Public Parking Financial Strategies

Sep 15, 2013

Public Parking Financial Strategies

Constructing parking can be an expensive endeavor. Structured parking in particular involves significant up-front expenditures. Moreover, parking fees, where charged, may cover operating costs and a portion of the capital costs but structured parking rarely pays for itself in full. Public agencies who construct parking often need to find sources of financing and revenue beyond their general fund. Private entities looking to construct parking may partner with public agencies to take advantage of financing mechanisms and lower interest rates available only to public entities (Baron and Dorsett 2004).

Bonding and Debt

Taking on some form of debt is a common way for public (and private) entities to get the funds to build a parking facility. Bonds often offer the lowest interest rates of any public financing method. Bonds issued by public or non-profit organizations to construct public facilities are usually tax-exempt, which helps lower their interest rate. Two major considerations for bonds are who issues them and how they will be paid back. Among public entities, municipalities and other units of local government (i.e. schools, park districts, and other authorities) have the power to issue bonds.

The best rates are for general obligation bonds, which are issued by municipalities and paid back through their general fund. Parking facilities are one of many reasons to issue bonds; other purposes may take priority when issuing bonds. Revenue bonds are backed by a specific pool of money: the revenue from the project. To use these bonds, however, one needs to show that there is a stable demand for parking that can generate sufficient revenue to pay back the bond. Depending on the project and the local parking system, there may be other sources of parking revenues to cover the debt service. Other sources might include parking meters or parking fine revenue from on-street spaces or other lots; rent from ground-floor retail around the facility (if built); and air right or ground leases (Bier et al 2006).

Financing and Districts

Local communities can also turn to the surrounding properties that stand to benefit from the parking in order to finance it. Tax Increment Financing (TIF) captures the increased property value generated by development in an area to create a pool of money that can be used for area improvements. When a TIF district is established, the current property taxes are defined as the "base" amount. In the succeeding years, for a set period of time, any additional property tax (over and above the base amount) generated within the district is set aside in a special fund. That money can then be used to fund further improvements within the district, including public parking facilities. TIF money can be used as it is generated or the municipality can issue bonds backed by the future revenues from the increment collected in the district. Depending on where a parking facility is being built, this may be a desirable financing mechanism.

A Parking Benefit District is a program through which a city or town agrees to return all or some parking revenue (generated through parking meters, assessments, and/or taxes) to area for improvements and/or beautification projects in the district. Returning parking money directly to the community often improves the general public's acceptance of the idea. "Key stakeholders such as businesses, developers, land owners, residents and government representatives need to work together to develop goals, objectives and a plan to create a parking district" (MTC, 2007). These stakeholders will also decide where and how funds should be spent. One example of a successful PBD is in Old Pasadena, where on-street pricing was raised to keep vacancy rates around 15% and all parking revenue was used to purchase street furniture, trees, light fixtures, and to do street cleaning and maintenance. In Boulder, the PBD uses revenues to provide free universal transit passes, bicycle parking, other services that encourage the use of alternative travel modes.

Business Improvement Districts (BIDs), called Special Service Areas (SSAs) in some areas, levy a special assessment on commercial properties within a defined area. The additional money is used to fund improvements in the district – including a parking facility if the area businesses choose to construct one. Assessments are often on a uniform per unit basis (square footage, receipts, assessed value). With regard to parking funded by a BID, there is "typically no exemption or tax credit…provided to property owners who provide all or a portion of their required parking" (Baron and Dorsett 2004).

Another, less common method of developing parking is through a parking tax district. These districts are similar to BIDs and PBDs but they only address parking issues, not neighborhood improvement more generally. In situations where the municipality provides most or all of the area parking, the special assessment is levied on all commercial (and sometimes multifamily residential) properties on a standard per unit basis. Exemptions may be permitted for those businesses that provide most or all of their required parking already. Parking tax districts do not currently exist in Illinois, but they are found in several states, notably California (Baron and Dorsett 2004).

Authorities and Utilities

Municipalities can choose to create a separate public enterprise responsible for the provision and operation of parking in a community. Known as parking authorities or utilities, these can be found in many large cities around the country, such as Pittsburgh and Miami, and are quite common in some states. There are no such public entities in Illinois and their creation would require additional enabling legislation at the state level. Authorities or utilities are self-supporting entities with responsibilities for all aspects of public parking in a community, including on- and off-street parking in many cases. They can issue their own debt and have their own budget and governing board. Authorities are usually independent and autonomous from the municipal government and their governing board is usually appointed. Their independence can help insulate them from political influences around parking decisions, but they are also not very accountable to the public. Utilities are more under the control of local officials and so less independent but more accountable (Bier et al 2006). In both cases, the staffs of these entities will likely duplicate some elements of local government for management and administration. The interest rates on the bonds they issue are also higher than general obligation bonds the municipality issues.

