Lease vs. Management: Understanding the Differences
August 10, 2020
I discussed in a previous article the benefits of executing a Parking Operator Request for Proposals process. Next, how does the property owner or manager know how to structure an agreement with a parking company? This article provides general guidance on this subject.
Parking Management Agreements vs.
Parking Lease Agreements
Two frequently employed forms of agreement between a property owner or manager (client) and a commercial parking operator are Parking Management Agreements and Parking Lease Agreements. Within those two general categories are many subsets, some which cross over from one agreement layout to another (lease agreements with percent rent components, management agreements with minimum payment requirements, etc.) This article compares the primary characteristics of each general agreement.
Parking Management Agreements
A Parking Management Agreement (“PMA”) is an arrangement in which the parking operator manages a parking facility or multiple facilities, reporting to a property owner or manager (“client”). Typically, the operator is compensated through a base management fee and/or a revenue (or net operating income)-based incentive management fee plus agreed-upon reimbursable expenses. The operator submits to the client annual budgets and detailed monthly financial statements, generally including all pertinent detail and supporting documents that require client’s “final say” in the operations of the facility.
Execution of a PMA allows the owner to maintain day-to-day control over all desired aspects of the
Parking facility owners and managers often execute PMAs when the client wants the flexibility to change operators, or to take the operation in-house at their discretion, and many PMAs include termination for convenience clauses. Below are some reasons why:
• Client desires day-to-day involvement in the parking operation, recognizing that the property tenant and visitor experience often begins and ends with the parking facility, often directly affecting the overall success of the development.
• Property does not require the ability to borrow against the value of a guaranteed long-term lease with a credit-worthy parking operator.
• Client requires in-depth visibility to parking operation’s profit/loss reporting and actively tracks the facility’s financial performance potential.
• In the case of a newly developed facility with many potential revenue and expense drivers, a PMA may allow the client and the parking operator to learn from each other as parking utilization ramps up, thus being able to make informed collective decisions relating to the parking facility, while maintaining the flexibility to change course based on evolving conditions.
• Client is testing and evaluating their existing parking agreement and considering an income-maximizing lease agreement in the future but requires a better understanding of actual performance to evaluate a future rent offer.
Examples often include commercial office buildings, government entities, universities, hospitals, hotels, sports venues, festivals and retail centers.
PARKING Lease Agreements
A parking lease agreement is an arrangement in which a parking operator rents a parking facility or facilities from a property owner or manager. The operator in this scenario is a tenant, and the client is the landlord. The operator reports to the client based on items agreed to in the lease document only. The operator often has “final say” in decisions relating to the subject operation. The operator of a leased facility may not be required to submit to the client annual budgets or detailed monthly financial statements. Therefore, the client typically forfeits visibility to agreement-specific aspects of the parking operation’s financial performance, having given up access to information in return for a base rental payment and/or rent based on a percentage of revenue generated. Lease agreements tend to be longer-term than parking management agreements, and significant liabilities for repairs and property taxes may be transferred to the operator in the process.
Property owners and managers often enter into lease agreements when:
• Client does not desire day-to-day involvement in parking operation, choosing to focus instead on the operation of its core business, such as the management of
a commercial building which the subject parking
• Project needs the ability to borrow against a long-term guaranteed lease with a credit-worthy parking operator.
• Client does not require in-depth visibility to parking operation’s profit or loss reporting.
• Client desires predictable monthly base rental
payment (plus percentage of revenue over a threshold in some cases).
• Client may want to transfer liability for capital repairs and property taxes to a responsible operator.
• Client does not require the ability to terminate the operator’s agreement for convenience.
Examples include free-standing parking garages or surface lots, and facilities within office buildings and condominium, cooperative or rental residential towers.
Management or lease?
A well-constructed lease agreement that provides maximum financial value to the client often transfers much of the go-forward decision-making process and risk to the tenant/parking operator. However, this is a trade-off, as the transfer of risk is generally accompanied by some loss of day-to-day control. Execution of a PMA allows the owner to maintain day-to-day control over all desired aspects of the parking operation and provides the owner flexibility to change parking operations strategies without waiting until a long-term lease is nearing its expiration date. The decision to execute a PMA or a Lease, perhaps one and then the other, or even a hybrid agreement with elements of each, is based on multiple market factors and property owner priorities.
Will Rhodin can be reached at WRhodin@walkerconsultants.com