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SUMMARY
Guidebook for Developing and
Leasing Airport Property
The reality of today's competitive environment for on-airport development projects, and the
need for developers to move through the public-sector process quickly, begs for examples of the
creative and/or hybrid solutions as well as tried and true, more traditional approaches to leasing
and developing airport property. Third-party development, conduit financing and tax-exempt
financing by private-sector entities, and the myriad of local and state incentives are a few of the
variables that make a black and white airport leasing policy inadequate. This Guidebook pres-
ents best management practices for leasing and developing airport property, with information
gathered from a wide range of case study projects as well as a thorough industry literature review.
The Guidebook intends to aid the airport sponsor in implementing leases, property management,
and development agreements. Financial, banking, and real estate development communities were
considered in terms of terminologies and industry standard protocols, but the Guidebook is
written from the perspective of the airport sponsor striving to facilitate development on leased
airport property.
An important element of this study is the case study analysis. The RW Armstrong team studied
10 development projects, including two from large-hub, two from medium-hub, two from small-
hub, two from non-hub, and two from general aviation airports. The case studies represented a
wide range of projects and geographic diversity as well. Detailed overviews of each case study, along
with a Project Attributes Matrix, can be found in Appendix A of the Guidebook. The body of the
Guidebook addresses issues relevant to leasing and development of projects: lease anatomy, the air-
port sponsor role, project development considerations, and financial matters.
Lease Elements
Depending on the type of tenant and the tenant activity at any given airport, each lease agree-
ment will take on its own unique characteristics to meet the needs of a given scenario. Commer-
cial versus private tenants and the location of the leasehold (airside versus landside) affect the
specificities of a lease and the elements that are included. Airport leases can generally be broken
down into the following broad categories:
· Aeronautical or nonaeronautical leases,
· Land leases,
· Fixed-base operator (FBO) leases,
· Specialized aeronautical service operator (SASO) leases,
· Hangar rental leases,
· Subleases, and
· Airline leases.
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2 Guidebook for Developing and Leasing Airport Property
Airport leases share a number of common threads and certain core elements, though the
structure of the lease should ultimately reflect the activity, tenant type, and location of the
leasehold in order to address the financial, development, and regulatory needs of the airport.
While covering a broad spectrum of development projects that occurred at airports of differ-
ent size and locations across the country, the case studies reveal general characteristics of an
effective lease agreement. Disputes often arise because of ambiguity in lease language, but if
the agreements leave few open issues to misinterpret, the parties involved are more likely to
have a mutually beneficial, long-term relationship. The lessees will sometimes propose addi-
tional lease elements that will protect their interests, but these additions are optional and are
added at the discretion of the airport sponsor as part of the negotiation. The airport sponsor
should not give any single tenant an advantage over its competition or exclusive rights that
violate federal grant assurances. Chapter 2 of the Guidebook details both essential and optional
lease elements.
Airport Sponsor Role
It is the job of the airport sponsor to take control and set the stage for airport development
projects. The airport sponsor is tasked with finding the appropriate balance between revenue
maximization through development, and with meeting the demands of the airport users and sur-
rounding community. The airport's primary priority should be to serve the aviation demands
of the community, even if nonaviation development may be financially attractive. However, non-
aeronautical development may also be beneficial to both the airport and the community in certain
circumstances. So again, there is rarely a black and white rule of thumb that governs all situations.
The airport sponsor is also responsible for coordinating applicable stakeholders, including local,
state, and federal agencies, as well as the local community and business organizations. These stake-
holders can contribute valuable resources, or they may present obstacles, so stakeholder engage-
ment should begin early in the development planning in order to ensure the process advances
smoothly. The airport sponsor should also have the ability to negotiate and adjust agreement terms
as needed throughout the process.
Establishing airport visioning tools and goals will help both the sponsor and the tenant take
advantage of opportunities that arise. Some tools that are advantageous to the visioning process
are an Airport Master Plan, Infrastructure Inventory Analysis, Land Use Plan, Airport Business
Plan, and Target Industry Analysis.
The airport sponsor needs to comply with all federal regulations and grant assurances. There are
a total of 39 individual grant assurances that can be found in Appendix A of the FAA Airport Com-
pliance Manual (Order 5190.6B). Compliance should be considered in the context of both the
anticipated use of the land and in the structure of the lease. Minimum Standards and Rules and
Regulations are effective tools for the airport sponsor to deploy in meeting grant assurances; these
documents should be developed prior to concluding the lease and referenced in the agreement as
an exhibit. These are living documents that can change as the airport matures, and since a lease can
span over several decades, it is important to allow for updates to these documents. Airports should
also develop a Standard Leasing Policies document, which will provide guidance in developing the
lease agreement.
Finally, the airport sponsor must consider the social and political makeup of a community
or region. The sociopolitical climate can affect development at an airport. Elected officials may
be able to provide support and leadership for development projects and may receive commu-
nity support if the project in question is perceived as an economic development opportunity.
Conversely, pressure from the sociopolitical arena may also defeat a development project if it
is controversial.
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Summary 3
Project Development Considerations
The competitive environment for on-airport development projects requires a thorough under-
standing of today's substantive issues. The airport sponsor must consider a variety of factors and
ultimately determine the tenant, developer, and financing approach to best meet the requirements
of the project and all parties involved.
Existing agreements should be examined, as they can affect future development on airport lands.
