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OCR for page 13
Anatomy of a Lease 13 or SASO lease. Storage hangar leases generally prevent a tenant from using the property for con- ducting a business or for storing other items because aircraft storage hangars typically do not have safety or public amenity attributes required for a proper business venture. The lease should require compliance with Airport Rules and Regulations and Minimum Standards and is generally short in term length to allow for market adjustments in rent. 2.1.6 Sublease (Subletting) Many agreements include language governing the tenant's ability to sublease (sublet) all, or a portion of, the leased property at the airport sponsor's discretion. Typically, the sublease is for a defined portion of the improvements: space in a conventional hangar, office space in an FBO building, or warehouse space and truck docks in a cargo building, for example. The ability and extent to which an airport tenant can sublease a facility must be clearly stated in the primary lease document between the airport sponsor and tenant. Depending on the type and function of the facility, the airport may require a formal approval process for any potential subtenants, a process that mandates the primary tenant submit written notification of the lessee's intent to sublease a portion of a facility. The submission should provide the following information to the airport: Location and size of the proposed sublease, Description of proposed use, Sublessee organization and authorized users, and Terms of the proposed sublease agreement. When George Bush Intercontinental/ It is the responsibility of both the airport and primary tenant to ensure that Houston Airport constructed its any sublease agreements conform to Airport Minimum Standards policy. The consolidated rental car facility airport has the role of ensuring compliance with policy in its dealing with the (CRCF), it was anticipated that primary tenant, as specified in the lease agreement. However, the oversight of there would be nine rental car sublease compliance can fall equally to both the airport and primary lessee. operators that would use the facil- Since real estate values typically appreciate over time, it is not uncommon for ity. Rather than negotiate and deal the lessee to have a net profit when subletting space. In cases where the ten- with nine separate lessees, the air- ant pays a known amount for space and sublets for a greater amount, it's not port required the consortium of uncommon for the airport sponsor in a commercial leasing scenario to operators to form a limited liability receive a percentage of the profit. Detailed provisions should be spelled out corporation (LLC) with which the in the lease and any operating agreement to avoid future conflict between the airport would enter into the lease parties in a long-term lease agreement. agreement. Operators pay the LLC for operational expenses based 2.1.7 Airline Leases upon their use of the facility. The LLC, in turn, is responsible for Airline leases, as one might imagine, are prevalent at many airports and maintaining and operating the take on a variety of forms. Lease agreements (also referred to as operating CRCF, including bus operations permits, use agreements, or licenses in some circumstances) will reflect the between the facility and the air- financial policy and rate-setting methodology of the airport. An airport's rate- port, utilities, and insurance. This is setting policy/methodology will consider the various types of spaces that an essentially a sublease arrangement airline will need to lease, how rental rates are calculated, and the allocation of by the LLC with the members of costs associated with operating those spaces. the consortium that constitute the LLC. Due to this arrangement, the Airlines traditionally lease their core operating spaces, such as ticket coun- airport has only a single entity to ters, boarding gates, and office/operations areas, on an exclusive or preferential deal with and is able to shift much basis, ensuring that they have the facilities necessary to meet the operational of the administrative, operational, needs of their flight schedule. Other spaces, such as baggage claim and bag- and financial burden of the facility gage make-up areas, are routinely leased on a joint or common use basis. Com- to the LLC. mon use facilities, however, are becoming more widespread. An airline may consider leasing boarding gates and even ticket counter spaces in a shared

OCR for page 13
14 Guidebook for Developing and Leasing Airport Property arrangement, especially in situations where they have a limited number of flights and cannot jus- tify the cost of leasing on an exclusive or preferential basis. Airlines just entering a market with a reduced schedule or international carriers that offer reduced frequency are examples of when common use applications might be desirable. Aside from passenger terminals, an airline may be one of several tenants in other multitenant facilities such as cargo buildings or ground support equipment buildings. In the passenger ter- minal scenario, the airline lease should address the allocation of terminal space costs that are not directly leased to the airline, such as mechanical and utility rooms, and public areas such as ticketing lobbies, restrooms, and hallways. In the instance of a multitenant facility other than a passenger terminal, attention should be given to shared interior spaces such as vestibules and access hallways, and shared exterior facilities such as automobile parking and airside access. Allo- cation of these common area costs should always meet the unique attributes and needs of a given situation and be equitable to the parties affected. Allocation of these costs should be addressed within the rate-setting methodology. Even within a multitenant facility, such as in the case of a passenger terminal environment, an airline may lease several different areas and/or types of facilities. For example, the airline may rent ticket counter and office space in the ticketing area of the terminal, which likely has a different rental rate associated with it than baggage make-up areas and operational spaces. In the gate area, the airline may have yet another arrangement for gate podiums and/or the use of passenger board- ing bridges that have their own unique set of rates and charges. Two rate-setting philosophies are prevalent within the industry. The compensatory model is an approach that gives the airport sponsor autonomy in setting its fees and charges. Compen- satory terminal rents may be calculated on the gross terminal space minus mechanical spaces, or the total rentable space within the terminal, to include airline spaces. It may be based on some other variation, but the compensatory model typically allows the airport to retain rev- enues that exceed expenses. This model also places the burden of any revenue shortfall on the airport sponsor. The second model is the residual model (sometimes referred to as the cost approach), which routinely includes a majority-in-interest airline's review of the forecast costs to be considered in the rate-setting exercise and generally places the airport sponsor in a revenue neutral position. Because the residual approach tends to focus on a break-even scenario, with appropriate reserves, both excesses and deficiencies in revenue collection generally carry from one year to the next. The cash position of the airport may, therefore, be limited in this model. Table 1 contrasts the two rate-setting approaches and highlights the attributes of each. An airport may choose to employ a hybrid of these two approaches, as well. For example, a residual approach might be applied to airfield costs in the calculation of landing fees, while a compensatory approach might be used in setting terminal rents; or a compensatory approach may be chosen for the entire airport, with credits given for certain revenue such as terminal con- cessions to help reduce airline costs. Hybrid approaches are limited only by the imagination; the rate-setting approach, whether it's compensatory, residual, or a hybrid thereof should ultimately meet the needs and goals of a specific airport and its unique mix of airlines and tenants. Landing fees and fuel flowage fees within an airport's schedule of rates and charges also play a role in airline leases and use agreements. The matrix of fees that an airline pays at any given airport can be quite complex and cover a broad range of real estate types. Ultimately, one of the metrics an airline uses to measure an airport is the total cost, per passenger, that the airline must pay in rents, fees, and charges to do business. This is then compared against other airports of similar size and against the market yield the airline is able to obtain.