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Permissible Uses of Airport Property and Revenue (2020)

Chapter: IV. FINDINGS AND DISCUSSION

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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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Suggested Citation:"IV. FINDINGS AND DISCUSSION." National Academies of Sciences, Engineering, and Medicine. 2020. Permissible Uses of Airport Property and Revenue. Washington, DC: The National Academies Press. doi: 10.17226/26011.
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ACRP LRD 40 27 eralizability. Just as important, all facts and circumstances set forth in this digest are based on interviews and reports from airport proprietors. None has been independently verified with third parties or the FAA, as necessitated by the project’s need to maintain anonymity. It is possible that some practices dis- cussed in interviews and hypotheticals may not be consistent with FAA practice or policy or even federal law. Readers are re- minded that the hypotheticals and experiences of other airport proprietors should not be adopted without careful analysis of the individual airport’s situation. Nevertheless, the researchers selected examples and experiences that, based on supporting re- search, shed light on important and relevant issues and discus- sion, while making efforts to confirm participant experiences through desktop research. IV. FINDINGS AND DISCUSSION A. Recent Developments in Airport Proprietor Activities to Expand Sources or Pursue Creative Strategies for Airport Revenue Use Airport proprietors must address the challenges of compli- ance with airport revenue use restrictions within the context of broader trends, such as growing infrastructural needs, increas- ing uncertainty regarding federal financial support, shifting business models and disruptive technologies. Current uncer- tainty about airport revenue streams makes it all the more im- portant that airport proprietors understand the limits of their authority and opportunities for using airport property for rev- enue generation. While there are considerable differences within the airport community and Congress regarding appropriate or necessary levels of federal airport funding, many airport proprietors are concerned about the continuity and flat-line of federal sup- port from AIP funding and the cap on PFCs, which are relied on heavily.254 These concerns have translated into a perception among airport proprietors that their funding sources must be diversified. Airport proprietors also face pressure to reduce costs to re- tain and attract airline service. Airline mergers, consolidation of hub airports under the legacy hub-and-spoke carrier model and the low margin, bare-bones business models of ultra-low- cost carriers (ULCCs) mean that airport proprietors have to live within tighter air carrier tenant budget demands, while adapt- ing to the needs among different service categories. The intro- duction of ULCC service also has provided airport proprietors opportunities to drive passenger growth and, with it, pressure to increase terminal capacity and airport facilities. At the same time, there are positive economic trends provid- ing revenue opportunities. Steady growth during the latest eco- nomic cycle means that more people are flying, providing some airport proprietors—particularly those in areas with growing populations—opportunities to seek additional revenue and use 254 While PFC charges are not considered airport revenue, they can impact airport revenue spending and, therefore, are a factor airports consider in contemplating airport revenue matters. The results of our research are presented in the following chapter (Chapter IV). To present these results in a useful man- ner, we organized them according to themes and topics that framed our scope of inquiry and, especially, areas of airport revenue and property use that we identified as particularly rep- resentative of the challenges in using these sources of revenue. In each section, we review identified major trends or issues, as well as means and methods of facing and addressing these challenges. Where useful, we incorporate examples from our inter views and publicly available secondary legal research. Following an overview for each selected topic, we provide a hypothetical case study constructed from one or more reviewed cases to illustrate the analysis to be conducted and resulting out- comes. In constructing hypothetical scenarios using our case study methodology, we intend to reproduce a logical process airport proprietors should use for making revenue and prop- erty use decisions.253 However, the hypotheticals are not purely hypothetical—each was designed to reproduce real-world prob- lems we discovered in our interviews (with any identifying informa tion removed or changed). We recognized early in the research that asking airport pro- prietors about creative or precedent-setting revenue or property use approaches could be sensitive, because failure to comply with federal requirements carries serious legal and financial consequences. We anticipated that participation in the research likely would be limited unless we could provide participants a level of anonymity and confidentiality. Indeed, two of the 13 airport representatives contacted to participate in the research declined because of the sensitive nature of airport revenue use issues. Accordingly, interview participants, while identi- fied as sources for information provided in our findings, were anonymized. The list of anonymized interview participants, all of whom are responsible for airport revenue and property use, is provided at Appendix B. Similarly, examples used to con- struct the hypotheticals, while based on real cases, also were anonymized. The list of these anonymized airports and a brief description are available at Appendix C. In some cases, minor details in the hypotheticals were changed to preserve anonym- ity or assumed where information was not expressly provided. In some instances, the hypotheticals discussed are based on case studies examined through secondary research, not interviews. These sources also were anonymized where used for creating the hypotheticals to preserve the identity of interview partici- pants and confidential privileged information. Airports named in the findings were identified separately through prior and secondary research of publicly available documents. While particular airports are identified in the re- search based on publicly available documents, they were not necessarily interviewed anonymously. Readers should be aware that the projects and experiences recounted from interviews and used in hypotheticals are illus- trative of some challenges encountered in this field and not intended to indicate any particular dominant trend or gen- 253 See Yin, supra note 250, at 18 (discussing the concept of “analytic generalizations”).

