Date: February 16, 199x

To: Fred Thompson

By: Scott Colson

Analysis of Proposed Parking Garage

Recommendation:

The City of Oakmont should sell the Elm Street building site for construction of a private parking garage. Further, the city should compensate the garage to ensure a rate structure that promotes short-term retail parking. Execution of this project has a present value of $7.4 million.

Analysis:

A private concern evaluating this project would compare the discounted future revenue streams to the required investment to determine whether this garage is a profitable venture. The required investment includes the land, construction and associated property tax liability. The builder would purchase the land from the city for $1 million. It would then build a $2 million parking garage on the land. The annual property taxes on the improved land would be $200 thousand for a present value tax liability of $3.4 million. This results in a present value investment of $7.4 million (See Exhibit 1).

Oakmont does not have sufficient parking; therefore, this garage should operate like other private parking garages in the CBD. Using data collected at a local parking garage, I estimated that an 800 car parking garage would generate $977 thousand in parking revenues (See Exhibit 3). This revenue combined with retail rental revenues less any operating expenses yields a present value of $11.7 million.

This project has a net present value of $5.3 million as a private concern. Therefore, this is an attractive investment for private sector investors. Oakmont cannot add value by building and operating the garage.

This project adds additional value by creating 200 new retail parking spaces resulting in a positive net spill-over effect. Two hundred additional retail parking spaces increase the city sales tax collection by $60 thousand per year; however, the losses is subway revenue due subway riders opting to drive and park are $94 thousand. Therefore, the city will lose $34 thousand per year for a present value loss of $584 thousand. This loss is offset by an additional $60 thousand in annual CBD retail profits for a present value of $1.0 million. The present value of the parking garage including associated spill-over benefits is $5.8 million. Further analysis indicates that the city can further increase the value of the new parking garage by acting to change the rate structure of the new garage to promote more retail parking.

A rate structure that lowers the average cost of short-term parking and increases the average cost of long-term parking will create 800 rather than 200 additional parking spaces for retail shoppers. Exhibit 2 shows that the annual spill-over benefits of these added 600 retail parking spaces exceed the associated costs. I estimated that the new rate structure would lower annual revenues for the parking garage by $134 thousand (See Exhibits 4 & 5). The city will need to compensate the parking garage for this loss. Additionally, the city will receive an additional $180 thousand dollars per year in increased sales taxes (See Exhibit 6). This gain will be offset by an additional $282 thousand subway revenue loss (See Exhibit 7). Therefore, adjusting the rate structure will cost the city $236 thousand per year for a present value cost of $4.0 million.

CBD retailers will receive an additional $180 thousand in profits each year (See Exhibit 8) and local drivers will experience $148 thousand in savings due to lower parking fees (See Exhibit 9). These benefits have a present value of $5.6 million over the 40 year life span of the parking garage. Modifying the parking rate structure for the new parking garage has a net present value of $1.6 million; therefore, the city should pursue a compensatory relationship with the parking garage after it is built to alter the rate structure. This will yield a total present value of $7.4 million for the project.

Note that from a cash management view point for the city, this project will present a present value cash deficit of approximately $200 thousand because the city will receive the $1 million proceeds from the sale of the land and will also receive the present value of the future property taxes on the parking garage which will offset the subway revenue losses and the compensation payment.

 Exhibit 1

Financial Analysis of Proposed Parking Garage

(All Values in Thousands of Dollars Except Totals)

 Discount Rate (Based on City Credit Rating) 5.00%

Analysis of Parking Garage as a Commercial Concern:

	Year 0	Year 1	Years 2-41	Present Value
Purchase Property	(1,000)			(1,000)
Direct Construction Costs
Demolition of Cinema	(40)
Construction Costs	(1,000)	(1,000)
Total	(1,040)	(1,000)		(1,992)
Property Taxes			(200)	(3,432)
Operating Revenue and Expenses
Parking Revenues (See Exhibit 3)			977
Retail Rent Revenues			50
Operating Costs			(270)
Management Commission			(71)
Net Revenue			686	11,774
Net Present Value of Commercial Proposition				$5,349,000
Spill-Over Effects of Parking Structure:
Indirect Revenues and Costs to City
Additional Sales Tax Collections (Exhibit 6)			60
Lost Subway Revenue (Exhibit 7)			(94)
Net Revenue			(34)	(584)
Other Benefits and Costs
Increased Retailer Profits (Exhibit 8)			60
Net Benefits			60	1,030
Net Present Value Including Spill-Over Effects				$5,794,564

