The negotiations for a major office space lease are a long and winding road. Herculean efforts to close the deal often center around mundane topics such as elevator schedules, building cleaning and parking allowances.
At the end of these marathons, exhausted negotiators on either side of the table are often tempted to give and take on lease-based parking requirements to get the deal done. Some free parking here, a few minimum guarantees there. . . hey, it’s only parking, right? Chump change.
Unfortunately, auditors of these lease-bound parking requirements report both Lessors and Lessees frequently leave a lot of loot on the table. This value can be surrendered in the negotiation, but more typically is given away long after the ink has dried on the final document.
Before we assess how these giveaways accumulate over time, let’s examine how parking concessions and allowances are often overvalued by Lessees and undervalued by Lessors in the negotiation.
Overvalued by Lessees
Lessees are sometimes seized by fear they have overpaid in rent and lease term and attempt to claw back a portion of the value in other areas, such as CAM charges and parking concessions. The value of these allowances might be indeterminate or difficult to calculate. Thus, Lessee representatives can declare victory in the negotiation; e.g., “OK, so we paid to market on buildable square feet but wow, did we take them to the cleaners on the parking!”
In the case of a brand new development, it is also not unusual for Lessees to be uncertain of transportation services that will be available after the project opens. Even if public transit is available, will people use it? Lessees are rightfully concerned about how their employees and visitors will arrive at – and depart from – the facility.
This mindset is evolving. Many larger Lessees are now encouraging – or even dictating – alternative transportation modes. Moreover, smart Lessors are moving to the front of the pack by sponsoring these modes to mitigate parking demand (see our series “Carpooling: Rules of the Road”, here).
Even so, driving and parking remains the both first option and safety net for many employees and visitors.
For long range commuters, it’s often their first option. There may be no other reasonable or cost-effective option; they must drive and park. For environmentally-sensitive employees transiting shorter distances, other concerns, such as personal mobility challenges or child care issues, might overcome their abhorrence for the SOV (Single Occupancy Vehicles). They might prefer transit, cycling or even Uber, but as a last resort in certain circumstances, they too, might drive and park.
The uncertainty over that “drive-in” factor regularly motivates Lessee representatives to seek over-ample parking opportunities for their constituencies. Shouldn’t we cover our bets, they might think?
The challenge for Lessors is that Lessees may not want to pay market rates for these “might needs”. What the Lessee really wants is access to parking. . . if they need it. And, preferably, with this fat, juicy lease it should be free. Like at the mall, right?
So, the Lessee howls as the moonlit talks grind on, “Why not just throw in some free parking to nail this contract down and we can all go home and get some sleep?”
Undervalued by Lessors
One of the reasons it is so tempting to toss a couple of parking bones to the hounds is the utter ubiquity of parking. One reason for this is the near-universal implementation of “parking minimums” regulations. These requirements were never underpinned by actual research and have almost no proven basis in practice.
Over the past decade, academics such as UCLA professor Donald Shoup, have statistically shown parking minimums actually contribute to congestion, pollution and sprawl. The net result of nearly 80 years of parking minimums is an overbuild of parking in most developments.
This excess parking is not needed now and may never be. It sits there empty, unused. It has only sunk value and no utility. So, why not give this excess parking away to a Lessee to drag the lease across the finish line?
Coming Soon: Unfree Parking
Here’s why: This paradigm is changing. There is a revolution brewing. Urban planners around the world are beginning to consider eliminating the requirement for building owners and managers to provide a minimum amount of parking based upon the amount of floor space leased or the type of premises use.
In the not-so-far-off future, parking minimums will be reduced or replaced by parking maximums (i.e., you will not be permitted to build more than “X” number of parking spaces). Or, minimums will be eliminated and the market will simply be allowed to dictate how many spaces need to be built.
The largest city in North America, Mexico City just did that, as noted here. Buffalo, New York is another major example and there are many smaller ones as well.
