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CHAPTER 9 Non-Aviation Development Although many airports have long had some instances of non-aviation land uses on their property, and a few airports have had extensive experience with non-aviation development, this sector is emerging as one of highly salient interest to airport proprietors. Although airport managers strive to improve their performance in conventional sources on non-aeronautical revenue, they have turned greater attention to less conventional sources, including non-aviation development. For this Guidebook, "non-aviation development" is loosely defined as development of real property owned by the airport proprietor that is designated for commercial uses other than the direct conduct of aviation services by the airport proprietor, the airlines, or their respective agents and vendors. The definition does not attempt to correlate with the definition of "aviation support" facilities that airports may use in their cost center accounting pursuant to airline lease and use agreements. It typically, but not necessarily, involves an agreement between the airport owner and the developer of the property rather than the direct user, or tenant, of the land improvements. Airport processes for commercial development tend to evolve over time as their markets mature, their governing body and staff become more knowledgeable about their market opportunities, their business communities become more comfortable with the commercially unconventional features of development in an airport environment, and their surrounding jurisdictions become more attuned to the economic expansion prospects for their own communities. Figure 9-1 illustrates this evolution. The early stages of an airport's commercial development profile are characterized by one-off transactions, either initiated by the airport owner or in response to a developer's unsolicited proposition, followed by the handling of incremental developments, again, with the airport either responding to declared developer interest or its own initiation. Further evolution is characterized by sophisticated airport-driven subdivision planning, with, perhaps, the ultimate stage of airport leadership in collaborative environs planning in what has variously been labeled as "airport cities" or "edge" planning. 9.1 Key Factors for Success in Airport Commercial Land Development Airports with successful track records in non-aviation development report several key factors for that success, above and beyond the issues contained in lease or development agreements. These factors are as follows: · Local Market Conditions. Although most airports operate in a national or global market, and the ultimate tenants of their commercial developments may operate on a national or international stage, prevailing conditions in the airport's environs carry great significance. 66
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Non-Aviation Development 67 Figure 9-1. Stages in airport commercial development. · Strong Business Practices. Not surprisingly, the adoption of strong business practices becomes more important in the face of dynamic market conditions. Successful airports recom- mend that the airport owner perform detailed master planning for its non-aviation areas (with specific master planning for each sector), prepare realistic market analyses, adopt an opportunistic and entrepreneurial perspective, and institute aggressive marketing techniques. · A Developers and Lenders Education Process. Airports early in their non-aviation develop- ment process must patiently and persistently educate developers, lenders, and potential ten- ant businesses about the airport regulatory environment. For those parties not accustomed to on-airport development projects, including their requirements for adherence to federal grant sponsor assurances and environmental provisions, airport development leases may be daunt- ing. Developers may face difficulty obtaining financing from lenders unfamiliar with the pro- visions necessary for airports to comply with federal regulations. Airports have found that, at least in their early development transactions, it was critically important to deal with national or large regional developers who had previous successful experience with commercial devel- opment in an airport setting. · Coordination with Local Planning Agencies. Finally, the sensitivities regarding perceived air- port competition with off-airport commercial development is an issue not to be ignored, par- ticularly when a non-local developer is involved and when the airport is not owned by the political jurisdiction in which competing development parcels are located. Airports have reported greater success when the planning agencies and officials of these jurisdictions are involved and coordinated with early in the airport's process. Some airports require a letter from prospective developers stating that they have looked around the area and, because of their specific business purpose, need to be on the airport. Conversely, airports have experienced delays in realizing their development objectives and attraction of adverse political reaction, when the members of the area business community or bureaucracy raise concerns. 9.1.1 Mortgage and Subordination Rights Developers will need to obtain temporary construction and/or permanent financing and refinancing during the term of their ground lease. These financings will require a leasehold mortgage in the form of a mortgage, deed of trust, or deed to secure debt or other security instrument by which lessee mortgages, conveys, assigns or otherwise transfers its leasehold to secure a debt or other obligation. The ground lease should specify the right of the developer to encumber the property such that financing can be obtained. However, under FAA regulations, no conveyance of a fee simple interest can be implied. Other documents that should be covered are also the provision of estoppels but with the pro- vision that no documentation shall impose any additional obligations on the airport operator or impair the lessor's remedies under the ground lease. The ground lease should also specify notice requirement by the mortgagee to the airport operator in the event of foreclosure or voluntary assignment. The ground lease must also make it clear that the mortgage is subject to the ground lease and that the lien under the mortgage will terminate upon any expiration or termination of the leasehold estate.
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68 Guidebook for Developing and Managing Airport Contracts See CRP-CD-81 (enclosed herein), Appendix to Chapter 9, Non-Aviation Development, for excerpts from the MIA, DFW, and PDX Development Agreements for good examples of devel- opment agreement language describing the developer's rights associated with financings. 9.1.2 Options and Rights of First Refusal The airport may wish to grant an option for the leaseholder to obtain additional property dur- ing the term of its base lease; best practice is to identify such property and to charge the lease- holder for this privilege. See CRP-CD-81 (enclosed herein), Appendix to Chapter 9, Non-Aviation Development, for excerpts from the DFW Development Agreements for example of option granted to developer. 9.1.3 Development Milestones In order to prevent developers from tying up the revenue potential of airport property by hold- ing land for the purpose of improved future return, the setting of development milestones is a key lease provision. In this, the airport requires the start of construction by a certain date, period from the lease commencement, or upon a specified event. When the lease is with a master devel- oper with a phased development schedule, the lease contains provisions for those milestones. The lease should also provide the airport operator with the right to take back undeveloped portions of the premises if the developer does not construct improvements as contemplated by the agreement within a specified period of time. See CRP-CD-81 (enclosed herein), Appendix to Chapter 9, Non-Aviation Development, for excerpts from the DFW Development Agreements for example of development milestones and the right to recapture undeveloped portions of the property. 9.1.4 Initial Rent The other provision designed to deter land speculation by developers is to charge rent com- mencing by a certain date or by a specified event. See CRP-CD-81 (enclosed herein), Appendix to Chapter 9, Non-Aviation Development, for excerpts from the MIA Development Agreement for example of initial rent which begins on the earlier of date of beneficial occupancy or 25 months from the commencement date of the lease. 9.1.5 Master Developer Airports have varied in their utilization of a master developer concept for both aviation-related and non-aviation development. Even within the same airport, different development transactions will have different structures. Interestingly, the pattern appears to be that airports use master developers both early in their development cycle and late in their development cycle, for differ- ent reasons. Early in their cycle, airports turn to master developers to help them develop and exe- cute a market strategy for their property, respond to market changes, and take advantage of market opportunities for which the airport may not be prepared. As the airport's market matures and the owner becomes more sophisticated in understanding the market, airports have used mas- ter developers to enable the owner to undertake larger, mixed-use developments. Airports may enter into development agreements that provide for phasing in of ground leases as tenants are identified. For development agreements, the specification of development milestones and the imposition of "initial rent" are key provisions. See CRP-CD-81 (enclosed herein), Appendix to Chapter 9, Non-Aviation Development, for excerpts from the Sample Development Agreement for an example of phased development goals.