For example, an existing lease policy or noncompete agreement may make certain types of devel-
opment less attractive.
Airport marketing can be instrumental in developing land and leasing airport property. Case
study research emphasized that a good relationship with the community's Economic Development
entity and/or Chamber of Commerce is almost always beneficial, and may even result in funding
for a project. Funding will be a major factor in the success of a development project; whether or
not the airport sponsor is responsible for financing, development may well depend on the finan-
cial resources available.
Land and facility development is another consideration for the airport sponsor. Offering shovel-
ready sites that include competitive rates, land entitlements, utilities, facilities, and incentives for
either aeronautical or nonaeronautical development will set the stage for a sustainable revenue
base. Aspects of land/facility development that should be considered include utilities, civil site work
and soil stabilization, airfield access, roadways and public access, development planning, and main-
tenance and upkeep of common areas, among others.
The airport sponsor is responsible for establishing the valuation of airport property and should
be aware of the risk of undervaluation, especially if existing leases do not include an appropriate
escalation clause. The airport sponsor should routinely update rates and charges as well as the value
of both improved and unimproved property so that when a development opportunity emerges,
the airport can take advantage. There are numerous valuation strategies, including appraisal, com-
parable sales approach, cost approach, and income approach.
Revenue maximization should be a key goal for the airport sponsor and must be a primary con-
sideration when entering into a lease agreement. Airports are required by the FAA to establish fair
and reasonable fees, and it is recommended that airports maintain a fee and rental structure that
makes or moves the airport toward self-sustainability. As mentioned earlier, external stakeholders
can provide valuable resources, both tangible and intangible, and should be involved in develop-
ment projects from the early stages of the process.
Finance Overview
There are numerous sources for financing and funding of an airport development project
depending on the stakeholders involved, incentives offered, grant funding available, and methods
that are applied. The airport sponsor should consider various tools and methodologies for secur-
ing financial support for a development project.
It is up to the airport sponsor to determine who the developer will be, whether the airport spon-
sor itself or a third-party developer. If the airport does play the role of developer, the airport spon-
sor is responsible for funding the project. If the airport acquires debt to fund a project, the debt
repayment cost should be offset through revenue derived from the project.
The airport sponsor must ensure that a development project is financially beneficial to the airport.
A pro forma analysis, a projection of the expected costs and revenue associated with the construction
and operation of an airport facility, can help the airport sponsor determine if the airport should be,
or wants to be, the developer. This analysis would include financing costs, operation and maintenance
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4 Guidebook for Developing and Leasing Airport Property
costs, lease revenue, and other associated revenue. The capital recovery rate, an important compo-
nent of a pro forma analysis, can also play a role in the decision of whether or not to enlist a third-
party developer. Return on Investment (ROI) is a factor that should be considered by the developer,
whether it be the airport or a third party. Expectations of the developer for ROI are typically defined
within the pro forma analysis.
Lease agreement terms can have a profound effect on project financing. The terms of the agree-
ment(s) define the flexibility of the developer to satisfy all of the project requirements, including
the expected return on investment and profit, even if the project has setbacks. The developer and
the lender must be confident that the project terms are generous enough to allow for recovery if a
setback does occur. Lease agreement components that could affect financing may include, but are
not limited to, the lease term, maintenance requirements, and allowable use.
The bank or financial institution that lends money against an airport development project will
typically have a slightly different perspective than the developer or the airport sponsor. Many of
the metrics that can be compared between the perspectives of the developer, the bank, and the air-
port sponsor are the same, but the bank/financier must always look at the worst-case scenario and
be comfortable with the business arrangement. The bank, financier, or lending institution will con-
sider the debt-to-equity ratio as one metric in establishing the developer's ability to pay off the
claims of its creditors in the event of default or liquidation. The lower the debt-to-equity ratio, the
better the debt coverage or security to the bank in the development project.
Airport development debt comes in a variety of shapes and colors, depending on the project's
size and type. Tax-exempt debt is generally applied to development projects that satisfy a public
purpose or need and can come from a public-sector entity or a government. This type of funding
can be complex and can appear in hybrid forms, such as a special airport facility bond. Some alter-
native public debt options are Recovery Zone Facility Bonds and Recovery Zone Economic Bonds,
both created though the American Recovery and Reinvestment Act.
Funding can also come from private sources such as traditional banks and commercial lending
institutions. Private funding is often characterized as being more expensive than public funding
sources; though private funding may be less complex and require less legal expense, both public
and private debt should be considered.
Again, external stakeholders can be beneficial for airport development in that they can provide
funding sources. Incentives, abatements, and deferrals can come from a variety of external stake-
holders, including public and private entities.
Other sources of funding include Airport Improvement Program grants, passenger facility
charges, economic development grants, and private capital.
Case Studies
The 10 case studies are detailed in Appendix A. Case study airports include
· Collin County Regional Airport in McKinney, TX;
· Monroe County Airport in Bloomington, IN;
· Coastal Carolina Regional Airport in New Bern, NC;
· New Bedford Regional Airport in New Bedford, MA;
· Albany International Airport in Albany, NY;
· Baton Rouge Metropolitan Airport in Baton Rouge, LA;
· Pittsburgh International Airport in Pittsburgh, PA;
· Ted Stevens Anchorage International Airport in Anchorage, AK;
· George Bush Intercontinental Airport in Houston, TX; and
· Tampa International Airport in Tampa, FL.
