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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. 1

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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.