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REITs: The Challenge of Parking Facilities
The careful negotiation of the rights and responsibilities involved with the operation of parking facilities associated with commercial properties is an often-overlooked component of the acquisition and leasing of those properties. It has been noted that the inadequate resolution of the competing interests between owners, lessors, and lessees of parking facilities can harm the interested parties' businesses and ultimately drive the parties into costly and time-consuming legal battles. Stacy E. Smith, Negotiating Parking Privileges in Commercial Leases: What Every Tenant Should Know. Com. Leasing L. & Strategy, July 2005, at 1. Unfortunately, the presence of a real estate investment trust ('REIT') among the concerned parties adds an additional layer of complexity to an already challenging situation.
As an owner of a parking facility, a REIT's structural and compliance obligations affect whether the REIT operates the facility pursuant to a management agreement with an independent contractor or whether it will lease the parking facility to a third-party operator. Operating the parking facility pursuant to a management agreement with an independent contractor is the preferable method, unless regulatory concerns dictate otherwise. First, the management agreement allows the owner to calibrate more accurately the fee paid to the independent contractor with revenues generated by the parking facility by making the fee paid to the operator a percentage of the gross revenues earned by the parking facility. In contrast, a lease arrangement requires that the operator keep the revenues from the parking facility and pay the owner rent. Since the rental amount is based upon a projection of the parking facility's revenues, the lessee will likely require a rent that will not be as favorable to the owner as the percentage fee paid under a management agreement.
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