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Airport Finance 19 the actual costs of providing the facilities or services. Another approach, referred to as the com- pensatory approach, is based on cost recovery for actual costs of facilities and services (6). There are many versions of the compensatory approach developed primarily for air carrier airport appli- cations. Airports have commonly used a compensatory or a residual ratemaking methodology, or some combination of both, to cover costs in the airport/airline relationship. The airport/ airline relationship is discussed in greater detail in Chapter 6, "Commercial Service," and de- scribed in Airport Planning and Management (6). For the purposes of this section and small air- port management, the compensatory approach essentially means cost recovery for actual airport facilities and services. In most cases airport owners will utilize a mix of both market-based pricing and cost-recovery pricing in determining rates and charges. The way that fees are determined also depends largely on the structure of airport leases. Short-term agreements allow management the ability to adjust rates more frequently as required. Long-term contracts and airport lease agreements may not allow for these types of adjustments. It is fairly common to establish rate escalators in longer-term lease arrangements. The FAA recommends that all leases with a term exceeding five years provide for periodic review of the rates and charges for the purpose of adjustments to reflect the then-current values. This process also establishes parity of rates between new operators coming on to the airport and long-term tenants (FAA Order 5190.6A, Airport Compliance Requirements). Of course, the nature of the activity contemplated under the lease will affect the determina- tion of how charges are calculated. Commercial users, hangar renters, FBOs, or agricultural land leases, for example, all may require varying approaches to establishing rates depending on the activity. A general aviation airport may also establish rates for terminal charges, airfield charges, and buildings and grounds charges (5). Terminal charges might involve such things as use of confer- ence facilities, concessions, gift shops, car rentals, or office space. Airfield charges include fuel flowage fees or landing and ramp fees. Fuel flowage fees, often established at general aviation air- ports, are collected on gallons of aviation fuel dispensed. This fee is often collected from private commercial operators as part of the lease agreement. Other fees or grounds charges may be estab- lished for use of airport buildings and grounds for a variety of uses, such as the construction of private hangars or special events. The airport manager should apply reasonable fees for airport rentals or other charges in a uni- form manner for like uses. For example, an FBO should be subject to the same rates and charges as another FBO making use of similar facilities or services. Terms and Conditions Careful consideration should be employed in determining the terms and conditions to be incor- porated into an airport lease agreement. This is particularly the case with regard to commercial use agreements. The contract between a public entity and private business normally involves the right to occupy and use designated premises in the form of a lease. The airport manager must negotiate a term consistent with other airport leases, goals, and objec- tives with the understanding that the commercial tenant may be contemplating a significant invest- ment at the airport. The lease of land or premises should consider a term long enough to amortize the investment to which the tenant will be committed (5). The terms of the lease must, however, be consistent with the master plan for phased airport development and land use. Airport lease agreements should also specify permitted uses and premises to be leased, estab- lish rental rates and payments, and spell out the responsibilities of each party. Other conditions of the lease should contain provisions for required insurance, sub-leasing, and termination. It is