Estimating Market Value and Establishing Market Rent at Small Airports (2020)

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16 An FAA Part 16 complaint is a formal complaint received by the FAA regarding concerns about an airport’s compliance with the Assurances. The FAA imposes strict deadlines for the filing, adjudication, and appeal of a Part 16 complaint. The FAA also accepts informal complaints either verbally or in writing under 14 CFR Part 13. 3.1 Introduction The FAA consistently and repeatedly discusses the importance of estimating market value and establishing and adjusting market rent through applicable orders, policies, advisory circulars, and other guidance materials. Further, Assurances 22 and 24, respectively, require the airport sponsor to “make the airport available as an airport for public use on reasonable terms and without unjust discrimination” (Assurance 22, Economic Nondiscrimination) and “maintain a fee and rental structure for the facilities and services at the airport which will make the airport as self- sustaining as possible under the circumstances existing at the particular airport” (Assurance 24, Fee and Rental Structure). However, this does not adequately reflect the significant importance of estimating market value or indicate how commonly these topics become a contentious issue at federally obligated airports. As stated in 14 CFR Part 16.1, Applicability and Description of Part, “the provisions of this part [14 CFR Part 16, Rules of Practice for Federally Assisted Airport Enforcement Proceed- ings] govern all FAA proceedings involving federally obligated airports, except for complaints or requests for determination filed with the Secretary under 14 CFR Part 302, whether the proceedings are instituted by order of the FAA or by filing a complaint with the FAA.” Based on a review of the complaints filed with the FAA under 14 CFR Part 16, Economic Non- discrimination (Assurance 22) and Fee and Rental Structure (Assurance 24) are two of the four most frequently cited Assurances. An analysis of 14 CFR Part 16 complaints outlines the importance of these topics, especially pertaining to issues of similarly situated entities and unjust discrimination. Current FAA guid- ance provides an underlying framework to begin understanding the nuances associated with (1) the characteristics that impact airport property market values and market rent, (2) the strate- gies to negotiate airport property development and lease agreements, and (3) the methodologies to estimate market value and establish and adjust market rent. From this underlying framework an industry best-practices approach can be developed. Therefore, this chapter examines current FAA guidance, as well as key airport policies. Included are strategic airport business plans as well as primary management and compliance documents (discussed in Section 3.4). The result is an industry best-practices approach for (1) negotiating airport property development and lease agreements and (2) estimating market values and establishing and adjusting market rents for airport property that can be developed and leased. 3.2 FAA Policies and Guidance The applicable FAA guidance documents providing the underlying framework for these vital topics include the Assurances, orders, policies, advisory circulars, and other materials that C H A P T E R 3 FAA Policies and Guidance

FAA Policies and Guidance 17 pertain to estimating market values and establishing and adjusting market rent. All guidance may be updated periodically to reflect new statutory requirements. In addition to applicable federal guidance (outlined in this section), airport sponsors of federally obligated airports (whether public or private) must ensure compliance with applicable state assurances, guidance, and requirements. Assurances The Assurances represent the 39 obligations with which federally obligated airports must comply to receive AIP funds. For this report, an analysis of four Assurances is applicable. Assurance 5, Preserving Rights and Powers Assurance 5, Preserving Rights and Powers, is most applicable to this report as it pertains to the reversion of lessee improvements, which is typically addressed in a lease agreement or an airport leasing policy. Assurance 5 states that airport sponsors will not take or permit any action which would operate to deprive it [the airport sponsor] of any of the rights and powers necessary to perform any or all of the terms, conditions, and assurances in this grant agreement without the written approval of the Secretary, and will act promptly to acquire, extinguish or modify any outstanding rights or claims of right of others which would interfere with such performance by the [airport] sponsor. This shall be done in a manner acceptable to the Secretary. This is often interpreted consistent with the requirement that airport sponsors preserve their rights and powers through appropriate subordination clauses in all airport leases, permits, and agreements. This Assurance, from a lease agreement perspective, begins to outline the need for airport sponsors to address reversion of lessee improvements on federally obligated airport land. By including and exercising reversion (transfer of lessee improvements to a lessor at the end of the original term of the lease agreement), an airport sponsor ensures the ability to maintain all the “rights and powers necessary to perform any or all of the terms, conditions, and assurances” in any agreement with the FAA. Based on a recent FAA interpretation