Additional Analysis of Certain Aspects of the OSU Proposal to Lease Parking Operations OSU Faculty Council May 31, 2012 Dick Dietrich, Accounting & MISAnil Makhija, Finance
Prior Work Earlier work highlighted 3 salient aspects: • The pure parking project. 2. Reinvestment opportunities from upfront payment by private operator. • Payments for “non-parking” activities (e.g., CABS, academic core) (“subsidies”) Note that 2. and 3. are related: More of 3. means less for 2.
Earlier Focus on 1.: Purely the Parking Project To assess project viability & potential for value creation for OSU. Compared “private operator’s problem” with “value to OSU”. Does private operator have sufficient competitive advantage to create value (NPV) in excess of value (NPV) created by OSU? Findings: Under reasonable assumptions, value for private operator can exceed value generated by OSU. But, only actual bid can affirm what assumptions hold. Recommended obtaining bids.
Implications of 2. & 3.: Upfront Bid & Subsidies Even if there was no net NPV gain, Leasing converts the 50 years of annual cash flows into a single upfront payment (bid). Reinvestment opportunities for bid amount exist in OSU’s LTIP. Reinvestment opportunities limited by draw-downs for activities funded from cash flows. (subsidization of non-parking activities)
Comparison that Incorporates 1., 2. & 3. Alternatives: “External Lease” versus “Internal Operation.” Comparison of end-of-period amounts, provided equal draw-downs and same rate of return on reinvestments. Support of same subsidization & same reinvestment policies
Alternatives External Lease LTIP0 = B LTIPt = LTIPt-1 (1 + rt – dt) Then, the draw-down = dt LTIPt-1 = Xt LTIP50 = ? Internal Operation LTIP0 = 0 LTIPt = (LTIPt-1 )(1 + rt) + (REVt – COSTSt – CAPEXt - Xt) Where Xt = same as above to ensure equal draw-downs, and rt is the same as above for equal reinvestment rates of return LTIP50 = ?
Base Case • NOTE: Unless otherwise noted, the results are based on the following base assumptions: • One-time payment from external operator (B) = $400 million • rt = 9% for all years • dt = 4.25% for all years • Year 1 revenue from parking operations = $30 million • Parking revenues (from all sources) increase by 5.5% for years 1-10; 4% thereafter • Year 1 operating expenses = $9 million • University operating expenses = 100% of operator operating expenses for all years • Capital expenditures are the same for the University and the operator • Inflation = 3.3% per year
Sensitivity Analyses • Bid: If the external lease alternative is chosen, A vs. B or D vs. E, shows that higher bids make it better for OSU (obvious, but good to confirm). 2. Reinvestment rate: If the external lease alternative is chosen, comparing A, B, and C vs. D, E, and F, respectively, higher reinvestment rates improve the deal for OSU (benefit of upfront payment). 3. Higher OSU Costs: A vs. C or D vs. F shows that higher operating costs for OSU worsens end-value for internal operations (obvious, but magnitude of effect reflects competitive advantages of private operation).
Effect of Draw-Downs: Variations on Same Base CaseOrdering of Ending LTIP is Unchanged!
A Most Sensitive Issue: Reinvestment Rate Bids amounts will soon be known for different rates of growth of parking rates. But, the reinvestment rate will remain an assumption. Yet, this rate is critical: See A (9%) vs. D (8%).
Is 9% Reinvestment Rate Reasonable? Nationally, pension funds assume around 8% today. STRS uses 7.5%. University endowments have higher risk-higher return investments than pension funds. (Appetite for risk?)
Recent Endowment Returns, Year-Ending June 30National Association of College & Univ. Bus. Officers Data YearMedian Rate of Return 2011 19.8% 2010 12.1% 2009 -19.1% 2008 -3.3% 2007 17.5% 2006 10.8% 2005 9.1% 2004 16.0% 2003 2.9% 2002 -6.4% - Geometric average rate of return over last 10 years = 5.2% Geometric average rate of return over past 10 years minus 2 Great Recession years of 2008 and 2009= 9.9%
Conclusion • End-of-period amount shows cumulative effect of • parking project through the bid if external lease or actual project cash flows if internal operation, • reinvestment opportunities, and • draw-downs. 2. Two assumptions, bid amount and reinvestment rate, have a significant impact on the relative performance of “external lease” versus “internal operation” alternatives. • Variations in draw-down amounts (“subsidies”) do not impact the relative performance of the alternatives. • “External lease” outperforms “internal operation” with reasonable reinvestment rate and certain bid assumptions.