Generating Revenue from Commercial Development On or Adjacent to Airports (2017)

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1 C h a p t e r 1 Introduction 1.1 Overview Many good reasons exist to consider development on an airport or on property adjacent to the airport. Development on and adjacent to airports can result in some or all of these potential outcomes: New revenue to the airport Reduced fees to airlines More jobs in the community Increased cargo service More aviation operations More commercial passengers Conversely, development may be a detriment to airport operations and airport revenue, through outcomes such as: Incompatible land use Conflicts with federal grant assurances Demands on shared infrastructure It’s easy to agree that the end goal for airport development is to have all of the potential positive outcomes without the negative ones. To reach this goal, however, it’s important that the development effort starts out with a carefully researched plan. Based on research conducted for ACRP Project 03-39, “Generating Revenue from Commercial Development On or Adjacent to Airports,” this guidebook has been created to provide airport managers, directors, and board members information and tools that are helpful for evaluating and planning development efforts to maximize positive outcomes. 1.1.1 Success Stories Throughout the country, many examples show how both airports and their surrounding communities have benefited from successful commercial development on or near airports. These success stories typically have involved attention to comprehensive planning and cooperative efforts between the airport and community. Notable examples include: Southern California Logistics Airport. A redevelopment of the former George Air Force Base, the 2,500-acre airport has remade itself into a logistics and aerospace hub through a public-private partnership, and it is the anchor for an additional 8,500 acres of multimodal

2 Generating revenue from Commercial Development On or adjacent to airports industrial development. By the end of 2014, close to 3 million square feet of industrial space was fully leased, and more buildings were under way. Southwest Florida International Airport. The airport is in the midst of a development effort involving 1,150 acres, with successful ground leases or land sales negotiated for retail, office, and other uses such that 70% of airport revenues are due to non-aviation activities. Pittsburgh International Airport. The airport has rebounded from the loss of US Airways a dozen years ago to produce several business parks, with private investments of $350 million developing over 3 million square feet of airport property, in addition to lease of oil and gas rights. Miami-Opa Locka Executive Airport. Part of the Miami-Dade system in Florida, the airport has leased and sold adjacent property to create a flourishing development that includes the 178-acre AVE Commerce Center with a master plan of over 2.5 million square feet; a lease by Orion Jet Center on 155 acres; and a recently announced Amazon distribution center of about 900,000 square feet, representing an investment of $200 million. Scottsdale Airport. The airport is surrounded by the Airpark, which is home to aviation, commerce, industrial, entertainment, and even residential uses, involving 33.9 million square feet of space hosting 55,000 employees. 1.1.2 Goals Versus Reality In an ideal world, planning for revenue generation through development would begin years ahead of time. Discussions would begin with the FAA, planning documents would be amended, market studies would be conducted, and pro formas would be created. Financing would be identified and the airport would be well-informed about the target market, the projected investment costs, and the projected revenue stream. In the real world, however, many airports enter the conversation about development with considerably less preparation, through scenarios like these: The industrial park in the community is built out, with no space to accommodate new businesses. Community leaders identify the airport as the next phase for an industrial park expansion. After all, a large amount of vacant land is available there, and utilities are already in place. The airport owns land that it no longer needs for aeronautical uses (or land that was never identified for aeronautical use). Why not develop it for nonaeronautical use? The region has a new economic development director who is planning to bring new jobs to the area. The airport seems to be a good place for new development that will bring new jobs to the community. Economic incentives will be discussed at the next board meeting. The airport is facing political pressure to reduce the general fund allocation toward airport operations. In addition to cutting costs, the airport starts to talk about develop- ment as a new revenue stream. A private airfield or a military base transitions to a public airport owned by the local community. In addition to the airport facilities, vacant buildings on the property can be leased to generate revenue.