28 ACRP LRD 40 ter, the factual and bases for the hypotheticals largely are based on the content of our airport proprietor interviews, combined with secondary research. In a few cases, we relied entirely on publicly available information to construct hypotheticals to illus trate issues that are important to the topic but for which no appropriate example arose in the interviews. While we relied on interview content to contextualize and supply legal analysis for the hypotheticals, we also independently assessed each case based on the existing legal framework. All sources for the hypothetical examples were anonymized to protect research participant confidentiality and encourage participation in the interview process. Publicly available sources also have been anonymized where used in hypotheticals. In some instances, details regarding the fact pattern for included examples were altered to maintain confidentiality. A brief description of each hypothetical source appears in Appendix C and is referenced in this chapter as appropriate. In analyzing the hypotheticals, it is important to remember that every airport environment is unique, particularly with re- spect to the issues addressed in this digest.256 Therefore, we urge caution in drawing draw exact comparisons from one airport to another. Every transaction involves many (sometimes compet- ing) considerations and requires careful planning and under- standing of directly applicable circumstances. However, we believe that hypothetical examples can play an important role in helping readers work through the implications of key issues and strategies for each topic investigated in this research. 1. Nonaeronautical Development of Airport Property a. Key Factors, Issues and Strategies For many airport proprietors, nonaeronautical development of airport property and nonaeronautical commercial activity are important, if not critical, revenue generators. Accordingly, air- port proprietors increasingly are turning to business models in which the proprietor makes capital investment to enhance rev- enue streams. Airports large and small are turning to this busi- ness model. Indeed, one interview participant from a general aviation airport cited capital investment projects as the means it uses to maintain its financial self-sufficiency.257 Notwithstand- ing its importance, however, there are many legal grey areas when it comes to aeronautical development as the result of over- lapping and embedded regulatory frameworks and case-specific circumstances. 256 One widespread perception that is not addressed in this digest is the view that different FAA district and regional offices apply divergent levels of scrutiny and adopt different interpretations of FAA regulatory requirements. In industries like those dealing with airports, such perceptions of bureaucracy are inevitable, but it is a particular issue that arose frequently in our research—i.e., that airport proprietors did not have certainty that they could rely on precedents from another district or region. The researchers are told that field and regional offices are directed to elevate novel issues of first impression concerning national policy to headquarters for resolution. Proprietors often elevate controversial matters to headquarters and Congress, as well. 257 Telephone interview with Interview Participant No. 3. See infra App. B. it to promote competition at airports. A number of interview participants noted growth in passenger counts and the demand for airport expansion.255 In the general aviation community, there are pressures from stakeholders to control costs and changes to airport economic dynamics caused by consolidation of fixed-base operators (FBOs). And with respect to ground transportation access, the expansion of public transportation and disruptive innovations such as transportation networking companies offer potential solutions to airport congestion but may cause their own issues with respect to revenue streams in the future. B. Key Factors, Issues, Strategies and Examples of Permitted and Prohibited Airport Revenue Use and Related Property Use To navigate external trends affecting airport revenue, comply with federal requirements and serve their communities, airport proprietors are looking for means of legally leveraging their resources to bridge the financial gaps they face. This section reports the results of our research into the analysis of particu- larly noteworthy areas of airport revenue use and legal strategies implemented by airport proprietors within these contexts. Our primary research interviews with airport proprietors and secondary and meta-research from publicly available data have identified five general topics of airport revenue use (and associated property use) that reflect some of the most impor- tant revenue use issues facing airport proprietors and illustrate some of the strategies and tips that can help them confront these issues: • Nonaeronautical development of airport property • Ground access (including intermodal) and “collateral” air- port development projects—i.e., nonaeronautical projects that provide support to the airport’s aeronautical functions • Revenue and property use for activities directed at pro- moting competition at airports and aeronautical service generally • Privatization and public-private partnerships (P3s) • Intergovernmental cost sharing, payment for services and tax revenue sharing. This is not an exhaustive list, but rather a selection of topics for considering revenue use and diversion issues. These topics also cover areas in which we believe further practical guidance and examples would benefit airport proprietors. For each of these topics, we discuss some of the key fac- tors, issues and strategies that our research uncovered. Where appro priate, we integrated discussion of our interview research results within these sections to illustrate concepts and strategies. Follow ing this discussion for each topic, we provide a hypo- thetical example illustrating some of the important points from the previous discussion. As detailed in the methodology chap- 255 Telephone interview with Interview Participant No. 1, Interview Participant No. 2. See infra App. B.