 Exhibit 2

Analysis of Modifying Parking Rate Structure to Add 600 spaces

(All Values in Thousands of Dollars Except Totals)

Net Present Value of Parking Garage as Private Concern: 5,795 Compensation Cost Due to Proposed Rate Change (See Exhibit 5) (134) (2,293) Additional Indirect Revenues and Costs to City Additional Sales Tax Collections (Exhibit 6) 180 Additional Lost Subway Revenue (Exhibit 7) (282) Net Revenue (102) (1,752) Other Benefits and Costs Additional Increased Retailer Profits (Exhibit 8) 180 Net Benefits to Drivers (Exhibit 9) 148 Net Benefits 328 5,636 Net Present Value of Spill-over Effects   Net Present Value of Proposed Project $1,591,000 ======= $7,385,564

Exhibit 3

Estimated Net Annual Revenues for 800 Car Parking Garage With Existing Rate Structure

(Based on Data Gathered at Local Private Garage)

Rate Structure:	First Hour	$0.75
	Second Hour	$0.50
	Subsequent Hours	$0.25
	Max Daily Charge	$2.00

Type of Parking	Number of Cars	Avg Stay (Hours)	Avg Cost Per Hour	Number of Days Per Year	Annual Revenue
Commuter Parking	600	8	$0.25	260	$312,000
Weekday Retail Parking	800	3	$0.50	260	312,000
Saturday Retail Parking	3300	2	$0.63	52	214,500
Saturday Evening Parking	800	4	$0.44	52	72,800
Sunday Evening Parking	720	4	$0.44	52	65,520 $976,820

 Exhibit 4

Estimated Net Annual Revenues for 800 Car Parking Garage With Modified Rate Structure

 Exhibit 5

Lost Revenue Due to Rate Structure Change

Exhibit 6

Additional Sales Tax Collections

Exhibit 7

Estimation of Daily Subway Revenue Lost Due to Additional Parking Spaces

Exhibit 8

Additional Retail Profits

Exhibit 9

Net Benefits to Drivers

Appendix: Discussion of Assumptions:

1. The discount rate for this project should be equal to the rate at which the city can borrow money (i.e., 5 percent). This discount rate is appropriate for analyzing the program as a private concern also. If the city decided that if needed a parking structure, it might easily arrange financing for the private enterprise at its municipal borrowing rate. In discounting future cash flows, I assume that all cash flows after construction will remain the same. Therefore, I treat all cash flows for years 2 through 41 as a 40 year annuity with a present value at the end of year 1. I then discount this value back to the beginning of the year.

2. The Finance Director discussed the value of the land. The current $1 million value of the land is immaterial because the land could be sold for $1 million in current dollars at the end of the parking garage lifetime. However, the foregone property taxes of $200,000 per year should be considered to determine the value of the next best alternative of the land.

3. Lost subway revenue will result due to an increased number of cars entering the CBD. This loss can be determined by multiplying the expected car traffic increase by 1.l75 to estimate the increase in people and then by 2/3 and 50 cents to estimate the loss to the subway. I estimate that each new parking spot will bring 3.1 additional cars into the CBD on weekdays.

4. The increase traffic caused by the availability of parking will have significant effects on pollution and streets maintenance. Therefore, I did not consider these externalities in my analysis.

5. When calculating the modified rate structure on parking revenues, I estimated a more conservative 3 cars per available parking space rather than the 4 cars per space that the sample data indicated. I felt that this decrease was justifiable given the relatively localized increase in supply. If the parking garage is utilized by 4 cars per parking space, revenues will exceed those generated using the normal rate structure. Therefore, compensation will not be required.