Introduction 3 These scenarios illustrate how the conversation about commercial development often begins, sometimes without airport involvement. Development on or adjacent to the airport may sound like a great idea, but the “build it and they will come” approach usually is not especially successful or particularly easy. 1.1.3 It’s Complicated—but Possible Generating revenue from development on or adjacent to the airport is complicated. Safe and efficient airport operations remain the first priority. To this end, FAA regulates on-airport development at federally obligated airports, which impacts development considerations such as the development schedule, permitted uses, building heights and locations, and lease lengths. Other airports may have similar restrictions as a result of state grant obligations. Airports without any grant obligations still need to make development plans that maintain safe and efficient airport operations and plan for future airport needs. The financial structure for on-airport development differs from, and can also be more complicated than, ventures for private development. For example, as a public transportation facility, an airport may have some tax advantages; however, there are also restrictions or limitations on disposing of (selling) property acquired with public dollars, so on-airport development often is done through lease agreements rather than sales. Also, FAA tends to favor lease durations that are shorter than those desired by private developers. Although it is complicated, the development process can be understood, and airports can effectively position themselves to maximize airport revenue. Generating revenue from property owned by an airport is the primary focus in most of this guidebook. The guidance is appropriate for: Airports of all sizes Public airports that are federally obligated Public airports that are not federally obligated Private airports Generating revenue from property that is near to—but not owned by—an airport—has unique nuances, and therefore has a dedicated chapter in this guidebook. Although the airport may have little to no direct control of the property in this situation, there is also less investment and less risk. Development on properties adjacent to the airport can often be developed on a more accelerated timeline. These developments can contribute to airport revenue directly through access fees or through-the-fence (TTF) agreements and indirectly by increasing the number of commercial passengers and general aviation activity. As airports look for ways to increase revenue sources, off-airport development for revenue generation is an innovative idea that is entering mainstream conversation.

4 Generating revenue from Commercial Development On or adjacent to airports Chapter 2 functions as a primer, introducing major elements of aviation planning, aviation funding, and land development within a few pages. The chapter explains how development on- airport and on land adjacent to an airport can be coordinated even as the two processes are guided and regulated by separate legislative, legal, and funding structures. In addition to discussing methods for successful development and coordination, the chapter provides notes 1.2 The Guidebook Real estate development on and adjacent to airports brings together two professions: airport management and real estate development. For the venture to be successful, airport management needs to know something about real estate development, regulations, and funding systems, and developers need to know something about airport operations, regulations, and funding systems. Each profession has its own language, processes, legal guidance, and goals. Nonetheless, it is possible to coordinate the two to reach a positive outcome. This guidebook has been created with both groups of professionals in mind. ACRP Research Report 176 will guide airport managers, directors, and board members through a series of chapter-based “toolkits” that provide an informative combination of narrative text and checklists. In each toolkit, the narrative text explains the issue and its connection to development while the checklists pose applicable, airport-specific questions in a helpful, concise format. For practical use, the checklists that are featured in the toolkits also are reproduced in an appendix at the end of the guidebook. Moreover, airports wishing to adapt these tools can download files containing the checklists from the “ACRP Research Report 176” webpage at www.trb.org. The toolkits’ primary function is to guide the user through evaluating and implementing the development process. On-airport and off-airport development efforts are not mutually exclusive, but each type of development calls for a specific set of considerations and actions. Accordingly, airports interested in generating revenue from development on property that is not owned by the airport will find a specific section on this topic in the guidebook. 1.2.1 Using the Guidebook The development of non-aeronautical land, whether for aeronautical or non-aeronautical purposes, involves a host of physical, legal, environmental, and urban planning issues that are generally outside the purview of airport management and operations. The airport manager must take on a different perspective—that of the developer. This is often unfamiliar territory, and the toolkits in the guidebook are designed to assist with this new role. Note that the term “non- aeronautical land” is used to refer to airport-owned land that is not needed for aeronautical uses and would be available for development. For grant-obligated airports, this is a designation that is shown on an approved Airport Layout Plan (ALP). The first three chapters in the guidebook set the stage with some basic information: Chapter 1: Introduction explains the guidebook goals and layout. Chapter 2: Fundamentals focuses on airport development and introduces terminology. Chapter 3: Legal Considerations addresses airport development and grant assurances.

