Guidebook for Developing and Leasing Airport Property (2011)

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68 Regardless of an airport’s size, location, or market, certain best practices prevail and provide a common thread through development projects at airports of all types. The airport sponsor must strive to meet the demands of the airport’s users, the needs and desires of the surrounding community, the financial concerns of potential developers, and the regulatory requirements of the FAA, all while ensuring that the current and future financial and operational health of the airport remains intact. This can be a difficult task to accomplish, particularly when these goals may often be seen as being at odds with each other. It is, therefore, imperative that the airport sponsor evaluate the potential financial, economic, and regulatory impacts of the agreement prior to entering into a lease. While it is important to consider the benefits to the community, the developer, and ultimately the tenant in the lease arrangement, it is important to remember that the financial sustainability of the airport is the primary goal. The following sections will review lease and development best practices discussed throughout this Guidebook, and provide the airport sponsor with procedures that achieve both the desired development and the neces- sary sustainability. 6.1 Project Development The project development phase encompasses all of the planning, collaboration, and decision- making processes that occur prior to the negotiation and execution of the appropriate agree- ments. For this reason, it is important to focus on setting the groundwork that will be required for a successful relationship that, in turn, will benefit both the airport and the tenant. 6.1.1 Airport Planning The airport sponsor must have a vision as to how the airport will be developed and those goals must be clearly defined and aligned with those of the community and potential tenants. Using the Airport Master Plan and any land use studies as a starting point, the basis of any potential development project should be evaluated for its desirability and impact on the airport. The Mas- ter Plan should define land appropriate for aeronautical and nonaeronautical use, as well as the types of development intended for the respective land uses (such as corporate hangars on land designated for aeronautical use or warehousing for nonaeronautical use). However, the airport will need to maintain flexibility when it comes to its overall vision for future airport develop- ment. The demands of the market dictate flexibility on the part of the airport sponsor and will often require deviation and exceptions to the airport’s Land Use Plan in order to secure a ten- ant agreement. (Airport Vision discussion in Section 3.1 provides additional information on this topic). C H A P T E R 6 Summary of Best Practices

Summary of Best Practices 69 6.1.2 Stakeholder Engagement In any development project or lease agreement, the identification and inclusion of all affected stakeholders early in the process is crucial to a successful outcome. An airport sponsor operating in a vacuum may overlook valuable resources or encounter unexpected hurdles if he or she has not actively engaged the stakeholder groups that have vested, or even ancillary, interests in the airport. Throughout the case study research process, it was evident that economic development agen- cies or corporations (EDA/EDC), both local and state, were able to provide airports with valuable assistance. It is essential that any project or lease agreement, particularly one with a commercial component or that will result in job creation, involve EDAs. Airport sponsors should consider the local and state EDA/EDC as key partners in achieving overall airport development goals. These resources should be engaged in a continuing relationship versus a project-specific role. EDA/ EDC should be regularly involved in airport planning and in policy discussion to keep airport development goals in the forefront of their own priorities. The EDA/EDC may be able to pro- vide the airport with resources to market the airport to potential tenants, secure new funding and/or grants, identify tax incentives, be an advocate in the political arena, and/or assist with the grant application processes. 6.1.3 Financial and Economic Considerations When attempting to secure either aeronautical or nonaeronautical development, the airport must offer competitive packages. Offering competitive commercial real estate packages is always a challenge when comparing leased property, with a defined term length, to a property that can be owned fee simple. Both leased and owned parcels are likely to have similar tax implications, with the exception of Foreign Trade Zone scenarios that may only be offered on leased airport property. Airport development, therefore, must be creative in its approach to compete on a level playing field with traditional development scenarios; the equalizer is often applying grants and incentives to perform some level of development on behalf of the project. Lease rates, placement of infrastructure required of airport development, planning, entitlement (the ability to develop property within a given jurisdiction), and location all play a role in the case of the tenant evalu- ating site options. While the airport sponsor must maximize revenues for the airport to ensure sustainability, there