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Funding for and financing of an airport development project can vary widely, depending on the stakeholders that are involved, the incentives that are offered, the grant funding thatâs avail- able, and the methods that are applied. In short, the variety of funding combinations is limited only by the imagination. There are multiple factors that must be considered by the airport spon- sor. These considerations are dependent upon who will be developing the project in question: the airport sponsor, the tenant that will occupy the development, or a third-party developer. The following sections will address certain financial perspectives and tools that the airport sponsor may utilize when considering an airport development project. Understanding the inter- relationships between financing, valuation, and lease elements, and how these relationships affect each party entering into the lease agreement, is essential in maximizing the financial benefits and long-term health of the airport. 5.1 Airport Sponsor Perspective The airport sponsor has the prerogative of determining who will play the role of developer and how the airport development will occur. The airport sponsor can choose to seek tenants that will develop their own capital improvements, enlist the help of a third-party developer, or the air- port sponsor can decide to play the role of developer itself. With risk usually comes reward, so the airport sponsor may find interest in the reward side of the development business. And reward can come in the form of new revenues, additional aviation activity, jobs, the synergy needed to develop a business cluster, the attraction of based aircraft, or some combination thereof. 5.1.1 Funding Should the airport choose to play the role of developer, the airport sponsor becomes respon- sible for securing necessary funding, which may come in the form of grants, debt, or, most com- monly, a combination of funding sources. Grant funds are present in many airport development projects and represent the most desir- able financing option for an airport sponsor. However, grants are limited to certain items based upon the issuing agency and eligibility criteria. The FAA may allow, for example, AIP funds to be used to extend a taxiway that serves multiple sites and the aviation public, but not allow funds to be used for an aircraft parking ramp that serves a single tenant or that would be considered exclusive use (see Section 3.2.6: Exclusive Rights for greater detail on exclusive rights versus pref- erential treatment). Similarly, EDA grant funds may be eligible for facilities directly related to job creation but ineligible for a taxiway extension that might be seen as lacking connection to the stimulus of economic activity. 55 C H A P T E R 5 Finance Overview
Grant eligibility should be discussed early on in the project with the FAA, the state aeronau- tical agency and with economic development organizations, because while grant funds are often an important component of the project, they typically have limitations and restrictions on their use. Grant funds, once applied to the development project, are generally viewed as equity and will satisfy only a percentage of the development cost; therefore, additional resources needed typ- ically translate into debt. If an airport acquires debt to fund a project (either partially or in whole), the debt repay- ment cost must be offset through revenue derived from the project. The airport sponsor must be reasonably certain that the revenue generated from a given development project will be sufficient to offset the expenses incurred. These considerations will not only include debt expense, but also any additional liabilities that will be incurred through the operation of the facility. Simply put, the airport sponsor needs to determine whether or not the benefits out- weigh the costs. 5.1.2 Quantifying BenefitsâPro Forma Analysis Regardless of the type of development an airport is seeking, the airport sponsor should make every attempt to ensure that the project is financially beneficial for the airport, now and into the future. By examining the financial implications and comparing the revenues versus the expen- ditures of the project, the airport sponsor can evaluate, through pro forma analysis of potential financing and lease agreement scenarios, how elements in the proposed lease agreement will impact the airportâs financial position. A pro forma analysis is a projection of the expected costs and revenue associated with the con- struction and operation of an airport facility. Before the decision as to whether the airport spon- sor should play the role of developer or not, the airport sponsor should go through a pro forma analysis and determine whether the direct and indirect benefits that can be derived from such an arrangement outweigh other opportunities available to the airport sponsor. Direct benefits would typically include rents and financial gain, while indirect benefits might include increased aircraft operations that stimulate fuel-flowage revenue. Economic impact and job creation may also be considered either direct or indirect benefits, but more so from a community perspective than an airport sponsor perspective. In an unbiased pro forma analysis, a strict separation of benefits directly attributable to the airport can be considered to ensure that the best interest of the airport is served and strict compliance with grant assurances is maintained. The level of detail of the pro forma is left to the discretion of the airport sponsor and often is dictated by the complexity of the proposed project. However, there are core elements that must be included when projecting the financial impact to the airport, including the following: ⢠Financing Costs: This represents the annual dollar figure required to service the debt associ- ated with the project (principal and interest). Obviously, the more this number can be reduced, either through developer financing or grants, the better the financial position for the airport. ⢠O&M Costs: Depending on what is stipulated in the lease agreement, the airport sponsor may be responsible for all or a portion of facility maintenance. In addition, operation expenses such as utilities and security may be incurred by the airport to a level that is stipulated in the lease agreement. These costs are often estimated per square foot, based on benchmarks from sim- ilar facilities, increased annually with use of some widely-accepted metric such as the Con- sumer Price Index (CPI). ⢠Lease Revenue: This is the anticipated annual revenue that will be derived from the facility once occupied. When accounting for anticipated lease revenue, be sure to account for any escalation clauses in revenue projections. 56 Guidebook for Developing and Leasing Airport Property
