Monthly parking contracts that fell from 71 to 38 while nobody repriced

A case worth studying because the loss hides inside a healthy looking gross line for a year. Six level garage in a secondary downtown, 240 spaces, with a minority partner buying in during 2021. The underwriting leans on 71 monthly contracts at $145 covering fixed costs, with transient revenue as the upside. What happens is that three of the four office tenants feeding the garage go to three days a week. Nobody cancels contracts in a block. It bleeds out, two or three a month, and because transient is recovering at the same time the gross revenue line looks fine for about a year. Everyone is reading gross. The mix has shifted underneath it, and nobody catches it until the operator's Q3 report breaks out contract count separately. By the time anyone looks, 38 contracts. Transient is covering the gap on weekdays and not at all on weekends, and transient carries a card processing cost plus a much higher variance. Net is down roughly 22 percent against year one even though gross is down 9. The fix attempted is wrong too. The partners cut the monthly rate to $119 to hold the remaining base. It brings nobody back, because the people who left had stopped driving in, and no price changes that. The cut gives up about $12k a year on the 38 who would have stayed anyway. What to do differently: track contract count as its own line from month one and treat any three month decline as a repricing event, upward or downward depending on what the occupancy data says. And ask for daily occupancy by hour before ever committing, rather than monthly revenue totals. Nobody in that partnership knew what the actual weekday peak was.

tylerbrooks9 AO1APRO 10

Answer

hannah_west29 SS2APRO 16

The $12k on the rate cut is the small loss here. The bigger one is that you were paying for 240 spaces of structure and using maybe 90 at peak. Run the numbers the other way. If your weekday peak was 90 and your monthly base is 38, you have a garage priced on capacity that never gets tested. That is a valuation problem on top of an income problem, because the next buyer prices it on trailing net and you have handed them a 22 percent haircut plus a contract count trend line that points down. On the repricing: cutting to hold a base only works if departures are price driven. You can test that cheaply before you cut. Call the ones who canceled. Ten calls tells you whether it was cost or commuting. Take a 110-space lot near a courthouse as the illustration: an operator makes those calls and twelve of fourteen say their employer changed the schedule. That operator holds rate and loses four more contracts. From there the count stabilizes, which is the usual shape when the cause is scheduling. Where your own diagnosis deserves pushback: you say the mistake was reading gross. The mistake was earlier. You bought a garage whose income depended on the commute pattern of four office buildings and did not underwrite what happens if those buildings empty out. Contract count reporting would have told you sooner. It would not have changed the outcome much. The question worth answering on your asset now is what the land is worth on its own, cleared. If that number is close to your basis, the income story is a rounding error and you are holding a redevelopment option with a caretaker cash flow. That changes what you should be optimizing for.

hannah_west29 SS2APRO 16

2 replies

nicole_adeyemi SS3APRO 13

@hannah_west29 is right about the land question and it deserves going further, that should have been the first page of the underwriting. Six levels of structure in a secondary downtown is an awkward asset to redevelop. Demolition on a concrete deck is expensive and you carry the asset while you entitle. A surface lot in the same location is the cleaner land bank because the holding cost is taxes and striping and you can walk away from the parking use in a weekend. Operators who land bank surface lots on exactly that logic treat the parking income as the thing that pays the tax bill and nothing more. One more piece worth digging into: check what your zoning actually permits by right versus what needs a hearing, and check whether the city has minimum parking requirements that make your garage useful to a neighboring developer. In a lot of jurisdictions those minimums have been cut back in the last few years, which lowers what an adjacent project would pay you for spaces. That varies city by city and you would want to read the current code rather than rely on what someone said in 2021. $12k on a rate cut is tuition. Not knowing your exit path on a six-level deck is the actual exposure.

nicole_adeyemi SS3APRO 13

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