of Assurance 5 as it relates to reversion, an airport sponsor’s failure to exercise existing lease agreement reversion clauses can result in non-compliance. During a compliance inspection of Shreveport Downtown Airport (Shreveport, Louisiana), the FAA determined that “the [airport] sponsor’s failure to exercise reversion clauses in leases has contrib- uted to forfeiting their [the airport sponsor’s] rights and powers as well as their [the airport sponsor’s] ability to move closer to self- sustainability.” This determination was a result of an FAA review of all lease agreements at Shreveport Downtown Airport containing a rever- sion clause. The reversion clause was vague and lessees found it difficult to interpret consistently and determine if reversion was effective at the termination of the original term of the lease agreement or at the termi- nation of any negotiated term extensions. Owing to the ambiguity in the language, the airport sponsor did not exercise reversion. This resulted in the FAA’s determination of non-compliance by stating “current airport sponsor management practices do not appear to meet the obligatory requirements for a federally obligated airport and could impact future grant funding.” The FAA based its determination on an airport sponsor not enforcing existing lease agreement terms and conditions, which included reversion. The determination was not FAA Compliance Inspection of Shreveport Downtown Airport “The [airport] sponsor’s failure to exercise reversion clauses in leases has contributed to forfeiting their [the air- port sponsor’s] rights and powers as well as their [the airport sponsor’s] ability to move closer to self-sustainability.”

18 Estimating Market Value and Establishing Market Rent at Small Airports a cate gorical statement that reversion must be included in every airport lease agreement. Assurance 5 is focused on the airport sponsor’s ability to maintain the rights and powers granted by the FAA—which can be accomplished by requiring existing lessees to demolish or remove all permanent improvements and return the underlying aeronautical or non-aeronautical land to its original condition. Assurance 22, Economic Nondiscrimination Assurance 22, Economic Nondiscrimination, is most applicable to this report as it pertains to the reasonable and not unjustly discriminatory treatment of all types, kinds, and classes of aeronautical activities at the airport. Additionally, Assurance 22 addresses “rates, fees, rentals, and other charges” as applicable to general aviation users. Assurance 22 states that “each fixed-based operator at the airport shall be subject to the same rates, fees, rentals, and other charges as are uniformly applicable to all other fixed-based operators making the same or similar uses of such airport and utilizing the same or similar facilities.” Advisory Circular 150/5190–7, Minimum Standards for Commercial Aeronautical Activities, describes specialized aviation service operation as “single-service providers or special FBOs performing less than full services.” As such and for this report, utilization of “fixed-based operator” in Assurance 22 is interpreted to include all types of general aviation commercial aeronautical operators, including FBOs and specialized aviation service operators (SASOs). Assurance 22 applies to the establishment of market rent; it does not require all commercial aeronautical operators to be charged the exact same rates, fees, rentals, or other charges. The FAA acknowledges that commercial aeronautical operators at the same airport may be situ- ated differently or engaging in different commercial aeronautical activities that may impact the reasonable and applicable market rent. For example, an FBO property centrally located at the airport with excellent airside and landside access may command a higher rental rate (for the land and/or improvements) than an FBO located farther away with poor airside and landside access. This acknowledgment by the FAA provides the basis for differentiation in market value or market rent, and also allows significant discretion in the methodology and process for estimating market value or establishing and adjusting market rent. Assurance 24, Fee and Rental Structure Assurance 24, Fee and Rental Structure, is most applicable to this report as it pertains to financial impacts and the obligations of a federally obligated airport to be as self-sustaining as possible. Assurance 24 requires airport sponsors to “maintain a fee and rental structure for the facilities and services at the airport which will make the airport as self-sustaining as possible under the circumstances existing at the particular airport, taking into account such factors as the volume of traffic and economy of collection.” As discussed within this chapter, the FAA also addresses the self-sustaining rule in both the Policy Regarding the Establishment of Airport Rates and Charges and the Policy and Procedures Concerning the Use of Airport Revenue. Further, Assurance 24 states that no portion of any grants for airport development, airport planning, or noise compatibility projects received “under Title 49, United States Code, the Airport and Airway Improvement Act of 1982, the Federal Airport Act or the Airport and Airway Development Act of 1970 shall be included in the rate basis for establishing fees, rates and charges for users of that [the] airport.” This Assurance requires that money received for AIP-funded improvements cannot be factored into rent setting for applicable improvements.

