Asset Into a Success Story
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 is well-positioned in the market.
The facility, next to Conseco Fieldhouse (home of the Indiana Pacers NBA team) and a downtown mall, is owned by a New York firm that leased the garage to a local operator on a “triple net lease” (NNN) basis. In late 2009, the owner contracted with Next Parking to provide asset management services for its portfolio of parking properties (12 individual assets in eight markets).
Next Parking was 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.
Under terms of the NNN lease, the lessee was required to pay taxes, insurance and structural maintenance in addition to the fixed rent. There also was a requirement for additional percentage rent to be paid to the owner should certain revenue thresholds be met.
The owner was quite concerned with the financial position of the lessee. The lessee was defaulting on its financial obligations, including rent. Certain of the facility’s vendors communicated that they were not being paid for services. The owner was further concerned that the lessee would not have the funds to pay the upcoming tax bill, which would cause the garage to fall into tax default.
The vendor defaults were indicative of significant additional problems. When Next Parking performed the original site analysis, the garage had a number of issues, among others: filthiness (the facility had not been cleaned regularly), non-functioning elevators, 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 Parking worked with 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 from the premises.
A Time of Transition
Next Parking managed all aspects of the transition from the defaulting parking lessee to the new management firm. Concurrent to the notice and cure periods, Next began the process of finding a new parking operator. Through intensive review of local parking operating companies, Next selected the most credible local operator, Denison Parking.
Because of its strong local reputation, Denison was best-positioned to reverse the facility’s bad impression with consumers and vendors more quickly than any other operator. Next installed the new operator as the old operator was leaving, procuring administrative records and overseeing the personnel transition in a single night.
Next Parking advised ownership in structuring the agreement with the new operator. Because the occupancy and the facility had suffered so much degradation with the previous operator, a new lease could only be obtained from a new operator 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 lower revenue was contrary to the overall consulting goal – to raise occupancy and revenue to benefit the owner. Any revenue increases would have solely benefitted the operator.
Next’s solution was to recommend a management contract instead of a lease. In this arrangement, the owner pays the operator to provide management and staffing for the facility, and all 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 recommended building in an incentive fee, providing a percentage of all revenue over a certain dollar amount (prior year operating income) to the operator.
The first year of the new management agreement required a focus on asset stabilization and addressing of inefficiencies. With Denison handling the day-to-day operations, Next Parking worked with ownership to address the large-scale deferred maintenance issues.
Utilizing Denison’s strong existing vendor relationships, Next managed the long list of necessary improvements. The elevators were repaired. The cleaning team swept the garage; it took three sweepings to get the basement floor clean. Apologies were made to customers and vendors.
The next phase of work to be done on the garage is crucial structural repairs, which are projected to cost more than $200,000. Next Parking has worked with the vendor to provide financing; all payments will come out of the operating income for the facility. Overseeing and negotiating these aspects are parts of its service to clients.
The Maryland Street Garage in Indianapolis is back on track.
Operator failure can have long-term repercussions. The value of the garage from both income stream and comparables perspectives is dramatically affected when an operator defers maintenance and loses parkers. It can destroy the asset and destroy the business for anyone in the future. Ultimately, the owner will not be able to get replacement rent, which puts him in a situation to default on his loan.
Using Next Parking to consult has been extremely beneficial for ownership of the Maryland Street Garage. In 18 months, the facility has gone from a barely functioning, inefficient parking operation to a thriving, effective facility that operates at full occupancy.
The issues important to the customers – cleanliness, security and fully-functional operating systems – have been addressed. The issues important to the owner – structural integrity and financial viability – are well on their way. Next Parking has quickly stabilized the asset and maximized its value for the owner.
Mike Nichols, Executive VP of Next Parking, can be reached at email@example.com. Contact Rebekah Carlson, the company’s Director of Marketing, at firstname.lastname@example.org.
Q and A
Question: How much of a difference can an operator make?
Answer: Take the elevators in the Maryland Street Garage, for example. The old operator had not been paying the contract to upkeep the elevators for so long that when they stopped working, the vendor refused to come and repair them. The owner’s seven-story garage had no functioning elevator. When the new operator was installed, its excellent relationship with the elevator company enabled a repair technician to come and fix it the first day of operation – at a cost of only $5,000.
Question: Should you choose a lease or a management agreement?
Answer: It depends on your needs and the parking operator you select. It’s nice to have the predictable income stream a lease provides and not have to worry about the financial aspects of the operation on a day-to-day basis, but consider the trade-offs. A lease does not equal safety. The financial health of the lessee (whether they can absorb changes in business and continue paying rent) and their ability to stick to maintenance schedules (operational and structural) are crucial considerations. In a lease, you are giving up control of your asset, so make sure your lease includes appropriate defaults and “cure” periods – and that you have developed a plan for lessee default.
Question: How did the owner pay for all these improvements?
Answer: Through all the improvements in the past 18 months, the owner has not had to provide money from reserves or issue a capital call to its investors. As part of Next Parking’s services, it creatively structured financing and delayed billing options so that all of the cost for improvements has been absorbed into the operating funds. Even with these costs, the owner is still receiving the same amount annually as under the prior lease.
Article Abstract from December, 2011