The city of Los Angeles is leasing out nine parking garages and hopes to use the money to help defray the $150 million deficit in the city’s budget, for the upcoming year. It’s that last phrase that got the council the nomination for our coveted award. The numbers are not knowable, but the city hopes to get $50 plus million for the deal.
No company in their right mind would bid $50 million to lease nine garages for 50 years unless the income was projected to be substantially more than that number. My guess is that the number will come in higher than the $50 million and that the revenue generated will be more in the $ 400 million range. Lets do some numbers:
There are about 9000 spaces – assume the revenue is $5 a day per space, higher in some places lower in others. So revenue is $45,000 a day – or $11 million a year. That’s five days a week, no week ends. So the revenue will be higher in some locations but let’s leave it at $11 million. Figure $4 million for upkeep and operations, that leaves $7 million net. That, over 50 years is $350 million net. Investors want to more than double their money, so I’m guessing that $50 million isn’t far off. Cool.
Except for one thing. The city is giving up $300 million over 50 years to get $50 million now. And it’s a one shot deal. The $50 mil will be gone five minutes after the check is handed to the city. It will help, not cure, a budget problem for 2011. After that, what else will they sell?
By the way, it makes no difference if the bit is $50, or even $100 million, the money will be gone in a heartbeat – don’t believe me? – remember what happened to the money in Chicago – Poof. Gone. Read about it here.
Wouldn’t it be better if the city of LA hired someone to RUN their garages, give them an incentive to market them and share in the profits. Professionalize the parking, maybe give up a quarter of the revenue. With my numbers above, the operator would make about 2 mil a year clear, assuming they did a good job. (Monitor them like a utility and be sure they do that good job).
The city would have $5 mil a year left over, times 50 or $250 million over the 50 years. Of course, all that would increase with inflation and other issues so that number would be higher.
The city is giving up future income for income now. Would they be better off to cut expenses by a couple of hundred million, increase revenue by running their parking properly, keep the revenue stream for the next half a century? I think so. Selling assets for the short term is seldom a solution. Cutting expenses is a good one. Not popular but a good one.
I’ll keep an eye on this one and see how close my estimates come to reality.
City of Los Angeles, Baghdad by the Bay award nominee.
JVH
One Response
While your revenue numbers are off (for example, revenues are around $18 million), your conclusion is correct: LA would be better off by hiring a professional operator and raising rates on their own. I might also suggest that the City hire a professional overseer to keep the operator honest.
According to a study done by Desman Associates (http://tinyurl.com/LAParking01), a private operator can expect to have revenues and operating profits in Year 5 of $38 million and $31 million, respectively, compared to $28 million and $16 million, respectively, if the City were to continue to operate the structures. 80% of the revenue differential is because of rates.
After the repayment of debt ($100 to $120 million) and other expenses, LA is projecting to net $53 million, which it will use to pay everyday operating expenses. Unlike Chicago, LA is not even pretending to establish a rainy day fund that it can subsequently loot.
LA’s sale of its parking facilities is a dumb deal: the City is selling revenue producing capital assets to pay everyday operating expenses. And at fire sale prices given the size and poor shape of the facilities and the political risk associated with doing business with business unfriendly governments of LA and California.
As it is, the City has 13 interested parties who have signed confidentiality agreements. The City anticipates closing a deal in March 2011, provided that it receives adequate bids. But by that time, the City will be so desperate for money, the definition of adequate will reach new lows, especially given the onerous Concession Agreement. http://tinyurl.com/LAParking02
Even More Lipstick on the Pig is going to needed for this deal. http://tinyurl.com/ParkingPig