“An Elegant Solution”: P3: The Seller


“An Elegant Solution”: P3: The Seller

Parking Today recently caught up with Dana Levenson, a former CFO for the city of Chicago and now Managing Director/Head of North American Infrastructure for the Royal Bank of Scotland’s Global Banking & Markets.
RBS is one of the world’s leaders in infrastructure sales and leases, working with investment groups such as Morgan Stanley, the winner in the city’s parking P3 deal. It provides investment advice or financing to clients considering such transactions (but not both to avoid conflicts of interest).
During Levenson’s time with the city, cash-strapped Chicago undertook the “sale” of the Chicago Skyway, which netted $1.83 billion, and the parking system, which netted $563 million. Both “sales” – technically, long-term concession agreements – were inked in 2006. The city benefited from the worldwide interest in revenue-producing public-private partnerships.
PT: What were the motivations behind the lease of the parking garages?
Levenson: We felt, based on our experience with the long-term lease of the Chicago Skyway – where we discovered the market for infrastructure assets was so strong – that perhaps there were other assets within the portfolio of the city of Chicago that would be appropriate for long-term lease in exchange for an upfront cash payment along the same lines. …
One of the ideas we had was the parking garage at Millennium Park, and we vetted that further and figured it would actually be more advantageous to [consider] a parking garage system, not only under Millennium Park but Grant Park as well. The possibilities we thought were pretty good that we would have a similar experience [to what] we had with the Chicago Skyway, and indeed we did.
Parking garages, frankly, were not a core competency of the city of Chicago. … Now they will be managed much more professionally by an owner who is far more incentivized to make sure that the returns are consistent with his other investments elsewhere.
PT: It was common knowledge that the city didn’t have a lot of capital to pour into some of the older, more deteriorated facilities. Was deferred maintenance a reason to do the deal?
Levenson: Sure. Clearly, we wanted to avoid that inevitable cost of repairing or rebuilding, especially the East Monroe Street Garage. But all that had an impact on a price that a bidder would pay. Everything you write into a concession agreement is going to have a positive or negative impact on the price paid upfront.
They are going to factor that into their cash flow and they are going to do their analysis of what their return could be to them and their investors. For example, on the Chicago Skyway, we capped the increase that the new lessee could raise tolls by. … For the parking garages, we thought the best thing, based upon our economic experience with that particular kind of asset, would be not to cap any of the parking fee increases and leave it to the market.
PT: Chicago can be a fractious town with a lot of vested interests. How did you gain agreement from among all the various stakeholders?
Levenson: When an investor is waving a large check in front of you, it’s going to have some influence. The stakeholders in the parking garages were the parkers certainly, but it’s not like it was a monopoly; they had other choices and they still do. The key stakeholder was the city of Chicago. The city was on the hook for the debt service [limited revenue bond with GO backing] payments that the garage revenues were servicing.
What this did was that if you took the price that was paid against the amount of debt that was outstanding, there was a significant amount of excess left over, not to mention the $65 million or so in cost avoidance … for the East Monroe Street Garage repair and rebuild. You take that excess above and beyond the debt and you apply it to a capital budget for city parks throughout the city, not just downtown but throughout the neighborhoods.
It was a rather elegant solution to a problem that we were having in terms of city parks that needed a capital budget and didn’t have one before that.
It comes down to what are you going to do with the money … to have a capital budget of several hundred million dollars … that goes a long way in city parks. That spread the benefits over the entire city. I never knew asphalt was a precious gem.