FAA Policies and Guidance 19 Airport sponsors often reference this portion of Assurance 24 in trying to understand the FAA’s intent for market rent pertaining to leasing land and/or improvements that have grant- funding impacts (e.g., AIP-funded aprons). However, as Assurance 22 applies to grant-funding impacts (e.g., AIP-funded aprons), there is nuance in the language. Namely, Assurance 22 utilizes “rates, fees, rentals, and other charges” as compared with Assurance 24, which utilizes “fees, rates, and charges” and does not include the word “rentals.” The requirement for federally obligated airports to be as self-sustaining as possible further substantiates the importance of their receiving market rent for land and improvements. Assurance 38, Hangar Construction Assurance 38, Hangar Construction, is most applicable to this report as it pertains to term of lease, which is typically addressed in a lease agreement and/or an airport leasing policy. Assurance 38 requires that if the airport owner or operator [airport sponsor] and a person who owns an aircraft agree that a hangar is to be constructed at the airport for the aircraft at the aircraft owner’s expense, the airport owner or operator [airport sponsor] will grant to the aircraft owner for the hangar a long-term lease that is subject to such terms and conditions on the hangar as the airport owner or operator may impose. For this report, Assurance 38 will be considered to apply to non-commercial entities at an airport based on an analysis of the language utilized throughout the Assurances. This Assurance requires that non-commercial entities constructing a hangar for the entity’s non-commercial aircraft storage must be granted a “long-term lease,” which the FAA defines in Order 5190.6B, Airport Compliance Manual (discussed in this chapter), as a lease agreement with a term of 5 or more years. As it pertains to aeronautical leases, Order 5190.6B indicates that the term for most ground leases ranges from 30 to 35 years, as the FAA deems this term is a “sufficient length of time to amortize the investment.” Orders—Order 5190.6B, Airport Compliance Manual The key FAA Order pertinent to this report is Order 5190.6B, commonly referred to as the Airport Compliance Manual. However, as it states in Section 1.1, “The Order is not regulatory and is not controlling with regard to airport sponsor conduct; rather, it establishes the policies and procedures for FAA personnel to follow in carrying out the FAA’s responsibilities for ensuring airport compliance.” Understanding the manner in which FAA personnel will view these (and other) topics allows airport sponsors to ensure decisions and actions are conducted consistently with FAA requirements. Order 5190.6B, the Airport Compliance Manual, is most applicable to this report on a variety of topics ranging from the requirement to charge aeronautical users reasonable rents to the market value of non-aeronautical use of airport property. This order provides the foundation for many other topics pertinent to this report, including highest and best use, rent adjustments, reversion, and term: • Rents for Aeronautical Use—Chapter 18 of this order clearly states that charges for aero- nautical uses of the airport must be reasonable. Charges for aeronautical use of landside or non-movement area airfield facilities (e.g., hangars and aviation offices) may be based on market value or market rent but are not required to be higher than a level that reflects the cost of services and facilities. In other words, charges for aeronautical use should be somewhere between cost and market rent.

20 Estimating Market Value and Establishing Market Rent at Small Airports Unlike private businesses, airports are not profit driven and as such, the justification of market value should be in setting a reasonable rate, not necessarily in setting the highest rate possible. Additionally, Chapter 17 of this order indicates that “fair market pricing of air- port facilities can be determined by reference to negotiated fees charged for similar uses of the airport or by appraisal of comparable properties.” This chapter also indicates certain airport and property characteristics that the FAA views as reasonable for consideration when estimating market value or establishing and adjusting market rent. Such characteristics include the “various restrictions on use of property on an airport (i.e., limits on the use of airport property, height restrictions, etc.).” • Rents for Non-Aeronautical Use—Chapter 17 of this order states that “rates charged for non-aeronautical use (e.g., concessions) of the airport must be based on fair market value (e.g., lease of land at fair market rent subject to the specific exceptions listed in this chapter).” In the event that market rent for non-aeronautical use of airport property results in a financial surplus, the surplus can be “used to subsidize aeronautical costs of the airport.” • Highest and Best Use—Chapter 3 of this order discusses the definition of highest and best use from the perspective of how surplus federal property is analyzed. While applicable to surplus federal property, such analysis is an introduction to a highest and best use analysis. For surplus federal property, highest and best use analysis outlines three key conditions for consideration: (1) “the economic potential of the property,” (2) “qualitative values (social or environmental) of the property,” and (3) “use factors affecting land use.” The “use factors affecting land use” condition outlines