Got a raw deal? Renegotiate a better one: If you are stuck coping with a faulty contract, try renegotiation.
Many viewed the deal to be a terrible one from the start. In December 2008, Richard M. Daley, then Chicago’s mayor, announced that his administration had agreed to lease the city’s parking meters for 75 years to a private company for nearly $1.2 billion in an attempt to tackle a budget shortfall of about $500 million. The deal was rushed through the city council despite members’ confusion about what, exactly, they were signing.
After Chicago Parking Meters (CPM), an investment group led by Morgan Stanley, took control of the city’s meters, Chicago drivers quickly found themselves paying the highest parking rates in the country. And in 2010, the news broke that, as had been widely suspected, the city had sacrificed billions of dollars in revenue in the negotiation. Daley spent $1.15 billion of the money paid to the city in the parking deal during what proved to be his final term in office, leaving just $125 million unspent. As we described in the article “Help Your Agreement Go the Distance” in our June 2011 issue, CPM revealed in a private note sale that it expected to receive $11.6 billion in parking revenues over the course of its lease.
When Rahm Emanuel took office as Chicago’s new mayor in 2011, he vowed to try to get taxpayers a better parking-meter deal, despite the fact that the 75-year contract had only just gotten under way. We look at his administration’s renegotiation tactics with an eye toward identifying how you can avoid Chicago’s mistakes—both in your initial negotiations and in your renegotiations.
If you find yourself struggling to cope with a lopsided deal, your first step should be to call the inequities to the other party’s attention and ask for a renegotiation. Because most people have an innate desire to be fair, the other party may be willing to reopen a discussion before the end of your contract period, especially if you back up your request with convincing evidence.
What if they aren’t? Some would say it’s time to threaten a lawsuit, if you believe you can make a strong case. But doing so could escalate a situation that might be resolved more efficiently, cheaply, and peacefully.
There may be other ways to get your counterpart’s attention. When CPM submitted a bill for $12 million in lost revenue due to street closings in 2011, Emanuel refused to pay it. He also refused to reimburse the company for the $35.5 million it claimed it was owed as a result of cars with disabled-parking placards and license plates parking for free. He publicly challenged the company’s right to reimbursement, saying, “There’s a new sheriff in town.”
Emanuel then put together a team of heavy hitters, including the city’s chief financial officer and a prominent hedge fund managing partner, Michael Sacks, to fight the bills. These attention-getting moves worked: CPM agreed to sit down at the table.
In August 2012, the mayor announced an agreement that the city, and not CPM, was entitled to determine how much the company was owed due to street closings. The city then hired a technology consulting firm to develop software to recalculate the city’s bill. Meanwhile, the city’s dispute with the meter company over reimbursements for free parking by those with disability designations entered arbitration.
“A little lemonade”
The negotiations between CPM and the city’s team continued for months. In addition to filing legal actions and revoking prime parking spots from CPM’s control, city representatives sought to resolve a dispute over tens of millions in unpaid fees.
In April 2013, Emanuel announced the terms of the revised deal, which he claimed would save the city a projected $1 billion over the course of the 75-year contract, specifically by reducing fees billed by CPM for out-of-service meters and other lost revenue. The city agreed to pay $8.9 million of the disputed $49 million that CPM had claimed it was owed. The new contract also provides for free parking in many neighborhoods on Sunday, a city tradition that vanished when CPM took control in 2008.
Yet an analysis by the Chicago Tribune suggested that the renegotiation may not have resulted in a better overall deal for city taxpayers and drivers. CPM negotiated to extend the hours of paid parking on most nights other than Sunday. And the company could net millions in service fees from a pay-by-cell-phone system that could be added to the contract.
The city largely lost in the arbitration over disabled-parking permits. Yet Emanuel has lobbied the Illinois governor to block CPM from seeking further reimbursements for free parking for those using disabled signs and plates.
Burned by CPM’s initial contract, Chicago reluctantly voted in June to approve the renegotiated deal. Emanuel has tried to deflect criticism that the new terms don’t go far enough to improve Chicago’s side of the deal. “I’m trying to make a little lemonade out of a big lemon,” he said. “We can’t make this bad deal go away, or make it a good one.”
Toward more successful renegotiation
The limited success that the City of Chicago had renegotiating its botched parking-meter deal attests to the difficulty of persuading a counterpart to revise existing contract terms. Perhaps the ultimate lesson from the dispute may be the value of getting the deal right the first time. Here are a few tips to follow:
1. Create breaks. Mayor Daley consented to a truly epic 75-year deal with CPM. Given the difficulty of foreseeing how economic and other conditions will change, try instead to do short-term deals that will allow natural breaks for renegotiation. A much shorter contract would have allowed the City of Chicago to examine how the parking deal was working, negotiate adjustments as necessary, and seek out other bidders in the event of non agreement.
2. Prepare for disputes. Even with short-term contracts, disputes and differences of opinion inevitably arise. Add a clause to your contract that requires renegotiation, mediation, or arbitration in the event that parties end up disagreeing about the terms of the contract or how the partnership should unfold.
3. Avoid quick fixes. Daley addressed a short-term crisis—a pressing budget shortfall—with what appeared to be a simple solution: a cash windfall from a parking-meter deal. In the midst of an emergency, it’s not unusual for negotiators to seize on seemingly quick fixes. Unfortunately, short-term thinking can lead to long-term problems. To avoid this common error, include disinterested parties in the decision-making process and encourage them to question your judgment.