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John Roy Real Estate Background:
- Founder of JNL Parking, a parking investments company
- Featured on CNBC as an expert in parking from his guide The Ultimate Parking Business Buyer?s Guide
- Serves on the Board of the National Parking Association and is a Certified Parking Professional
- One of the leading brokers in the Parking Industry
- Based in Fort Worth, Texas
- Say hi to him at www.jnlparking.com/
- Best Ever Book: The Fish that Swallowed the Whale
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Joe Fairless: Best ever listeners, welcome to the best real estate investing advice ever show. I'm Joe Fairless and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any fluff.
Today we're gonna be talking about a topic we have never interviewed someone about before. As creepy as it sounds, I've actually dreamt about interviewing someone about this topic, because I hadn't met anyone who invests in... Parking lots and parking garages! How are you doing, John Roy?
John Roy: Great, Joe. How are you doing?
Joe Fairless: I am doing well, and I'm pumped to talk about this stuff. I guarantee you no one's ever been more excited to talk about parking lots and parking garages than I am right now, because again, I've interviewed close to 1,000 people and not one person has invested, or at least have talked about investing in parking lots and parking garages.
A little bit about John - he is the founder of GNL Parking, a parking investments company. He's been featured on CNBC as an expert in parking, from his guide "The Ultimate Parking Business Buyer's Guide." He's on the board of the National Parking Association and is a certified parking professional. He is based in Fort Worth, Texas, my hometown. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
John Roy: Thank you, Joe. I don't wanna put the listeners to sleep with all the accolades in parking. Sometimes it's not a very exciting topic to talk about. People that know about the subject, once they start learning about it, they can't stop talking about it. They always say "I've never really looked at it as an investment." I know that I always have to pay, so it's something that's relatable to everybody, because we've all had to pay for this, but we never really think about it as an asset class.
Once people come around and learn about it, they're usually very motivated to learn more about the investment and how they can get involved.
Joe Fairless: Well, let's talk about how you make money with parking lots -- well, first off let's do this, before you answer that question. How about you tell us the business model behind parking lots and the business model behind parking garages? And if we can group them together in the same conversation or if we have to have two separate conversations.
John Roy: Great. Here's the basic business - it's the business of taking blacktop or pavement, an 18 by 10 section, and renting it over and over and over, with very little upkeep, no TI's and very little headaches when you do it properly. That is the basic business model. Now, as with anything, it's a lot more complicated, but what you really are looking for when you're looking at parking investments is "What is my demand generator?" That is the number one thing that you always have to ask yourself.
We look for certain demand generators and certain demographics... We love universities, we love courthouses, we love hospitals and we love sporting events. We focus on those areas that have just proven time and time again to be great demand generators for people in need of parking.
Joe Fairless: Universities, courthouses, sporting events and what else? What was the fourth one?
John Roy: Hospitals.
Joe Fairless: Yes, I have driven to all four of those and parked somewhere. That makes sense. How do you run the numbers?
John Roy: It is calculated on a cap rate basis. A lot of times people get hung up in the price/space, what you're paying. It's similar to the hotel industry and a lot of other industries, where they'll look at the price per key, but really in parking it comes down to your cap rate. You look at it and you analyze it just like any other business. You'll take your revenue minus expenses, and you end up with your net operating income, and you look at it based on a cap rate.
Now, there's opportunities within that, and you can't always be scared of the cap rate because some of our best deals are purchased at low cap rates, so we immediately turn around, fix the operations and we can increase the cap rate sometimes by 300-400 basis points.
Joe Fairless: Will you give us an example?
John Roy: We were looking at a deal up in Milwaukee - it's a great little parking market, not a lot of big institutional investors are really clamoring to look at some of these great Midwestern towns, but we found a listing where an owner was selling a Thai restaurant and a parking lot. A lot of people are gonna be chasing Thai restaurants in downtown Milwaukee. So we went up there, took a look at it, and we found a great opportunity with a surface lot. We didn't really want the Thai restaurant, that's not our forte, so we convinced the owner to keep the restaurant and we would purchase the parking lot for a million dollars.