⢠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. 5.1.2.1 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 âwasting assets.â 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 Finance Overview 57
of money that must be collected each year, CAP rates also speak to the market and level of com- petitiveness. If the airport sponsor requires a 10% CAP rate, 10% of the value of the land is col- lected each year in ground rent. CAP rates regarding improvements on leased land, however, can be significantly more complex to calculate because the CAP rates are likely to vary depending on the type of development and the markets that exist for certain types of development, especially when the development is nonaeronautical. In the example above, the straight-line recapture rate component can be cut in half if the development takes place on a piece of property that is owned fee simple, and if the improvements have a 50-year useful life. Similarly, the discount rate, which is a function of the developerâs con- fidence in collecting future rents and fees, can be affected by the range of allowable facility uses, the size of the market, and number of potential tenants for those improvements. Therefore, it is easy to see how CAP rates can vary so widely. On the other side of the comparison, development on leased property has its advantages as well because of the lack of property acquisition on the front end of the development project. For an airport sponsor to be competitive with surrounding land owners that are willing to sell their property, CAP rates for a nonaeronautical airport development project must be consistent with the immediate market and conscious of the higher CAP rate driven by the lease term. The airport sponsor should understand that term length must speak to both a reasonable amortiza- tion of investment and to the market conditions that drive CAP rates and affect project compet- itiveness. A 25-year lease term may appear perfectly adequate, for example, to construct a hangar or other aeronautical facility, amortize the investment, and still allow for a profit. Market-driven CAP rates on other types of development, however, may be very different due to options avail- able for a given nonaeronautical development project. In short, CAP rates for nonaeronautical development are generally lower than for aeronautical airport development projects and can affect the overall financial structure of the development project, including term length. While aeronautical uses may well accept a 10% capital recovery rate, industrial development or distri- bution warehousing, where the development can take place either on or off airport property, may only support a 6% to 8% CAP rate. In other words, one CAP rate does not fit all scenarios. 5.2 Developer Perspective Financing a new project at a public airport on leased land can be challenging, especially at air- ports with smaller amounts of developed property and/or when there has been no recent devel- opment of land. Because development on airports is often synonymous with development on publicly-owned property, funding of the project has its challenges from a collateral standpoint. In traditional real estate development, the developer has the luxury of encumbering the title of the property for the purpose of lender security, and the lender has the ability to place a lien on the real estate to secure its financial position. Airports, specifically publicly-owned airports, are typically precluded from allowing claims, such as liens, to be placed against the title of airport property, and are unable to offer that security to the lender for a specific development. The lender is therefore left with the improvements on the property, the length of the lease term, and the strength of any sublease or pledged revenue stream to collateralize the debt. 5.2.1 Return on Investment The financial benefits that flow from an airport development project are typically expressed as an annual percentage of the amount invested, or return on investment, representing annual cash flow. Expectations of the developer for return on investment are typically defined within the pro forma of the development project. 58 Guidebook for Developing and Leasing Airport Property
If the project is being developed by the airport sponsor, such an analysis should consider the opportunity cost associated with the use of its cash, debt capacity, or other resources to develop a facility for a tenant, versus its ability to utilize those same resources for the purpose of devel- oping public infrastructure. Once airport resources are invested in facilities for a specific tenant or group of tenants, it should acknowledge that those resources are no longer available for pub- lic infrastructure improvements, an investment that is often amplified by state and federal grant funds. An analysis of the potential for missed opportunity may reveal, for example, the inability of the airport sponsor to either invest in or place debt for other public-use projects. Any cost of missed opportunity should be considered as a component of the overall airport sponsor cost of the project. Investment by a developer other than the airport sponsor, that does not encumber airport resources, will