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18 Guidebook for Developing and Leasing Airport Property 2.2.7 Escalation Clause One of the most troubling aspects of long-term land leases is providing for the continued adjustment of rental property to compensate for inflation. When rent remains constant during a time of inflation, the airport is losing income, and this period may last for several years. The ideal situation is for an annual reappraisal of property, but this can be relatively expensive to administer. Rate studies may be implemented to establish appropriate rents throughout the lease term, but the most common form of rent escalation is a standard increase every 3 to 5 years, where rent escalation is tied to one or more of the consumer price indices set by the U.S. Depart- ment of Labor. This usually establishes a reasonable rate for the next period of time, while ensur- ing that the costly process of identifying a correct lease rate does not have to be completed more often than necessary. 2.2.8 Operation and Maintenance The operation and maintenance (O&M) element(s) of a lease agreement will specify the divi- sion of responsibility between the lessee and lessor for the cost and effort required to maintain the leasehold to airport standards, and allocate the expenses associated with daily operation of the facil- ity (utility costs). It should be the goal of the airport sponsor to assign to the lessee the general main- tenance and repair responsibility and expense along with grounds upkeep obligations. The O&M section of the lease will list the specific responsibilities of the lessee for leasehold maintenance and upkeep, as well as detail the minimum standards that must be met. These responsibilities and standards are often referenced in the Airport Minimum Standards docu- ment, so referencing this document within the lease agreement will prove beneficial for the air- port in the long term. These documents can generally be modified to reflect changes in the regulatory and operational environment in a much easier fash- ion than individual lease agreements. Escalation clauses are common and The airport sponsor may have the duty to perform any maintenance and necessary elements in airport upkeep that is not specifically referenced as the responsibility of the lessee leases, particularly those with within the lease agreement or Airport Minimum Standards document. It is in longer lease terms. The frequency the best interests of the airport to be as detailed as possible when assigning and escalation basis (i.e., set per- these obligations within the lease, as well as ensuring that the Airport Mini- centage, inflation based, appraisal) mum Standards document is as complete, up-to-date, and in compliance is open to negotiation. The airport with FAA, TSA, environmental, and other applicable regulations as possible. sponsor can offer an initial period of deferred rent escalation in order The responsibility of general operation costs, with items such as utilities, to provide the tenant with cost cer- janitorial, and landscaping costs, may also be assigned within the operation tainty through a predetermined and maintenance element of the lease agreement. These may also be addressed period. As part of the incentive in an individual subsection of the lease agreement, depending upon the com- package offered to EDS/Hewlett plexity of the arrangement. Typically, for stand-alone leaseholds, the lessee Packard to relocate their corporate will assume all utility and operational costs. However, in the case of an agree- aviation facility, Collin County ment in which only a portion of a facility is leased, such as an office space within Regional Airport structured the an airport-owned GA terminal, the lessor may assume utility and operation escalation clause in the lease agree- costs as part of the lease agreement. ment to provide a fixed rent O&M costs can be a point of negotiation between the airport sponsor and through the first 10 years of a the tenant/developer. With this in mind, the decision of who pays O&M costs 40-year lease term. Rent adjust- and how O&M costs are allocated or shared should be tailored to the specific ments begin at the end of the business circumstances of a given lease agreement. In the case of multiple ten- 10th year and 5 years thereafter. ants within the same leasehold, O&M costs can be allocated or pro-rated accordingly, rather than the airport sponsor assuming the costs. The airport