Pittsburgh has received an offer of nearly $452 million for a 50-year lease of its parking garages and meters, besting the Mayor’s expectations and providing the city an alternative route to rescue its woefully underfunded pension.
“This number certainly exceeded our expectations,” Pittsburgh Mayor Luke Ravenstahl said in a statement.
The offer, received today before Pittsburgh’s 4pm deadline for best-and-final offers for the parking assets, came from a team comprised of JPMorgan Asset Management and LAZ Parking. A runner-up, Swedish private equity firm EQT, staked out $423.1 million as its best-and-final offer.
Together, the two firms were the last two bidders standing after last Wednesday’s official offer submission deadline. JPMorgan and LAZ offered $413 million, EQT offered $391.5 million and Carlyle Infrastructure Partners offered $311 million, Pittsburgh said in a statement. Because the JPMorgan-LAZ team and EQT were within 10 percent of each other, they moved on to the best-and-final offer round concluded today.
This number certainly exceeded our expectations
The best-and-final round was the last step in a nearly two-year-long process championed by Ravenstahl to lease the city’s parking assets in an effort to raise cash for the city’s pension. The pension is only about 30 percent funded and is threatened by a state takeover unless the city can get it up to a 50 percent funded status by year’s end.
The assets up for lease include 8,946 parking spaces in 11 garages and one attended lot, 7,012 on-street metered spaces and 1,729 off-street metered spaces located in 32 surface lots.
Ravenstahl said leasing these assets is “the best solution to protect our residents from the burden of higher taxes, more debt, or serious service cuts” that Pittsburgh would have to incur if it tried to fund the pension without the parking proceeds.
City officials previously told Infrastructure Investor that they would require an offer of at least $317 million to make the one-time cash infusion necessary to fund the pension and pay off debt on the parking assets being leased.
At $452 million, the JPMorgan-LAZ offer easily bests that threshold and gives Pittsburgh extra funds that that the city will have at its disposal for further pension, infrastructure or community investment.
However, several important thresholds have to be met before the city will have any of that money at its disposal. Most importantly, the Pittsburgh City Council and the Pittsburgh Parking Authority must approve the offer, which expires on 1 November and must reach financial close by 31 December.
The city council must also pass a budget which, due to a Pennsylvania law governing distressed municipalities, cannot include any revenues contingent on the deal reaching financial close. That means that Pittsburgh City Council members may be forced to act on a budget that does not reflect the $452 million of parking deal revenues. Such a budget could inform city council's decision-making on the parking deal if it is put to the city council for approval before the parking deal.
Another outstanding data point that will inform the city council's deliberations on the deal is a valuation study of the city's various alternatives for funding its pension. The study is being conducted by Texas-based Finance Scholars Group and will be unveiled Friday, according to the firm's website. If the study's assessment of the parking lease's value differs wildly from the $452 million winning bid, it could cause city council members to think twice about approving the deal.
Perhaps sensing this uncertainty, Raventahl warned that “this number [$452 million] does not represent the value of our parking system as a whole” but rather the value of the parking system “with all of the guidelines we are legally holding the operator to”.
Those guidelines, developed under during a public process this summer, included changing the parking fee collection technology prior to increasing parking rates, opening a Pittsburgh office and lowering fee increases in certain neighbourhoods.
Last week, Scott Kunka, Pittsburgh’s finance director, told Infrastructure Investor the guidelines had “cost ourselves some money” but represented the best way to balance the city’s needs with those of the private bidders.
At the same time, the way those guidelines were forged – a combination of public hearings, city council meetings and posting the lease agreement online during the bid process – gained the city notoriety for openness during what is usually a more reserved, behind-the-doors process.
“The openness is something that distinguishes this transaction,” Tom Morsch of Scott Balice Strategies, one of the city's advisors on the deal, previously told Infrastrucure Investor.
Pittsburgh retained Scott Balice Strategies last year as it considered the viability of leasing the parking assets. Once Mayor Ravenstahl decided to pursue the transaction, the city hired investment bank Morgan Stanley to act as sole sell-side advisor for the auction process that concluded today.
The city's legal advisors included law firms Katten Muchin Ronsenman and K&L Gates.
The JPMorgan-LAZ team was advised by law firm Kirkland & Ellis and boutique investment bank Evercore Partners.