Now, on the cap rate it was a 5% rate of return. It didn't look great, but we saw opportunity, we saw the traditional signs that you look for, which is an attendant taking cash, not good signing, no automation... The operations were wrong. He was catering to monthly parkers, which in the parking industry you don't typically want a lot of monthly parkers. You want daily, what we call "transient" parkers that are gonna turn the spaces over and over again.
So we purchased it on a 5% cap, then we turned around and signed a lease with Standard Parking, which is the largest parking operator in the country for $155,000/year. After our taxes, we were at an unlevered rate of return of 14%. We signed a ten-year lease, so we don't even operate the lot; that's not our model, we're not operators. And we have a tenant in there that's a publicly-traded company, and we have a great asset that we can probably turn around and make some good money off.
Joe Fairless: So you're not operators, that's what you've just said... Standard Parking - is that the name of the company? You usually just lease out your stuff to them?
John Roy: And there are hundreds, if not thousands of parking operators in the country. When somebody wants to get into parking, the easiest thing to do is to get into the operation side of it. Very few people have the capital, the wherewithal, the patience to actually invest into real estate, and that's really what's made us successful - we invest in the actual, physical real estate asset of parking, and then we turn around and lease it. It's a cutthroat industry among operators. They operate on very low profit margins, so you're actually able to get really good lease terms from parking operators throughout the country.
Joe Fairless: Okay, so you're buying the actual real estate, the parking lot, but then you're leasing it out so you don't have to operate it, because as you said, it's a cutthroat business and it's tough to make some money on that unless you're a well-funded, well-oiled machine...?
John Roy: I'm gonna jump to the end of your show here, where I'm gonna offer your listeners the best advice ever.
Joe Fairless: You're killing my format! I've gotta ask you the question, we've got lead-up music and everything, so I'm gonna ask you the question and then we're gonna keep our conversation going... What is your best real estate investing advice ever, since you forced my hand?
John Roy: Don't get into operations. [laughter] If you're going to get into parking, get into the physical real estate side of it. Don't get into operations, it's a nasty business. If you go into it, you're gonna get killed. They're very competitive. Focus on real estate. That's really my talk here - we're driven by real estate; there's no money to be made in operations... Very little. Let's look at the actual ownership of assets. However, we have a lot of experience in operations, because we've done that in the past, so we could literally walk into a parking lot or a parking garage and within the first five minutes be able to say, "Okay, this is how we're going to improve this operation, this is how we're gonna drive our return; here's what they're doing right, here's what they're doing wrong." Once you know that, then you can drive the actual value.
For people who wanna get into this type of business, what I always tell them is if you find a great site, contact two or three operators, let them do the due diligence by having them give you offers to lease this parking space from you, and you'll have three competitive bids and you'll be able to know pretty quickly what the real value of that asset is, without getting in trouble.
Joe Fairless: Okay. Obviously, you need to have it under contract at that point, when you get the bids, right?
John Roy: Not necessarily, no. Because if it hasn't been sold and you're doing your due diligence work before, it doesn't take the operator very long to give you an operating bid. It usually takes about a week to get a bid back, as long as it's not a very complicated process.
Joe Fairless: But the concern would be that they'd buy it and take it out from under you.
John Roy: That's correct, yes. If you're in a marketplace that's competitive, depending on the market, sometimes these assets are gone very quickly, so you do have to tie it up and then start your due diligence, and that's usually the process that we follow.
Joe Fairless: You said you can walk into a parking garage and know pretty quickly what they're doing right, what they're doing wrong. You already mentioned two things that are wrong - an attendant taking cash and not good signage... What else is wrong that you've commonly seen?