are often other economic and financial factors outside the confines of the airport that may affect the desirability of a particular airport lease agreement. Economic considerations such as job creation and tax revenue generation may provide a positive impact for the local community while offering little direct financial benefit to the airport. When working in conjunction with an EDA/EDC, states, and local governments, the airport may be pressured to enter into leasing arrangements that do not directly benefit the airport but provide other benefits to the commu- nity as a whole. In this scenario, the airport sponsor should seek to protect the airport’s finan- cial interests to the extent possible. Financial incentives for a potential lessee should be provided in the form of EDA/EDC grants (state and local) and tax incentives rather than reductions in base rent. If it is deemed that lease rate reductions are necessary to secure the potential lessee, alternate forms of revenue, such as a percent of gross sale arrangements or additional fees based upon the lessee’s business operations (such as fuel-flowage fees), should be actively sought prior to executing the agreement and coordinated with the FAA prior to completing negotiations. 6.1.4 Economic Impact Considerations Quantification and description of a project’s economic impact can be a powerful message and justification for project support. This Guidebookhas already described the economic development

aspects of airport development from a variety of perspectives. The most important considera- tion of economic impact is the impact the project will have on the airport and on the airport sponsor. The airport development project should have a net positive impact on the airport and positively benefit the airport’s financial position. Economic impact can be direct, as in the case of net revenue to the airport (the difference between revenue and costs of the airport develop- ment to the airport), or indirect, as in the case of new activity that directly causes new revenue from other tenants. An example of a direct benefit is the revenue paid to the airport for a ground lease for which the airport has no new additional expense associated with operating the airport. An example of an indirect benefit is a new development project on land already being leased to a tenant, which results in no new direct revenue to the airport but provides a new activity that generates additional revenue. This additional revenue can be increased fuel-flowage fees or per- haps new landing fees that would not exist without the new airport development project. 6.1.5 Regulatory Compliance in Development Ensuring that any proposed project is in compliance with all applicable FAA, NEPA, state, and local regulations is the responsibility of the airport sponsor, and, as such, the sponsor must remain engaged throughout the project planning, development, and execution phases. While it can be anticipated that a third-party developer will bring an understanding of the regulatory requirements pertaining to its area of expertise (e.g., design, construction, operation), the third party may not be familiar with the regulations that guide on-airport land use and develop- ment. The airport sponsor must ensure that any proposed land use does not conflict with the airport’s FAA-approved ALP, that any development does not encroach into any safety areas, or that the structures and associated operations do not inhibit the safe and efficient operation of the airport. 6.2 Lease Execution A lease agreement may take on various forms and include differing stipulations based upon the function, location, and tenants involved (land lease versus facility lease, or aeronautical ver- sus nonaeronautical leases, for example). Many leases will be unique in their development and execution while others will adhere to a standard airport lease policy that can be uniformly applied to multiple tenants, such as in the case of T-hangar leases. The airport sponsor must determine whether the circumstances of a specific lease negotiation are unique enough to deviate from standard terms and contract language, whether deviation from leasing policy in order to accom- modate a tenant is appropriate, and/or whether similarity prevails and consistency is more important than accommodating one tenant. Regardless of whether the anticipated lease agreement is for existing facilities or new develop- ment, or for aeronautical versus nonaeronautical use, the best practices of project development discussed below should be applied. • While ensuring reasonable rates, leasing policies should also state the need to comply with all state, local, and federal building codes. • Lease terms should be as consistent as possible and clearly understood by all parties. • An airport may decide to pursue a solicitation process, but in some cases airport property may be leased without seeking competitive proposals when it is in the best interest of the airport or community and described/offered through a visioning document such as an Airport Master Plan. If a solicitation process is required, the process and criteria for approval should be stated clearly in the policy. • The leasing policy should state whether the transfer of a lease or subletting will be permitted. 70 Guidebook for Developing and Leasing Airport Property