Introduction 5 Chapter 5: Site Evaluation Toolkit presents a toolkit for documenting locational features, infrastructure, and markets. Chapter 6: Implementation Toolkit presents a toolkit for movingforward with the first steps toward development. user’s convenience, and are provided in a downloadable Word file from the report webpage at about how things can go wrong when the two worlds collide. Both seasoned professionals and novice practitioners in the aviation and real estate industries will benefit from the combined overview. Chapter 3 introduces common legal topics in a short text format, offering a dedicated discussion of several legal issues with lots of potential to impact commercial development plans on and adjacent to airports. The chapter thus provides a basic legal framework to support the initial assessments that will be made using the exercises in the guidebook’s subsequent (toolkit) chapters. The information in Chapter 3 also can help guidebook users recognize when it may be advantageous to seek legal counsel in the planning or development process. Specifically, this chapter identifies legal considerations in five categories, providing a high-level review of legal matters related to: Federal obligation of airports Zoning and other property and leasing laws Environmental regulation Insurance and liability Federal regulatory restrictions Guidebook users who are not familiar with these topics will find it valuable to read Chapter 3 from beginning to end before beginning the evaluation checklists in Chapters 4–7. Users who are more familiar with these topics may choose to bypass Chapter 3 and begin directly with the toolkit chapters. Each airport is different, and not every legal issue will apply in every instance. Within the toolkit chapters, graphical icons are used to connect the checklist exercises with the foundational information presented in Chapter 3. (For information and examples detailing the icons used in the guidebook, see “Section 1.4.3, Icons,” in this chapter.) Following Chapter 3, the next four chapters present the interactive, workbook-style content: Chapter 7: Off-Airport Considerations and Revenue presents a toolkit for addressing the special considerations involved in generating revenue from off-airport property that is not controlled by the airport. Chapters 4–7 are toolkit chapters that guide the user to answer various questions related to airport ownership, structure, business activity, context, and planning. Every airport is unique, so no one-size-fits-all toolkit is possible. Moreover, all criteria may not be relevant in all cases. Rather, the exercises and checklists provided will need to be adjusted to the airport’s particular situation. The checklists provided in the guidebook also are collected in the appendix for the www.trb.org. Once the file is saved to the guidebook user’s computer, the checklists can be customized and completed by the user to include specific local conditions and regulatory requirements. The topic explanations provided in the introductory chapters will help the Chapter 4: Self-Assessment Toolkit presents a toolkit for evaluating the airport’s position with regard to development.

6 Generating revenue from Commercial Development On or adjacent to airports guidebook user make these determinations. Even when it is not directly applicable, the criteria may add value by reflecting real-world insights, advice, and principles heard during the project research. The four toolkits are intended to be worked on in the order presented. They build upon each other, and the toolkits assume that the airport is interested in examining the revenue potential of commercial development and considering the use of non-aeronautical land for that purpose. The toolkits pose questions and criteria for the airport sponsor to consider and answer. In Chapter 4, the first toolkit guides the user to answer various questions relating to airport ownership, structure, business activity, and planning. This self-assessment process should result in a better understanding of the airport’s current position in a host of categories; it also should help the airport identify specific goals for pursuing commercial development. In Chapter 5, the second toolkit guides a review of the characteristics (physical and otherwise) of targeted land. This chapter incorporates the real estate perspective. The toolkit assists in identifying the attributes of the site that would be important to developers or tenants/users of the land. It includes numerous factors relating to regulations, utilities, and market conditions. The guided evaluation process results in one of two conclusions: 1. Land development is reasonably feasible and there do not appear to be many factors that would preclude proceeding to the next stage. 2. Financial, legal, or physical obstacles exist that would discourage development for the foreseeable future and indicate that it would not be prudent to proceed. In Chapter 6, the third toolkit is a two-part exercise, providing first a financial analysis, then a development and management planning guide. Advancement to this toolkit assumes that— following the site evaluation described in Chapter 5—a decision has been made to proceed with the next phases of development planning. A starting point for this toolkit will be the creation of a development concept that brings together the site evaluation and market factors in a test Concept Plan. The financial analysis guides the user through the identification of costs to implement the plan. The final section of this toolkit, which addresses development and management, will guide refinement of the development plan and measures for implementation, including partnerships, marketing, and financing, as well as management of the property. Joint venture structures and revenue options are among the elements examined. In Chapter 7, the fourth and final toolkit focuses on special considerations for development on land adjacent to the airport. This toolkit concentrates primarily on the circumstance in which an airport sponsor does not own the surrounding non-aviation land. In such cases, the sponsor can evaluate how the airport might benefit from commercial development on privately owned land, and how to influence off-airport development decisions to maximize either direct or indirect benefits to airport revenue. When commercial development is considered on or near airport land—and throughout the evaluation and decision-making process described across the toolkits—it is important to remember that the airport does not exist in a vacuum. A critical consideration throughout the process is the relationship of the airport to its surrounding community. Whether positive or negative, that relationship will be a significant element in the feasibility of any development plan and has the potential to impact either the development plan facilitation or obstruction.

