Mark is upset because there is a lawsuit going on in Chicago against the firm that recommended that the city proceed with their deal to lease their on street meters to Morgan Stanley et al for a billion plus. The suit alleges that William Blair and Co way underestimated the numbers and the city got the shaft.
Mark comments:
They’re leaving no stone unturned in Chicago. Does this mean that inaccurate budget projections should be subject to legal action? Could “out perform” become a bad thing
This is a little different than a sales manager who projects a billion in sales and then makes a billion five. He is a hero.
However I believe this case is like the calling in an expert to appraise your artwork for a million, selling it for a million one, and then watching the person who bought it turn around and sell it for five million. You appraiser was slightly off – and the law suit says that William Blair was off a bunch. You can read about the suit here.
Let me parse this controversy a bit. The city of Chicago had been taking in about $20 million a year on its meters. In the first year, Morgan Stanley et al took in $73 million. Assuming William Blair based their projections in part on the $20 mil number, was there any way they could have forseen a nearly four time increase in the first year. Except – almost any parking auditor will tell you that many cities are notorious in their on street parking revenue collection. Many (actually about 90%) of all citations are never written, a ton more are never collected, and of course if people don’t think they are going to be caught they won’t feed the meter.
Chicago increased it’s rates. Morgan Stanley installed new equipment to collect fees (credit cards and all) and of course, has been cranking up the enforcement. After all, that’s what good business does.
What the people who feel litigious in Chicago should be doing is looking at the city. Remember they were running the parking before a professional parking organization took over.
I discussed this problem a couple of years back when this was all coming down. The city can’t use too high a number in its projections for future income because someone will take a close look at what has been happening in the past and will wonder why that amount of money couldn’t be collected by a parking department that was run by the city government. So the numbers have to be in line with history, not with what is possible.
Maybe the aldermen and hizzonner took the best deal they could get because they knew, and probably never discussed, that the city simply couldn’t handle parking enforcement and collection. Hey – if you take $20 million and multiply it by 75 (length of the lease) you get 1.5 billion. Figuring the cost of money, and the expense of collecting, Morgan Stanley had to figure they would have to do a little better just to break even.
However they keep going at the rate they did in the first year, they will knock down 5.7 billion over the 75 years of the lease. And of course, and time goes on and rates go up, They will most likely do even better.
In some defense of William Blair, who (outside the parking industry) could believe that the numbers would increase nearly four times in one year? I’m fairly sure that Morgan Stanley’s consultants had a pretty good idea of just how much money was on the table. And good for them.
Caveat Venditor – or in this case, let the seller beware. You have to know what it’s worth before you set the price and if you don’t, you had better be sure you find out.
JVH
One Response
What something is worth and what someone is willing to pay for it are not necessarily the same thing. When you evaluate what you are willing to pay you factor in risk, the cost of money and all the potential negatives that could impact the value. When you are evaluating the worth of something you look at all the potential positives so as to maximize the value.
Chicago needed cash and it seems like this deal was based more on what someone was willing to pay versus the “potential” long term value. My guess is that over time the true “value” of this deal will be somewhere between what the two sides came up with, unless of course this becomes the only parking deal in history that never experiences any kind of downturn.