Summary of Best Practices 71 Finally, the airport should establish policy for rent increases. For example, an airport may decide to increase rents on some periodic basis, assuming rents are at fair market value, to keep pace with inflation. 6.2.1 Airport Leasing Policy A recommended best practice is that airport sponsors develop a standard Airport Leasing Policy that applies to both facility and land leases. The Leasing Policy must be flexible enough to allow for unanticipated development opportunities while being comprehensive enough to account for multiple tenant types and operations. A standard, comprehensive Leasing Policy provides for the equitable treatment of all airport tenants and will minimize questions, concerns, and potential conflict between the airport and its tenants. The Leasing Policy should include, at a minimum, the following provisions: • Land lease rates (per square foot), differentiated by area. Aeronautical versus nonaeronautical, for example, and consideration of the land’s proximity to infrastructure. • Hangar lease rates (per square foot), with consideration to the gauge of aircraft that the hangar will accommodate in terms of hangar doors size, height, and clear span distance. • Building and facility lease rates (per square foot). • Standard lease terms that are compliant with state and local law. • FBO/SASO lease requirements, which are consistent with an airport’s Minimum Standards. • Process for adjusting rents and fees (living clause). • Insurance requirements, preferably in one document and adopted by official action, of the gov- erning body. Consolidation of all insurance requirements applicable to the airport allows an air- port to review, update, and have them reconsidered by the governing body from time to time. • Obligations of lessee, covered in a Rules and Regulations document. • Routine inspection provisions for safety and compliance of airport tenants and users. • Construction and improvement standards that outline pre-approval by the landlord and the airport sponsor, local permitting agency requirements, and FAA notification of proposed construction once all other approvals are secured. • Subletting policy. 6.2.2 Minimum Standards As with the Airport Leasing Policy document, the airport sponsor should have Minimum Standards that apply to all lessees. This document is necessary to ensure that lessee improve- ments conform to the operational standards set forth by the airport, and that the level of ser- vices provided to the aviation community is appropriate. Minimum Standards are especially relevant to leasing and developing airport property because they speak to what facilities are required for a specific activity. For example, if a parcel of land is less than one acre in size and surrounded by other development, and the Minimum Standards require more than an acre of land for FBO and other commercially-intense business activities, the value of that property, and any improvements on the property, may be affected by the fact that only certain activities will be allowed on a parcel of that size. Therefore, comparables used to value the property and improvements should only include examples with uses that would be allowed on the airport where the subject land resides. (Section 3.3 offers additional detail regarding the elements of a Minimum Standards document.) 6.2.3 Lease Rate Determination It should always be the goal of the airport sponsor, in line with FAA guidance, to maximize rev- enue for the airport. An appraisal of airport property should be conducted in order to determine

the base value of airport assets. Land leases for commercial nonaeronautical uses should be based on current market rate comparables. Airside land, aeronautical facilities, and hangar rates should be based on comparable facilities at surrounding airports with similar attributes. In order to accurately value land and facilities, benchmarking of airports of similar size and with similar infrastructure (runway length, instrument approaches, security, and air traffic control for exam- ple), should be used in a consistent manner. The same benchmarked airports are tracked over time for comparative purposes. The appraisals and benchmark rates should be used as guidelines for the airport to determine baseline rates that can be subsequently adjusted as new information becomes available. The airport may vary its lease rates depending upon size, function, location, and level of improvements to the land and the facilities being leased. For example, the rental price of a build- ing or hangar may vary based on size, amenities, location, access, condition, construction, and allowable use by the airport. Likewise, the airport may want to vary land lease rates based upon factors such as the magnitude of the project, the synergistic effect the project may have on other tenants and/or future development, airside versus landside location, availability of utilities, and access (from both the airside and the landside). The airport may also adjust lease rates below established baseline rates if the tenant provides additional airport revenue through other sources, such as fuel sales or percentage of gross rev- enue. The airport should consider modifications to rental rates that include a percentage of gross sales, depending on the type of business being conducted. Similarly, the airport might consider land leases that require a percentage of any profit be paid to the airport on the sale of leasehold improvements or equity. Regardless of the rate-setting methodology used, the airport sponsor should create a transparent process for all stakeholders to see and understand. Once transparency is established, the airport sponsor can clearly outline the rationale and justification for its rates and charges, placing itself in a defensible posture that will either hold up to stakeholder criticism or that can be adjusted for broad acceptance by the aviation community. 