John Roy: I'm gonna give you an example for a garage, and this is very common. We had an example of a garage in Baltimore where they couldn't make money - they were operating in the negative. We walk in there, and there's another garage just a few doors down that is just absolutely killing it. It doesn't take very long for us to walk in there and say "It's the lighting. You have a lot of female clients who will not park in a garage that's not well lit, that [unintelligible 00:11:52.24] that's dirty." A lot of times you'll neglect that demographic of your business, which is a huge mistake.
First thing we tell people is make the appearance presentable and welcoming, and don't ignore that demographic of your clientele. They wanna be able to feel safe the whole time - safety is a huge issue in garages. So just simple things like fixing up the lighting, cleaning up the place, new paint will do wonders in turning around that garage.
Joe Fairless: And then things people do right with their garages - proper lighting, having it automated, good signage and clean with new paint?
John Roy: That's correct. You want a garage that's presentable, good lighting, you want the latest technology... You want to be able to have a garage where people can come in, pay and get out quickly. They don't wanna wait in lines, they don't wanna deal with cash, they don't wanna deal with tellers a lot of the time. The business is moving away from the human factor into almost complete automation.
You really do find opportunities out there when you find what we call the dinosaurs - people still taking cash... Or some people will be familiar with the [unintelligible 00:13:02.24] boxes with a bunch of slots in them that you fold your dollar up sometimes to slip it in there... Whenever you see that, it's a great opportunity. You know, on average, that according to studies through the National Parking Association, there's about 30% theft rates whenever you're dealing with cash.
Joe Fairless: You say "death rate"?
John Roy: No, theft.
Joe Fairless: Theft. [laughter]
John Roy: I guess it could -- well, let's not talk about that. Yeah, theft rate. People are stealing money, in other words. It's a cash business, it's been going on for years and it's changing, but there still are some opportunities out there.
Joe Fairless: Okay, so if we find a parking garage or a parking lot that had any of the things you've just mentioned that are wrong, then it could be a tell-tale sign that we have a motivated seller, or someone who would be interested in selling. How do we get in touch with that person?
John Roy: You rarely see signs for parking lots and parking garages for sale. I don't know if you've ever have seen one yourself, but it's very, very rare.
Joe Fairless: No, I haven't.
John Roy: That's the thing. Most of the times they're done quietly, that's why we're in such demand in the industry and that's why we specialize in what we do, and it's really relationship-driven and you have to do your work. We call it pounding the pavement - getting out there, going to cities... We focus on downtown areas. We'll walk around and we'll look for garages and lots that have some of the tell-tale signs that we've just discussed, and we'll call the office back and we'll do a title search, tech search, and then we just start dialing and trying to get a hold of people. Sometimes it takes years before they come around, but eventually we see that if they get the right price, they'll be interested in selling.
Joe Fairless: What does that conversation sound like, when you reach out to them initially?
John Roy: "Never. I will never sell this asset. It generates great cash, I'm not in a hurry to sell." That's typically how the conversation starts. Over time you just kind of break them down, sometimes you'll bring an offer and you'll pique their curiosity. A lot of the times sellers don't have an idea that their asset could be worth as much, so once you present a number that they weren't really thinking about, they tend to start opening up.
Sometimes there's deaths in the families, they're generational assets that are passed down, and the next generation doesn't have any interest in operating the parking assets.
Joe Fairless: If we find a parking lot and we're like "You know what? I might be able to get this person to sell me it", who are the top three leasing companies I should reach out to?
John Roy: The biggest one is Standard Parking. They go by ticker symbol SP. They're publicly traded, so you can actually invest in them. You have a lot of regional operators. If you're on the East Coast, you have a company called [unintelligible 00:16:02.24] they're a pretty big one. You have a Canadian company named Impark - it's growing rapidly here in this country. Then I would say ABM is another one that's a pretty big company in the Midwest... There's no shortage of operators throughout the country.
Joe Fairless: What type of risk should we be aware of as someone who has real estate experience, but not this type of experience in this industry?
