Strategies for Reuse of Underutilized or Vacant Airport Facilities (2011)

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50 CHAPTER FOURTEEN CONCLUSIONS This synthesis developed a series of case studies of vacant or underutilized aeronautical property at U.S. airports. Although not an exhaustive analysis, the investigation of vacancies suggests that the problem appears widespread. Vacancies originate for a variety of reasons, including • Functional obsolescence of a building, • Changes in passenger demand (up or down), • Consolidated or merged airline operations, • Loss of connecting hub status, • Outsourcing of services and functions, and • Tenant bankruptcy. Each of these reasons influences the timing and likeli- hood of the vacancy and the subsequent role of the airport sponsor. Given the history of rapid growth of air travel, air- ports are more accustomed to addressing obsolescence in the context of expansion rather than in the context of no growth or decline in airport activity. As shown earlier, some con- necting airports in the United States, such as John F. Ken- nedy International Airport, Charlotte, and Denver, continue to experience strong passenger growth, whereas others, such as Pittsburgh, Cincinnati, and St. Louis, have experienced the opposite. The most challenging vacancies for an airport arise when an airline dehubs or when an airline or other major tenant rejects a lease in bankruptcy. In these instances, the prop- erty is often highly specialized or in poor condition and the bankrupt entity does not need it anymore. These properties usually revert to and become the responsibility of the airport sponsor. As documented through the case studies, rarely does an airport sponsor receive a property that is in both high demand and excellent shape. Most reversion situations require (and inspire) airports to institute a review of options that range from a decision to maintain a facility for future reuse, find a replacement tenant, or tear down the building. The case studies offer a few valuable principles for con- sideration that are summarized in the following sections. DECISIVE ACTION ON REUSE OR DEMOLITION Most airports have master plans and/or airport layout plans that identify existing and future aeronautical land use. When a large property goes vacant, it is common to conduct a mar- ket or reuse assessment. However, under market conditions present from 2008 to 2011, finding a replacement tenant may take several years to accomplish, even for facilities in good condition. Costs for long-term maintenance and repair will accumulate as the property sits vacant. Sponsors need to plan for vacancies. Airports that have specific timelines associated with each option can move decisively from one option to the next. KEEPING A FACILITY ALIVE PRESERVES OPTIONS (AT A COST) The synthesis presented case studies such as the former Pittsburgh passenger terminal where a decision to turn off the heating and cooling systems and other utilities resulted in remarkably fast degradation of the terminal’s interior and systems. Mildew and mold as well as vandalism transitioned the property from a possible reuse candidate to a building hazard within 1 year. Other airports spend millions to keep a building alive. The Port of Oakland might have demolished the Oakland Maintenance Center (OMC) when United Airlines vacated, but it had planned to expense the demolition as part of future capital projects on or near the site. Those projects have not yet been needed and the Port has spent a lot of money to maintain the vacated maintenance facility. These expenses have been somewhat offset by advertising revenues from billboards and interim storage and use of office space at the OMC. Keeping a building alive promotes safety, prevents future expenses for costly repairs, and creates a positive environ- ment on airport property, which will attract future tenants. At a minimum, upkeep includes heating and ventilation of the interior and regular inspections of the building’s mechanical systems and fire safety. Airports secure vacated properties so as not to be a further cost liability or safety hazard. Vacated buildings can become a “storage facility.” In these instances, accumulation of junk, trash, debris, boxes, lumber, scrap metal, or any other materials may produce health, fire, or safety hazards or become harborage for rodents or other animals. Maintenance of plumbing and completely draining or heating all pipes for water to resist

