Parking, Storage And Other Ancillary Income

Ancillary income is easy to dismiss because each item is small. Its characteristics are unusual enough that it deserves attention disproportionate to its size.

Why the margin is different

A parking space that already exists costs almost nothing more to let. There is no additional heating, no additional turn cost and minimal additional maintenance.

The same applies to storage areas in buildings that have them. The space exists whether or not it produces income, so nearly all of the charge is incremental.

Because the incremental cost is low, ancillary income flows through to net income at a much higher rate than an equivalent amount of rent does.

Unbundling changes the pricing question

Where parking is included in rent, its value is invisible and every tenant pays for it whether or not they use it.

Separating the charge lets it be priced against its own demand, which in a location with constrained street parking can be considerably higher than the rent premium it was earning.

It also allows adjustment independently of the lease, since a parking agreement can run on different terms from the tenancy where local rules permit.

Laundry has its own economics

Shared laundry can be operated directly or leased to an operator who installs and services equipment in exchange for a share of revenue.

Direct operation captures more income and carries the capital cost, the servicing burden and the vandalism risk. The leased arrangement trades income for simplicity.

In-unit laundry removes the income entirely but usually supports higher rent and lower turnover, which is generally the better trade where the plumbing allows it.

Fees that are not really ancillary income

Some charges labelled as ancillary are cost recovery rather than income: utility billbacks, application processing costs and similar items reimburse a cost already incurred.

Treating recovery as income inflates apparent margin and produces a distorted picture of how the property performs.

Which fees may be charged at all, and how they must be disclosed, is regulated in many jurisdictions and the rules are revised periodically.

How ancillary income affects valuation

Because income property is often valued from net operating income, a recurring ancillary stream contributes to value at the same multiple as rent does.

Buyers scrutinise its durability, though. Income from a month-to-month parking arrangement is treated differently from income secured by a lease.

Documenting these arrangements formally, rather than running them on informal understanding, is what allows the income to be recognised when the property is eventually sold.