How Appraisers Value Parking Facilities
By William “Ted” Anglyn
Real estate appraisers infrequently value parking structures. The result is that garages are often analyzed as special-use facilities. Appraisers tend to be conservative with special-use property valuations.
As such, for credible value indications, parking facility owners/operators need to be aware of how to address key value metrics when dealing with appraisers. Otherwise, the reported values may compromise an owner’s strategies for disposition, financing or compensation in an eminent domain case.
For property valuation, appraisers generally apply three traditional valuation approaches: Cost, Direct Sales Comparison and Income.
In the Cost Approach, an appraiser estimates the current cost
to replace improvements; this amount is then adjusted to reflect depreciation resulting from physical deterioration and obsolescence, and is added to the current land value. Specifically for parking structures, the Cost approach is used for under-construction or new facilities and rarely used for
The Direct Sales Comparison Approach is a primary valuation technique for many property types (particularly residential real estate). In this approach, similar properties recently sold or offered for sale in the market are analyzed. For parking facilities, however, reliable recent comparable sales are rare, and as such, this approach is typically not used.
The Income Approach is used most often to value income-producing properties via the direct capitalization approach. It is based on the principle of anticipation; appraisers will forecast the gross revenue that may be generated by the property, as well as the associated expenses to appropriately operate it. The resulting net income is then capitalized into a value indication.
As the Income Approach is the preferred valuation method for parking structures, this is the focus of this article.
For a parking structure income analysis, an appraiser has to forecast the revenue to be generated by the facility, the likely supply/demand (occupancy), the cost to operate the property, and how the market will convert that property’s income stream into a supportable value indication.
Most appraisers will request three years’ operating statements, the profit-and-loss summary for the current year, copies of lease contracts, lists of parking rates, a budget and a capital improvement summary. The appraiser also will need to survey market conditions to support revenue and expenses.
(N.B. Although not stressed by the authors, it is recommended that an independent audit of the revenue by a parking auditor be performed.. This is to confirm the actual versus reported revenue in the facility.)
Typically, an appraiser will request a schedule of the property’s current parking rates. These will then be compared with competitive parking structures to establish market rents.
If the existing rates are above market, the durability of the associated revenue may be at risk for declining, vacancy may be higher, or the applicable investor rates may be higher due to perceived risk. If the existing rates are below market, the appraiser will consider whether rates can be increased or possibly apply a lower investor rate for less risk associated with this income stream.
Revenue also will be affected by the type of parking space user (e.g., transient, special-event, contract/monthly users).
Parking Space Count: Most appraisers are diligent in counting actual parking spaces. This count needs to be confirmed with the appraiser for consistency with revenue forecasts.
Revenue Space Count: The appraiser should be notified if revenue is generated from handicap, visitor and temporary spaces (courier use, delivery truck, etc.). Parking spaces that do not generate rent will be excluded in the revenue forecast.
Other Revenue: This type of revenue may generate from many forms, but frequently includes signage, cell tower revenue, ground-floor space for office and retail rents, plus revenue from ancillary services including carwash and valet services.
Key points to share with the appraiser include historic occupancy levels by use (monthly, transient, event, etc.). If desired occupancy levels have not been achieved historically, strong support is needed to demonstrate whether improvement in the foreseeable future is reasonable. The forecasted occupancy level has a significant impact on value. Some studies have advocated optimum occupancy is achieved at 85%. The forecasted occupancy level has a significant impact on value.
Accumulation Studies: Experienced operators often perform accumulation studies to support facility usage at various times of the day. These results not only document and support optimum pricing strategies, but also may provide valuable insight for the appraiser as to management effectiveness to maximize revenue. Sharing these studies with the appraiser should enhance credibility in the revenue forecast.
Turnover: A property’s turnover rate involves an analysis of the monthly parking spaces that can be oversold and will be influenced by the tenancy. A particular property’s oversell rate may be 10% to 20% higher due to tenant issues and can impact a property’s overall revenue forecast. Some properties have tenant use that is heavily influenced by business travel. If overselling is significant, explaining why a property is able to successfully oversell spaces is information that could positively affect value.
Appraisers will next forecast the appropriate operating costs. Parking facility costs vary based on a myriad of reasons, including type of operation, geographic location (labor costs/weather considerations), size of facility and management considerations. Other considerations include, but are not limited to, varying utility cost structure, security requirements and property tax practices.
Most appraisers will request a historical breakdown of expenses, plus a budget. If atypical variations have occurred, be prepared to explain why an expense was unusually low or high. Clarity should preclude inappropriate expense conclusions.
Of note, parking facility expenses are often lower than other property types, so detailed guidance will likely preclude an appraiser from making inappropriate comparisons to higher property type expense patterns.
Personnel: These type of costs can vary dramatically by region and by level of services provided. Attendant parking facilities are common. More intense personnel operations are valet garages. Valet garages typically have higher personnel expenses, but depending on the location and the services demanded, may be the preferred option.
Personnel costs may include administration costs, as well as uniforms. Key metrics to provide the appraiser are the appropriate personnel with specifics on typical wages/benefits and associated costs.
Management: These expenses are typically tied to a percentage of collected income. This expense tends to vary more than most operating expenses. The management fee should be commensurate with the level of its involvement.
Repairs and Maintenance: These expenses will be influenced by the age of the parking facility and equipment, usage and climate conditions. Maintenance costs tend to be less on newer facilities because both the structure and equipment are relatively new.
Utilities: Typically, utility expenses are low for parking facilities, particularly for water and sewer. Electricity expenses will be influenced by the type of facility and the hours of operation. Also, ownership initiatives to install energy efficient lighting might provide lower utility costs. Specific energy cost control measures and their impact should be shared with the appraiser.
Security: Security cost forecasts will include all expenses associated with security staff assigned to the facility. If improvements have been made to address this expense, such enhancements (e.g., installation of improved lighting, security cameras, etc.) should be shared with the appraiser.
Fixed Expenses: Property taxes and insurance are standard fixed expenses for most property types. Depending on the municipality, the assessed value may be based on the cost approach, because many property tax appraisers rely on this technique due to limited sales and income data.
Insurance: Property insurance expenses include fire and extended coverage and owner’s liability coverage. Significant savings may be realized from the use of a blanket policy that covers numerous properties.
Reserves: Appraisers often forecast an expense for those short-lived items at a property (e.g., items that have an economic life shorter than the actual building/structure). This category is referred to as reserves for replacements. From a practical perspective, property owners may not provide a separate account for reserves. The overall reserve estimate for parking structures should be tempered by the fact that most are pre-cast concrete with long-term lives and typically fewer reserves are appropriate for parking structures vs. other property types.
Total Expense Forecast
For parking structures/facilities, the expense analysis is most often based on an expense per space. These expenses are then compared with and contrasted to other expense comparables for establishing reasonableness.
Experienced property operators may benefit sharing expense comparable data with the appraiser, obviously with the caveat that the information be kept confidential.
Deducting the total expense forecast from the associated revenue forecast provides a net operating income estimate. This figure is then converted to value based on applying an overall rate to that number.
Parking facility valuations are uncommon for appraisers. As such, owners and operators need to be aware of influences that will affect a property’s value. With proper documentation and analysis, the appraisal should provide credible results.
William “Ted” Anglyn, MAI, CCIM, CRE, is president of Anglyn Property Advisors, LLC, a Commercial Real Estate valuation and consulting firm. Contact him at firstname.lastname@example.org.
Article Abstract from October, 2013