Guidebook for Developing and Leasing Airport Property (2011)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

The competitive environment for on-airport development projects requires a thorough understanding of today’s substantive issues. Existing agreements must be taken into account with an eye toward future land or facility development. Marketing strategies should be innova- tive and include input from local stakeholders. And last but certainly not least, airport sponsors must successfully manage the development process. When it comes to the components that make up a successful airport development project, the mix varies widely. In the simplest form, the airport leases property to a tenant that develops its own improvements on airport land. From there, third-party developers, airports providing built- to-suit facilities on airport land, application of incentives to whomever develops the property, and subleases set the stage for a wide variety of successful combinations. In short, the airport will need to identify who the tenant and developer will be and determine how the project will be financed to construct a development program that meets the requirements of all involved. At the core of this issue is the reality that improvements or rehabilitations meant to meet the needs of the tenant/user will need to be “developed” by either the airport sponsor, the tenant/ user, or by a third party. And those improvements or rehabilitations will need to be financed by one of those parties. As the structure of the land lease and development project comes together, those three parties may play a variety of roles and may even share roles. The combination of air- port development components is limited only by imagination and creativity, as various tools are applied to provide incentives ultimately resulting in facilities for tenants to occupy. 4.1 Existing Agreements Existing airport lease agreements have the potential of affecting future agreements in multiple ways, thus, it becomes important to account for any tenants and agreements that may be impacted by planned development. Several factors may influence lease agreements between the airport and a potential tenant, including existing airport lease policy and noncompete agreements. Existing airport leasing policy, if applied equitably to existing tenants, will limit the flexibility of the airport to offer discounts, incentives, and other benefits to new tenants without negatively affecting the goodwill of existing tenants. It is the goal of an airport leasing policy to assure that each tenant is treated equitably, so it becomes necessary that the airport consider potential con- flict and confusion that might arise when granting lease policy waivers and exemptions to new tenants. It is the duty of the airport to assure that new agreements are not in conflict with existing leases and airport leasing policy. A cohesive and accessible leasing policy can be a key tool in mitigat- ing any confusion and conflicts that may arise later. 49 C H A P T E R 4 Project Development Considerations

Noncompete agreements are generally in conflict with federal grant assurances and difficult to apply to commercial ventures such as an FBO or MRO operation. When seeking to execute a lease for commercial activity, the airport must be aware of current tenants in the same industry and be cognizant that grant assurances require access to new entrants at public airports. If non- compete clauses are prevalent in existing documents, changes may be required. 4.2 Marketing Airport marketing can be instrumental in developing land and leasing airport property. The marketing targets will differ, depending on whether there is an existing facility or if the airport plans on constructing a new facility. If a facility exists on airport property, the airport will likely market that facility to potential tenants. If the airport is planning to build a new facility, it may need to mar- ket to the community and local, state, and federal agencies to garner support for the project. In either case, a good relationship with the community’s economic development entity and/or cham- ber of commerce is always beneficial. In fact, these entities may be able to help the airport secure funding for the project. With an existing facility, the economic development entity may be able to help attract tenants, and, in some cases, even build a workforce. An example of this can be found in the PEMCO project in Tampa, FL (see Appendix A). Characteristics such as the airport’s loca- tion, possible niches, history, and area demographics should be taken into account as well. The airport professional that manages real estate within the airport’s organization should typ- ically coordinate land negotiations. Negotiations usually begin with a written offer, which should not be less than the appraised value of the property. Valuation is discussed in more detail in Sec- tion 4.5 of this chapter. There are many ways to market and solicit proposals for project construction and for identi- fying land available for lease. Most common is to post the opportunity on airport websites and in association publications’ business announcements, such as a monthly opportunities newslet- ter. Another option is to use a third party, such as the economic development entity described above. Many times, it is advantageous to use third parties for resources such as professional knowledge, time management, and financial management. Many publicly-owned airports could use third-party organizations for less cost than private organizations because these developers may be included within the local municipality. Whether it is a third party, the airport, or a con- sortium of entities, the most knowledgeable and able entity should be the one to manage the pro- posals and deploy varying means of mass communication. An important axiom to remember is that the larger the project and greater the potential for economic impact, the more competition for development. 4.3 Funding The ability to enter into a lease agreement is often dependent upon the availability of funding or the ability to obtain project financing. Whether or not the airport sponsor is responsible for financing the development project, either in part or in total, is dependent on the type of project and the financial resources the developer/tenant brings to the table. In addition to airport-specific resources (e.g., revenue derived from existing airport leases, fees, and charges), potential funding sources for an airport development project can be found from a variety of local, federal, and state agencies. These sources may include • AIP, • Passenger Facility Charge (PFC) Program, • Local or state economic development grants, 50 Guidebook for Developing and Leasing Airport Property