likely have no cost of missed opportunity for the airport sponsor to con- sider, because that same private capital is likely unavailable for investment in public infrastruc- ture. Regardless of who the developer is, the developer should expect a return on investment. Development projects that do not reflect a reasonable return on investment only erode the mar- ket value of all improvements at a given airport. Replacement-based valuation considers the cost of building new facilities in todayâs dollars, amortizing that investment, and establishing rental rates adequate to recover the investment, with a return on that investment. If hangars are developed by an airport sponsor, perhaps with the assistance of grant funds, for example, without regard for replacement-based valuation, the improvements can be undervalued and the rents charged to occupy those facilities can be too low. Once below-market rents exist, the airport is unlikely to attract private investment for addi- tional hangar development because the market will have eroded from the undervalued develop- ment, and new development will be unable to attract the capital required to construct new facilities without market rents that will support the associated debt service. The airport sponsor will then either experience demand that exceeds supply and bring rates up to market value (hope- fully in a consistent manner) so that new development can attract capital and service debt, or invest more of its own capital resources to build additional hangars that remain undervalued. In short, undervaluation of improvements is somewhat short-sighted because it leaves the airport sponsor with fewer development options. The airport sponsor, when fulfilling the role of developer, may consider return on investment in the form of additional airport activity or from the attraction of an enterprise that has long- term benefits to the airport. Arguments can be made for both sides of this debate and certainly one rule of thumb will not fit all development scenarios. The airport sponsor should first weigh the return against other investment opportunities, such as investment in runway and taxiway improvements, and then consider the long-term implications if undervaluation of rents is to be traded for benefits the airport considers to be returns on its investment. FAA compliance should also be considered, as achieving market value on the rents an airport sets is an important part of complying with federal grant assurances. One strategy or best practice in this regard is for the airport sponsor to include grants in the project pro forma and in the calculation of return on investment. Once all project equity is accounted for, a rate that yields a positive return on invest- ment will insure a replacement-based valuation of improvements. A typical return on investment might be on the order of 5% to 10%, especially in the case of a facility that is developed for a single tenant who signs a long-term agreement and who asks for very few specialized improvements. Generally speaking, the less specialized the improvements are, the larger the market will be for the developer to lease a given property to a different tenant if need be. Return on investment can vary as the development project wanders from the param- eters described above. Specifically, in the scenario mentioned above where undervaluation on the part of the airport sponsor, and/or lack of consideration regarding grant funding, takes place in lieu of other desirable benefits the airport development might bring, the return on investment Finance Overview 59
may be zero or even less. Conversely, in the case of a private development that includes construc- tion of speculative lease space, without a specific tenant, the project may require a higher return on investment as deemed appropriate for the reward of that speculative risk. Speculative devel- opment may be a goal of the airport sponsor, and, in those cases, the return on investment may well be in excess of 10%. In all cases, though, the airport sponsor will need to judge the appro- priateness of the return on investment expected from the developer, and base its endorsements and approvals on its own evaluation of the proposed balance between risk and reward. 5.2.2 Financial Effects of Lease Components The terms of the agreement or agreements that govern an airport development project can have a profound effect on project financing. Agreement terms speak directly to risk, and can affect the rate of return required by the developer and the developerâs lender to take on a given risk. The terms of the agreement(s) define the flexibility of the developer to satisfy all of the proj- ect requirements, including the expected return on investment and profit, even if the project has setbacks. Because setbacks include vacancy of the tenant or subtenant, built-to-suit facilities may represent more risk than perhaps an aircraft storage facility that falls within a general grouping of facilities with similar attributes. This is especially true in the case of a third-party developer that borrows a portion of the project funds based on the security of its tenant, but also applies to a tenant that borrows money to build its own facility, or to the airport sponsor that will need to service its own debt. The developer and the lender must be comfortable that the project terms are generous enough to allow for recovery if a vacancy does occur. They must also be convinced that the terms include ample enough time necessary for the replacement of a tenant or subtenant to still meet the objectives of the project pro forma. 5.2.2.1 Lease Term The lease term must be long enough to allow the developer/tenant to fully amortize their ini- tial investment in the proposed improvements. If the lease term is too short, interested tenants may not see the financial benefit from entering into an airport development project. Flexibility in the length of the lease term can be achieved through extension provisions written into the lease. These can be 5- to 10-year extension clauses that effectively extend the lease term to a length that is mutually beneficial for both the airport sponsor and the tenant. This is a particularly beneficial tool when an airport sponsor is limited by statute (state or local) from issuing lease terms for a period long enough to allow a tenant to amortize its facility investment. 