Garage income fell 31% and the exit ended up being a land sale

Closed out an LP position last quarter and it worked, though not for any reason in the original deck.

Deal was a 300-space structured garage in a mid-size downtown, three blocks from a stadium and inside a district of mid-rise offices. Entered at $12.4M total capitalization, $8.1M debt, my check was $175k. Pro forma leaned on monthly contract parking from the office buildings, roughly 62% of revenue, with transient on event nights as the upside.

What happened to the income: monthly contracts fell 31% over the hold as tenants in two of the four feeder buildings went part-time in office. Event transient held up and even grew a bit, and rates went up, so total revenue only fell about 14%. NOI fell more than that because insurance on the structure roughly doubled and the deck reserve came due for real.

The part that nearly broke it. The debt matured in year four. The refinance was sized off trailing twelve months NOI, which was the worst twelve months of the hold, and the quote came in about $1.4M short of the payoff. Sponsor called capital, $2.2M across the LPs. I funded $31k. Two LPs didn't and got diluted per the agreement. Distributions were paused for the two years before that and didn't resume.

The exit was a residential developer buying the site for a mid-rise, closed at $16.9M against $12.4M in, and the garage is coming down. Nothing about the parking business drove that price. It was 0.9 acres of entitled-adjacent downtown land with a structure the buyer valued at less than zero because demolition costs money.

What I'd keep: I read the capital call and dilution provisions before I signed, so when the call came I knew exactly what not funding would cost me and could decide in a day instead of a week. What I'd change: I underwrote the income and treated the land as a story. It was the reverse.

3 replies

3laurenkim53Passive

So the deal that was sold to you failed and the dirt bailed you out. Which is fine, and it's a better outcome than most, but it makes me wonder what the sponsor would have done if no residential developer had shown up. You'd have a garage with 31% less contract revenue, a fresh capital call, and a deck needing money. Did anyone in the LP group ever get told what plan B was?

1bmoreno23AB1B

Why would a buyer pay more for the site than the whole garage deal was worth if he's tearing the garage down? I think I'm missing something basic about how land gets valued separately from what's sitting on it.

1Rena Expert

@ember the two are valued by different methods and the higher one usually sets the price.

An income approach values the garage on what it earns, so NOI divided by a cap rate. A land residual approach works backward from what a developer could build: estimate the finished value of the project he can put there, subtract construction, soft costs, financing, demolition, and his required profit, and whatever is left is what he can pay for the land. When a downtown site supports a mid-rise, that residual can exceed the income value of a low-intensity use like parking by a wide margin, and the existing structure becomes a cost line in his budget rather than an asset.

That is the redevelopment optionality people describe in parking. It sets a floor under the asset that has little to do with how many cars park there. It also has real conditions attached. It depends on the site being zoned or rezonable for the denser use, on a developer with capital being active in that market at that moment, and on the finished-product economics penciling. Change any of those and the land residual can fall below the income value, in which case you own a garage and only a garage.

@hollow names the risk correctly. Between the income falling and the land bid arriving, the position had to survive a maturity and a capital call, and that survival is a function of the loan terms and the equity's willingness to fund. Nobody should assume a redevelopment bid appears on schedule, and nobody should treat this outcome as a return anyone can expect. Loan sizing standards and appetite change year to year, so any specific refinance assumption belongs in writing from a lender.

Garage income fell 31% and the exit ended up being a land sale

3 replies