6.2.4 Lease Term Determination The Airport Leasing Policy document should consider appropriate lease lengths. Land leases are routinely set at 20- to 30-year terms; lease terms beyond this length may be limited by local or state statutes. Provisions for the extension of a land lease should be included in the lease agree- ment and outline the requirements that must be met before the lessee is allowed to extend the lease, preferably contingent upon the lessor’s concurrence and approval, by periods of 5 to 10 years. These extensions of the lease are considered addendums to the original lease document with all covenants and provisions of the original remaining in effect. The length of a lease and the ability to extend the lease term is an important consideration for potential tenants who will be making substantial investment in improvements that will need to be amortized over a number of years. It is important to consider the useful life of the improvements and the size of the tenant’s invest- ment when negotiating length of term. Risk and reward should also be given due consideration. If improvements are very specialized, the developer may need a longer lease term than normal. Without knowing the exact functional life of the improvements, or how the niche industry might change and make the improvements functionally obsolete, the developer may require a buffer of term length to ensure that sufficient time exists to repay the debt and make a reasonable profit. 6.2.5 Reversion Best practices for leasing and developing airport property include reversion of improvements back to the airport sponsor at the termination of the lease. Therefore, the lease must be long enough 72 Guidebook for Developing and Leasing Airport Property

Summary of Best Practices 73 for the developer to be able to amortize the investment the company makes in improvements, but not so long as to unnecessarily restrict the options available to the sponsor to develop and improve the airport in the future. The savvy airport sponsor will be prepared to balance these sometimes competing goals so as to attract development without impeding future options, all the while securing market-rate fees that will support the operational costs of the airport in a sus- tainable fashion. 6.2.6 Regulatory Compliance in Leasing As discussed in Chapter 3 (Section 3.2: Grant Assurances and Federal Compliance), the airport sponsor must be careful when crafting the lease agreement that federal grant assurances are not violated. Within the lease document, there are four common issues that the sponsor must be aware of: lease term length, economic nondiscrimination, airport sustainability, and the grant- ing of exclusive rights. The following addresses these points in greater detail: • The lease term should not be longer than 50 years for land that has actual or potential aero- nautical uses. The FAA may consider lease terms greater than 50 years as a disposal of land and require fair market value payment from the airport sponsor. • The lease must ensure economic nondiscrimination; all tenants must be treated equitably when assessing rates, charges, and terms, and, to the extent possible, any provisions and rights afforded to one must be available to all. • The airport sponsor must maintain a fee and rate structure that will make the airport as self- sustainable as possible. This requires the airport sponsor to know and negotiate market-value rate for airport property. • The airport sponsor cannot grant a tenant exclusive rights within the lease agreement. The inclusion of noncompete clauses that strictly prohibit the airport sponsor from leasing to a competitor of a tenant can be considered a violation of this grant assurance. 6.3 Airport Sponsor Checklist The Guidebook has presented multiple issues, concerns, and considerations that the airport sponsor must account for prior to entering into a lease agreement. These considerations encom- pass a wide range of issues that are dependent upon the type of development, anticipated uses, location on the airport, financing, funding, required financial return, grant assurances, regulatory compliance, and community impacts. The airport sponsor must be aware of each and account for their effects, financial and otherwise, when structuring and implementing a lease agreement. The following sections will provide the airport sponsor with general checklists of items that must be considered in the project development analysis (applicable to new or redevelopment projects) and when structuring a lease agreement (applicable to all airport lease agreements). The checklists should be used to prepare the airport sponsor for negotiations by stimulating the thought process and considering the long-term implications of a proposed airport devel- opment. The checklists may also be used to prepare for community discussion or to prompt further research. 6.3.1 Project Analysis Checklist New development or redevelopment of existing facilities provides the greatest challenge for the airport sponsor, as multiple planning, stakeholder, and financial variables may exist. These variables, which are often absent in the case of existing facilities such as hangars, need to be con- sidered throughout the project planning process. The airport sponsor’s role in the development process is to ensure the airport’s financial sustainability, consider the highest and best use of