ACRP LRD 40 29 the state of the law and FAA policies as they existed prior to enactment of Section 163 and should be read in that light (all interviews were conducted before FAA had issued even infor- mal guidance or made any decisions concerning the applicabil- ity of that new statute). The FAA website on Reauthorization Act guidance is a valuable source for the latest information on implementation of that law. Unless specified otherwise, airport land must be designated on an ALP map for aeronautical purposes. To use aeronauti- cal property for nonaeronautical development, the FAA must determine that the property is not needed for present or fore- seeable aeronautical purposes; that determination is reflected in approval of the ALP property map. Likewise, if there are any deed restrictions on property use (which should be indicated in the Exhibit “A” map, and best practice is also to show such restrictions on the ALP property map), the airport proprietor must generally seek formal written release of those restrictions before the property can be used for nonaeronautical purposes. Airport proprietors who understand the history of their property and existence of deed restrictions can actively integrate those constraints into their planning processes. One interview participant cited that the local government’s planning depart- ment already was familiar with the deed restrictions affecting airport property. The result was that when the airport depart- ment submitted plans for approval by the planning department, the approval process was smoother than if the airport staff had to educate planners on the constraints that affect airport devel- opment.259 The planning department’s preparation and under- standing of planning documents—including detailed maps indicating the origin and federal status of portions of the air- port property—provided a clear understanding of the expected federal processes and predicates to development of the airport. If airport staff members are unaware of the contents or inat- tentive to the importance of the ALP, they and the development approval agencies may be surprised during consideration for approval. The narrower FAA review and approval of ALPs as a result of Section 163 of the FAA Reauthorization Act of 2018 reduces the risk of surprises. An ALP is a long-term planning document that often sets out development and land uses for a 20-year time horizon. Regrettably, it is not uncommon for ALPs to be inaccurate, incomplete and dated. As a result, the FAA may require the airport proprietor to submit a revised ALP. The FAA also may need to complete an environmental review for revi- sions that require ALP approval and any other federal action, such as a release. One interview participant noted that, because its ALP was outdated, there were unexpected delays due to the FAA’s need to approve the ALP revisions.260 The interview par- ticipant’s experience predated passage of Section 163, which, as 259 Telephone interview with Interview Participant No. 4. See infra App. B. 260 Telephone interview with Interview Participant No. 4, infra App. B. See also Timothy R. Karaskiewicz, Transp. Research Bd., Airport Coop. Research Program, Legal Research Digest 35: Legal Considerations in the Funding and Development of Intermodal Facilities at Airports 16 (2018). The following common themes emerged as areas where pro- prietors must exercise particular caution. (1) Investments to enhance value of nonaeronautical prop- erty. The value and developability of greenfield airport property can be considerably affected by whether the property has access to horizontal infrastructure. Infrastructure developed to service airport functions often is not designed, or located in a manner, to provide service to vacant airport property. It is common in real estate development for the developer to bring horizontal infrastructure such as roads, utilities, water, sewerage and com- munications to the site prior to sale to enhance its marketability. While the FAA has allowed airport proprietors to make such investments when a direct connection between infrastructure investment and property marketability can be shown, propri- etors should not assume that they have carte blanche to engage in speculative or uncertain investments in their non aeronautical property, even if such investments are made in connection with marketing efforts. The FAA has repeatedly made clear that it does not intend to second-guess business decisions of airport proprietors,258 but there is a fine line between scrutinizing busi- ness decisions and allowing use of airport revenue in a risky or speculative venture. Airport proprietors should expect that the FAA will carefully scrutinize investments of airport revenue de- signed to enhance the marketability of nonaeronautical property. (2) Consult the ALP and Exhibit “A” maps to determine a property’s legal designation. In determining permissible uses of airport property and the role the FAA plays in the develop- ment process, three pivotal issues arise. First, an airport pro- prietor must consult its ALP to determine the property’s desig- nation as aeronautical or nonaeronautical. Second, an airport proprietor must determine how the property was acquired— e.g., from the federal government as military surplus, another nonsurplus federal property or otherwise. Finally, the airport proprietor must identify the funding source used to acquire the property—e.g., federal grant funds, airport aeronautical or nonaeronautical revenue, or other unrelated source. The ALP, and particularly the property map component, de- picts the legal status of airport property as designated for either aeronautical or nonaeronautical uses. Because it must accu- rately reflect all uses of airport property, and because it requires FAA approval, the ALP has significant legal importance for pro- posed development. It is critical to note that the extent of FAA’s authority to approve changes to an ALP is specifically addressed in Section 163 of the FAA Reauthorization Act of 2018. Section 163 limits the FAA’s role in such approvals, but the agency has not issued any guidance and, at this writing, has not indicated how it will implement the statutory limitations on agency ap- proval authority for ALPs. The following sections are based on 258 See, e.g., FAA Part 13 Informal Complaint Determination, Wyoming Jet Center LLC against Jackson Hole Airport Board (Jul. 31, 2019). Note that this discussion was determined under the FAA’s informal complaint procedures pursuant to 14 C.F.R. Part 13. Such decisions are not precedential or binding.

