Price the parking income or the dirt, and what if they disagree?

Question

Looking at two deals in the same mid-size downtown and they've forced a question I can't resolve cleanly.

Deal A: 180-space surface lot, two blocks from a hospital campus. Trailing net around $310k. Ask is $4.6m, so roughly a 6.7 cap on parking income. Land is about 1.4 acres and comparable dirt in that submarket has traded around $2.1m to $2.4m an acre for multifamily sites, call it $3.0m to $3.4m for the parcel. So the parking income supports a price meaningfully above land value.

Deal B: 96-space surface lot, four blocks further out, weaker demand. Trailing net around $92k. Ask is $3.9m. That's a 2.4 cap on parking, absurd on income. But the parcel is 0.9 acres directly across from a station platform and the seller's whole pitch is entitlement. Land comps there are thin and he's arguing $4.3m plus.

The two deals are asking me to use different valuation methods and I don't think you can hold both in the same portfolio without lying to yourself about one of them.

The case for pricing on income: it's the only number you can verify. Parking receipts are real, dirt comps in a thin submarket are stories. If you buy on land value you're buying an opinion and paying a negative carry to hold it.

The case for pricing on land: the chapter's own point is that redevelopment optionality is often the actual asset. If you only ever buy on a parking cap you'll never own the parcels that matter, because those are exactly the ones where somebody else already priced the dirt.

What I keep circling is that Deal A pays me to wait and Deal B charges me to wait, and I'm not sure that's the same risk with a different sign.

laurenkim53 · Accepted Answer

The thing that decides this for me is the hospital, not the math.

Deal A's income comes from a campus that can't relocate and generates 24 hour demand from shift workers, patients, and visitors. That's about as remote-work-proof as parking gets. Deal B's income comes from commuters walking to a platform, which is exactly the demand that's been reshuffling. So you've got the more durable income stream also being the one that prices cheaper, which is unusual and worth taking seriously.

But I'd separate two things you're mixing. Deal B's land value doesn't depend on the parking demand holding up. If anything it depends on the opposite, that the station area gets denser and people stop driving. So the seller's story isn't crazy, he's just selling you a bet on the thing that would destroy his own income line.

On @arbor's point about failure rates, that's the number I'd chase hardest. In small markets I look at, entitlement near transit sounds inevitable and takes eleven years. What kills these isn't rejection, it's a council that never puts it on the agenda.

So I'd buy Deal A on income and treat the dirt as something I got for free, and I'd only touch Deal B if I could carry it indefinitely with no timeline in my head at all. If you need Deal B to resolve, don't buy Deal B.

diane_kowalski · Answer

Deal B isn't a parking deal. Calling it one is what's making the comparison hard.

It's an entitlement play with a 2.4% coupon attached, and you should underwrite it the way you'd underwrite any pre-entitlement land buy. What's the current zoning, what's the target, what's the approval timeline in that jurisdiction, what's the failure rate on similar applications there over the last five years, and what does it cost you per year to be wrong. That last one you can compute exactly. $92k of net against $3.9m of basis plus taxes and insurance means you're negative carry from day one unless you're all cash and even then you've got opportunity cost.

Deal A is the opposite shape. You get paid 6.7 on verifiable receipts and the dirt is a free option that's currently worth less than what you're paying, which means you're paying nothing for it. That's a clean structure.

Where I'd argue with your framing: you said you can't hold both without lying to yourself. You can. They're different sleeves. What you can't do is use Deal A's cash flow to justify Deal B's carry and call the pair diversified.

tashaford30 · Answer

@hollow's last line is the one I'm writing down. If you need it to resolve, don't buy it.

One thing I'd add to the Deal A column. 6.7 on trailing net is only 6.7 if that net holds, and hospital-adjacent lots sometimes carry a big contract with the hospital itself. If one employer is 40% of your monthly base you don't have 180 spaces, you have one tenant. @meridian have you seen the contract breakdown?

jordan_ellis2 · Answer

Voted for the lower of the two and I know that's the coward's answer.

Six months of looking and the pattern I keep hitting is that the deals where the seller has a story are the ones that don't pencil, and Deal B is entirely story. $3.9m for $92k of income is someone asking you to pay today for an approval that hasn't happened.

Though @hollow's framing about the seller betting against his own income line is genuinely the smartest thing in this thread and I hadn't thought about it that way at all.

Price the parking income or the dirt, and what if they disagree?

4 replies