airport land resources, and ensure the project complies with regulatory requirements and grant assurances. To help achieve these goals, the sponsor must consider all facets of the development process and be ready to address the following questions in order to determine whether a poten- tial project is a fit for the airport: Planning:  Does the project fit within the stated goals listed in the airport visioning documents (Airport Master Plan, Land Use Plan, and Airport Business Plan)?  Does the project comply with community land use plans, zoning ordinances, and other appli- cable planning documents?  Is the proposed development in compliance with the FAA-approved Airport Layout Plan?  Does the proposed use of the property violate any grant assurances?  Is the proposed use of the property in compliance with security and environmental regulation?  Does this project represent the highest and best use of the property?  Is the proposed project in conflict with any current airport agreements such as noncompete or right-of-first-refusal clauses that may be in effect with an existing tenant?  If the property is airside, or has airside access, does the proposed use of the property con- form to desired aeronautical uses (airside land being used for aviation purposes, for example)? Stakeholder Involvement:  Have all of the potential stakeholders in the project been identified?  Have the perspectives, concerns, and resources (potential funding sources, marketing resources, and development expertise, for example) of the stakeholders been identified?  Are plans in place to reach out to the identified stakeholders, and are mechanisms such as public meetings, round-table discussions, and focus groups planned to facilitate communi- cations and dialogue? Finance and Funding:  What will the project cost in terms of immediate outlay of resources, and what ongoing oper- ational, maintenance, and financing costs are anticipated in the future?  Where will the project funding come from, and what entity/stakeholder is responsible for securing the funding?  Will the airport sponsor’s debt capacity and/or creditworthiness be impacted by financing this project?  Does the airport have the ability to issue debt, either through the airport sponsor organiza- tion or through another applicable public-sector entity such as the city, county, or state gov- ernment?  Does the project qualify for EDA/EDC grants or bonds (either local, state, or federal)?  Will the airport revenue anticipated from the leasing of the property be sufficient to cover debt obligations and recurring operational costs assigned to the sponsor?  Will the airport sponsor recognize revenues in line with the valuation estimates or appraised market value of the property?  Has a pro forma financial analysis of the project, from the airport sponsor perspective, been conducted that will forecast the project-specific financial implications for the airport? 6.3.2 Lease Agreement Checklist When an airport sponsor plans to enter into a lease agreement, it is imperative that each potential aspect of the agreement, or lease element, be carefully considered. The potential impact on the airport’s financial health, regulatory compliance, and future development potential must 74 Guidebook for Developing and Leasing Airport Property

Summary of Best Practices 75 be considered. The following list of questions represents a checklist of considerations that the sponsor must address within the framework of the lease agreement:  Are the lessor and lessee clearly identified in the lease document? This element of the lease agreement should include a lessee point-of-contact, a statement requiring updated contact information should that information change during the lease term, and any identification of a dba (doing business as).  Are the premises (also referred to as the “property”) clearly defined in the lease agreement? This element must detail the land and improvements subject to the lease agreement and will typically consist of an “Exhibit” referred to in the lease document. The premises exhibit should contain a drawing delineating the boundaries of the leased land and a listing of all the pertinent features and improvements subject to the lease agreement.  Does the lease agreement stipulate the approved use of premises? For a lease with a business entity, this element should identify if and what type of business and commercial operations may take place at the leasehold. Approved uses should be listed in the Airport Minimum Stan- dards and Rules and Regulations documents, and the lease needs to reference these documents in the use of premises section.  Is the length of the lease stated with a clear “commencement date” on which the lease agree- ment will take effect? The lease term element of the lease agreement will also include any extension options, if included in the agreement.  Does the lease term violate any local or state statutes regulating the maximum term that may be offered by a public agency? The airport sponsor must ensure that the lease term does not exceed what is allowable by law.  