Introduction 7 Because the guidebook is written for a wide range of airport sizes, locations, and structures, criteria in each toolkit may apply to some individual cases more than others. Some may be more applicable to public than private airports, for example. It should also be noted that these toolkits are not intended to eliminate the need to involve experts such as legal counsel, engineers, and architects; however, they will provide an important framework for due diligence and evaluation. Throughout the text, icons indicate where consultant expertise is particularly advisable. Following Chapter 7, the guidebook concludes with a list of abbreviations, a glossary, and a bibliography/references list: The Abbreviations and Glossary section offers a quick reference that introduces and defines some of the terms important to the intersection of airport planning and land development (e.g., on-airport development, adjacent to airport development, federally obligated, grant assurances, etc.). The Bibliography and References section provides source information for the publications that are referenced throughout the guide, particularly in Chapter 6. 1.2.2 Development of Criteria The criteria provided in all four toolkits stem from four sources: 1. Literature review regarding airport development examples and histories 2. Professional experience in real estate development and airport planning 3. Prior ACRP reports 4. Interviews and in-depth case studies Toolkit criteria have been developed from the project team’s real estate planning and development experience with commercial and multiple-use development projects, as well as experience with airport master planning and lessons learned from the project research in real estate. The literature review for this guidebook also produced many examples of airport development projects and the variety of factors affecting their feasibility. Other criteria were derived from earlier ACRP reports, which are referenced at applicable points in the guidebook. The criteria are intended to encourage the development of a land manager and developer perspective, viewing the available airport land and land adjacent to the airport as an asset to evaluate with respect to market demand and non-airport competitive locations. At the same time, on-airport land is in a unique category that incorporates particular constraints of land use, noise compatibility, and FAA regulation, among others. Thus, site evaluation criteria typical of real estate analysis have to be supplemented with a practical aviation operations outlook. A classification system presented in Chapter 2 provides a guide to the various constraints on different types of airport land. The airport case studies and industry interviews conducted during development of the guidebook provided important practical insights as well as greater awareness of common issues and principles in land development. When using the toolkit chapters, it is important to keep these issues and principles in mind, with the following issues being foremost: Land availability Predictability for participating developers

8 Generating revenue from Commercial Development On or adjacent to airports Real estate investors’ need for land control A comprehensive long-term planning vision Infrastructure availability Consistency of airport goals with regional economic development goals Government support for airport success Competition with non-airport development sites Diversity of off-airport development uses FAA restrictions and approvals 1.2.3 Important Details This report is not intended to be a do-it-yourself guidebook to commercial development. Regardless of size, every airport will probably need expert help at some point along the way. What ACRP Research Report 176 does offer is an initial do-it-yourself evaluation to determine whether the airport appears to be well-suited to on-airport development. If the airport decides to move forward with such a project, the guidebook offers enough information that airport managers, directors, and board members can understand the issues and the process. Guidebook users also will be positioned to identify which resources may be available on staff and where experts will need to be involved in the process. The treatment of off-airport development in the guidebook yields similar results. The topic of “successfully managing the airport” is not included in this document. This guidebook walks carefully through steps toward on- and off-airport development specifically for the purpose of generating airport revenue. It does not cover broader issues of airport management. That said, the guidebook culminates with the following topics that were identified as critical to financial success: Creating a test Concept Plan Identifying costs to implement the plan A final refinement of the development plan Measures for implementation Awareness of the need for a guidebook on this subject grew out of the finding, in ACRP Report 44: A Guidebook for the Preservation of Public Use Airports, that insufficient revenue streams have been a contributing factor in the decline of U.S. public use airports over the past few decades and that simple business failures are a major cause for airport closures.

Introduction 9 1.3 Other ACRP Work on This Topic In addition to ACRP Report 44, other ACRP works provide related guidance on the topic of revenue generation. In 2007, ACRP Synthesis of Airport Practice 1: Innovative Finance and Alternative Sources of Revenue for Airports began to survey the current practice on the topic. In 2015, ACRP Report 121: Innovative Revenue Strategies—An Airport Guide presented strategies to help airport professionals identify, evaluate, and implement innovative strategies for generating revenue. Topics included innovative financing, improving existing airport businesses, and—most closely connected to this report—revenue participation in real estate development. The continued selection of finance and revenue topics for ACRP research is indicative of how significant the issue is to aviation industry practitioners. These works are related but they are not duplicative. For example, ACRP Report 121 provides an understanding of the comparative benefits of tools for revenue generation. ACRP Research Report 176 provides guidance for airports on evaluating whether revenue generation through commercial development on or adjacent to the airport makes sense for a specific airport—and, if so, provides guidance regarding physical and financial considerations in planning for such development. To determine its goals and objectives for commercial land development, it is essential for the airport operator to identify the relative importance of the financial, political, and aesthetics/identity considerations. ACRP Synthesis of Airport Practice 1 ACRP Works Related to this Topic: ACRP Report 44: A Guidebook for the Preservation of Public Use Airports ACRP Report 47: Guidebook for Developing and Leasing Airport Property ACRP Report 121: Innovative Revenue Strategies – An Airport Guide ACRP Synthesis of Airport Practice 1: Innovative Finance and Alternative Sources of Revenue for Airports ACRP Synthesis of Airport Practice 19: Airport Revenue Diversification