30 ACRP LRD 40 its function mitigating airport noise may permissibly coincide with nonaeronautical uses that otherwise might suggest the land is serving no discernable airport purpose. In a few areas, the FAA has sought to clarify what consti- tutes an aeronautical use. For instance, in 2016, the FAA pub- lished its Policy on the Nonaeronautical Use of Airport Hangars to bring additional clarity to what uses of airport hangars, which are aeronautical facilities, are permitted under the law.262 This document provides additional analysis to help determine nonaeronautical use in the context of public-use hangars, but also illustrates how nuanced and interwoven such uses can be. For example, the policy allows limited nonaeronautical use of aircraft hangars as long as such use does not interfere with their primary aeronautical purpose. The gap between aeronautical/nonaeronautical and collateral/ noncollateral can be confusing and may lead airport proprietors to misunderstand what level of FAA approval is needed for a proposed development or land use change. In one case, an air- port proprietor was frustrated to learn that relocation of a road required significant (and time-consuming) FAA review because the project affected a runway, even though the relocation was ini- that allow aeronautical or commercial development in support of the airport’s aeronautical function. The resulting designation on the ALP of land as “airport support” and ambiguity of this term create uncertainty regarding what FAA approvals are required. 262 Policy on the Non-Aeronautical Use of Airport Hangars, 81 Fed. Reg. 38,906 (June 15, 2016). discussed elsewhere in this digest, impacts the FAA’s authority to review and approve ALPs. In Figure 3, the decision tree provides a simplified explana- tion of the process that an airport proprietor must follow when considering whether a proposed revenue-generating develop- ment project requires FAA approval of an ALP revision. (3) Distinctions between legal and practical definitions of aeronautical and nonaeronautical property and uses. Distinc- tions between aeronautical and nonaeronautical property and uses are legally important, but, from a practical or operational standpoint, it is not always easy to identify them. As a practi- cal matter, ALP labels often do not use this clear dichotomous distinction and instead carry nuanced descriptions that make it difficult to determine from the ALP alone whether particular projects are permissible in a certain location. For instance, while some property and facilities—runways, taxiways, hangars and terminals—clearly are aeronautical in use and purpose and need no further explanation, others are less clear. ALP designations such as “commercial airport develop- ment,” “future airport development,” “airport support develop- ment,” “terminal area” or “collateral development” may have different meanings depending on context. In particular, such designations may not reflect restrictions on the underlying property that would permit some, but not all, nonaeronautical development.261 Noise land may prove particularly confusing, as 261 For example, one airport in the western United States has property that is subject to unique Surplus Property Act deed restrictions Figure 3: Decision tree showing process to determine if project requires FAA approval.

ACRP LRD 40 31 may be required. Some FAA offices also have objected to, or at least required that they approve, long-term nonaeronautical leases on nonaeronautical property. What constitutes a long- term lease is somewhat subjective, but for aeronautical leases, it generally is considered those longer than 25 years.268 FAA head- quarters has advised agency staff members to treat aeronautical leases longer than 50 years to be a de facto alienation of property requiring FAA approval for disposal of the property.269 How- ever, the extent of the FAA’s role in review and approval of long- term nonaeronautical leases always has been subject to varying interpretations within different FAA divisions. The agency has not opined how this new statute will affect agency review or ap- proval for long-term nonaeronautical leases. In one of the first interpretations of its authority under Sec- tion 163, the FAA asserted that it can require airport proprietors to provide documentation indicating compliance with the FAA’s authority to regulate airport safety and receipt of fair market value, as well as other generally applicable requirements, such as maintenance of an up-to-date ALP (Grant Assurances 29 and 49 U.S.C. § 47107(a) (16) (A)). More broadly, some interview participants opined that it is beyond the FAA’s role to review receipt of economic value for nonaeronautical transactions.270 In particular, they identified the restriction on leasehold duration to be unworkable in many cases.271 For example, one interview participant recounted how he or she believed a potentially high value nonaeronautical ten- ant was lost after the FAA told the airport proprietor that the lease term, which was to be 50 years, was too long for that type of commercial lease and should instead be 25 years. The pro- spective tenant disagreed and terminated negotiations. When the airport proprietor informed the FAA that there was no indi- cation in the guidance governing the length of non aeronautical leases, the airport proprietor was told that the applicable guidance, FAA Order 5190.6B, was to be updated.272 Similarly, another interview participant noted that the FAA had pushed back on the airport proprietor’s practice of basing fair market value on the lesser of the average price index or the appraised value of the property (which the airport appraised every three years). Although FAA guidance states that either can be used to determine fair market value and that the airport proprietor was not required to appraise the property every three 268 FAA Order No. 5190.6B, FAA Airport Compliance Manual, § 22.33(d) (2009). 269 Id. § 12.3(b) (3). 