certain property characteristics that the FAA views as reasonable for consideration when estimating market value or establishing and adjusting market rent. Such characteristics include “zoning, physical characteristics, private and public uses in the vicinity, neighboring improvements, utility services, access, roads, location, and environ mental and historical considerations.” Additional information regarding highest and best use is outlined in Chapter 4 of this report. • Rent Adjustments—Chapter 9 of this order outlines the FAA’s recommendation that “ground leases with terms of five (5) or more years should contain an escalation provision for periodic adjustments based on a recognized economic index” to facilitate parity between new lease agreements and existing lease agreements. • Term—Chapter 12 outlines the FAA’s determination that “leases that exceed 50 years may be considered a disposal of the property in that the term of the lease will likely exceed the useful life of the structures erected on the property.” Further, this order indicates that FAA offices should not consent to lease agreements with a term of 50 years or greater. As outlined in Chapter 12, “the FAA does not review all leases, and there is no requirement for a[n] [airport] sponsor to obtain FAA approval before entering into a lease [agreement].” However, the purpose of requesting an FAA review of an aeronautical lease agreement is to ensure the lease agree- ment does not violate the airport sponsor’s federal obligations. As it specifically pertains to term and for this report, a maximum of 50 years will be considered. Policies The policies applicable to this report include (1) the Policy and Procedures Concerning the Use of Airport Revenue, (2) the Policy on the Non-Aeronautical Use of Airport Hangars, and (3) the Policy Regarding the Establishment of Airport Rates and Charges. Policy and Procedures Concerning the Use of Airport Revenue This FAA policy addresses the requirement that revenue generated on an airport must remain with the airport. This policy is most applicable to this report as it pertains to the requirement to charge rental rates based on market value for non-aeronautical use.

FAA Policies and Guidance 21 This policy also provides guidance regarding rental rates charged to not-for-profit aviation museums, aeronautical higher education programs, police/firefighting units operating aircraft at an airport, and civil air patrol and use of property by military units. This requirement extends to other departments within the airport sponsor (e.g., a law enforcement department). “Under the Final Policy, the lease of airport property to a unit of the sponsoring government for non-aeronautical use at less than fair market value is considered a prohibited revenue diversion unless one of the specific exceptions permitting below-market rental rates applies.” The policy indicates that the FAA would not object to lease agreements with a rental rate less than market rent if the use of the underlying lease agree- ment is deemed a “qualified use” for the community benefit. However, “the community use should not preclude reuse of the property for airport purposes, if the airport operator determines that such reuse will provide greater benefits to the airport than the continued community use.” This policy outlines specific qualified uses as identified in Figure 3-1. Qualified uses do not include airport sponsor departments “seeking an alternative site for [the airport] sponsor’s general governmental purposes.” For example, an airport sponsor cannot lease airport property to a law enforcement agency (e.g., city, county) at a rental rate less than market rent, as this would be considered revenue diversion. Not-for-profit aviation museums can, however, be offered rental rates at less than market rent, which would not be deemed revenue diversion as a result of the contribution such muse- ums make to the understanding and support of aviation. The extent of the reduced rental rate and fees offered to not-for-profit aviation museums must be reasonably justified by the tangible and intangible benefits to civil aviation. Though airport sponsors accept below-market rents for not-for-profit aviation museums, they do have the authority and discretion to treat not-for- profit aviation museums as any other aeronautical activity and establish rental rates accordingly. This is only applicable for not-for-profit entities. The policy clearly states that “all for-profit aeronautical activities provide some benefit to the airport, by making it more attractive for potential airport users. If this benefit were a sufficient reason to permit reduced rental rates to commercial aviation businesses on a routine basis, the requirement for a self-sustaining airport rate structure would be virtually unenforceable.” For example, a city cannot claim the community use exception for a nominal value lease of airport property for a municipal vehicle maintenance garage. Such usage, while beneficial to the taxpaying citizens of the sponsoring government, would be difficult to justify as benefiting the airport by improving the airport’s acceptance in the community. Policy and Procedures Concerning the Use of Airport Revenue Acceptable use •Public park •Bike/jogging path •Baseball field •Skate park •Recreation facility Unacceptable use •Road maintenance equipment storage •Police/fire department •Government facilities that do not directly support operation of airport Figure 3-1. Qualified uses of airport property.