John Roy: This is why parking, in my opinion, is the greatest asset, because it's really a hybrid of investment vehicles. You have basically a bond that pays you regular payments once you sign a lease with an operator, and it's also a stock, because the land underneath it appreciates in value, and it's always for future development - whether it's a garage or a surface lot in a downtown. You have a stock, you have a bond, it's all backed by real estate, and you also have basically a tip that protects you against surges in inflation because you have annual CPI increases built into your lease.
A typical investment is you purchase a surface lot in a downtown, you sign a lease for $100,000/year, plus 2,5% annual CPI increases. You have this guaranteed income for the next ten years.
Here are the risks that you have if you don't get a guaranteed lease from an operator - the biggest risk is the governments, through taxation. But I guess that's an inherent risk throughout real estate. What some cities will do is that it's really a tech parking in the form of the parking tax, because that's usually the low-hanging fruit for cities. So they could implement overnight a 10% parking tax. Now, typically it's a pass-through cost to the consumer, but that's really the biggest risk that you have.
If you've done your due diligence properly and don't have any environmental risk on the land below you, there's really not a lot of risk because if the operator stops paying you, you just move on to the next operator.
Joe Fairless: You mentioned environmental risks... Who does the due diligence on this? What type of professionals do we need to hire in order to do all the due diligence that we possibly need to do on a parking lot?
John Roy: Number one - you start with an operator. Get them to give you a guaranteed lease - I can't emphasize that enough. Number two - YOU are going to do the due diligence on the surface lot, and here's how it's gonna go. You're gonna tie it up for 45 days, you're gonna order a property condition report if it's a garage. You want to know that the garage is structurally sound. Do not ever buy a parking garage without a property condition report, because there's a lot of swindlers out there that will try to sell you a garage that's falling apart or could be condemned, and those are usually huge expenses. So get a clean bill of health through a property condition report.
You're also gonna get environmental reports, and this is more prevalent for surface lots than garages. You wanna make sure that the land that you're purchasing has not been contaminated in the past, because you could potentially be liable, even if it's before you purchased this asset. Once you get a clean phase one, as we call it, then you're fine. If they come up with what's called RECs (recognized environmental concerns), you need to order a phase two where they will actually drill into the surface and try to get samples of any contamination. If it comes back that there are contaminations, walk away. Don't do anything but walk away. If you get a clean phase two, then you can proceed with the deal. It's as simple as that.
You're gonna get a survey, which is standard for most real estate, and you're gonna get a clean title. As long as you get that done, then it'll be a very good investment for you.
Joe Fairless: Anything else we haven't talked about as it relates to investing in parking lots and parking garages that you wanna mention?
John Roy: It's tough to do. It's tough to find these assets, but if you do, most of the time you need debt, so you wanna leverage these assets. Typically, in today's market you can actually get debt on these parking assets where in the past you really couldn't... Especially surface lots, banks would look at them as land plays, and you know how difficult and expensive it is to get financing for raw land. But now, with about 35% down, you can actually buy these assets, as long as you prepare a good proforma showing the cashflows, and especially if you have a guaranteed lease from an operator, you can get financing pretty easily.
I would say people that wanna get into this realm - don't get discouraged. It's gonna take you some time, but if you ever do find a great asset, you [unintelligible 00:20:53.01] make it work, have a worst-case-scenario and you can pass it on to us and we'll give you a referral fee. There's opportunities to be had, you just have to be patient with it.
Joe Fairless: The chicken before the egg thing that I'm getting tripped up on is this guaranteed lease from the operator, but hen also getting financing... Because the bank's gonna wanna make sure that you have the guaranteed lease, but you can't get the guaranteed lease until you actually own it. So how does that work?
John Roy: That's a great point, thank you for pointing that out. Sometimes you get so caught up in your industry, you do it so much that you think everybody understands it. A guaranteed lease is just as simple as getting a commitment letter from the operator. The commitment letter will specify all the details; you will actually work through a lease, and then the day that you close on the property, the lease will be in place. The contract is really contingent upon closing.