10 Generating revenue from Commercial Development On or adjacent to airports 1.4 Organization of Content This section has been created to help guidebook users get the most out of this resource. It starts with an explanation of: How things are arranged (Know, Have, Do) How the icons and links connect ideas between chapters How terms are used 1.4.1 KNOW, HAVE, DO The evaluation criteria are arranged around various topics in Chapter 2 and in the toolkits in Chapters 4–7. Each topic is introduced with an explanation of its significance. The dedicated pages also include a section of the annotated checklist or worksheet associated with the topic and a discussion about what the results mean. The checklist sections include this icon as a reminder that the complete checklist appears in the appendix: Each topic follows a structure of “Know, Have, Do,” as follows: KNOW This narrative section explains the basic elements of the topic and why it is important to the conversation. This section may also contain references, resources, and examples drawn from airport case studies. HAVE This annotated checklist walks guidebook users through the specific topic considerations, asking questions and providing answer choices. Using this approach, the user is guided through a process of identifying existing characteristics or conditions that impact decisions about on-airport development (Chapters 4–6) and development adjacent to airports (Chapter 7). If additional information is needed to answer the specific questions, the guidebook user is directed to additional resources. In most cases, completing the checklist is primarily a matter of understanding where to find existing information. DO This wrap-up section assists with interpretation and direction regarding the checklist results, including providing direction about next steps. In some cases, there may be a gap in the airport’s readiness for development. When that is the case, additional studies or professional expertise may be recommended. 1.4.2 Sound Bites In this guidebook, sound bites are statements that the project team heard during case study interviews that were carried out as part of the initial research for ACRP Project 03-39. They are presented as call-out boxes. Sound bites are found primarily in the toolkits (Chapters 4–7) and are placed next to a related toolkit topic. Their purpose is to connect the information presented in the guidebook with actual experiences of airports from around the country. For example, this sample sound bite is drawn from Chapter 5, where it appears next to a discussion about staffing needs associated with successful development projects.

Introduction 11 Participants in the case study interviews were assured of anonymity so that they could speak freely about the lessons learned from both successes and failures. Therefore, individual speakers are not identified. 1.4.3 Icons The guidebook uses icons to identify topical elements such as key concepts or common themes, or to indicate connections between chapters or sections of text and worksheets or checklists. Each icon is a graphical reminder that an introduction and explanation of the topic can be found elsewhere. The following icons are used in the report: Five Tiers Pro Forma (Financial Tool) Core Concepts Consultant Expertise Community Relations Market Research Legal Reference FAA Chapter Reference (Chapters 1–7) Off-Airport Toolkit Reference (Chapters 4–7) Reminder: Complete Checklist Is in the Appendix Stop/Go Decision Point SOUND BITE

12 Generating revenue from Commercial Development On or adjacent to airports 1.5 Summary This guidebook is designed to help aviation and real estate professionals and community leaders understand the basic framework of generating revenue from on-airport and near-airport development. To this end, the next two chapters set the stage for the conversation with a discussion of the fundamentals, including the necessary vocabulary and the legal framework specific to on-airport development and development adjacent to the airport. Following the informational chapters, the guidebook changes to a workbook style, allowing the user to first explore the topic and then consider its airport-specific application. Property development is a complicated issue. ACRP Research Report 176 provides general guidance, but it is not intended to be a “do-it-yourself” toolkit. It is not intended to replace the advice or professional assistance airport professionals may need to obtain from engineers, planners, attorneys, surveyors, financial professionals, and others along the way. It should allow the guidebook user to understand what makes a development successful, make some initial decisions about whether development makes sense, and enter into the conversation as an informed participant.