22 Estimating Market Value and Establishing Market Rent at Small Airports Policy on the Non-Aeronautical Use of Airport Hangars This FAA policy addresses utilization of airport hangars (designed for aeronautical use) for non-aeronautical purposes. This policy is most applicable to this report as it pertains to the underlying rental basis (aeronautical or non-aeronautical) utilized in these situations. In June 2016, the FAA issued a policy regarding the storage of non-aeronautical items in hangars, which, at the time, was intended to provide consistent direction across the airport industry. As it relates to market rent, this policy solidifies the FAA’s position that if a hangar is used for non-aeronautical purposes, then an airport sponsor must establish a market rent for non-aeronautical use rather than charge an aeronautical rate. The policy states, “If an airport tenant pays an aero- nautical rate for a hangar and then uses the hangar for a non-aeronautical purpose, the tenant may be paying a below-market rate in violation of the [airport] sponsor’s obligation for a self-sustaining rate structure and FAA’s Revenue Use Policy.” The FAA encourages airport sponsors to confine non-aeronautical activities to designated non-aviation areas of the airport, as this will ensure non-aeronautical use of airport property is monitored. This approach also allows the airport sponsor to clearly differentiate non-aeronautical and aeronautical uses, which may result in different rental rates as appropriate. By co-mingling aeronautical and non-aeronautical uses, the airport sponsor risks subsidizing non-aeronautical uses with aviation revenues. Policy Regarding the Establishment of Airport Rates and Charges This FAA policy provides airport sponsors guidance in the manner of and options for establishing and adjusting market rent and imposing applicable airport fees. This policy is most applicable to the report as it pertains to the options for establishing market rent for aeronautical users and the airport characteristics that may be considered. The FAA requires that all rates, rentals, landing fees, and other charges that airport sponsors impose on aeronautical users for aeronautical use be fair and reasonable without unjust discrimina- tion. The policy is also clear in that “it is the fundamental position of the Department that the issue of rates and charges is best addressed at the local level by agreement between users and airports.” The policy states that at some airports, market conditions may not permit an airport proprietor [sponsor] to establish fees that are sufficiently high to recover aeronautical costs and sufficiently low to attract and retain commercial aeronautical services. In such circumstances, an airport proprietor’s [sponsor’s] decision to charge rates that are below those needed to achieve self-sustainability in order to assure that services are provided to the public is not inherently inconsistent with the obligation to make the airport as self-sustaining as possible in the circumstances. As stated throughout this report, the interchangeable use of the terms market value and market rent, as well as the utilization of rates and fees, can lead to confusion and misunderstanding. Consistent with other FAA guidance and for this report, this policy is interpreted to allow airport sponsors to charge less than market rent for aeronautical use of airport land and improvements only when doing so can be justified. The policy also states that reasonable methodologies to estimate market value and establish and adjust market rent “may include, but are not limited to, historic cost valuation, direct nego- tiation with aeronautical users, or objective determinations of fair market value.” Additionally, the policy requires that an airport sponsor “must apply a consistent methodology” for comparable aeronautical uses at the airport. If an airport tenant pays an aeronautical rate for a hangar and then uses the hangar for a non-aeronautical purpose, the tenant may be paying a below- market rate in violation of the sponsor’s obligation for a self-sustaining rate structure and FAA’s Revenue Use Policy.

