I noodled around to calculate the present value (PV) of the income stream for NYC’s parking meters after reading Felix Salmon’s blog post “How will NYC improve on-street parking?” on the subject.
A rough calculation for 90,000 parking meters yields around $4,000 per meter-year at $1 per meter hour 12 hours a day after discounting for people who don’t pay their meter. That’s roughly $360 MM per investment-year. Assuming a 2% inflation rate on parking rates, yearly income rises to over $1.5 BB by year 75. (Assumptions, $1 per hour for 12 hours per day, 365 days in a year and roughly 90% payment. I can fiddle with those.)
The present value of that income stream is exactly the same as the present value of the $360 MM per year at a zero discount rate. (Zero discount rate because I am compensating for inflation.) In that scenario, roughly $27 billion is the current PV for 90,000 NYC parking meters on a total income of approximately $66 billion over 75 years. (Find a PV calculator if you want to check it.)
But, there’s a kicker. As the buyer, you have been ordered to maximize your revenue as described in the article. That’s what variable pricing does – optimize revenue.
What is the revenue possible? At least double or triple what it is now with fixed-rate parking. Let’s choose 2.5X and figure that after an investment of $1 BB and three years, the buyer multiplies revenue from its year 3 level by 2.5.
That problem is a 3 year income stream at zero discount plus a 72 year stream at zero discount. But in year 4 (year 1 of the 72 year annuity) you multiply the income of year 3 by 2.5X. Working that out, I get PV of approximately $1.08BB + $64.799 BB.
So for the investors who are buying NYC’s 90,000 parking meters for $11 BB, their sensible base scenario has a PV of around $66 billion. I know that looking at that off the top of his head, Felix thought $120K per meter was high. And if you wanted to auction off parking meters for 75 years, folks would think that was high. But 75 years is a long time, and if you can set the price of your meter to optimize your income then $730K makes sense according to the numbers.
What’s their downside risk? They could go to zero because of war, global warming flooding the city, etc. NYC could outlaw automobiles I suppose. Seventy-five years is a long time. But is that likely? No. For one thing, parking tickets are still going to be a source of revenue, and right now, parking and towing nets the city double what it gets from meters. So the city won’t give up that income easily.
What’s their upside potential? They could find that optimum revenue to meet their curbside parking availability targets is 10X current revenue. Working that out, the PV of those meters is $260 billion. (Total 75 year gross revenue over $600 billion.)
I’d guess it’s safe to say that in the next 75 years we will see a boom period. If NYC goes through a boom (we are now in a trough) meter revenues could go to 20X maybe 30X what it is today. Let’s put that assumption 30 years out and rework the problem. Let’s say that at year 4 it goes to 10X and at year 30 it multiplies again by 3X. Working that out, I get a PV of $1.08BB + $97.2BB + $486BB. The upside potential PV is $584.2 billion. (Total 75 year gross revenue over $1.5 trillion.)
In other words, Felix, unless I seriously screwed up my calculations, that $11 billion price for 90,000 NYC parking meters is a solid 6 banger, and could easily be a 23 banger. In the high side scenario, that $11 billion investment is a 53 banger. Downside risk is so miniscule you may as well forget it.
Now you know why the buyers are interested in that investment.
The people of NYC deserve more money for their meters – a lot more.