Tuesday, July 17, 2012

Is a San Francisco Taxi Medallion a Good Investment?

 William Stevens emails:
I was hoping you could provide some help on an issue my close cousin is facing regarding San Francisco taxi medallions. He's been driving a cab in the city for over years now and enjoys it. In his words: 
Every taxi in SF is licensed by the city, and the city has a cap on the number of permits (currently about 1500 permits). These permits are called medallions, as they are represented in the cab by a small little tin license plate bearing the number of the permit. A taxi cannot be on the streets for hire without a medallion, and medallions can only be owned by individuals who work 800 hours per year as a taxi driver. They used to be free to those who waited on a list put together by the city from working drivers, but when the drivers retired there was no payout, just the medallion going back to the city the to the next person on the list. They have been switching over to a scenario more like the one in NYC - buy a medallion, sell it when you retire for more (they are currently $600,000+ in NYC). It means a big loan, and no more $ in the short term... but it means I'm building equity in something in a city where only the rich can afford a house. And it means I can really come and go as I please, by setting my own shifts and hours. The company I work for cannot own medallions themselves, so they rent them from medallion owners and then attach them to a taxi and rent them to guys like me (who make up 80% of the drivers and make the companies 100% of their profits). So the company will cut me a check every month that I don't get currently but I will have a loan to pay with the extra money. But in the long term it means equity for other businesses I want to pursue and real financial freedom for my hard work. And ten years from now when the loan is paid off it means working a few days a week and making a pretty good living by pimping my medallion to the companies. It is the carrot on the stick in my business, and one I didn't think I'd get for another five years. It's also more debt than I've ever dreamed of being in before... and it looks like it means I'm gonna be a cabbie for a LONG time.
I know you have frequent posts regarding the San Francisco area so was hoping this was something you could cover for not only advice to my family member, but also as how it pertains to the city's economics and government controls. Anything you can cover on this topic would be greatly appreciated.

The first thing you have to understand is that the value of the taxi medallion is completely the result of government intervention in the market. The city of San Francisco, like many other cities (see NYC), has limited the number of taxis that can operate. What a city government can give, it can take away. That said, medallions appear to be something that city governments don't appear to want to mess with, once a quota has been set. It's probably because politicians don't want cabbies bad mouthing them every day to riders---and that cabbies can shut traffic down in a city protest pretty quickly.

And so, whereas there would be many more taxis serving cities with quotas, if the free market were allowed to operate, the lack of new taxis results in the price of  taxi medallions going up in value, as supply and demand results in taxis fares climbing and climbing.

It's an outrageous situation for those riding taxis regularly, but a gift to those who own medallions, as the populations of cities grow and price inflation grows, demand to ride the limited number of taxis goes up ---and city government seems to be willing to grant generous price hikes for cab fares.

If this situation continues, taxi medallion prices in cities like NYC, Chicago and San Francisco will continue to climb. Medallions are especially attractive at the present time because interest rates are low. If I were to buy a medallion, I would do so only if I could get a very long term to pay the funds back (at least 10 years) and only if I could get a FIXED rate on the loan. Without the fixed rate, you become very vulnerable to climbing interest rates that are sure to come in the years ahead.

The downside to owning a medallion is if for some reason governments turn against medallion owners and put more taxis on the street. This seems unlikely, but if it did occur, it would result in a market cap on medallion prices or perhaps even a decline. Again, it doesn't appear that governments want to take on medallion owners, but be aware what will happen if they do.

Other problems that could impact the price of a medallion is if gas prices climb rapidly. In the past, governments have allowed medallion owners to tack on an additional "gas fee", but if that isn't allowed in the future, the profit made will go down and so will the medallion price.

If overall price inflation really starts to heat up (and I think it will in years to come), the possibility ofoverall  price controls would probably impact taxi fares and would result in a decline in profit for medallion owners and, thus, a decline in medallion prices.

Bottom line: If things continue to way they are now, taxi medallions will be a good investment, as they have in the past. But there are some negative scenarios, especially potential overall price controls down the road. If that happens, it could be tough times for medallion owners.