5.2.2.2 Maintenance Requirements Appropriate maintenance, and more importantly, who is responsible for that appropriate maintenance, is an important term of the agreement(s). Maintenance is important to ensure that the full useful life is achieved, that tenant health and safety is maintained, and for the protection of the investment through the term of the agreement(s) and beyond. Because maintenance is costly, a description of who is responsible for maintenance, in great specificity, both inside and outside of the building, is important to include within the language of the lease. 5.2.2.3 Allowable Use An understanding of the facility uses that the airport sponsor will allow is an important agree- ment term and definitely speaks to project financing. As discussed above, the developerâs risk is affected by the market for replacing a tenant or subtenant. So the more specialized the facility, or the more restrictive the allowable uses, the smaller the market for tenants and the greater the risk to the developer/lender. Greater risk may require a longer lease term, higher expectations for return on investment, and can affect the amount of money the developer can afford to pay the airport sponsor. 60 Guidebook for Developing and Leasing Airport Property
A common trap is to restrict uses of airside facilities to aeronautical activities. While preser- vation of airside property and facilities for aircraft operations and movement seems appropriate on the surface, prudent closer examination acknowledges that some commercial aeronautical activities require interface with nonaeronautical functions. Cargo consolidator, expeditor, and sorting activities are examples of how nonaeronautical operators can justifiably occupy airside facilities. Large cargo operators require this support network to carry out their mission. 5.3 Bank/Financier Perspective The bank or financial institution that lends money against an airport development project will typically have a slightly different perspective than the developer or the airport sponsor. The bank must consider the possibility of the airport losing the tenant that will occupy the improve- ments they are being asked to finance, and/or losing the developer that is counting on a mutually beneficial business arrangement in a given airport development project. Many of the metrics that can be compared between the perspectives of the developer, the bank, and the airport sponsor are the same, but the bank/financier must always look at the worst-case scenario and be com- fortable with the business arrangement and its ability to cure, should an unpleasant scenario arise despite all efforts. 5.3.1 Debt/Equity Coverage An airport development projectâs debt-to-equity ratio is determined by dividing the total long-term debt of the project by the developerâs/sponsorâs equity in the project. Equity will include cash, as well as soft-costs paid up front such as for design, planning, and/or consulting services needed to estab- lish feasibility of the venture. The cash portion of the project may also include grant funds that are immediately available, which usually come through the airport sponsor. Existing improvements may also be considered as equity in the project. The developer of a given airport project is likely to require a portion of the development costs to come by way of debt from a bank or lending institution. The bank, financier, or lending institution will consider the debt-to-equity ratio as one metric in establishing the developerâs ability to pay off the claims of its creditors in the event of default and/or liquidation. The lower the debt-to- equity ratio, the better the debt coverage or security to the bank in the develop- ment project. In the event of default or liquidation, the primary lender will typically have the first right of claim against any equity in the project. There- fore, the lender will be focused on the likelihood of recovering the principal amount loaned in a liquidation scenario, even if the lender must discount the value of the improvements to recover its money. So the lower the ratio, the larger the margin between what is owed and what the project is worth, and, therefore, the more room a bank or lender has to work a new deal and cure its position in a distressed situation should the developer default on its obligations. As part of a lenderâs evaluation of the developerâs ability to repay the debt service (principal and interest), the lender will consider the ratio of debt to equity. Or, debt-to-equity ratios can be used to set standards for lending. If, for example, a bank requires a debt-to-equity ratio on a given project, after considering the pro forma of the project and the creditworthiness of the developer, of 1.5:1, and the completed development project is $1,000,000, the Finance Overview 61 The Lynxs Group entered into an agreement with Ted Stevens- Anchorage International Airport to construct and operate the Alaska CargoPort (ACP) air cargo complex for use by commercial carriers and freight forwarders. To ensure the financial viability of the ACP, the airport and the developer were willing to consider out-of-the-box ideas. The Lynxs Group secured financing for the $35 million proj- ect, but financing costs needed to be minimized to be viable. As a public entity, the airport was able to obtain tax exempt financing for the project, resulting in an esti- mated $1 million savings in debt service. Under IRS rules, the airport was required to actually take own- ership of the improvements and lease the facilities back to the developer. This public-private financing partnership provided for the ultimate construction and profitable operation of this thriving facility.
