298 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / JULY/AUGUST 2000 INVESTMENT RISK ANALYSIS IN AIRPORT PARKING FACILITY DEVELOPMENT By Massoud Javid 1 and Prianka N. Seneviratne, 2 Member ASCE ABSTRACT: Although parking revenue is a principal source of income, supply of parking infrastructure at airports is based largely on expected needs. Although that is a rational basis, high investment costs and man- agement fees are requiring developers and financiers to carefully analyze investment risks. This paper focuses on sources of investment risk in airport parking infrastructure development and discusses the application of Monte Carlo simulation to estimate and understand the impacts of cash flow uncertainties on project feasibility. It is shown that cost overruns, which are common in construction project development, have the most significant impact on return risk. INTRODUCTION Parking infrastructures are an important aspect of airport operations and air travel. On the one hand, they make up a sizable portion of the total revenue at most airports. For ex- ample, according to the Minneapolis-St. Paul International Air- port’s News Release (‘‘Questions’’ 1996), the airport received $30,300,000, over 30% of the total operating revenue, from parking operations. Likewise, parking facilities contributed over 13% of the total airport system operating revenue in 1998 to the city and county of Denver (Denver International Airport 1998). Indeed, a 339-airport survey performed by the Airports Council International (1998) has revealed that almost 50% of revenues in 1996 at North American airports were generated by nonaeronautical sources, including parking. On the other hand, well-planned and well-located parking facilities contribute to the overall quality of air travel, partic- ularly in the United States where the automobile is the dom- inant airport access mode. Quality, in turn, influences market share at airports in regions with multiple airports, to which airport operators would be more sensitive than to parking rev- enue. The above two factors are boosting investment in parking infrastructure. It is likely that even small airports, which are seeking to capitalize on the increasing costs and congestion at the larger ones, will increase the supply of parking. However, past parking infrastructure development projects, listed in Ta- ble 1, indicate that infrastructure costs are rising faster than the growth in air traffic. The reported average unit cost (cost per parking space including land and construction) between 1990 and 1996 was approximately $15,000, and the unit cost has almost doubled during the same period. Based on a study of parking structures in California and Illinois, Shoup (1999) estimated the cost of aboveground parking to be approximately $15,000 at the University of California, Los Angeles, and as high as $37,500 in Beverly Hills, Calif. Moreover, landslide space and environmental regulations are continuing to con- strain development, which in turn leads to elevated costs. The rising costs raise two important questions. Who should finance, design, build, and/or operate future parking infrastruc- tures? and how? Their revenue generating potential is certainly an incentive for airport authorities to undertake parking de- 1 Sr. Assoc., Resource Systems Group, White River Junction, VT 05001-9263. 2 Prof., Dept of Civ. and Envir. Engrg., Utah State Univ., Logan, UT 84322-4110. Note. Discussion open until January 1, 2001. To extend the closing date one month, a written request must be filed with the ASCE Manager of Journals. The manuscript for this paper was submitted for review and possible publication on July 12, 1999. This paper is part of the Journal of Construction Engineering and Management, Vol. 126, No. 4, July/ August, 2000. ASCE, ISSN 0733-9634/00/0004-0298–0305/$8.00 + $.50 per page. Paper No. 21432. velopment projects. Likewise, they also are attractive invest- ments for the private entrepreneurs and other airport tenants such as the airlines, which the federal government see as in- evitable future airport developers and operators (U.S. Depart- ment of Transportation 1996). In fact, airlines have been and will continue investing in landside infrastructure. Terminals and aircraft servicing facilities at several large hub airports around the world are owned and operated by airlines. How- ever, planning, designing, and building of parking infrastruc- ture are still largely undertaken by the airport authorities. The operation and management are subsequently outsourced through public tenders. Whether it is a semipublic airport authority or a private developer, the financial viability of and interest in parking in- frastructure projects depend on potential returns on the in- vestments. In the case of airport authorities, the returns must be sufficient to service revenue bonds, meet Federal Aviation Administration (FAA) investment criteria for Airport Improve- ment Program funds or secure commitments from other fund- ing sources. Private developers must demonstrate the expected returns to the financiers, generally comprised of several com- mercial lenders (e.g., construction and permanent finance) and equity investors. Returns, however, depend largely on antici- pated demand for parking, which is a random quantity influ- enced by variables such as demand for air travel, parking charges, and the present and future availability of alternative modes. Consequently, there is an inherent risk associated with returns, the magnitude and sources of which developers of parking infrastructure at airports will be required in the future to analyze and manage. The writers propose the use of Monte Carlo simulation to generate information typically needed by developers and fin- anciers. Using data from Dorval Airport in Montreal, the writ- ers discuss and illustrate the impact of various economic and technical factors on cash flows and risk. RISK ANALYSIS Risk is a major concern in many fields ranging from lottery to economics and banking to engineering (Damodaran 1996; Walsh 1996; Kottegoda and Rosso 1997). The objective of risk analysis in any field is to determine the probability (likelihood) of failure of a system to meet a predetermined level of per- formance during a given period, because of a given action or decision. Knowledge of that probability or risk enables deci- sions and actions to be tailored to minimize, or even circum- vent, the adversities. The risk issues addressed in this paper pertain to investment decisions made by developers as well as financiers. Developers of parking infrastructure may finance projects with equity cap- ital bank loans or bond issues. The willingness of financiers to lend, however, depends on the likelihood of asset value rising over time. Therefore, return risk is a fundamental quan-