In short, the medallion business is a business that is a microcosm of the current economy. When medallion owners cozy up to government to prevent competitors, they gain a huge edge, sometimes worth millions. But the schizophrenic government could turn on the owners in other ways, especially when macro regulations are put across an economy (such as price controls). It makes it very difficult for businesses to plan, especially long term, because you don't know in the long run what regulations will come on the scene, even though at one level the government regulators seem to be under control.

In summary, the purchase of a San Francisco medallion appears to be something that will likely prove beneficial under many scenarios , but it is not a sure thing at all, especially if years down the road price controls are implemented on prices across the country.

If someone is really sharp and gets a low rate fixed mortgage (that is also transferable to a new medallion owner) and as soon as he sees the signs that price controls may be coming, or sees the signs that city regulators are not going to be ruling in favor of medallion owners in the future, and sells immediately when these negative signs first start appearing, then a medallion purchase now is even more attractive, but you really have to be watching the signs closely and be willing to sell when the warning signals are first flashing. If you are a day late under such circumstances, you will lose a lot.


  1. I'm a huge fan but this post was completely off base, in five years there will be no cab drivers: http://en.wikipedia.org/wiki/Google_driverless_car That medallion will be worthless.

  2. If I understand governments correctly, there may be driverless cabs, but that doesn't mean there won't be medallions.

    1. In that case, there will be a lot fewer clients per cab since the only people who will need cabs are those without vehicles (either by choice or because they flew in and did not rent a driverless car or have their car drive itself to the destination overnight).

      Either way the medallions will be worth a lot less, if anything.

  3. Interesting post. I own a small business that is affected by government regulations, taxes, and mandates. That is tough enough to deal with. In addition, I spent 8 years as a city council member in my city of 60,000.

    I would NEVER recommend investing in a business where the value of one' investment is completely predicated on the actions of local government. NEVER.

  4. I thought your analysis was very good bob. I'd have to agree with anonymous above me here. While the upside is big and even probable, the downside sounds like it could be catastrophic for this person ("more debt than I ever imagined").
    I was considering buying into a package (liquor) store in my state. The profit margin would be great, but it is entirely dependent on zoning laws, laws that make all liquor prices the same, liquor license restrictions, and laws against wine and liquor sales at grocery stores.
    The location was great. Due to zoning no one could enter the area (this place was grandfathered in). Due to the price laws there was no difference in prices among stores. And most importantly the wine and liquor sales at grocery stores were illegal so people had to come to this place, which was the only one around.
    I ultimately decided not to. It was too much money to invest in on a business that was dependent on the whim of state laws.

  5. I tried to start a cab company in SF once- the local govt is corrupt and protectionist as anything I've ever experienced. If there's any safe bet, it's that they will continue to behave that way... BUT- MIses taught me that I can never depend on humans behaving the same way in the future that they have in the past. Beyond this, Harry Browne taught me to never let any one asset comprise more than 25% of my net worth. In the questioner's case, that medallion is a possible gain and a possibly catastrophic loss- hardly advisable to somebody who wants to maintain their capital.

  6. Why would u put $250,000 dollars on a medallion, when Uber can pick up passenger anywhere in the city, it just cause Uber $500 to get the TCP licence. I have been a cab driver in the city for three years. It is a unfair competition between cab and Uber. Uber has way less overhead than cab. TAXI expense: company color free $1000 a month+$800 each month insurance +$1600 interest per month($250,000 loan at 7.5% APR).
    I'm a day shift driver, at the early morning around 4-7 am, there are many uber drivers driving all around the city with there iphone app, waiting passenger to flag them to sfo. I did a survey at the airport terminal, the drop off ration between cab and town car is almost 1:1 ratio and the early morning.

  7. Forward the clock two years. The medallions are not worthless with services like Lyft and Uber steamrolling the market. The Taxi industry has been asleep at the wheel and in bed with the government at the expense of the consumer.