bank has an equity requirement of at least $400,000 in cash, grants, soft-costs, capital improve- ments, and/or other equity to satisfy the debt coverage requirements of that bank or lending institution. 5.4 Debt Vehicles There are differing types of debt that are applicable to financing airport projects; their appli- cability and availability are dependent on the type of airport project being considered and whether the airport sponsor or a private developer is funding the development. The following sections provide a brief description of differing types of debt and how they can impact airport development projects. 5.4.1 Tax-Exempt Debt Tax-exempt debt is generally applied to development projects that satisfy a public purpose or need, and generally comes from or through a public-sector entity or a government, such as a city, a state (such as an EDA or infrastructure bank), or the federal government. Private lending insti- tutions can also offer a tax-exempt product, carrying an obvious benefit to the lending institu- tionâs customers and owners. Tax-exempt funding can be complex and usually involves the need for bond counsel to give opinion on the taxable status of the project. Simply put, the project must provide a public pur- pose to receive the tax-exempt status, so detailed analysis is usually required to determine whether the project, or a portion the project, has a public purpose. For example, facilities that support public air transportation may satisfy the legal test, so a review of whether or not a project meets the objectives for some facet of tax-exempt financing is generally prudent. Public financing often carries with it an attrac- tive interest rate that can have significant impact on debt service over time. Another hybrid of tax-exempt funding is the special airport facility bond, whereby the credit rating of the airport sponsor is extended to a development, again offering favorable rate attributes and access to attractive financing. This funding generally does not count against the airport sponsorâs debt capacity because the project offsets debt with revenue. Again, bond counsel is a pru- dent first step to determine whether the project would qualify for tax-exempt funding. 5.4.1.1 Alternative Financing Structures A contemporary strategy for financing a project, and found in one of the case-study examples, is for the airport sponsor to assist a private developer in financing a project with tax-exempt debt by assuming the debt and owner- ship of the improvements and recovering the future payment liabilities through a leaseback agreement with the developer. Since tax-exempt financ- ing is typically available to government agencies only, eligibility for such funds require that the airport (a public entity) actually take ownership of the pro- posed facility and lease 100% of those facilities back to the private developer. Such an agreement can save the private developer substantial financing cost, to the benefit of both the developer and the airport sponsor. A similar strat- egy has been applied in other circumstances whereby the tax-exempt debt flows through the public entity, directly to the private development. Alterna- tive and hybrid financing structures can be complex, but, more importantly, 62 Guidebook for Developing and Leasing Airport Property In order to create a leasable air- port asset, New Bedford Regional Airport subleased a vacant facility to the New Bedford Redevelop- ment Authority for the develop- ment of Bridgewater State Collegeâs new aviation training facility. This allowed the Authority to utilize redevelopment bonds, which provided subsidized financ- ing for the project. This arrange- ment exemplifies the deft utilization of available local resources with bond issuance authority to provide financing options for an airport develop- ment project. In this case, not only was the local community improved through the addition of the new training facility, the airport was able to convert a vacant liability into a revenue-producing asset.
