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Finance Overview 57 Other Revenue: In addition to rent, the airport may derive other revenue from the execution of a lease agreement; this is particularly true of a lease agreement with a commercial enterprise. The airport sponsor should, to the best of its ability, estimate these revenues and include them in the pro forma analysis. Examples of other revenue include fuel-flowage fees derived from additional aircraft activity, tie-down fees, concession fees, and percent of revenue agreements. Consistent On-Airport Valuation Valuation should be accomplished by comparing like facilities capable of accommodating the same type of activity. For example, a hangar that can accommodate a large business aircraft will have a greater value than a hangar that is restricted to smaller aircraft, if for no other reason than the cost of replacement is greater. So door height, the clear span within the facility, and the bear- ing strength of the hangar floor and adjacent movement areas will all affect the value of a devel- opment per square foot. The discussion of debt and debt service, or the repayment of principal and interest to the lender, illustrates the importance of consistent, appropriate valuation. Valuation translates to revenue stream, which provides the means by which the debt can be serviced. Ignoring the correlation between market value and replacement value (construction cost) can quickly set the stage for a gap that cannot be bridged without revenue from another source. Wide gaps between similar facilities at the same airport, due to a scenario of undervalued existing facilities and appropriately valued new facilities that satisfy the requirements for debt service, may be seen as discriminatory from one tenant to the next. Vigilance on the part of the airport sponsor in monitoring property valuation can help mini- mize that gap, and development of a methodology for justifying any gap between facility values and replacement values can avoid, or at least prepare for, scrutiny of the methodology. Age and ameni- ties of the facility can certainly justify differing values, but a methodology and justification is impor- tant for the airport sponsor to achieve. 5.1.3 Capital Recovery Rates The capital recovery (CAP) rate is an important part of any pro forma analysis, as it, too, speaks to risk. The faster the developer is able to recover the capital expenditures associated with con- structing permanent improvements, the less exposure (associated with the shorter period of time) there is for the possibility of a tenant vacating the facility early or defaulting on a sublease. Because improvements are generally made on leased airport property in a typical airport development sce- nario, they are considered "wasting assets." The improvements, and any value associated with those improvements, usually return to the airport sponsor, along with any rights to the property itself, at the end of the lease term. The CAP rate is the sum of a straight-line recapture rate, or the annual percentage required to recover all of the investment over the term of the lease, and the discount rate, which is the rate used to convert the future receipts and/or payments from the tenant to the developer (which may be the same entity in some cases or two separate entities in other development projects) to present value. For example, if the lease term is 25 years, and the useful life of any improvements is 25 years (assum- ing the lease begins once improvement construction is complete and that the improvements revert to the airport sponsor at the end of the lease), the developer is faced with a 4% straight-line recap- ture rate (100% of the asset value divided by the 25-year term the developer has to recover its invest- ment). The discount rate is then added to establish a CAP rate. CAP rates are routinely in the 6% to 12% range per year and vary depending on the type of devel- opment. Because a CAP rate on the high side of that range will accelerate the amount of money that must be collected each year, and a CAP rate on the low side of that range will minimize the amount