• Federal economic development agency grants, • American Recovery and Reinvestment Act (ARRA) bonds, • Airport issued bonds, • General obligation bonds, and • Private financing. While an airport’s operating revenue is generally derived from lease agreements and fees, most airports rely on capital improvement project funding from the FAA through the AIP. Many com- mercial service airports also levy passenger fees through the PFC Program. Other sources of proj- ect funding come in the form of economic development grants should the project meet eligibility requirements, while additional financing options are in the form of subsidized bonds. A detailed overview of available funding sources is presented in Chapter 5: Finance Overview, Section 5.6: Funding Sources. 4.4 Land and Facility Development Airports and potential tenants have a wide variety of leasing options and examples at their dis- posal. The land will more often than not require certain improvements such as utilities, access, and preconstruction development. These improvements are usually negotiated in the early stages of project development, to ensure the required elements are available when needed. As develop- ment coordinator, the airport’s first priority is fostering and supporting aviation. Portions of air- port land may be occupied by entities that have little to no involvement with aviation when airports offer a competitive strategy for stimulating economic activity by preparing excess land for compatible nonaeronautical development. While some airports turn away from leasing or developing land for nonaeronautical use, nonaeronautical development can diversify an airport’s revenue stream. Shovel-ready is a popular term for sites that have utilities, roads, and, in some cases, initial permitting completed before ever talking to potential developers, which only maximizes the desirability of the site. Offering shovel-ready sites that include competitive rates, land entitle- ments, utilities, facilities, and incentives will support the development of airport property and set the stage for a sustainable revenue base. In this regard, many airports develop their land before marketing ever begins. Out-of-the-box thinking can be extremely valuable because land/facility development can be a costly prospect. In cases of nonaeronautical development in particular, developers may have many options, most of them on property that can be purchased fee simple, so preparation on the part of the airport can pay big dividends. Aspects of land/facility development include, but are not limited to, the following: • Utilities such as water, electricity, and sewer; • Civil site work and soil stabilization; • Airfield access; • Roadways and public access; • Development planning; and • Maintenance and upkeep of common areas. The scale of the project, its intended use, the impact on the community, a balance of commer- cial enterprise versus private use, potential job creation, and public resources needed will all deter- mine the mix of stakeholders that need to be involved. While private-party leases tend to be straightforward, requiring limited stakeholder involvement (e.g., renting a hangar to the owner of a single-engine Cessna), commercial enterprise projects are typically more complex. Commer- cial enterprises require greater resources and produce a corresponding greater positive impact on Project Development Considerations 51

the community in terms of job creation and tax revenue. Commercial enterprises are often sought by competing communities, and, through competitive site selection processes, the commercial enterprise may consider incentives offered when choosing its ultimate location. These projects often involve the inclusion of multiple local, state, and federal entities that are needed to provide funding, tax incentives, and other applicable financial incentives, as well as regulatory oversight. 4.5 Valuation Valuation of airport property can vary widely from one airport to the next and is often influ- enced by both the valuations that are placed on property at other airports and by local influence of the aviation community. In cases where airport development has not been done at the subject airport for some time, the risk of undervaluation can come into play if the airport sponsor did not negotiate appropriate escalation language in the existing leases. In those cases, applying a contem- porary method of valuation may be met with resistance if the new valuation is significantly higher than the lease rates already in place. Similarly, airport sponsors that take control of improvements after they revert back to the airport at the end of the lease term may inadvertently undervalue the improved property if they don’t seek the assistance of an appropriate valuation methodology. Airport sponsors that are systematic in their approach to updating rates and charges, and that routinely update the value of both unimproved and improved property, are best prepared when a prospective airport development does present itself. As in most real estate transactions, facil- ity and property valuation should not be too low or the airport sponsor misses a revenue oppor- tunity, but not too high or the airport sponsor misses a development opportunity by not being competitive in the marketplace. The marketplace, in the context of airport development, can sometimes be a large geographic area, because prospective development may have the luxury of considering airports of comparable size within a region of the country, as opposed to more site- specific, nonairport development such as distribution parks, hotels, and restaurants. The value of airport property is usually dictated by location, size, uses, and income-generating potential. Regardless of the valuation method, the airport sponsor should always remember that allowable uses, or restriction of uses, within the boundary of the leasehold being considered have a profound effect on property value. Restricting the use of airside property to aviation purposes, for example, is certainly legitimate and appropriate for the airport sponsor. However, from a real estate valuation perspective, in most circumstances, restricting allowable uses will lower the value of the airport property because the use restrictions reduce the market demand. Similarly, security requirements and the ease or lack of access to a property can impact value. Security, or lack of security, can have a positive or a negative effect on property value, depending on the needs of the tenant and the market that exists for a given piece of property with given characteristics. Other restrictions placed on airport property such as height, due to navigable airspace, smoke/emissions, due to interference with the pilots’ ability to maintain visual separation between aircraft, and organics products, such as composting and landfill activities, affect uses and ultimately land val- ues as well. This difference is perhaps more pronounced in small- to mid-sized communities than at large-hub airports, but the airport sponsor should focus on a comparison of comparable prop- erties at comparable airports rather than focus so much on real estate parcels within the same community. The following sections provide an overview of differing valuation strategies. 4.5.1 Appraisal The appraisal process for airport property should consider comparable land and facilities at airports of similar size throughout the region. Components of comparability include the popu- lation of the community, proximity to other modes of transportation such as highways, number 52 Guidebook for Developing and Leasing Airport Property