vary from airport to airport, from state to state, and from situation to situation. In addition, alternative funding structures must stand the test of perception within the community, regard- ing the appropriateness of using tax-exempt funding for private development. 5.4.1.2 Alternative Public Debt Options Issuing bonds is an option for financing airport projects for airports with such bond issuing authority. Most airport bonds are issued by large- and medium-hub airports operated by inde- pendent airport authorities, and are secured by current and future airport revenue (i.e., airport revenue bonds). Smaller commercial service airports and GA airports, however, often do not have the authority or the financial strength to independently issue bonds. This condition, how- ever, does not necessarily mean that these smaller airports cannot issue debt for airport devel- opment. If issuing debt for a specific project is deemed the appropriate course of action, the airportâs owner (e.g., the city, the county, an authority, or the state) can issue a general obliga- tion bond that is secured by the taxing authority of that entity. Since these bond payments are guaranteed by tax dollars, issuing these bonds is often a difficult undertaking if the underlying revenue stream associated with the project cannot be guaranteed. In 2009, the Federal Government passed into law the ARRA with the intent of stimulating the economy through infrastructure and business investment. Within this Act are two bonding pro- grams that may be applicable to airport development: Recovery Zone Facility (RZF) bonds and Recovery Zone Economic Development (RZED) bonds. These programs are representative of federal and nonfederal programs that are available from time to time, and may include eligibil- ity for a specific airport development project. In short, the airport sponsor may benefit from both traditional approaches and emerging or one-time opportunities when considering debt vehicles. Recovery zone bonds are targeted to areas particularly affected by job loss and help local gov- ernments obtain financing for economic development projects, such as public infrastructure development. The ARRA included $25 billion for these two new types of recovery zone bonds: $10 billion for RZED bonds and $15 billion for RZF bonds. The following provides brief descrip- tions of each: ⢠RZED bonds are one type of taxable Build America Bonds that allow state and local govern- ments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45% of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. ⢠RZF bonds are a type of traditional tax-exempt private activity bond that may be used by pri- vate businesses in designated recovery zones to finance a broad range of depreciable capital projects. Note that funding for these bond programs runs through the end of 2010, and at the time of the writing of this Guidebook, it is unknown if these programs will be renewed in future years. 5.4.1.3 Debt Payment Options Payment of debt obligations is typically funded through revenue derived from the project for which the debt was issued. If the airport development project is approved for funding through PFC collection, bond-associated debt associated with allowable costs can be repaid with PFC funds, per 14 CFR Part 158 and FAA Order 5500.1. Debt obligations can also be satisfied by another stakeholder within the community with an interest in bringing the airport development project to a successful completion. 5.4.2 Private Financing Private funding is that which originates from traditional banks and commercial lending institu- tions or from private investment. Private funding is often characterized as being more expensive Finance Overview 63
than public funding, though the legal requirements and costs, especially on smaller projects, may be significantly less and save the development project other expenses. Again, tax-exempt funding can also originate from private-funding sources. It is not at all uncommon to see a mix of public- and private-funding sources for the same project. Some costs of the development, such as feasibil- ity studies, marketing, and start-up, may be difficult to finance through traditional public or pri- vate sources because they are difficult to collateralize. Those development costs are routinely either paid for with the developerâs cash or are funded with venture capital, which typically comes with a higher interest rate. The equity portion of the development project may fall into a similar category in that equity is generally required to come from cash. The developer must either have cash to sat- isfy the equity portion or borrow money from another source, often venture capital, to satisfy that portion of the development cost. 5.5 Incentives, Abatements, and Deferrals Incentives can assist in the overall financial pro forma as well by lowering the operating cost of the project. For example, a third-party developer may construct buildings and improvements on a piece of airport real estate and sublet to a tenant. An incentive such as ground rent abate- ment or deferral of airport fees may improve the cash position of the developer for a period of time while marketing occurs or during the period of time that the developer passes incentives along to the tenant as an enticement for the tenant to occupy facilities. Beyond grants and incen- tives, the developer is left with cash and debt to satisfy the development costs and operating expenses of the new facility. Incentives, abatements, and deferrals can come from a variety of stakeholders. As described above, the airport sponsor can provide incentives and abatements but other stakeholders often contribute as well. In some cases, cities, counties, states, school districts, and other governmen- tal and/or quasi-governmental authorities can offer abatement of certain taxes. Economic devel- opment agencies may have the ability to offer cash, low or no-cost financing, relocation assistance for employees, or job training. Also, local industry and businesses often step up to the plate to provide incentives, cash, or in-kind services. In fact, a broad pallet of incentives, abate- ments, and deferrals exist, but will vary from community to community. The best strategy for the airport sponsor is to meet with all of the stakeholders within the community, early in the development project, to explore how appropriate assistance might be applied. 