This trend will not only affect new developments. Existing developments may be “freed” to repurpose unneeded parking areas for other uses, such as greenspace or new buildings. Consequently, the mindset to just “throw in some parking” will need to be adjusted. Free parking will no longer be a carrot – or a crutch – to weary negotiators.
While autonomous fleets of ride sharing vehicles “may” dampen parking demand (a not-foregone conclusion), the death of minimum mandates is much more certain to decrease future parking supply. Thus, more facilities that are now “free” may be converted to paid parking. Our prediction: Look for roughly the same number of cars chasing fewer spaces, resulting in higher market prices over the next decade.
With all this in view, offering a parking concession now could have a dramatic impact over time. For a facility that is now “free”, it is surrendering the possibility of future income if and when the facility might be converted to other uses or can begin to charge for parking. For facilities where there is now a charge, it is surrendering the certainty of future income.
A simple calculation: Let’s take one, $100 per month parking permit extended over 15 years, as an example. If that income were collected and compounded by, say, a combined 5 percent (in interest foregone and the increase over time in market rates for parking), that one permit concession yields over $26,000 lost forever.
Common Monthly Parking Requirements in Leases
On both sides of the table, the folks who negotiate larger office leases are typically tough, smart cookies. None of the above is probably news to them. Negotiators commonly hammer out complicated solutions to monthly parking requirements and memorialize them in leases in the following ways:
- “Must-Takes” – These are the monthly parking permits and/or spaces (the two are quite different) the Lessee is required to lease. “Must-Takes” are sometimes used to help finance development and represent a core financial pillar for the project. The number of permits/spaces and the rate charged may change over time, per the negotiations. “Must-Takes” are the only truly beneficial parking concessions for the Lessor; however, rates should be charged to represent an ROI payback on the parking facility or tracking a COLA or local market. Discounting “Must-Takes” to close the deal is common, but it is recommended to put a time limit on the discount.
- “May-Takes” – These are permits/spaces for which the Lessee has the option, but not the obligation to lease. Rates may be set in advance, incremented with a COLA or pegged to market (better). This puts the Lessor in an awkward position: When the Lessee exercises this option, will the spaces be available? “May-Take” allowances are best qualified and allowed only at the reasonable discretion of the Lessor, according to operational needs.
- “Reserved Spaces” or “Reserved Areas” – These are spaces set aside with signs or separate ingress/egress that are dedicated to the Lessee for use by specific individuals, groups or purposes (such as customer or couriers) of the Lessee. Reserved parking is best avoided or minimized because it destroys the “diversity” (i.e., the sharing of spaces between users and uses) of the parking facility.
- “Free Parking” – Free parking isn’t really free when you consider land, construction, utilities, cleaning, maintenance, liability. . . we could go on. We suggest some carve-outs for these expenses – or at least the Lessee underwriting liability, if possible. If that’s not possible, place a time limit on free parking, after which point the concession segues into a paid model. Give parking away at your peril. Inevitably, it seems, it’s the freebies that come back to bite you.
Although all these factors are known to negotiators, it may be surprising to learn how often after-action experts report these basics were misplayed, overlooked or mismanaged. But you had to be there to understand how that happened. In every negotiation, there is give and take. “OK, you want 200 free spaces for the length of your lease term? We’ll give you 100 free for five years, then it reverts to market rates.”
It’s those numbers, dates, COLAs, and market rates that all come into play in sustaining the value of parking over the lease term. And it’s in all those details the value can be – and often is – lost.
(The H2H2H Foundation is a nonprofit organization committed to “sharing excellence in mobility management”, which includes promoting best practices in the administration of parking and transportation facilities. We also advocate for transportation consumers and advance alternative mobility options, such as car sharing, bicycling, carpools and many others. You can learn more about our efforts and ways you can help us at www.h2h2h.org. Image Credit: A Creative Commons image by Michael Coghlan via Flickr.)