51 being frozen during cold months are critical. It is important to check and maintain fire suppression systems so that they are operable. VACATED PROPERTIES REQUIRE ADDITIONAL SOURCES OF OPERATING AND CAPITAL FUNDS Typically for airport-owned aeronautical facilities, capital budgets that replace obsolete structures such as passen- ger terminals include a budget for demolition of the older structures. Facilities that unexpectedly revert to the airport sponsor require unplanned expenditures for maintenance, renova- tion, marketing, and/or demolition. Potential sources for operating and capital budgets include • General operating funds, • Security deposits, • Letters of credit designating the airport sponsor as beneficiary, • Temporary rentals, • Airport Improvement Program (AIP), • Economic Development Administration grants, • Amortization through a capital project. Vacant property ownership is often unplanned and unbudgeted, and the lowest cost option can be demolition. Unless airports can find ways to finance adaptive reuse, many vacant properties will continue to be either demol- ished or used for a succession of interim uses. MARKETING A VACANT BUILDING Airports that have found replacement tenants reported that facilities took a long time to lease. Tenants often came from other locations on the airport or in the region, but sometimes they arrived unexpectedly from their own internal search for property. Some airports have business development manag- ers that engage in extensive trade show presence and Internet promotions. Once there are active prospects, these manag- ers may also serve as liaison with the prospect to facilitate inspections and remodel estimates. In most of the case stud- ies where replacement tenants were found, the airport also renovated the property to meet current building codes and mitigate any safety or environmental hazards. Keeping the FAA Airport District Office informed throughout the marketing process is an effective way to demonstrate best efforts toward attracting an aeronautical replacement tenant or mixed-use solution before seeking a conversion to nonaviation use. PLANNING FOR FLEXIBLE USE From an airport planning perspective, vacancies within ter- minals and other aeronautical properties mean that future airport facilities could better incorporate the risk of capac- ity reduction or expansion and new technology into facility design. For example, many of the iconic passenger termi- nals designed at JFK International Airport were demolished because rehabilitation was either too expensive or difficult to address larger passenger volumes, bigger aircraft, new secu- rity requirements, and infrastructure needed to install infor- mation technology requirements. Flexible design includes a few important principles that incorporate the possibilities for expansion, appropriate contraction, or reuse: • Consider aviation trends when planning for a new facility or setting design standards for development. • Design spaces for resizing. • Design systems for both expansion and subdivision. • Encourage common-use solutions in terminals versus customized propriety space. • Engage stakeholders and tenants in the design process. • Evaluate the impacts of resizing on airport cost centers. RISK ANALYSIS FOR VACANCIES A reasonable response to turbulent economic conditions is implementation of a structured, consistent, and continuous risk management process that is applied to airport property management. The process would include— • Development of an exit strategy for each leased prop- erty on the airport. • Anticipation of the risk of vacancy during lease nego- tiations and addition some kind of financial protection in the event of lease rejection through bankruptcy. • Identification, assessment, and prioritization of tenants and properties at risk annually. • For the highest risks, formulation of a plan to raise awareness of the risk, develop mitigation plans, and incorporate into the budget cycle. Figure 42 describes a sample vacancy-risk graph that visually portrays the likelihood and impact to airport rev- enues, operations, and jobs of various events that could lead to vacancies. For example, a corporate hangar vacancy (F) is likely but would have a relative low impact overall. On the other hand, bankruptcy of a signatory carrier might be less likely but would have a large impact. These are general esti- mates only. In each case, unique factors such as the tenant’s financial strength, the size of the space, rent, remaining lease term, and suitability for reuse will affect both the likelihood and the impact of vacancy.

52 airport level. Further research is needed to calibrate the extent of the problem and to develop a risk management strategy that would help airports identify properties at risk and pursue an exit plan to reuse or dispose of the property. This research would include development of a toolbox of strategies for air- port property managers that addresses the following issues: • Lease provisions that protect the airport in the event of tenant bankruptcies or sudden termination of lease, • Letters of credit naming the airport as sole beneficiary (and enforcement of provisions over time) to guaran- tee that funds are available for reuse or demolition of a property, • Analysis of the tradeoffs (pros and cons) between higher rent and end of lease security provisions, • Risk assessment methods for airport properties and/ or tenants, • Exit strategies, • Worksheets to evaluate the cost of maintaining a vacant or underutilized property over time versus demolition, • Environmental and safety considerations for vacant and underutilized properties, and • Financing sources for demolition in the event that air- port operating funds (and AIP) are unavailable. FIGURE 42 Sample vacancy-risk graph. FINANCING ADAPTIVE REUSE The financing of adaptive reuse (or demolition) of aeronauti- cal property is an area of uncharted public policy. The FAA grant programs address demolition and reuse primarily in conjunction with new capital projects. In the instance of a mature or contracting industry, there appear to be fewer options for the financing of reuse or demolition except as an operating cost. The model for who pays does not lend itself to reuse, and it is important that the cost of demolition be tied to redevelopment of the site if it is to be funded by AIP. This leaves instances where redevelopment is not needed currently and airports need to shoulder the operating costs to maintain a building and keep it safe. FURTHER RESEARCH With consolidation of airlines, air cargo carriers, and air ser- vice routes, the trend suggests that some airports will con- tinue to experience a surplus of aeronautical land and require funding to dispose of vacant or obsolete buildings and to secure the airfield. This synthesis scratched the surface of a very large topic not widely reported beyond the individual