270 Telephone interview with Interview Participant No. 2, Interview Participant No. 6, Interview Participant No. 7. See infra App. B. 271 Id. 272 Telephone interview with Interview Participant No. 2. See infra App. B. Readers need to be aware that the projects and experiences recounted from interviews and used in hypotheticals are illustrative of some challenges encountered in this field and not intended to indicate any particular dominant trend or generalizability. Just as important, all facts and circumstances set forth in this digest are based on the interviews and reports from airport proprietors. None has been independently verified with third parties or the FAA. tiated to improve road user and air traffic safety.263 Therefore, it is important for airport proprietors to understand which distinc- tions in business character are legally important from the stand- point of federal restrictions and which are not. (4) Navigate the FAA’s role in development of non aeronautical property. In the context of nonaeronautical development, one of the most difficult issues for airport proprietors is not under- standing the role and legal authority of the FAA with regard to nonaeronautical development of airport property. More than one interview participant recounted surprise or skepticism at learning the extent of the role that their particular FAA district office intended to exercise with regard to one or more of their airports’ nonaeronautical projects.264 In the airport community, there is a perception of inconsis- tency between FAA district offices regarding the approval pro- cess for development of nonaeronautical land. It is important to note that, as enacted, Section 163 does not explicitly refer to nonaeronautical property, but the legislative history of earlier versions of this section, and that the intent of the key sponsors (Sens. Gardner of Colorado and Sullivan of Alaska and Reps. DeGette of Colorado and Simpson of Idaho) suggest that Sec- tion 163 primarily was intended to address FAA regulation of nonaeronautical property. With respect to safety, developments planned for airport property that are completely unrelated to aeronautical uses may be inconsistent with, or otherwise conflict with, airport opera- tions, creating unforeseen challenges. Airport proprietors may need to be prepared to undergo more rigorous FAA review for these projects and, potentially, find ways of mitigating or elimi- nating inconsistent uses. For example, one interviewed airport proprietor, whose development of an emergency response train- ing center included a firing range, had to design the range so as to mitigate any potential danger to aircraft.265 The FAA also may seek to investigate a lease of non aeronautical property to ensure the airport proprietor receives fair market value. The FAA has stated that it “may verify compliance with these requirements through a financial compliance review, the enforcement of grant assurances or other enforcement mecha- nisms at a later date.”266 One interview participant noted strategic success in involving FAA staff in projects early on in the develop- ment process and addressing common FAA concerns up front.267 Even where property clearly has been designated and ap- proved for nonaeronautical use on the ALP, further FAA review 263 Telephone interview with Interview Participant No. 4. See infra App. B. 264 Telephone interview with Interview Participant No. 4 and Interview Participant No. 5. See infra App. B. 265 Telephone interview with Interview Participant No. 3. See infra App. B (verified and elaborated with supporting public documentation). 266 Letter from Steven Hicks, Dir., S. Region, Office of Airports, FAA, to Michael Landguth, President & CEO, Raleigh-Durham Airport Auth. (Apr. 29, 2019) (regarding “Lease Agreement between RDUAA and Wake Stone Corp.”) 267 Telephone interview with Interview Participant No. 6. See infra App. B.

32 ACRP LRD 40 and the airport proprietor unit receives fair market value (or its equivalent) and is not involved in the development other than as lessor, any additional revenues generated by the new enterprise could belong to the local government as non-airport revenue.277 b. Hypothetical Examples (1) Proposal A: Nonaeronautical development on aero nautical airport property.278 A county government in which an airport is located approaches an airport proprietor to lease property on the airport for creation of an emergency response training center run by a local technical college (“Proposal A”). The proposed site, Lot A, is airport land located on steep elevated terrain currently used for agriculture. Lot A was acquired primarily with local funds, with a small portion acquired with AIP grant funding. Lot A is designated as aeronautical property on the ALP. Development of Lot A under Proposal A: • Because the airport proprietor has accepted AIP funding, it is obligated to comply with federal requirements concern- ing use of airport property, revenue diversion, safety and airport planning, and future development of the airport. • The airport proprietor’s grant assurances (Grant Assurance 29) prohibit it from allowing any airport property to be used for nonaeronautical purposes unless approved by the FAA. Here, Lot A is designated by the ALP as aeronautical property, and the county and private developer proposals involve nonaeronautical activities. Accordingly, to proceed, the airport proprietor would need to seek FAA approval to modify its ALP. Whether formal FAA review and approval are needed would be a function of the applicability of Sec- tion 163. • A small portion of the property also was acquired using AIP funds. Accordingly, the airport proprietor must also seek a formal release of the restrictions that limit use of this property to aeronautical use. Here, the FAA might release 277 While this approach has not, to our knowledge, been tested at any airport, this scenario follows logically from property and revenue use rules. For instance, a commercial development on airport property that is financed by the airport proprietor, using airport revenue and operated by a private-sector entity through a management or concession agreement, would result in profits from such a business being treated as airport revenue. If, however, the same development was financed by a private entity, constructed on airport property leased to that entity by the airport proprietor and operated by the lessee, the lessee’s net revenue would not be considered airport revenue. This distinction suggests that a separate unit of government itself—even if part of the same government entity that is the airport proprietor—could generate non- airport revenue from nonaeronautical airport property assuming that: (a) the proprietor unit responsible for the airport receives fair market value for the real estate; (b) the revenue is generated from nonaeronautical activities; (c) the activity is not on land acquired from the federal government or with federal grant funds; (d) the proprietor makes no investment in the enterprise with airport funds; and (e) the activity is not directly related to the sponsorship of the airport. 