FAA Policies and Guidance 23 Advisory Circulars—Advisory Circular 150/5190–7, Minimum Standards for Commercial Aeronautical Activities This advisory circular provides recommendations and guidance for airport sponsors to develop minimum standards for commercial aeronautical activities. Minimum standards outline development requirements (i.e., land and improvements) for commercial aeronautical operators and may also include minimum investment requirements. Other Guidance Materials The other guidance materials applicable to this report include (1) the Uniform Appraisal Standards for Federal Land Acquisitions, (2) Compliance Guidance Letter 2018–3, Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property, and (3) the FAA Reauthorization Act of 2018. Uniform Appraisal Standards for Federal Land Acquisitions The Uniform Appraisal Standards for Federal Land Acquisitions, commonly referred to as the “Yellow Book,” has been developed to provide guidance for appraisers, attorneys, and other industry stakeholders. This guidance was developed on behalf of the Interagency Land Acqui- sition Conference and with the assistance of the Appraisal Foundation and the United States Department of Justice. This document is most applicable to this report as it pertains to the guidance regarding highest and best use analysis, appraisal development, appraisal reporting, appraisal review, and the legal foundations for appraisal standards. While this document is geared toward appraisals for estimating market value, justification for certain required appraisal elements is explained. This document also states that in conducting an appraisal under the stan- dards, the appraiser must complete a comprehensive study of the physical, legal, and eco- nomic characteristics of the subject property, as well as the neighborhood and market in which it is located. Compliance Guidance Letter 2018–3, Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property Compliance Guidance Letter 2018–3, Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property is a letter from Kevin Willis, Director of the Office of Airport Compliance and Management Analysis, ACO-1 to Regional Airport Division Directors, Airport District Office Managers, and Compliance Specialists. The purpose of this letter is to assist and inform FAA field offices, airport sponsors, and commercial appraisers on the appraisal process required for the sale and leasing of federally obligated property. This letter also describes the FAA-accepted processes and report documentation standards for (1) estimating market value for the sale or exchange of federally obligated airport property and (2) establish- ing market rent for federally obligated airport property. The letter provides information on developing a “scope of work” for procuring an appraiser, the airport sponsor’s selection of an appraiser, features of an appraisal report, and a discussion of the basic valuation process, among other topics. Compliance Guidance Letter 2018-3 confirms that market value is the required standard when an airport sponsor disposes of airport property as well as, with some limited expectations, leases airport property for non-aeronautical purposes. However, consistent with previous FAA guidance, market value is not the standard metric when setting rates and charges for the “air- field (runways and aircraft movement areas).” Rather, aeronautical rates and charges (or fees for aeronautical use of the airport) “may not exceed the capital and operating costs of those facilities.” The airport sponsor may, but is not obligated to, utilize an appraisal to establish

24 Estimating Market Value and Establishing Market Rent at Small Airports market rent for aeronautical properties in the non-movement areas (e.g., hangars, office, land). Additionally, Compliance Guidance Letter 2018-3 reaffirms the definition of market value as stated in Order 5190.6B and states five conditions implicit in the definition. Compliance Guidance Letter 2018-3 outlines sample scopes of work for the disposal of an existing airport; the disposal of non-aeronautical airport land; the acquisition of on-airport leased premises; the concurrent and interim lease of on-airport property; the sale and lease of oil, gas, and mineral rights; the sale and disposal of utilities and pipeline easements; the disposal and lease of hotels; the disposal and lease of golf courses; and the sale and lease of agricultural land. Directly pertinent to this report, determination of fair market value is also outlined in Compliance Guidance Letter 2018-3: The following are the major factors that should be used to identify comparable properties for deter- mining FMV [fair market value] of aeronautical airport property: • Size of the metropolitan area and population, • Surrounding demographic profile and economic character, • Location of the airport, • Runway(s) length and orientation, • Airport classification, size, and function, • Number of operations and other activity statistics, • Number of based aircraft, • Fixed-base operators and the services provided, • Age and quality of facilities, • NAVAIDS and Air Traffic Control facilities, • Airport cost structure and fees (landing, fuel flowage, aircraft parking, hangar use), • Fuel sales, • Amenities at the airport, • Location on the airport, • Size of the property parcel in question, • Property function, and • Highest and best use of the property. When appraising airport land, Compliance Guidance Letter 2018-3 indicates the “length of the lease term” may also be appropriate to consider and indicates the typical length of an airport lease is 20 to 30 years “with renewal options and reversion of all improvements (or removal) at lease termination.” Additionally, major factors to identify comparable properties in the local community for appraising non-aeronautical property were identified and include • Zoning designation and land use (legal encumbrances), • Size and configuration of parcel, • Highest and best use of the property, • Property function, • Roadway and utility services access, • Other amenities, and • Construction method and longevity. FAA Reauthorization Act of 2018 The FAA Reauthorization Act was signed October 5, 2018, to reauthorize federal aviation programs, to improve aircraft safety certification processes, and for other purposes. The Reautho- rization Act is most applicable to this report as it is pertinent to (1) compatible recreational use of airport property on an interim basis and (2) non-aeronautical development on non–federally sponsored airport property.

