The Ohio State University (OSU) successfully reached financial close on a deal to lease its 35,000 on-campus parking spaces to a private bidder. Not only was OSU facing the challenge of being the first US university to ever agree to lease its parking spaces before, but it also had to overcome a generally negative perception of parking concession agreements, especially after a US$1.15 billion deal for the Chicago Parking Meters System in 2009 left city residents angered over the fact that parking rates had skyrocketed, and that the city still faced a huge budget deficit.

Additionally, P3 deal makers were discouraged by the fact that that cities of Los Angeles and Pittsburgh abruptly cancelled P3s for their parking meter system, mostly due to political reasons, and that a deal by New Jersey Transit to lease the parking spots at its commuter stations has been in limbo for the past two years.

OSU’s parking deal, however, turned out to be resounding success due to strong community relations and due to the school’s efforts to create a process that eliminated politics. The result was that OSU was able to reel in a US$483 bid from winning consortium QIC/LAZ Parking, which was far higher than the minimum bid of US$375 million.

As first reported by IJ News late last month, the QIC/LAZ consortium signed an agreement to lease the school’s parking system for 50 years, and beat out finalist teams led by IFM and Macquarie. The agreement limits rises in the parking meter rates to 5.5 per cent for the first 10 years, and the greater of either 4 per cent or the rate of inflation for every year thereafter.

“The biggest thing we tweaked in the deal was that when we started the deal, we set the maximum rate increase at 7.5 per cent for the first 10 years,” said Geoff Chatas, chairman of OSU’s board of directors and the school’s CFO, told IJ News.

“When we looked back over the past 12 years or so, the average rate of increase annually was 5.5 per cent, so we decided to go with the lowest possible price increases. We got higher bids with the higher increase, but we decided to go with the lower bid in order to keep the rate increases at 5.5 per cent.”

Deal History

The parking deal began in 2010, when the school brought in Geoff Chatas, a former managing at JPMorgan Asset Management’s  infrastructure investing group, as chief financial officer and chair of its board of directors. Chatas, a former managing director at JPMorgan Asset Management’s infrastructure investment team, realized that a fundamental change had to be made in the school’s financial philosophy.

“When I was brought in here three years ago, the first thing I did was to get my team together to go over the long-term financial plan for the university,” Chatas said. “I found out that the university had a one year financing plan. That was it, one year. So I immediately put together a team to build a 15-year financing model.”

Chatas said that in creating the financial plan, his team realized that the school would be several billions of dollars short over the next decade of where it wanted to be in terms of staff and facilities.

“We looked reviewed all of the university’s assets that were non-core. That included golf courses and airports. When we did that, we realized that parking could gain the school the most significant amount of assets.”

Overcoming negative image

In an era of public distrust of Wall Street, Chatas said that OSU’s community outreach efforts had to be greater than what he had originally thought in order to sell the deal to the faculty, the students and the public in general.

“I thought we could have a bunch of town hall meetings for this. We did have a bunch, but we also had to develop a social media network and get a lot of our leaders to talk to small groups about why we were doing this deal and the value that this deal presented to the school.”

Chatam added that one of the biggest challenges his team faced was to differentiate OSU’s parking deals with municipal parking deals in the past. “We spent a lot of time talking about how this deal wouldn’t be like Chicagom and what protections we put in to the concession agreement to limit price increases to no more than they have been over the past 12 years.”

Choosing the preferred bidder

Chatam said that OSU also had to defuse fears on the part of bidders that the school’s parking P3 would not fall through like they did in Pittsburgh and Los Angeles. Chatam, relying on his experience in the corporate world, said he was well aware of the money that P3 deal makers had spent on putting together bids for failed deals.

“One of the things we did was to get the board to pass on the decision making authority to a small group that included (OSU President) Dr. Gordon Gee, and one of the board members. We were authorized to move forward with the transaction if bids came in over a certain amount. That gave the bidding community confidence that this was a real transaction.”

Chatam said that OSU chose Morgan Stanley as its financial advisor because of the work it had done in the US P3 market, and because it was experienced in valuing parking assets. He added that while the three finalist bidders were all qualified, but the school’s internal parking operator believed that LAZ was the strongest parking operator among the bidders.

Additionally, Chatas said that “QIC has a long-term view and investment strategy, which is something that we wanted.”

Financing

Chatas said that he was not worried about raising the financing for the deal, given that the school had issued US$500 million in 100-year bonds in 2011.

“We have a strong AA- credit rating, and when we issued the 100-year bonds, the deal was oversubscribed to the point that we could expand the offer to US$500 million from the original US$300 million. That being said, I wasn’t worried about raising capital.”

Financing for the deal came in a mini-perm structure in which BBVA, Wells Fargo, SMBC and BMTU each put up US$66.25 million in a five-year loan facility and US$5 million each in a Capex facility. The cost of the loans were not released. The facility most likely will be taken out by a long-term bond offering that will be issued sometime before 2017.

Morgan Stanley served as the financial adviser to OSU, and Jones Day (legal) and and Desman Associates (technical) also advised. The QIC/LAZ consortium is being advised by Evercore (financial), Allen & Overy (legal) and Parsons Brinckerhoff (technical). Milbank is the financial adviser to the lending banks.

Parting advice

OSU’s deal was so popular that it prompted QIC last month to create a division that will focus solely on parking assets. Additionally, The Indiana University issued an RFQ in July for a similar parking deal, and it is rumored that Michigan State University and North Carolina State University are considering parking deals as well.

“I have two pieces of advice for those schools,” said Chatas. “First of all, don’t just see the dollar signs, rather, make sure that the deal is part of a long-term strategic and financial plan. Second, you have to create a very robust communications plan with all of your constituencies. Be upfront with them and make sure they are part of the process.”