May 14, 2011
Harrisburg needs money â€” somewhere close to $310 million â€” to avoid default and bankruptcy. The cityâ€™s parking garages are its most valuable asset, so itâ€™s no surprise thereâ€™s a lot of talk going on about how to get big money out of them.
Harrisburg is not the first city to contemplate leasing prize assets. At the moment, similar discussions are happening in Los Angeles, Boston and Pittsburgh. Then thereâ€™s Chicago, the poster child of asset leases. Our city can learn from these larger players â€” what to do and what absolutely not to do.
In late 2006, Chicago sold (excuse me, leased for 99 years) its four prime parking garages downtown to a Morgan Stanley infrastructure group for what seemed an eye-popping $563 million.
The deal seemed so successful that two years later, Mayor Daley was able to do a 75-year lease of Chicagoâ€™s parking meter spots for an even heftier $1.16 billion.
The upside of the leases is better operation. Itâ€™s hard to dispute the fact that it used to take an average of two days to service broken down parking meters in the Windy City and now it takes two hours.
Chicagoâ€™s garages got new payment systems, enhanced security and aesthetic upgrades. The old meters were replaced with computerized and solar-powered pay boxes within months. The collection rate is now about as close to perfect as you can get.
The other benefit is up-front cash. Chicago received a hefty infuse of money just before the world went haywire in the recession. Sadly, Chicago didn’t spend the proceeds very well, but Harrisburg has a clearer place for the money to go.
But serious questions have been raised about the sale prices. Valuations are tricky to do, especially on a horizon of a century. Prices are ultimately set by the market, just like on houses. As we all know, one house can sell for a certain price and a seemingly similar house right next door can sell for a lot more or less.
One Chicago alderman (its equivalent of City Council) warned that any city looking to lease or sell should have an independent third-party valuation.
Harrisburg has just done that. Mayor Linda Thompson announced Friday that the garages are worth more than people thought â€” at least $215 million for a 30-year lease, according to the firm Wilbur Smith. But someone has to be willing to pay that.
In hindsight, Chicagoâ€™s eye-popping sums look like bargain prices. The financial news group Bloomberg reported last year that the Morgan Stanley coalition will likely make 10 times what it paid.
But the biggest lesson is what everyday Chicago residents faced: big price hikes. Meter rates went up within weeks of the takeover from 50 cents an hour to $1. By 2013, they will be $2. In the most high traffic areas, they will go as high as $6.25 an hour. Itâ€™s a similar story with the parking garages fees doubling in the last five years.
As other cities have contemplated following Chicagoâ€™s lead, price hikes have been a key sticking point. In Los Angeles, the City Council insisted that the city maintain control of prices. The result? No bidders on the garages.
Private firms know thatâ€™s where the money will be made. They donâ€™t have to deal with the political pressure of trying to pass price increases. They raise rates to the â€śpoint the market will bear.â€ť
Another concern is the lengthy lease. Chicagoâ€™s Mayor Daley said â€śOur responsibility is to help the generation right now,â€ť but that strikes a raw chord to families looking at their kids and grandkids. Indianapolis built in a buyback provision every 10 years in its 50-year parking lease. It is complicated legally, but it left an out for the private operator and city.
The most important question any city contemplating a sale or lease of assets has to ask is: Why donâ€™t we just do what a private operator would do ourselves?
Thatâ€™s what Pittsburgh is doing. Mayor Luke Ravenstahl was gung ho about leasing parking garages to help plug its huge pension shortfall. The city received bids and the mayor announced JP Morgan Chase was the highest at $452 million for 50 years.
But City Council said no. Instead the city controller and council put forward a plan to keep the garages in city hands, but raise parking rates and have the city do its own bond backed by parking revenues. Itâ€™s an intriguing idea, although whether bond markets go for it is another matter. It also means the city is still responsible for upkeep of garages, some of which need big repairs soon.
â€śIâ€™m not totally opposed to privatization,â€ť says Pittsburgh controller Michael Lamb. â€śBut what changed my mind is that dealing with a public parking authority on community development issues is a lot easier. Private owners can have different goals.â€ť
The bottom line is: Selling or leasing parking garages is not the golden fleece some thought after Chicagoâ€™s deals. It can provide the up-front cash, but at a cost to commuters and future city profits.