5.6 Funding Sources Because development on airports is often synonymous with development on publicly-owned property, funding of the project has its challenges from a collateral standpoint. In traditional real estate development, the developer has the luxury of encumbering the title of the property as col- lateral and the lender has the ability to place a lien on the real estate to secure his/her financial position. Airports are typically precluded from clouding the title of airport property and are unable to offer that security to the source of funds for a specific development. The lender is there- fore left with the improvements on the property, the length of the lease term, and the strength of any sublease or revenue source to collateralize the debt. Funding challenges represent one rea- son that incentives or grants are used to assist the development of a project. For example, a grant can mitigate the need for borrowing and effectively improve the coverage ratio on the loan. In other words, the grant can be used as equity and satisfy a percentage of the development cost, thus reducing the need for both cash and debt. 64 Guidebook for Developing and Leasing Airport Property
Incentives can assist as well by lowering the operating cost of the project. For example, a third- party developer may construct buildings and improvements on a piece of airport real estate and sublet to a tenant. An incentive such as ground rent abatements or deferred airport fees may improve the cash position of the developer for a period of time while marketing occurs, or the developer may be able to pass those incentives along to the tenant as an incentive for the tenant to occupy the facilities. Beyond grants and incentives, the developerâwhether the tenant, the air- port itself, or a third partyâis left with cash and debt to satisfy the development costs and oper- ating expenses of the new facility. While cash is mostly straightforward, debt can vary and come in a variety of types but generally falls into one of two areas: public and private. The following sec- tions list available funding sources, both grant and debt, and provide an overview of each. 5.6.1 Airport Improvement Program The AIP provides grants to public agencies for the planning and development of public-use airports. AIP funds are typically not available for revenue generating projects, so it may be diffi- cult, though not impossible, for the airport sponsor to use these funds for projects designated for commercial activity (e.g., GA terminals, aircraft hangars, FBOs). AIP funds are apportioned in the following categories: ⢠Primary Entitlement, ⢠Cargo Entitlement, ⢠State Apportionment, ⢠Non-primary Entitlement, and ⢠Discretionary. The following provides a brief overview of each of the above and how the funds can be used. A more detailed overview of these programs can be found in the Airport Improvement Program (AIP) Handbook, Order 5100.38C, and ACRP Report 16: Guidebook for Managing Small Airports. ⢠Primary Entitlement Funds: These funds are given to commercial service airports with annual enplanements of 10,000 or more. Distribution is based on a formula that takes into consideration the total number of passengers an airport serves, with a $650,000 minimum annual entitlement. ⢠Cargo Entitlement Funds: Entitlement funds are given to cargo service airports that handle a landed weight of at least 100 million pounds per year. Landed weight is the total weight of the aircraft and cargo, and is inclusive of all-cargo aircraft only (not passenger aircraft that may also be carrying cargo). ⢠Non-primary Entitlement Funds: General aviation airports listed in the National Plan of Integrated Airport Systems (NPIAS) are eligible for $150,000 a year. They can accumulate this money over a 4-year time frame without penalty. If this money isnât used by the 5th year, that yearâs money is forfeited and cannot be obtained. ⢠State Apportionment: The FAA will allocate AIP funds to be used within designated states based upon the population and area of the state. The airport sponsor must apply directly to the FAA for these funds unless the airport is in a block grant state. If in a block grant state, the airport sponsor will apply to the state aviation authority for state apportionment funding. ⢠Discretionary: After all AIP obligations under the entitlement funding formula are met, remaining funds can be distributed to any NPIAS airport at the discretion of the FAA. The air- port sponsor must apply directly to the FAA to obtain discretionary funding. It is important to note that under Order 5100.38C (Airport Improvement Program Handbook), several arrangements allow use of entitlement funds at a different location than the entitled air- port so unused amounts are not carried over each year for airports with no planned project. In Finance Overview 65
