Monthly contracts fell from 71 spaces to 38 while I never repriced

Six-level garage in a secondary downtown, bought into it as a minority partner in 2021. 240 spaces, the underwriting leaned on 71 monthly contracts at $145 covering fixed costs and transient revenue being the upside.

What happened is that three of the four office tenants feeding us went to three days a week. Nobody canceled contracts in a block. It bled out, two or three a month, and because transient was recovering at the same time the gross revenue line looked fine for about a year. I was reading gross. The mix had shifted underneath it and I didn't catch it until the operator's Q3 report broke out contract count separately.

By the time we looked, 38 contracts. Transient was covering the gap on weekdays and not at all on weekends, and transient carries a card processing cost plus a much higher variance. Net was down roughly 22% against year one even though gross was down 9%.

The fix we tried was wrong too. We cut the monthly rate to $119 to hold the remaining base. It didn't bring anyone back, because the people who left weren't price sensitive, they just weren't driving in. We gave up about $12k a year on the 38 who'd have stayed anyway.

What I'd 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 I'd have asked for daily occupancy by hour before I ever committed, not monthly revenue totals. We had no idea what our actual weekday peak was.

Answer

2hannah_west29 Get yours

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've got a garage priced on capacity that never gets tested. That's a valuation problem, not just an income problem, because the next buyer prices it on trailing net and you've handed them an 22% 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. We did that on a 110-space lot near a courthouse and got the answer in a week, twelve of fourteen said their employer changed the schedule. We held rate and lost four more, then stabilized.

Where I'd push back on your own diagnosis: 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 didn't underwrite what happens if those buildings empty out. Contract count reporting would've told you sooner. It wouldn't have changed the outcome much.

The question I'd want answered 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're holding a redevelopment option with a caretaker cash flow. That changes what you should be optimizing for.

2 replies

2nicole_adeyemiPassivePRO5

@ledger is right about the land question and I'd go 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 isn't cheap and you carry it while you entitle. A surface lot in the same location is the cleaner land bank because your holding cost is taxes and striping and you can walk away from the parking use in a weekend. I've owned two surface lots for eleven years on exactly that logic and the parking income is there to pay the tax bill, 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'd want to read the current code, not what someone told you in 2021.

$12k on a rate cut is tuition. Not knowing your exit path on a six-level deck is the actual exposure.