Does the lease agreement clearly state the rent due to the lessor, the schedule of payment, acceptable method of payment, and penalties for late payment?  Is there an escalation clause that will allow the airport sponsor to adjust the lease rent? The escalation clause within the rent element must clearly state when an adjustment will be made (every 5 years from the commencement date of the lease agreement, for example), and what factors the rent escalation will be based on, such as annualized CPI or appraised value.  Is the division of responsibility for leasehold operation and maintenance clearly stated for the lessee and lessor? The operation and maintenance section of the lease should list the specific responsibilities of the lessee for leasehold maintenance and upkeep, and should reference the Airport Minimum Standards document.  Is the process for the construction of improvements by the lessee clearly spelled out? The lease agreement should detail the required approval process regarding any repairs, renovations, improvements, and alterations to the leasehold. Since improvements must comply with the Airport Rules and Regulations and Minimum Standards, these documents should be refer- enced in the construction of improvements lease element.  Does the lease clearly state how and when ownership of the leasehold improvements will revert to the airport? The reversion clause should state that at the termination of the lease agreement all improvements revert to the ownership of the airport. Termination of the lease is not lim- ited to expiration of the lease term, but may also include the following: • Failure to pay rent, • Violation of Airport Rules and Regulations, • Failure to comply with the Airport Minimum Standards, • Violation of a lease-specific clause within the agreement, • The triggering of a noncompete clause, and • Airport purchase of the leasehold improvements.  Are the rights, reservations, and obligations of both the lessor and lessee addressed in the lease agreement? These rights and reservations may vary depending upon the lease type and activity conducted on the property but will typically reference the Airport Rules and Regulations and

Minimum Standards documents as well as require compliance with any environmental and security regulations that may be applicable.  Does the lease agreement allow for the inspection of the premises by the airport sponsor? This right may be deemed necessary by airport management in order to ensure lessee compliance with Airport Rules and Regulations.  Are the insurance obligations of the lessee clearly spelled out in the lease agreement? Insur- ance requirements, at a minimum, should outline coverage types and amounts so that the airport is protected from financial liability. If the primary lessee is subleasing all or a por- tion of the property, the lease agreement must stipulate that the sublessee be in compliance with the insurance requirements outlined within the lease.  Does the lease agreement include a hold-harmless provision or indemnity clause that will protect the airport sponsor from any legal action, suits, proceedings, claims, damage, loss, or liability resulting from the actions of the lessee?  Will the lease agreement allow the primary lessee to sublease all or a portion of the property? If the lessee will have the right to sublease the property, the lease agreement must specify the responsibilities of the lessee in relation to the sublessee. Detailed provisions should be spelled out in the lease agreement and any operating agreement to avoid conflict between the parties in a long-term lease agreement.  Does the lease agreement include any potential grant assurance violations relating to lease- term length, economic nondiscrimination, airport sustainability, and the granting of exclusive rights? If there is a potential cause for concern, has the FAA been consulted and approval sought? The airport sponsor checklists provided are by no means intended to represent an exhaustive list of issues that can be expected to arise when an airport sponsor enters into a lease agreement. The list of variables—when dealing with the diverse types of development that occur within the confines of an airport, coupled with a multitude of potential stakeholders and their divergent interests present in each project and lease—will ensure that a single, standard lease agreement and project development approach will never be achieved. Due to the many variables that exist, there is simply no one standard for leasing and/or project development that will fit all scenarios, though the checklists provided will serve as an excellent starting point and can be applied to many scenarios that the airport sponsor might encounter. As with the Guidebook in its entirety, the checklists should serve as the foundation for struc- turing a lease agreement that is beneficial to the airport, the tenant, and the community, while protecting the airport sponsor from financial, regulatory, and legal ramifications of a poorly con- structed lease agreement. The questions asked within the checklist should serve to raise aware- ness of the airport development issues and responsibilities on the part of the airport sponsor. The subjects discussed and addressed were ultimately designed to help guide the airport spon- sor through the many facets of airport project planning, development, and leasing policy. 76 Guidebook for Developing and Leasing Airport Property