278 Hypothetical example based on Airport Proprietor A. See infra App. C. This hypothetical did not consider the circumstances as set forth in Section 163(d) since Section 163 was new and largely untested. years, the FAA still questioned the practice.273 In the interview participant’s experience, escalation clauses that the FAA sug- gested airport proprietors include in leases were unrealistic.274 To deal with these issues, the interview participant suggested that airport proprietors be open and direct with FAA officials about their intended leases and legal justification for why the FAA should approve or not withhold approval for the deal.275 While the nine interview participants acknowledged and agreed with the logic of the statutory prohibition on revenue diversion, they generally did not agree that current FAA over- sight, in the context of nonaeronautical development, was effec- tively furthering this goal, and instead opined that it hampered legitimate and legal efforts toward financial self-sufficiency.276 Participants may not have fully understood the extent to which FAA oversight is discretionary and statutorily mandated, and they may have perceived greater agency discretion in the law than exists. (5) Understand revenue use requirements concerning rev- enue from nonaeronautical development. An airport pro- prietor must receive fair market value for the use of nonaero- nautical property, and all revenue it receives from such use is considered to be airport revenue subject to use and diversion restrictions. With limited exceptions, this rule applies regardless of whether the nonaeronautical activity is collateral or noncol- lateral development. It also applies not just to the ground lease for the property, but any additional airport proprietor invest- ment in the development. Therefore, airport proprietors must be aware of revenue restrictions even where the connection be- tween development activities and airport operations is tenuous and a proprietor’s investment in an airport development is un- related to provision of aeronautical services. In limited cases, the requirement to receive fair market value may not necessarily require monetary payment. For example, as discussed further below in the section on ground access, an airport proprietor may be able to lease property for non- aeronautical purposes at less than fair market value or for no rent if it can demonstrate that the development results in trans- fer of property, improvements or some other tangible and quan- tifiable benefit to the airport proprietor that equals or exceeds fair market value of the property. In addition, governmental units that own or control an air- port proprietor may be able to structure a development project to allow for its investment in the project to generate revenue that is not considered airport revenue. This might be the case where a local government subdivision unconnected to its airport pro- prietor function invests in an on-airport development. Assum- ing that no airport revenue is at risk (e.g., no airport revenue is used to finance development of nonaeronautical activity), 273 Telephone interview with Interview Participant No. 7. See infra App. B. 274 Id. 275 Id. 276 Telephone interview with Interview Participant No. 1, Interview Participant No. 2, Interview Participant No. 6. See infra App.B.

ACRP LRD 40 33 • Lot B also is surplus property. Accordingly, the property carries a deed restriction that mandates its use for aeronau- tical purposes. The airport proprietor must seek a release of the surplus property deed restrictions. Whether the propri- etor also needs FAA review and approval of the ALP change is a function of how the FAA interprets the criteria for re- view and approval in Section 163. • The need for approval to update the ALP and the prop- erty’s status as subject to the Surplus Property Act means that the airport proprietor must seek formal release from the deed conditions. Both of these activities constitute fed- eral actions that trigger environmental review pursuant to NEPA.282 • Lease terms for the nonaeronautical portion of the prop- erty would require a fair market value rental rate, and all revenue collected by the airport proprietor would be con- sidered airport revenue that must be used at or in support of the airport. • The airport proprietor need not charge the tenant fair market value rent for aeronautical uses on the property, but must charge rates that are fair and reasonable. All revenue collected from the aeronautical lease would be considered airport revenue and must be spent on aeronautical activi- ties at or in support of the airport. 2. Ground Access, Intermodal Projects a. Key factors, Issues and Strategies Notwithstanding the importance and benefit of establishing intermodal connections between airports and various modes of ground transportation, “the process of developing intermodal facilities at airports has lagged behind the capacity of airports to put passengers in the air.”283 Meanwhile, congestion and delays in ground access have become a major policy concern.284 The historical lack of focus on ground access may be traced to federal policy priorities and, until relatively recently, a lack of sustained programs for federal funding.285 In recent years, how- ever, the perceived environmental and public health benefits of public transportation have resulted in a gradual shift in federal policies to allow, and even encourage, funding for intermodal facilities at airports.286 With this policy support, airport propri- etors increasingly are seeking better integration of intermodal and public transportation facilities.287 282 See FAA Order No. 5050.4B § 202.b. 283 See Karaskiewicz, supra note 260, at 3 n.1. 284 See Bannard, supra note 83, at 1. 285 See Karaskiewicz, supra note 260, at 4-5 (discussing the legislative history of intermodal airport funding). 