Parking Contracts: The Good, The Bad and The Really Ugly

Choosing the right type of business relationship with a parking operator is even more important than choosing which operator should run your parking facility.

Why? Because the terms, conditions, and expectations of the business arrangement (in the form of a management contract or lease agreement) are clearly set out in advance between the property owner and parking vendor. For example, the assumption of operating expenses for the facility such as cleaning, labor, parking equipment, signage or marketing all depends on which type of contract is put in place.

A number of factors play a key role in determining the “right” business relationship with a parking vendor such as the daily transient ratio, state of the parking equipment, tenant parking entitlements and customer service. However, revenue projections versus stable income returns remain the two most significant deciding factors for property owners when deciding between a management deal or lease of parking operations.

Below, my insights on “The Good, The Bad and The Really Ugly” for each:

Lease Agreements

The good: hands-free

Under a lease agreement, the parking operator is completely responsible for all of the daily management, operations, and expenses associated with the parking facility. There is no need for the property owner to dedicate nearly as many resources to overseeing the parking operation versus with a management deal. Instead, the property owner can expect a steady monthly rent check from the parking operator.

In addition, property owners can also benefit from what is known as a “Revenue Share” of parking revenue. A “Revenue Share” represents a percentage of monthly revenue that a property owner can expect to receive when the parking operator surpasses a predetermined threshold of revenue generated per month.

Tip: Always negotiate a Revenue Share with a parking operator in a Lease agreement. This will ensure that the property owner benefits from the parking operator’s success in growing the facility’s annual revenue.

The bad: low offers

Under a lease agreement, the parking operator is essentially “renting” the parking facility from the owner and providing a guaranteed monthly revenue payment in return. Unfortunately, many property owners do not seek advice from an independent parking professional or parking consultant to assess how much more revenue can be generated per month. Instead, many property owners accept the initial offer from a parking operator which seem like a great deal at first, but in comparison to what the facility will be generating in 1-3 years, it is usually well below market value.

Always keep in mind, a parking operator’s primary goal under a lease agreement is to maximize their profits over and above the monthly amount being paid to the property owner.

Tip: Make sure you know the true revenue potential of your parking facility (1-5 years) before negotiating the monthly rent with a parking operator.

The really ugly: elimination of services

Point blank, don’t expect the same level of customer service or cleanliness in a leased parking facility versus a managed lot. Because all of the operating expenses in a lease agreement fall under the responsibility of the parking operator, labor-intensive services such as daily cleaning or customer assistance are usually the first items to be cut by the parking operator as it directly impacts their bottom line.

Unfortunately, most property owners don’t even find out what services have been cut until after the parking operator assumes the lease of the facility. Have you ever parked in a really dirty or dank parking facility? Chances are, it’s being leased by a parking operator.

Tip: Be wary of what services are promised by the parking operator in a lease agreement, and always ensure that the hours of service for such items as daily cleaning or customer assistance are clearly set out in advance within any parking agreement Lease.

Management Agreements

The good: oversight and control

Depending on the parking facility, some property owners dedicate a lot of time and resources to ensure that the image of their property and parking experience exceeds both tenant and daily parker expectations. After all, a parking facility is often the first and last impression of a visitor to a property. Under a management agreement, the property owner can direct a parking operator on where to spend additional resources and what areas of operations require special attention. For example, even though the vast majority of parking facilities are fully automated, some property owners still want additional customer service staff on site to handle parker complaints, questions or to assist in making payments.

The bad: “no skin in the game”

Under a management contract, the parking operator does just that…manage. It’s often said that they don’t have “any skin in the game”  when it comes to maximizing revenue or improving operations within a management agreement. The reality is that operators only collect a monthly management fee to oversee the daily operations of the parkade, while expensing all other services and fees back to the property owner.

When it comes to RFP proposals, parking operators will often forecast huge revenue gains and moderate expenses under a management agreement. Unfortunately, because they don’t have any real incentive (e.g. percentage of annual facility revenues) to capitalize on, an operator’s efforts in maximizing parking revenue doesn’t always take priority within a management agreement.

Tip: Always negotiate revenue targets with incentives for the parking operator within a management agreement. If they can directly benefit from the facility’s success, a parking operator will place more emphasis on maximizing revenues for the owner.

The really ugly: padded expenses

If you really think about it, how can any parking operator sustain or grow its business by only charging $1,000- $2,000/month in management fees? Simply put, they can’t. Under a management agreement, the parking operator charges back the property owner for various operational services such as labor, supplies, insurance, cleaning etc. The reality is that almost all of these products and service fees are “padded” to generate additional revenue for the parking operator.

I can remember reviewing a client’s management agreement whereby the incumbent parking operator was overcharging the property owner by more $4,000/month for facility insurance over the last 5 years. The client had no idea that insurance fees were supposed to be around $400/month for a facility of that size.

Final Tip: Parking operators often charge for vague and ambiguous items such as “Administrative Fees” or “Processing Fees”. Always double check and confirm what expenses the parking operator is charging for, and always ask for multiple independent quotes as a reference, especially when it comes to power washing or another facility cleaning.

 

Ross_Frangos_headshotAbout the author:

Ross Frangos is the President and Founder of AuditPark Services Inc., a parking consulting firm based in Toronto ON. He specializes in Requests for Proposal, parking documents and assisting his clients in the procurement of parking management services.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s