By The H2H2H Foundation
Auditors of lease-bound parking requirements report both Lessors and Lessees frequently leave parking loot on the negotiating 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.
In this series, we are focusing on long term parking issues, most typically, “monthly” parking. This is where tenants are issued access credentials to enter and exit the parking facility, bypassing daily transient cashiering controls. Lease-bound, “validated” parking concessions, in which a Lessee is permitted to provide free or discounted parking for daily transient visitors, employees, customers, etc. is another realm that sees frequent abuse, but is not in our spotlight here.
In Part 1 of this series, we discussed how parking allowances can be overvalued by Lessees and undervalued by Lessors during the lease negotiation process. To recap, here are a few of the most common monthly parking requirements in Leases.
“Must-Takes” – These are the monthly parking permits and/or spaces (the two are quite different) the Lessee is required to lease.
“May-Takes” – These are permits/spaces for which the Lessee has the option, but not the obligation, to use for free or lease.
“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.
“Free Parking” – Free parking isn’t really free when you consider land, construction, utilities, cleaning, maintenance, and liability; however, it is often a “throw-it-in-to-close-the-deal” bone in lease negotiations.
Introducing the Parking-to-Lease Matrix
Many asset managers rarely look at the actual lease to make business decisions, but rely instead on abstracts. The Parking-to-Lease Matrix is an abstract that governs the practical application of the intent of the lease with regard to parking. It can be where much of the value of lease-based parking is frittered away.
This abstract is best distilled while lease negotiations are fresh in everyone’s mind. Attorneys converting a memorandum of agreement between the Lessee and Lessor can inadvertently – or purposefully – tweak the negotiators’ intent. Or, attorneys may leave the final lease document vague and/or unenforceable on critical parking-related specifics.
You can save considerable time, aggravation and legal hassles down the road by extracting the parking data soon after lease consummation. Prodding the participants in the negotiations for their memories of the lease’s intent can help avoid misunderstandings before the parties begin to invest themselves in business decisions founded on “their” understanding of the document.
Consequently, inaccuracies or clarifications can be formally added as a codicil to the agreement or informally appended as a memorandum of understanding.
Don’t Make These Two Mistakes . . .
The person or team performing the parking requirements extraction should have at least some experience in parking management. While a seasoned asset or property manager can easily ferret out the needed data, a third party, such as a consultant or parking operator, is sometimes retained for this purpose.
Lessors are often reluctant to hire third parties due to concern over losing control of confidential lease information, perhaps to a competitor. This objection is easily overcome. If a third party is involved, best practice recommends that you sign those outsiders to a Non-Disclosure Agreement. In addition, provide the outside entities with only the sections of the lease that reference parking.
Two mistakes many organizations make:
1) Everyone of note involved in the negotiations immediately goes on vacation or moves on to other things after the signing of the lease, so creating the Parking Lease Matrix is long-delayed. The passage of time can blur memories and the “why” of some lease terms.
2) Delegating this task to a lower-level assistant or bookkeeper with no experience in parking issues, who fails to construct a usable Matrix.
Critical Information Needed for the Parking-to-Lease-Matrix
The Matrix serves a very simple need: It enables whomever is allocating access credentials and billing/collecting for those credentials to do their jobs in an accurate and timely manner.
There are several dimensions to this information. Failing to accurately transcribe any of these dimensions can result in errors. These mistakes can affect either party, but Lessors are most often the victim, for reasons we will explain in a later part of this series. As time flies by these errors are compounded.
To complete the Matrix, the abstractor needs to consider:
1. Tenant Relationships – This might appear to be over-obvious, but exactly who is being issued access credentials and is receiving the monthly parking invoices is a frequent source of errors. For example, a tenant might have the right to issue credentials to a third party not under their legal umbrella, such as an IT contractor, or if the facility serves a medical center, a doctor. Or, the tenant might change its corporate name. Maybe ABC Corp spins off a subsidiary XYZ, LLC, but now both entities occupy the space. Or, perhaps ABC is allowed to sublease some of its space to DEF Inc.
In any case, the end user of the credential must be tracked and linked to the tenant. If these sorts of linkages are missed, allowances, concessions, “must-takes”, and billings get discombobulated.
2. Leasable area – Whether its defined as gross or usable space, a per square foot (or meter) basis is often the basis for allocating lease-bound parking. These tie-ins can change over the life of a lease, expanding and contracting not only the tenant’s physical presence but their parking benefits and obligations as well.
For example, a tenant might expand its leasehold and has a “free parking benefit or “must-take” parking obligation linked to a per square foot/meter baseline. In these cases, this could mean a change in parking revenue for the Lessor.
3. Lease Ratios – Occasionally seen, a Lessee will receive a certain number of “Reserved” parking spaces (the bane of parking efficiency) in a ratio to the number of spaces leased on a non-reserved basis. Another ratio often found is where a prime tenant has a call on a percentage of parking spaces (a type of “may-take”) based on the ratio of its leased space to the building space.
For example, if a tenant possessing this entitlement expands its leasehold from 40% to 50% of the space in a building with a 1,000 space garage, the garage may need to boot 100 other customers to allow the tenant to expand its parking rights from 400 to 500 spaces. These sorts of allowances can stir up customer troubles on any number of fronts and management must be prepared to deal with them when and if they occur.
4. Rate Changes – Another typical scenario can be seen when rate changes – particularly increases – are capped or linked to a COLA, market rates or sometimes a specific percentage for the life of the lease. In these cases, some effort, research, documentation and notice of the change to the tenant are required. These can easily be forgotten or overlooked. It’s so much easier to keep doing what you’re doing.
Frequently missed: A tenant may have insisted that it be written into the lease that their special-deal, lowball lease-bound parking rate may not be increased by more than three percent a year for the life of the lease or any extension thereof. It’s understood by all that the intent of the provision, in this case, is the Lessee protecting its “downside” from unexpectedly-high parking rate increases in the future.
But careful reading of this also means the Landlord “could”, if it chose to exercise its “upside’ of that deal, automatically increase the tenant’s rate three percent a year. Given a large tenant with a significant number of parkers and the power of compounding over a 10-15 year lease, this can generate some serious revenue.
5. Milestones – Many leases contemplate events tagged to the mere lapse of time, as seen in the previous paragraph. However, it’s not unusual for even the most sophisticated landlord to fail to record these milestones and to miss revenue opportunities. Take a time-based, “free parking” concession as an example. The tenant is allowed say, 100 access credentials at no charge for the first 5 years of its lease. The lease may not specify what happens after that, but the unspoken message is that after that 5-year period, the tenant’s rate rises from zero to market.
Or, the milestone might be tied in by numbers. Another customary scenario is where the tenant is allotted, say, 200 free parking credentials. Let’s say the tenant only uses 100 to start with, but gradually increases its employee head count through the years. Then, one day, the 201st parking access credential is requested. If this milestone is not in someone’s tickler file, its very likely that 201st credential will be treated like all the others: no charge.
It may be surprising, but real-life, lease audits reveal this sort of milestone – and revenue opportunity – is often missed.
Abstract with Care
A close reading of the lease and careful abstracting of all these sorts of details into the Parking-to-Lease Matrix is worth the time and trouble of every asset manager whose portfolio includes paid parking facilities.
Next, we discuss how to audit for lease compliance.
(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. Questions or comments? Contact us at firstname.lastname@example.org. Image Credit: A Creative Commons image by Michael Coghlan via Flickr.)