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Anatomy of a Lease 15 Table 1. Rate-setting models: compensatory versus residual. Compensatory Model Residual Model Typical Application Airports with positive cash Airports with consistent levels flow and relatively high levels of operations and who are of liquidity/discretionary cash willing to trade cash-on-hand on hand or airports that to reduce the fees and charges require subsidy from an that airlines must pay outside agency Party That Assumes the Airport--the airport sponsor Airline--the airport sponsor Majority of the Financial bears the short-term financial recovers "net costs" of the Risk risk and is more exposed to airport's operations through financial and economic fees and charges paid by the downturns. airlines. Advantages (from airport The airport sponsor retains all The airlines guarantee the sponsor's perspective) of the benefits derived from financial soundness of the nonaeronautical revenues and airport and share in the risk of airlines receive no direct financial and economic benefit from this revenue downturns. source (thereby incentivizing the airport to pursue nonaviation revenue). The airlines have limited control over capital projects, and the airport sponsor has the ability to maintain relatively stronger operating and debt coverage ratios. Disadvantages (from The airline pays only for the Nonaeronautical revenues are airport sponsor's facilities it uses and does not credited toward the airline's perspective) take part in sharing all of the rate base and the airlines pay airline-related costs of the fees and charges based on net airport. costs after nonaeronautical revenues are subtracted. The airport sponsor has less incentive to maximize nonaeronautical revenues, and the airport generally has less liquidity/discretionary cash, which can result in a weaker balance sheet and a higher cost of capital. An airline may also occupy single-use airport developments that have the same lease attributes as any other single-tenant facility. This is especially true at airports where the airline has the level of activity and presence to support a stand-alone airport development such as a maintenance operation or its own cargo facility. While neither airline use agreements nor rate-setting methodologies are the subject of this Guidebook, they both represent a component of the complex issue of airline compensation to the airport sponsor, and correlate directly to the subject of leasing and developing airport property. Ultimately, airline leases represent one small piece of this complex puzzle and contain many of the same elements as any other airport lease. For a more comprehensive discussion of this subject, the reader is encouraged to review ACRP Report 36: Airport/Airline Agreements--Practices and Characteristics. 2.2 Essential Lease Elements Through the case study interviews, the intangible effects of relatively good and relatively bad agreements were revealed. It became readily apparent that agreements tend to either set the stage for a mutually beneficial long-term business relationship that will withstand changes in staff, own- ership, and tenant management--or set the stage for dispute. Ambiguity in the lease agreements