REITs: The Challenge of Parking Facilities

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.

Second, the management agreement only gives the independent contractor contract rights, while a lease gives the lessee a possessory interest in the parking facility in addition to contract rights. Finally, negotiating and documenting a third-party lease that will approximate the flexibility of a management agreement requires a greater degree of sophistication and will generally be more expensive than preparing a management agreement. Although the management agreement option is preferable to a lease, the REIT's regulatory requirements may require it to pursue the less desirable lease option.