Ultimately, for any municipality looking at an asset like this, they have to think about, first and foremost, not that they are going to get a lot of money but what they are going to use the money for. The municipality that takes the money and plugs their budget hole is doing itself and the taxpayers such a disservice, because the following year they will have the same budget hole and then some and they will have nothing to show for it.
If you sell your parking garages or your Skyway and you have a fair amount of cash in the bank that generates the same amount of income that you were getting before, plus you have the ability for a capital budget … that’s the way to go. … [But] not every deal out there is the right one. …
PT: Many cities are risk-averse and like to see other cities pioneer ideas. What model or precedent was Chicago following?
Levenson: We didn’t have that advantage. Up until we did it, there were virtually no municipally privatized assets in the U.S. … We left ourselves an out throughout the whole process, mainly that we could reject any and all bids. If we didn’t like it for whatever reason, we didn’t have to go through with it.
PT: A major criticism of these kind of deals is that control of the asset is lost. What is your response to that?
Levenson: I think there’s an element of control that is gained … It’s done in a way that dictates the operating standards. And it says further that if you, the new lessee, don’t live up to those standards, the city will take back the asset without a financial recompense. Therefore, you are actually gaining a measure of control by forcing the new lessee to stick to these operating standards, and if you look at the concession agreement, which is inclusive of the operating standards, you’re talking about three or four hundred pages single-spaced, double-sided.
Contracts have to adhere to the city’s MBE/WBE ordinance. All these rules and regulations are taken into consideration by a bidder, and that bidder says, based on those rules and regulations and how they affect my P&L, this is how much I’m willing to pay. That type of control was never afforded the previous owner; it could have been, but it wasn’t.
PT: You no longer are directly involved, but from what you know, how is this deal working from the city’s point of view?
Levenson: From my understanding … [the] garages are working quite well. The city is not privy to the financial statements, but keep in mind that’s not all that’s important to the city. The city is not concerned with whether the owner is making money. The city is concerned whether the garages are being operated in a way that’s consistent with the concession agreement. …
PT: What has surprised you about this deal?
Levenson: It worked very smoothly. We really had a sense of purpose as to how to do this because of what we had been through with the Skyway. On the other hand, we also knew that a toll road is not a parking garage is not an airport. The skill set that it takes to assess a parking garage is not the same skill set that you’re going to use to assess Midway Airport when that deal comes to market within the next couple of quarters.
Perhaps a surprise is that more cities haven’t availed themselves of the billions of dollars that are out there and the interest in their own assets. … We are so far behind Europe. They are light years ahead of us when it comes to privatizing assets. Those assets are all working quite well.
PT: In advising cities on these P3 deals or helping cities finance them, what is your role for RBS now? What do you tell cities?
Levenson: Their job is to throw up roadblocks and my job is knock them down. If I knock them down successfully, then they will want to engage our services not only to get them from pitch to close, but when that close comes that they’ve done everything in the interest of good governance. … The municipality needs to live with the effects of their sale. If it’s done correctly, like it was done in Chicago, you can live with the effects of that sale quite nicely.
Make sure you don’t spend the money foolishly, have a plan with what you’re going to do with the money, how you’re going to sell it to your constituents, so that when the day comes to vote on it, all the questions have been answered.