addition, sponsors may have other reasons for using entitlements at a different airport than would be allowed under the law. A sponsor may enter into an agreement with the FAA to waive receipt of all or part of its entitlement funds provided the waived amounts are made available to the sponsor of another eligible airport. Transfer of entitlement funds from one airport to another must adhere to these basic guidelines: ⢠Funds included in a transfer should be primary, cargo service, or non-primary entitlements. State apportionments are not transferable. Each agreement should specify entitlements of only one airport. ⢠The receiving airport must be in the same state or geographic area as the airport of the spon- sor making a waiver. In this instance, a âgeographic areaâ means a multi-state area where the receiving airport is in the same or an adjacent standard metropolitan area as the airport of the sponsor making a waiver. 5.6.2 PFC Program The PFC program allows the collection of PFC fees up to $4.50 for every enplaned passenger. PFC revenue may be used only to finance the allowable costs (e.g., total project cost, debt service, and/or financing costs) of approved projects at any airport the public agency controls. In addi- tion to full funding from PFCs, a public agency may combine PFC revenue and airport grant funds to carry out an approved project. However, the FAA may provide an exception to the rule requir- ing the use of PFC revenue to pay for debt service for approved projects only. The FAA may authorize a public agency under Part 158.18 to use PFC funds for debt service on noneligible projects if the FAA determines that such use is necessary because of the financial need of the airport. Additional detail on the PFC Pro- gram can be found in Title 14 CFR Part 158-Passenger Facility Charges and FAA Order 5500.1. 5.6.3 Alternative Grant Sources Most airport sponsors are familiar with the FAA funding mechanisms dis- cussed in the previous section. However, discovering the multitude of local, state, and federal grants that may be applicable to airport development is often a daunting task. These grants are channeled through numerous, and often frag- mented, EDAs at the local, state, and federal levels, and have stringent require- ments that dictate how and where these funds must be used. When seeking EDA funds for an airport development project, the local EDA, or similar organization, should be the primary resource for the airport sponsor. The local agency will be able to identify all local, state, and federal grant sources and incentives that may be applicable to an airport development project and can act as a point of contact in efforts to obtain these grants. State and local grants are tied to specific economic development and job creation goals and vary on a state-by-state or region-by-region basis. They may be restricted to defined geographic areas or to targeted industry classifi- cations. The airport sponsor should work closely with EDA officials to iden- tify which potential grant or incentive applies to a given airport development project, and how to position said airport project in economic development terms in order to maximize the potential of receiving the targeted grant. The requirements for obtaining federal EDA funds that may be applicable to airport development projects are standard throughout the nation. Federal EDA grants are also typically tied to job creation or projects that increase a 66 Guidebook for Developing and Leasing Airport Property It is important to explore and understand the economic develop- ment funds that may be available from state and local sources before project initiation. The Albany Airport Authority, after being selected by HondaJet for their Northeast headquarters, held sev- eral meetings with the New York State Senate Majority Leader Joseph Bruno and with HondaJet officials to secure State funding for the planned development. The Airport applied for two grants on behalf of HondaJet East. They include a grant of $500,000 from the New York State Economic Development Assistance Program, and a grant of $180,000 from the New York State Transportation Bond Act AIR â99. In addition to the State-funded financial pack- age, the Albany Airport Authority is also providing a $45,000 match to be used towards HondaJetâs facility construction costs.
regionâs economic and business competitiveness. If the airport development project can meet the requirements for enhancing the economic competitiveness of the surrounding community, or its need is framed in such a manner, the facility may be eligible for funds more completely described in the Catalog of Federal Domestic Assistance (CFDA). If any of the prospective tenants of the facility can ensure a level of private-sector employment that meets program require- ments, the facility may be eligible for funds under CFDA 11.307. Details for each program are provided below: ⢠CFDA 11.300 Public Works and Economic Development Program: Public works and economic development investments help support the construction or rehabilitation of essential public infrastructure and facilities necessary to generate or retain private-sector jobs and investments. These investments attract private-sector capital and promote regional competitiveness, includ- ing investments that expand and upgrade infrastructure to attract new industry, support tech- nology-led development, redevelop Brownfield sites, and provide eco-industrial development. ⢠CFDA 11.307 Economic Adjustment Assistance Program: The Economic Adjustment Assistance Program provides a wide range of technical, planning, and infrastructure assistance in regions experiencing adverse economic changes that may occur suddenly or over time. This program is designed to respond flexibly to pressing economic recovery issues and is well suited to help address challenges faced by U.S. regions and communities. 5.6.4 Private Capital Needless to say, from the airport sponsor perspective, private financing by the developer/tenant for any improvements on airport leasehold is the ideal scenario. In this scenario, the airport spon- sor is not responsible for the funding of any of the proposed improvements, but does have the requirement to conduct due diligence on the financial soundness of a potential developer prior to entering into a lease agreement. The ability of the developer to meet the financial obligations dictated by the financing arrangement for the specific airport project should be verified to the extent possible. Though the airport sponsor will not be financially liable should the developer default, such a case could cause problems for the sponsor and management, including the need for the airport to assume the operation and maintenance functions for the facility, potential rever- sion of the facility to the airport, and issues with third-party tenants should sublease agreements be in effect. Finance Overview 67
