Legal Issues Related to Large-Scale Airport Construction Projects (2020)

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Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. ACRP LRD 38 11 DB, the airport owner specifically recognized that other delivery methods, including DBB and CMAR, would not have allowed the owner to complete the project within the time restrictions set for the project. IV. PROJECT FUNDING There is a wide range of financing options for airport proj- ects. Each of these options comes with its own set of impacts, including the level of control the airport authority may retain, amount of documentation required from owners and their consultants, cost of project financing, potential risk allocations, and—in the case of airport privatizations—potential public con- cerns (Nichol 2007). These options range from an airport fund- ing a project exclusively with airport revenue sources, which leaves the owner with the highest level of control, to projects utilizing federal funding, which are heavily regulated. To avoid complications associated with breaching obligations tied to the receipt of certain funding, it is critical for an airport to iden- tify all applicable funding-related requirements, including any federal grant assurances, ahead of commencing procurement. Owners need to clearly reflect these requirements in their con- struction contracts (independent of project delivery method) and identify clear checks and balances during construction to ensure compliance (ACINA et al. 2012). The five main sources of funding are: • Federal funding (FAA and TSA). The FAA‐administered AIP and the Airport and Airways Trust Fund, which are generated by aviation user taxes, are the main sources of federal funds for eligible airport projects (Nichol 2007). It is important to note though that according to the Govern- ment Accountability Office (2015), larger airports, including large and medium hubs, obtain more than half of their capi- tal funding through airport-generated income, while smaller airports, including small nonhubs and general aviation air- ports, rely more on AIP grants for 69% of their funding. The FAA Airport Improvement Program Handbook— Order 5100.38D, (FAA 2014b) is the published policy eligibility and justification for any AIP-funded project. As described in the AIP Handbook, when airport owners accept AIP funds, they must agree to certain obligations called grant assurances. The grant assurances require the recipients to maintain and operate their facilities safely and efficiently and in ac- cordance with specified conditions. Some grant assurances state conditions that must occur before a grant is issued or are specific to implementation of grant projects. These grant assurances are either included in the grant or are specifically incorporated by reference (FAA 2014a). Considering its potential impact on large complex con- struction projects, Grant Assurance 25, Airport Revenues, is worth particular attention. This grant assurance provides that all revenues generated by the airport and any local taxes on aviation fuel established after December 30, 1987, will be expended by the airport for the capital or operating costs of the airport, the local airport system, or other local facilities tractors’ concerns regarding bonding capacities are not exclu- sive to CMAR projects and can arise on projects utilizing other PDMs, including DBB. According to the interviews with owner representatives, the decision to select the CMAR delivery method for these proj- ects was made by the leadership team and high-level staff at the airport, including the executive manager, engineering manager, and chief operating officer. Some of the factors used by case study participants for selecting CMAR as a delivery method for their project included (a) the complexity of the project, (b) the value of bringing the contractor onboard during the design phase (constructability), (c) the ease of phasing the project from design to construction, and (d) the owner’s ability to retain greater control over the design. One participant mentioned that the owner was more concerned about the building’s aesthetics than about completing the project within set performance spec- ifications, and this desire for greater control over design was a factor for that owner in deciding to use CMAR. When partici- pants were asked if they would use the CMAR delivery method again for another project, they affirmed that they would, stating that they received very positive feedback from their previous CMAR projects. B. Progressive DB Case Study Results The progressive DB project, a terminal expansion project that was split into two separate progressive DB contracts (one for airside work and the other for landside work), was the air- port’s first experience using progressive DB. Because the airport did not have prior internal experience with progressive DB, a significant educational effort for both upper management and the board was required, ahead of getting approval from the air- port’s board in order to proceed. Although the airport had a great amount of flexibility un- der its enabling authority to use alternate PDMs, internal poli- cies built up around the use of DBB did not permit the use of progressive DB. As a result, the airport owner’s decision to use progressive DB required changing these policies, which added another step to the delivery method selection process. Of the several factors used by the case study participant in choosing progressive DB, the most important were (a) the expedited proj- ect delivery schedule that compressing the design and construc- tion periods would enable and (b) the ability of progressive DB (relative to DBB) to shift the risk of design errors to the design- er–builder and still allow the owner to have input into design decisions until setting the GMP. C. Lump-Sum DB Case Study Results Similarly to the progressive DB case study, the timeliness of project delivery was a key factor in the case study participant’s decision to use lump-sum DB for this project, which was a re- placement of the airport’s central utility plant. The need to com- plete this project as soon as possible was critical to mitigate ef- fects on airport operations and because it was necessary to have the plant operational before the owner could bring other major airport improvements on line. When deciding to use lump-sum

