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Anatomy of a Lease 29 the facilities and services at the airport that will make the airport as self-sustaining as possible." This means achieving Tampa International Airport was able to entice market value rates for all available property. PEMCO World Air Services, an MRO operator, to a 150,000 square foot maintenance hangar that was 2.3.3 Percent of Revenue vacated by US Airways. PEMCO, unsure of the ulti- mate financial success of the new venture, was Another method of revenue recognition for the airport wary of entering into a long-term fixed lease. The sponsor, a method that is common in terminal concessions airport agreed to a revenue sharing arrangement, lease agreements, is percentage of gross revenue payment. with payments of a 1.3% share of PEMCO's gross The airport sponsor may enter into an agreement with a les- revenue generated from the facility. This arrange- see that may reduce the base cost per square foot rate of a land ment allows the airport to reduce the lessee's fixed and/or facility lease, but make up for this loss in airport rev- lease payments, which appeals to the tenant desir- enue by stipulating that the airport receives a percentage of ing reduced start-up costs, but ties the airport the tenant's gross revenue derived from the activity at the directly to the success of the lessee's enterprise. The facility. Typically, a floor, or minimum monthly payment is airport has the potential for greater returns over set, and the greater of the minimum payment or percentage the life of the lease in this scenario. of profits is paid to the airport. This approach could, how- ever, require a greater involvement of the airport, an agreed- upon auditing process, and solid understanding of what defines gross revenue. 2.3.4 Term Extension Options Term extension options are a common component of a lease agreement that will often allow the Flexibility in the length of the lease term can be achieved developer and tenant to recoup initial investment through extension provisions written into the lease. These in improvements or extend the useful life of can be 5- to 10-year extension clauses that effectively extend improvements. Knepper Press, when developing the the lease term to a length that is mutually beneficial for both Clinton Commerce Park at Pittsburgh International the airport sponsor and the tenant. This is a particularly Airport, secured two 10-year lease extensions on beneficial tool when an airport sponsor is limited by statute the initial 29-year lease term. These options ulti- (state or local) from issuing lease terms for a period long mately made the lease deal more attractive for enough to allow a tenant to amortize its facility investment. Knepper Press and assured the airport sponsor a The airport sponsor will want to ensure that any lease rate long-term, viable tenant. escalation occurs periodically in order to keep pace with market rates and current appraisal values.