of based aircraft, types of commercial activity, and level of air service. The airports being com- pared should have similar levels of amenities as well; air traffic control, instrument approaches, lighting, security, and hours of operation all affect access by the aviation community, and, there- fore, value of the property on that facility. There are several real estate appraisal certifications; perhaps the most widely recognized in the commercial real estate arena is the MAI or Member of the Appraisal Institute designation. MAI appraisers are qualified to perform both residential and commercial property appraisals, and they routinely stay current in their discipline through trade association involvement. As discussed above, the challenges of appraising airport property include an understanding of the unique attributes of an airport, the federal obligations that the airport sponsor must follow, and the allow- able uses of the property when establishing market value. Identifying an individual that is versed in airport real estate is every bit as important as a certification, so the airport sponsor should look for both experience and credentials when choosing someone to appraise airport property. 4.5.2 Comparable Sales Approach The most common form of valuation is the identification of relatively similar land and the assessment of the established value. From this information, the similar land can serve as a bench- mark to determine valuation based on a measurement metric such as cost per square foot. This approach involves determining the lease rates at comparable sized airports offering similar lev- els of services and using the findings to establish lease rates. In order to account for varying regional real estate values, lease rate data should be acquired from competing airports within the same market area. Market area, size of airport, and demographics of region should all be con- sidered when establishing comparables, as well as the number of based aircraft, size of based air- craft, and indicators of traffic volume such as fuel-flow volumes. 4.5.3 Cost Approach When comparable sales are lacking, another valuation method may be implemented. The sec- ond valuation approach identifies the cost of replacing all existing facilities and improvements. The cost of such replacements—less depreciation—can serve as a basis for setting a value on developed land only. 4.5.4 Income Approach This approach identifies the possibilities for development of the land to produce and gener- ate revenues or other values when the land is used to its highest and best use. This method proves more difficult to quantify due to the fact that the income or value must be estimated for a point in the future. Also, determining the “best use” may change as the land or surroundings change. It is best not to attempt to actively valuate property unless aware of and educated on the var- ious valuation processes. If valuation is needed, an experienced individual should be used to apply the most appropriate valuation method, thereby ensuring that lease rates are realistic. 4.6 Airport Revenue Maximization Airport revenue maximization should be a key goal for the airport sponsor and must be a pri- mary consideration when entering a lease agreement. The FAA, through its grant assurance doc- uments, requires airports to establish fair and reasonable fees without discriminating against a specific aeronautical user. The FAA also recommends that airports maintain a fee and rental Project Development Considerations 53

structure that makes the airport virtually self-sustaining. Airports are expected to establish rents and airport user fees that generate enough revenue to meet airport funding requirements. Key considerations involve balancing the financially intangible benefits of a specific project (such as improved service offerings, job creation, and new tax revenue) with the tangible benefits of rev- enue to the airport. An Airport Business Plan can prove to be a valuable tool as the airport sponsor seeks to maxi- mize airport revenue. A properly executed business plan will provide a comparative analysis of the airport’s lease rates, charges, and fees in relation to other airports, as well an analysis of the air- port’s lease policy. This will provide airport management with the basis to adjust rates and charges to true market rates if the findings of the analysis dictate. 4.7 External Stakeholder Resources Coordination of airport development initiatives with community stakeholders is important, and described earlier in this Guidebook. Aside from coordination, external stakeholders can pro- vide valuable resources, both tangible and intangible, to a specific airport development project. The state government, for example, is a stakeholder and is likely involved with policy direction and regulation of the airport, and in some cases may be a development partner by providing grant funds, low-interest infrastructure loans, or matching funds required for an airport to accept fed- eral funding. The same may be true for the list of stakeholders described in Chapter 3. In the intangible arena, external stakeholders may be able to offer tax incentives or other incen- tives under the auspice of economic development, when the airport sponsor might find it diffi- cult to justify such an offering. Whether tangible or intangible, identification of an appropriate mix of external stakeholders, and bringing those stakeholders onto the airport sponsor’s develop- ment team, can be a powerful strategy. Assembly of a diverse spectrum of funding sources is some- times required to make a specialized airport development project commercially viable, especially if the project lacks feasibility without external funding sources and requires some component of debt service. 54 Guidebook for Developing and Leasing Airport Property