FAA Policies and Guidance 25 Compatible Recreational Use of Airport Property on an Interim Basis. Compatible land uses are developments that discourage residences, schools, churches, and other congregations of large crowds near airports; such uses may include golf courses, racing tracks, solar gardens, and refuse facilities. Section 131 of the Reauthorization Act states that an airport sponsor of a public-use airport shall not be considered in violation of the Assurances solely as a result of entering into a lease agreement with a local government department utilizing airport property for an interim compatible recreational purpose at below-market value. The Reauthorization Act sets forth provisions that must apply and also allows the Secretary of Transportation to regulate that an airport sponsor receive market value or market rent in a commercial transaction for the use, lease, encumbrance, transfer, or disposal of land and any facilities on such land. However, each of the following must apply: • An agreement was established before February 16, 1999 (date of publication for the FAA Policy and Procedures Concerning the Use of Airport Revenue); • The agreement between the airport sponsor and the community use is subordinate to the Assurances; • The airport property was acquired under a federal airport development program; • The airport sponsor has provided a written statement to the FAA that the property will not be needed for any aeronautical purpose during the next 10 years; • The recreational use will not impact the aeronautical use of the airport; • The airport sponsor certifies that it is not responsible for the preparation, start-up, operations, maintenance, or any other costs associated with the recreational purpose; and • The recreational purpose is consistent with federal land use compatibility. Non-Aeronautical Development on Non–Federally Sponsored Airport Property. Section 163 of the Reauthorization Act states that the FAA “may not directly or indirectly regulate (1) the acquisition, use, lease, encumbrance, transfer, or disposal of any land by the airport owner or operator [sponsor]; (2) any facility upon such land; or (3) any portion of such land or facility” on non–federally sponsored airport property except under the following specific conditions: • To ensure the safe and efficient operation of aircraft or safety of persons or property on the ground; • To require that an airport sponsor receive not less than market value or market rent for the lease, use encumbrance, transfer, or disposal of land, any improvements on the land, or any portion thereof; or • To ensure the airport sponsor does not pay more than market value for the acquisition of land and/or improvements on the land. For the purposes of the Reauthorization Act, non–federally sponsored airport property (land and/or improvements) does not include property acquired or modified with federal monies or property under the authority of a Surplus Property Act instrument of transfer or Section 40117 of 49 USC (passenger facility charge). 3.3 Strategic Airport Business Plans In addition to understanding the current FAA guidance, which provides the basis from which to develop an industry best-practices approach, airport sponsors, airport management and staff, and property managers need to consider the impacts to and strategic direction of the airport. Airport management and staff, as well as property managers, should strive to align the approach to leasing land and improvements (including estimating market value and establishing and adjusting market rent for airport property) with the strategic direction outlined by the airport sponsor. For example,

26 Estimating Market Value and Establishing Market Rent at Small Airports if an airport sponsor is strategically oriented toward full self-sustainability, setting rental rates for not-for-profit entities at less than market rent may not align with its strategic direction. Conversely, if a goal of the strategic airport business plan is to secure additional development to increase utilization, airport management and staff may need to consider the desired timing, the market demand, and, ultimately, the rent rate for leasing land and improvements when the rental rate may need to be less than market rent. For this purpose, airport sponsors with a strategic airport business plan should consider the airport’s mission, vision, values, goals, and objectives outlined therein. For airport sponsors without a strategic air- port business plan or with an outdated strategic airport business plan, the strategic direction of the airport should be considered and fully articulated before making significant policy decisions. From a background perspective, a strategic airport business plan is a document that uses a logical and disciplined structure to set out goals, objectives, and action plans that drive the day-to-day operation and management of an airport while maintaining consistency with FAA Assurances, orders, policies, advisory circulars, and other guidance materials as well as the airport’s ALP and master plan. A strategic airport business plan serves as an important planning tool, a critical management tool, and a vital communications tool. As a planning tool, an airport business plan • Articulates the mission, vision, and goals for the airport; • Sets forth the objectives for achieving goals; • Identifies the action plans for accomplishing objectives; • Establishes the parameters for checking progress; and • Provides the basis for making adjustments—as needed—to achieve the goals and realize the mission and vision for the airport. As a management tool, a strategic airport business plan assists in keeping airport management, policymakers, and stakeholders focused on achieving goals and realizing the mission and vision for the airport. Additionally, the