Want more information? Contact Dana Levenson at Dana.Levenson@rbs.com or (312) 777-3604.

P3: The Buyer

Sports teams continually look for the winning edge. Such factors as team chemistry, quality personnel, preparation and hard work are frequently cited as keys to victory.
When the city of Chicago announced it would accept a $563 million proposal from the Morgan Stanley / LAZ Parking team to operate its parking system garages for 99 years, the team knew it was more than just throwing the highest number on the table that had ensured its success.
Team Chemistry Started With Relationships
When the principals at Hartford, CT-based LAZ Parking began their pursuit of the Chicago P3 parking deal, they knew they would need to partner with a heavy financial hitter to have any chance of winning. Fortunately for LAZ, Chief Investment Officer Peter Levin was already on board, spearheading the firm’s investment arm, LAZ Parking Realty Investors (LPRI). “Its sole purpose is to buy $1 billion worth of parking lots and garages throughout the country,” says LAZ Parking co-founder Alan Lazowski.
Levin had joined LPRI from investment giant Aldrich, Eastman & Waltch, where he had worked closely with Morgan Stanley’s investment bankers. A couple of calls to his former colleagues led Levin into contact with Sadek Wahba, managing director responsible for Morgan Stanley’s infrastructure investments. The firm had implemented the infrastructure group in 2006 to leverage its capabilities in attracting capital to move into the burgeoning public-private partnership market, competing with such established firms as Goldman Sachs, Macquarie Bank and JP Morgan.
Quality Personnel Contribute
to Team’s Success
For the Chicago parking P3, the firm assigned New York City-based Fred Pollock, a vice president in Merchant Banking, to honcho the Morgan Stanley-LAZ Parking team’s efforts. Pollock worked closely with LAZ to develop a plan of attack. Once the deal was won, Morgan Stanley recruited and assigned another experienced pro from the world of parking real estate management, Dennis Pedrelli, formerly with Equity Office Properties’ REIT, to oversee the asset.
Meanwhile, LAZ threw its principals into doing the prep work and building a potential management team. Once up and running, day-to-day operating responsibilities would fall to LAZ’s General Manager Antonio “Tony” DiPaolo.
The team also knew they would have to show the public that things had changed. LAZ Parking places a major emphasis on encouraging employee involvement in the delivery of service to customers and profit to investors. According to Lazowski, regional managers are heavily incentivized to succeed in their respective markets; after a five-year vesting program, they become a “partner” in the firm and the boss of their own geographical area of responsibility. Likewise, the firm says it focuses on providing a good “family-style” working environment for line employees.
“We are only as good as the employees we have working for us,” says Lazowski, “and there’s nothing like ownership. We believe everyone should take ownership and pride in the operation. We’re fortunate to have great, great employees and great partners to help us achieve our mission.”
Preparation and Hard Work Pay Off
To prepare for the Chicago bid, LAZ Parking placed a team on the ground to investigate the particulars of the market surrounding the facilities involved in the bid. Without operations in Chicago, the team was at an initial disadvantage in knowledge about parking in the city and needed to apply some shoe leather to catch up with more market-savvy competitors.
“For example,” says Lazowski, “we talked to 160 potential [customer] companies in advance of the deal to help market the [empty] spaces. We spent four or five months in the due-diligence phase to create our business plan and understand the marketing to create the value.”
The focus for the team was to identify areas of potential value and attempt to quantify it. They looked closely at such areas as filling empty spaces, rate adjustments, and finding inefficiencies or errors in accounting and controls. Expenses were vetted closely, and a number were eliminated or reduced.
Once completed, Morgan Stanley took the projections and created a 99-year vista that would take into account such things as inflation and rate increases. Numbers were plugged in for long-term maintenance needs, such as the $65 million renovation of the East Monroe Street parking facility, which was part of the bid but in poor shape. “It was a very expensive and extensive due-diligence process,” says Lazowski.
But winning the deal was only the beginning. Chicago is a strong union town, and the team had to deal with a number of crucial transition issues, particularly with personnel. It decided early on to keep most of the parking system’s line employees but replaced the management team. With excellent cooperation from the city and a professional relationship with the union, problems were few. “We’ve had a wonderful transition with the employees and the union, and I think everybody is very happy in that respect,” Lazowski notes.
Once in control of the properties, the team began to systematically upgrade the facilities. A program of cleaning and painting began, and an overhaul of the revenue control system is planned.
Customer service was enhanced by the addition of a fleet of golf carts to help patrons with the long distances between pedestrian exits in the massive, flat-floor parking plates that lie beneath the city’s Millennium and Grant parks. “There’s been a tremendous response with kids and families,” Lazowski says. “We’ve really improved the parking experience in the system. We’ve gotten a number of accolades and letters from clients and customers, and that’s a great feeling.”
What Winning Looks Like
“What set us apart,” Lazowski says, “was the due-diligence work, the business planning that we did and our scope of operations plan that allowed our team to put in the highest price.”
While Lazowski makes it sounds simple, industry insiders say the deal has been sweet for the buyer’s team. Numerous control issues were found and corrected, which led to increased revenues, these sources said. Lazowski would only say, “We’ve exceeded our expectations in terms of growth and enhancements both in revenue and operational expense, while at the same time delivering a superior operational product that customers are extremely excited about.”
LAZ Parking and Morgan Stanley, while not exclusive, continue to look for other P3 and private-sector parking investment opportunities. “We’re excited about doing more business with Morgan Stanley,” says Lazowski. “They’re a very good partner. “We have another operating partner, Lupert-Adler, which is a $4 billion real estate pension fund [and] with whom we are pursuing deals throughout the country. Different deals make sense for different operating partners and financial partners.”
With both buyer and seller thus far elated with the results of the transaction, baseball fans may be hoping Morgan Stanley and LAZ Parking would team up next to buy the Chicago Cubs.

Want more information? Contact Alan Lazowski at
alaz@lazparking.com or (860) 306-8844. Contact Fred Pollock at Frederick.Pollock@morganstanley.com or (212) 761-5126.

(Charles R. “Charlie” Munn III, CAPP, CPFM, is a parking research
principal for Scotchtown Associates, a human resources and customer service consulting firm. Contact him at: cmunn3@aol.com.)

Article contributed by:
Charlie Munn
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