A similar approach, used primarily by municipalities and universities, is to create a parking enterprise fund. This fund is self-sustaining and is separate from the general fund, but its administration is still within the local government (or university). The fund does not have the capacity to issue bonds on its own, but can raise revenue in a number of ways. These revenue streams are also available to public enterprises and include:

  • Monthly leases or permit sales
  • Parking meter revenues
  • Parking violation revenues
  • Short term (non-contract, non-monthly) parking fee revenues

The key to the fund's success is that while no one facility may cover all of its costs, multiple facilities together can. This is because the lifespan of a parking structure can range from 40-50 years or more, but development costs are typically capitalized over a 20-30 year period. This means that most parking structures have useful lives after their debt is retired, thus freeing up parking revenue to help pay for newer facilities (Baron and Dorsett 2004).

Payment in Lieu of Parking

As discussed above, most municipalities require that a minimum amount of parking be provided as part of all new developments. As an alternative, some municipalities allow developers to pay a fee in lieu of constructing some or all of that parking. The fees collected are used to construct a public parking facility that serves that particular development, as well as surrounding uses.

Most cities set a uniform fee per space, with the number of spaces per development still dictated by the parking code. The fee itself is often less than the full cost per space for the public sector to provide the parking. Unless updated regularly, the fee may be considerably lower than the actual cost if the system has been around for awhile. Vancouver, British Columbia takes an interesting approach by setting the fee per space equal to the cost to construct that space in a public garage minus the expected revenue the city will get from that space (Shoup, 2005).

In most cases, the developer can choose whether or not (and for how many spaces) to pay the in-lieu fee. Some cities may offer payment in lieu of parking only in certain districts, such as in Lake Forest or Riverside where the option is available in downtown commercial / business districts. Other cities in northeastern Illinois that offer payment in lieu of parking are Libertyville and Highland Park. Both of the cities charge $15,000 per space in the downtown areas. Lake Forest has estimated the cost of providing a space at $18,000, but charges only $9,000 per space.

Beyond the financial aspects of payment in lieu of parking, there are a number of benefits to such programs. Donald Shoup (2005) identifies a number of advantages to payment in lieu of parking, including:

  • Greater flexibility for developers , which can be a boon for historic preservation given the challenge parking can pose for adaptive reuse;
  • More shared parking, thus potentially reducing the total number of spaces needed in the area;
  • Fewer surface lots, because lots have been consolidated into one surface lot or possibly a structure; and
  • Fewer zoning variances that need to be issued, which expedites the development process and levels the playing field for all developers.

Additionally, fewer surface parking lots lead to better access management and improved traffic operations.

Public-Private Partnerships

The financing mechanisms described above mostly involve the public sector taking on debt to provide public parking facilities. Public-private partnerships (PPP) are a way to reduce the public sector's direct debt burden while also providing needed infrastructure. A key element in this is the ability to enter into design-build contracts, but this is not currently an option in Illinois. Long-term leases, another form of PPP, are the current extent of PPPs in Illinois. See this strategy paper for more details on public-private partnerships.

One example of a public-private partnership, while controversial, shows how partnerships can be used in parking strategies. For an upfront payment of $1.2 billion, Chicago leased the city's meters to Chicago Parking Meters LLC for 75 years. In return for operating and maintaining the system, the company receives all revenue from the meters. The city maintains control of meter rate increases, though they are supposed to be brought closer to market levels over the next five years (Chicago Receives $1.157 Billion Winning Bid for Metered Parking System, December 2008). In the analysis of parking management strategies, this serves as one example; CMAP has not analyzed the pros and cons of this arrangement.

Another form of PPP that has been applied to parking in a couple cases nationwide is the use of Design-Build-Operate-Manage (DBOM) to construct new facilities. An example from Connecticut can help to illustrate this innovative method. In 2000, the state issued bonds to cover the costs of constructing a new parking facility at the Bradley Airport in Hartford, Conn. Due to the structure of the agreement, the bonds are actually guaranteed by a private entity. The state's arrangement used the same entity to design and build the facility and then after construction, to operate and manage through a lease from the state. The lease payments cover the state's debt service and the facility revenues cover the lease payments. Excess revenues are split between the state and the private operator. Should the lease payments and revenue sharing prove insufficient to cover the debt service, the private operator is responsible for making up the difference (Bier et al 2006).

A similar strategy used to pay for parking facilities is called build-operate-transfer (BOT). A private entity may cover the costs associated with building public infrastructure, operate it until the costs are recovered, and then transfer ownership to a public agency. Early parking meters were often installed in this fashion with manufacturers of meters installing them and recovering costs until they were paid for (Shoup 2005).

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