So you get the commitment letter from the operator, you will sign a lease and it will state that on this date, the lease commence is as long as the deal close.
Joe Fairless: It makes sense. Are you ready for the Best Ever Lightning Round?
John Roy: Let's go.
Joe Fairless: Let's do it. First, a quick word from our Best Ever partners.
Break: [00:22:11.07] to [00:22:52.25]
Joe Fairless: Best ever book you've read?
John Roy: The Fish That Swallowed The Whale. It deals with Sam Zemurray and the Banana King. If people have not read that, that would be the number one book that you need to read right now. Get it on our list, you won't be able to put it down. Amazing book.
Joe Fairless: The Fish That Swallowed The Whale?
John Roy: About bananas. Who would have ever thought a book about bananas would be the best book that one could ever read?
Joe Fairless: Wait, I wanna make sure I got the title down right: The Fish That Swallowed The Whale And Bananas...? Is that the title?
John Roy: The Fish That Swallowed The Whale, that's the title. And it deals with making of the Banana King.
Joe Fairless: Okay, got it. There's a lot of nouns thrown into that title. Okay, cool. Best ever deal you've done?
John Roy: Downtown Cincinnati. We took an old mall, we converted into a parking garage. Purchased it for 14,5 approximately, and when I said "we purchased it", we helped that real estate group buy it. Now potentially worth 25-28 million, two years later.
Joe Fairless: How much did you put in to make that conversion?
John Roy: It was already done. It was turnkey at 14,5.
Joe Fairless: Oh, wow. Best ever way you like to give back?
John Roy: I like to volunteer my expertise in parking. Like I said, it's a difficult field to get into, but I will always take calls and give people advice. They're free to call me on my cell phone and I'll walk them through a process, I have no problem doing that.
Joe Fairless: Just on that best ever deal, you said it was a mall and now it's a parking garage, right?
John Roy: Correct, it was a mall. It's downtown on Ray's Street and 3rd, if you know Cincinnati. It was repurposed into a parking garage, about 775 spaces, and it's been an absolute home run.
Joe Fairless: It was repurposed after you purchased it or before?
John Roy: It was concurrent. We had a deal in place with the city and a contractor to buy in and have them convert it into a parking garage. It took about 8-12 months for completion, but once it was done, it opened and we almost filled that garage up within two months.
Joe Fairless: So you didn't have to pay for the conversion?
John Roy: We did, yeah.
Joe Fairless: You did, okay.
John Roy: Basically the conversion, land, everything, all-in 14,5.
Joe Fairless: Okay, I'm with you now. Got it. What's a mistake you've made on a deal, on a very tactical level?
John Roy: Partnering up with a developer where you contribute the land and they don't contribute enough equity themselves. We will never do that again.
Joe Fairless: And where can the Best Ever listeners get in touch with you?
John Roy: Go on my website and you can find both me and my partner's contact information. Feel free to give us a call if you're ever in Dallas or Fort Worth. Look me up, I'd love to have a drink or dinner with you.
Joe Fairless: Well, the theme has been clear, that's for sure, on parking, and that is if you get into parking and you get into operations, then you did not listen to this episode very closely, because John does not want you in parking operations. Instead, buying the parking lot or garages and then finding an operator that has the experience to then enter into a lease with them.
We talked about a bunch of stuff, from the due diligence that you need to do to how you make money, which is through that lease, which is something I didn't know. Then also you said at the very beginning of our conversation how you don't want monthly parkers, you prefer to have more transient parking, and you look for universities, courthouses, sporting events and hospitals.
Then also the ways to do a parking garage right and wrong, and when we look at the wrong areas, perhaps we find a motivated seller. Or in your case, you said not a lot of times are they motivated, so really just someone who should be selling and perhaps eventually will sell to you if you stay in their ear long enough. Thanks so much for being on the show, John. I hope you have a best ever day, and we'll talk to you soon.
John Roy: Joe, my pleasure. Thank you!
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