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. 12 ACRP LRD 38 Most large commercial airports collect PFCs (ACINA et al. 2012). • Airport cash flows for project finance. Local airport rev- enue streams can be used when federal and state grants are insufficient to pay for a project and/or the agency wants to maximize the level of control on its project. These funds are generated from airline rates and charges, terminal revenues, auto parking and ground transportation fees, rental car fees, general aviation fees (such as hangar rentals), land leases for aviation and off‐airport uses, and aircraft fuel throughput fees, among others. Airports with steady streams of revenue are best suited to select this type of funding. However, with this stream of funding, there is high risk, due to volatility in airline operations and lease agreements, especially in pro- grams requiring multiyear funding. Thus, this pay-as-you- go funding may be more suitable for projects with short durations (ACINA et al. 2012). Customer facility charges represent another funding source used to construct rental car facilities and certain transportation facilities (e.g., auto- mated people movers). • Debt financing/airport revenue bonds. Debt instru- ments provide another mechanism to leverage an agency’s cash-flow streams and are the largest source of funds for airport capital needs (Nichol 2007). There are many debt instruments available for airport agencies, such as fixed- or variable-rate bonds and grant anticipation notes (ACINA et al. 2012). Funding used to pay debt service on such instru- ments can come from a variety of sources, including the gen- eral airport revenues, issuing entity’s overall tax base, or PFC revenues, as well as revenues from the facility constructed with the bond proceeds, or a combination of these [refer to Nichol (2007) for details on different financing mecha- nisms]. Project definition, budget commitment, cost analy- sis, and delivery milestones become critical in bond-funded financing, because the owner needs to determine the amount of bonds at the right time. Highly complex projects with no clear scope inherently bear a lot of risk, making them a poor fit for bond funding (ACINA et al. 2012). A. CMAR Case Study Results Funding for the CMAR case study projects was similar to that of the airports’ traditional DBB projects. These CMAR proj- ects were funded by internal revenue sources from aeronautical and nonaeronautical revenue streams, as well as by AIP fund- ing. Available funding sources or the potential effects of using CMAR on the funding sources was not a factor in the airports’ decisions to use CMAR for these projects. However, for other airport owners, this might not be true. Under applicable federal requirements, the CMAR projects that used federal funding in this case study were required to obtain special permission from the FAA to use a QBS process to select the construction managers for the projects. This was independent of the amount of federal funding the airport used for the project. that are owned or operated by the owner or operator of the airport, and which are directly and substantially related to the actual air transportation of passengers or property, or for noise mitigation purposes on or off the airport. There are only three limited exceptions to this rule, and airports are subject to an annual audit in association with Grant Assurance 25, which must review and provide an opinion on the use of airport revenue, where the airport is subject to civil penalties for violations of this assurance (FAA 2014b). As projects get larger and more complex, it is critical that airports consider whether their expanded scope creates any diversion issues. To aid in this process, the FAA has identi- fied certain situations that result in revenue diversion, such as payments that exceed fair value of services, payments for general economic development, and land rented or used for nonaeronautical purposes at less than fair market value (FAA 2014b). It is worth noting that on PPP projects that are subject to federal requirements, the addition of maintenance to the de- veloper’s contract requires the airport owner to ensure that it complies with federal restrictions on using certain types of federal funding to pay for routine maintenance. For example, on availability-payment PPP projects, the owner must track the availability payments it makes to the developer to ensure that the restricted federal funding is only used to pay for per- mitted costs. This is relevant because availability payments are “unitary” payments from the owner that the developer uses to pay for various activities (prior design and construc- tion, financing, operations, and both routine and capital maintenance costs). Without further documentation, it is unclear which of these activities the owner-provided avail- ability payments are covering. As a result, when public agen- cies first used availability-payment PPPs in the mid-2000s, they met with the U.S. Department of Transportation to work out the accounting protocols needed to give the federal government confidence that its funding would be used in compliance with federal restrictions. • State funding. Most state funding for airport construction projects is limited to supplementing federal grants by provid- ing matching funds. Some states provide funds in the form of outright grants (Nichol 2007). With state funding assistance comes another layer of statutory compliance issues that an owner must track, including requirements that may partially or wholly conflict with federal or local laws that otherwise apply. All such requirements should be clearly transferred into the respective contracts to protect the project eligibility and ensure project cost reimbursement (ACINA et al. 2012). • Passenger facility charges (approved by the FAA). The use of passenger facility charges (PFCs) on airport-related proj- ects was approved in 1990 through federal legislation. These funds are not subject to federal budget authorization, be- cause they are generated locally on a per‐enplanement basis. Unlike AIP funds, payments for debt service can be made through PFCs. However, for the PFCs to be collected and used, prior approval by the FAA is required (Nichol 2007).