Parking Considerations in the Hotel Real Estate Life Cycle
By Joshua Miller Principal, Niche Advisors | March 22, 2009
Development of a hotel begins with a conceptual plan, usually followed by a feasibility study. This analysis contrasts the forecasted potential income of the concept against the potential cost of development. Depending on the location of the property, a separate parking feasibility study may be in order. In one example we worked on, a boutique hotel was being proposed in a busy retail location which was adjacent to a popular public beach. Preliminary analysis of the local parking market showed a tremendous shortage in parking supply. With this in mind, the developer planned a large underground garage with enough capacity to capture revenue from the underparked neighborhood. They initially retained us to answer questions related to separating the garage operation from their agreement with their hotel operator. After looking at the development plan, we advised the client that the potential parking revenue might significantly alter their financing arrangements and that a separate feasibility study was in order. In the end, it turned out that there was so much parking demand in the market that the parking bottom line would be greater than that of the hotel. While this is an extreme case, in the right location and market, parking can make a large difference in a hotel's bottom line and should be examined strategically in this manner.
Once the concept has been finalized, a developer must move forward in the entitlement process. While there are certainly not a lot of hotel entitlement requests in the current market, those few projects which are moving forward will definitely be faced with parking challenges. All city planning agencies have some sort of mechanism for determining parking requirements. These rules are broken down into many different varieties of calculations and result in requirements which range from anywhere between 0-3 parking spaces per key. Our experience has shown that unless a hotel has tremendous local parking demand beyond hotel guests (e.g. it is part of a mixed use development, major shopping facility, convention center, or is otherwise extremely popular with locals), that one space per room is nearly always effective operationally. If you consider that not all rooms will be occupied most days, and that only a portion of guests will drive to the hotel (usually less than 40%), this leaves more than enough spaces for employees, catering events, etc. The concept of shared parking also comes into play as hotel guests utilize their car off site most frequently during the day when the vast amount of hotel employees are on site. Cities do not always take this into account and often place burdensome parking requirements on the developer. A parking demand study conducted can result in documentation which can be used to appeal or seek a variance from these requirements.
After entitlement, conceptual design must be turned into actual plans. In the parking facility, this means traffic and space layout planning. Too often, we see parking facilities designed by an architect with no parking focus. They are simply given the required number of spaces and told to figure out a way to make it fit. Most architects look for a way to do this that does not interfere with the design of the hotel. They try to set it up so that drivers get the right first and last impression by having the drive aisles provide the right views. While this is all good, it often results in traffic problems and more importantly in poor space utilization by customers. We worked with one hotel which had fought their local planning body on space counts and lost. In order to accommodate the number of spaces they were required while also minimizing the parking land use, they utilized a tandem stall plan with the idea of valet parking most guests. Unfortunately, they were in a market where customers did not want to pay for valet service, so all of the customers tried to self park. On high occupancy days, customers parked behind each other thereby blocking other guests and valet customers from their vehicles. Many simply parked in the outside stall leaving the inside stall vacant and unusable. We developed an operational plan for them eventually, but the developer now understands the importance of reviewing site plans with a parking focus.
If the hotel is in a market that supports charging for parking, a hotel's parking department can be much like a microcosm of the hotel itself. It is a small business selling a perishable item which requires all aspects of strategic management. The same success that hotel owners experience by bringing in an asset manager applies to parking operations as well. By putting someone with extensive resources and expertise in charge of overseeing your asset, you have the greatest opportunity to maximize your financial performance. Whether during the pre-opening period or during operations, certain decisions and activities need to be completed in regards to how the parking operation will be run. A parking asset manager can use their expertise to guide you through these decisions, including: parking operator procurement, contract negotiation, and contract compliance; procurement and implementation of parking technology; revenue management (both in the traditional sense of utilizing rates to maximize the use of your inventory and also in reaching peak revenue control to make sure all revenue earned is actually captured), expense monitoring and management; insurance and risk management analysis, parking facility maintenance and long terms asset plans, etc. Most parking asset managers can make a 10-40% improvement in the financial performance of any property, thereby generating cash flow and hence value improvement. By implementing our asset management plan, one client saw their bottom line department profit increase by over $500,000 in the first year. The hotel was sold the next year at an 11% cap rate, meaning the asset management efforts generated $4.5 million in unanticipated sale price.
In the latter stages of the life cycle and particularly in the current market, hotels are looking at refinancing or at disposition. Just as described earlier in feasibility planning, the appraised market value of many properties can be greater if the parking asset is divided out as a separate facility. In other words, the sum of the two parts is often greater than the whole. This happens for numerous reasons, but often because hotel appraisers include parking income as part of some overall assumed minor operating department percentage which is then applied to the hotel's cap rate. An appraisal is meant to look at the potential income of a property rather than historical, and few non-parking appraisers can identify this number. In addition, investor and lending behavior is different in parking than in hotels, and hotel cap rates rarely apply. By having a parking expert conduct your appraisal, you may be able to qualify for more financing, or at a minimum help your underwriting efforts.
When a hotel is sold, this appraisal theory can actually be put into practice. We have worked with several hotels who have sold their parking facility separately from the hotel itself. This is most frequently done with parking operators who understand the value of the asset, but there are many other buyers of parking facilities as well. In fact, in today's marketplace, a hotel may have a much easier time selling their parking facility than the hotel itself. If handled properly, this an excellent method for injecting severely needed capital into the property. Careful contract planning must be conducted to ensure that the hotel will still be able to utilize the facility in the same manner under the new ownership. However, even if the hotel has to pay some sort of rent or take on a new operating cost, the capital influx and the elimination of the management of the facility often make this arrangement very productive.