286 See id. 287 FAA guidance indicates that the term “ground access” generally refers to “rail lines, bus-ways, light rail lines, ferry terminals, transportation centers and connections to interstate or interstate-type highways or other major surface arterials that provide access to an airport.” Bulletin 1, supra note 37; See also Notice of Policy Regarding the Eligibility of Airport Ground Access Transportation Projects for Funding Under the Passenger Facility Charge Program, 69 Fed. Reg. 6366 (Feb. 10, 2004) [hereinafter Ground Access Eligibility Guidance] Lot A based on a determination that the property’s terrain prohibits it from being used for aeronautical activities. • A formal ALP update and/or release requires FAA approval and thus constitutes a federal action that triggers environ- mental evaluation of the proposed action pursuant to the National Environmental Policy Act (NEPA).279 Because at least a portion of the property is encumbered by AIP grant obligations, the FAA would retain approval authority (even after enactment of Section 163 of the FAA Reauthorization Act of 2018). • Furthermore, if the lease is longer than 50 years, FAA ap- proval also would be required since the FAA considers leases of at least 50 years to be the equivalent of a disposal. • The rental rate for lease must reflect fair market value of the property with improvements, since the proposed use is nonaeronautical. The airport proprietor may not lease the property to the county or technical college for free or at reduced rates, or in lieu of taxes. • Revenue generated from lease of the property is considered airport revenue and must be used for airport purposes. (2) Proposal B: Mixed aeronautical/nonaeronautical devel- opment on surplus property.280 A private developer approaches an airport proprietor with an interest in developing a mixed aeronautical and nonaeronautical development on airport property under a 30-year lease (“Proposal B”). The proposed site is Lot B, which is land on the airport’s edge containing the former corporate headquarters of a bankrupt airline. The prop- erty is held subject to the Surplus Property Act and designated as aeronautical property on the airport’s ALP. The deed for the property requires approval of any change to the ALP. Development of Lot B under Proposal B: • Because the airport proprietor has accepted AIP funding, it is obligated to comply with federal requirements concern- ing use of airport property, revenue diversion, safety and airport planning, and future development of the airport. • Lot B is designated as aeronautical property on the ALP. However, a portion of the proposed development will be commercial (i.e., nonaeronautical). Because the property is encumbered by Surplus Property Act deed restrictions, the FAA would retain authority to approve use of the property. FAA review and approval of the ALP amendment would be necessary if use of the property triggers the criteria set forth in Section 163 for FAA review and approval of an ALP change.281 279 See FAA Order No. 5050.4B, National Environmental Policy Act (NEPA) Implementing Instructions for Airport Actions § 202.b. (2006). 280 Hypothetical example based on Airport Proprietor B. This hypothetical did not consider the circumstances as set forth in Section 163(d), since Section 163 was new and largely untested. See infra App. C. 281 See 49 U.S.C. § 47107(a) (16) (B) (2019).

34 ACRP LRD 40 ground access projects, but it carries restrictions that are greater than those applicable to use of other airport revenue. PFC use for ground access projects must be approved by the FAA, be otherwise eligible for AIP funding, meet at least one of the PFC program objectives and be adequately justified pursuant to 49 U.S.C.§40117(d) (3).292 Airport proprietors must demonstrate that the ground access project satisfies PFC qualifying objectives independently of any associated terminal or airside project.293 (1) Use of general airport revenue for ground access projects. Airport proprietors need not necessarily secure FAA approval to use airport revenue for ground transportation projects. How- ever, use of airport revenue for ground access projects, like use of airport revenue for any other purposes, is limited to the operat ing and capital costs of the airport. The portion of ground access projects that occur on airport property and serve airport passengers and employees is relatively easy to justify as eligible for airport revenue use. The more difficult case often involves what is eligible for off-airport spending. In practice, the FAA has shown willingness to be flexible in allowing use of airport revenue for airport-related portions of ground access projects. For example, when the FAA approved use of airport revenue funding for on-airport portions of a rail transit project that connected Minneapolis-St. Paul Interna- tional Airport on a rail line to downtown Minneapolis and the Mall of America, the agency allowed airport revenue to fund 100 percent of the cost of two on-airport stations for exclusive use by airport passengers. It further allowed proportionate use of airport revenue for connecting right-of-way infrastructure on airport property even where less than a majority of that infra- structure was to be used by airport passengers.294 However, for other segments whose use would include non-airport passen- gers, airport revenue could cover only the percentage of costs equal to the percentage of anticipated airport passengers using the facilities.295 Likewise, the FAA also has allowed for a relatively broad spectrum of project costs, as long as they are prorated accord- ing to the portion allocable to the airport component. When the FAA authorized use of San Francisco International Airport revenue to fund an extension of Bay Area Rapid Transit (BART) passenger rail service to the airport, the FAA noted the eligibil- ity of the above-mentioned costs along with those for automatic train control equipment, system cable network, communica- 292 Id. 293 FAA Order No. 5500.1, Passenger Facility Charge Handbook § 4-6(e) (2001). 294 See Bannard, supra note 83, at 2 (citing Letter from Nancy Nistler, Manager, Minneapolis Airports Dist. Office, FAA, to Nigel D. Finney, Deputy Exec. Dir., Metropolitan Airports Comm’n (Apr. 25, 2000)). The FAA’s response indicates that in certain circumstances, small portions of off-airport sections of an airport intermodal facility may be funded with airport revenue if the project is (1) primarily located on airport property, and (2) the off-airport portion is an inseparable part of the system. See Karaskiewicz, supra note 260, at 27. 