plan provides a process for building on strengths, addressing weaknesses, capitalizing on opportunities, and managing threats. As a communications tool, the strategic airport business plan provides the opportunity for airport managers, policymakers, and stakeholders to discuss the current and future direction of the airport. While there are several compelling reasons to utilize a strategic airport business plan, com- mon reasons include generating more revenue, reducing or eliminating expenses, and creating more jobs. Another is that a general aviation airport is expected to be operated and managed as a public enterprise; having a business plan demonstrates good stewardship by establishing goals, developing objectives, and formulating action plans, consistent with realizing the mission and vision for the airport. While airports can be managed successfully without a strategic airport business plan, a survey conducted in support of ACRP Report 77: Guidebook for Developing General Aviation Airport Business Plans indicates that this is less likely to occur without a stra- tegic airport business plan. Additionally, not utilizing a strategic airport business plan can result in unknown or varying perspectives regarding the future direction of an airport. 3.4 Primary Management and Compliance Documents In addition to a strategic airport business plan and the current FAA guidance, airport sponsors, airport management, and airport property managers need to consider the existing primary management and compliance documents (PMCDs) for the airport. PMCDs are It’s not hard to make decisions when you know what your values are. Roy Disney

FAA Policies and Guidance 27 designed to assist with the operation, management, and development of the airport. These documents—if developed consistent with industry best practices while maintaining consistency with FAA Assurances, orders, policies, advisory circulars, and other guidance materials, as well as the airport’s ALP and master plan—will • Contribute to the airport’s financial health; • Facilitate its orderly development; • Promote quality products, services, and facilities; • Protect the health, safety, interest, and general welfare of the public; and • Reduce potential conflict with lessees, consumers, and users. Primary management and compliance documents include those explained in Figure 3-2. Research conducted for the development of this report indicated that 57% of respondents believe that PMCDs are very important. Further, all respondents believe PMCDs are, at minimum, slightly important, which further supports the industry’s recognition that this compendium of documents is consistent with best management practices. Existing PMCDs may identify historical leasing practices of the airport sponsor, which need to be reconciled with any modifications to the estimation of market value or establishment and adjustment of market rent. Chapter 6 and Figure 3-3 present the typical parameters addressed in a general aviation leasing policy and a general aviation rent policy. •Sets forth the parameters for leasing airport land and improvements. •Applies to entities who want to occupy/use airport property (new or renewal of existing agreements). Leasing Policy •Sets forth the parameters to establish and adjust rental rates associated with leasing, occupying, and using airport land and/or improvements. •Conveys the methodologies utilized by the airport sponsor to establish and adjust airport rents. Rent Policy •Sets forth the parameters to establish and adjust fees associated with the use of the airport. •Conveys the methodologies utilized by the airport sponsor to establish and adjust airport fees. Fee Policy •Sets forth the minimum requirements for an entity to engage in commercial aeronautical activities at the airport. •Applies to entities who want to engage in commercial aeronautical activities at the airport. Minimum Standards •Sets forth the rules and regulations for the safe, orderly, and efficient use of the airport. •Applies to all persons using the airport—at all times, for any purpose. Rules and Regulations •Sets forth the parameters governing the design, development, construction, or modification of improvements at the airport. •Applies to all lessees or developers who will be constructing improvements at the airport. Development Standards Figure 3-2. Primary management and compliance documents.

28 Estimating Market Value and Establishing Market Rent at Small Airports 3.5 Chapter Review Expanding on the applicable FAA guidance outlined in Chapter 2, this chapter focused on the details related to estimating market value and establishing and adjusting market rent, as outlined in Figure 3-4. This chapter also investigated the benefits of strategic airport business plans and PMCDs. Leasing Policy • Approval process • Competitive process • Demonstration of immediate need • Term and Reversion Rent Policy • Establishment of market rent • Negotiation and competitive process • Rate of return • Airport sponsor financing • Adjustment of rents Figure 3-3. Leasing, rent, and fee policies. Assurances Assurance 5 Preserving Rights and Powers Assurance 22 Economic Nondiscrimination Assurance 24 Fee and Rental Structure Assurance 38 Hangar Construction Orders Order 5190.6B Airport Compliance Manual Policies Policy and Procedures Concerning the Use of Airport Revenue Policy on the Non- Aeronautical Use of Airport Hangars Policy Regarding the Establishment of Airport Rates and Charges Advisory Circulars AC 150/5190- Minimum Standards for Commercial Aeronautical Activities Other Guidance Materials Uniform Appraisal Standards for Federal Land Acquisitions Compliance Guidance Letter 2018-3, Appraisal Standards for the Sale and Disposal of Federally Obligated Airport Property FAA Reauthorization Act of 2018 Figure 3-4. Chapter 3 key aspects.