295 Id. Notwithstanding these policy shifts, restrictions on airport revenue use continue to make ground access project funding at airports a complicated endeavor. While both airport rev- enue and PFCs may be used in some instances for ground ac- cess projects, federal requirements on airport revenue use limit spending on these types of projects, particularly components that are located off-airport or serve off-airport functions. These limitations have led airport proprietors to seek innovative forms of funding, including through the private sector. The FAA has provided more detailed guidance regarding ground access projects in Bulletin 1: Best Practices—Surface Access to Airports.288 ACRP also recently published ACRP Legal Research Digest 35: Legal Considerations in the Funding and Development of Intermodal Facilities at Airports (2018), which covers the subject in considerable detail. Readers are referred to these resources. Discussion here is limited to noting that airport revenue use for ground access projects, just like airport revenue use for any other purposes, is limited to “capital and operating costs of the (A) airport; (B) local airport system; or (C) other local facilities owned or operated by the airport proprietor and substantially related to the air transportation of passengers or property.”289 In the case of ground access, the FAA has elabo- rated on this statutory requirement, stating that it is permissible for airport revenue to be used “for the capital or operating costs of those portions of an airport ground access project that can be considered an airport capital project or of that part of a local facility that is owned or operated by the airport owner or opera- tor and directly and substantially related to the air transporta- tion of passengers or property, including use by airport visitors and employees.”290 Although PFC revenue is not considered airport revenue under the Revenue Use Policy, such revenue can play a signifi- cant role in airport ground access projects. The FAA has pro- vided specific guidance with respect to use of PFCs to fund ground access projects.291 Briefly, PFC revenue may be used for (describing ground access as covering all technologies, including road, heavy or light rail, water, etc.). The FAA’s use of the term “intermodal project” indicates that it refers to “connections on airport property between aeronautical and other transportation modes and systems.” FAA Order No. 5190.6B, FAA Airport Compliance Manual, § 15.9.i (2009). While nothing in this terminology suggests that road projects are excluded from intermodal projects, the FAA often uses the term “intermodal project” in the context of rail and fixed guideway systems. See, e.g., Ground Access Eligibility Guidance, 69 Fed. Reg. at 6369. Because of the substantial similarity between “ground access” and “intermodal facility,” this digest generally defers to “ground access” when referring to projects and facilities covered by these terms. 288 See Bulletin 1, supra note 37.See also FAA Order No. 5100.38D, Change 1, Airport Improvement Program Handbook app. P (2019). 289 49 U.S.C. §§ 47107, 47133(a) (2019). 290 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. 7696, 7718-19 (Feb. 16, 1999). 291 Ground Access Eligibility Policy, 69 Fed. Reg. at 6366. The FAA has proposed potential changes to PFC funding of ground access projects. See PFC Proposed Guidance, 81 Fed. Reg. 26,611 (May 3, 2016).

ACRP LRD 40 35 passengers,” and (2) “[a]irport funds must be prorated to airport use, [i.e.], for portions of the project used by both airport and non-airport passengers, airport funds to be used for the project cannot exceed a portion of total project funding greater than the projected percentage of total use of the project by airport passengers.”303 For instance, where an off-airport transit station is built to accommodate airport passengers traveling to and from an airport and where the percentage of airport users compared to overall users of the station is expected to be 80 percent, an airport proprietor could use airport revenue to pay 80 percent of the costs of that station. It is important to recognize that if the local facility was not intended primarily for airport passenger use—i.e., was not designed and constructed for ground trans- portation to the airport—then no percentage of costs may be covered with airport revenue, even if airport passengers use it. Costs that may be incorporated into capital projects or, on a prorated basis, eligible local facilities, include: maintenance facilities and equipment, general operating and maintenance ex- penses, planning and design, operating system equipment, fare collection equipment, rolling stock, shared-use agreements with existing rail carriers, and debt service on eligible project costs. b. Hypothetical Example (1) Airport passenger rail access P3.304 A federally obligated airport proprietor, facing ground congestion issues, is consider- ing how to use airport revenue to fund a proposed passenger rail connection between the airport and a nearby rail line that makes up part of the neighboring city’s urban passenger rail system. The urban passenger rail is owned and operated by a separate public entity, but the new infrastructure and facilities on the airport are to be owned by the airport proprietor. As shown in Figure 4, the project would require construction of a new station at the airport terminal (Terminal Station) and another on-airport station serv- ing new commercial development on non aeronautical airport property (Commercial Station). The project also includes new rail trackage and associated infrastructure between the existing rail line and Commercial Station (Segment A) and between the Commercial Station and Terminal Station (Segment B). Funding for Segment A: • Because of its location, the portion of Segment A that is not on airport property cannot be considered an airport capital project. Furthermore, the off-airport portion of Segment A would not otherwise be eligible for airport revenue fund- ing because the airport proprietor does not own or operate this segment. (Note that if it acquired this segment of right- of-way, the airport proprietor could potentially make it an eligible facility.305) The airport proprietor cannot merely subsidize the local transit system. 303 Id. at 4-5. 304 Hypothetical example based on Airport Proprietor C. See infra App. C. 305 In addition, the FAA has indicated that in certain circumstances, small portions of off-airport sections of an airport intermodal facility tions, infrastructure relocation, guideway systems installation and transition approaches, and fire, life and safety elements.296 (2) Value capture and P3s in delivering ground access projects. Use of airport property may be leveraged to fund ground access projects that might not otherwise be eligible for airport revenue use. One such strategy is through value capture, which allows airport proprietors to exchange the value of access to their pas- senger traffic for privately funded public infrastructure.297 Pri- vate developers may be willing to fund such projects if they can monetize the rights to use and control airport property through activities such as co-located commercial development. For surface access projects, any project that is located on airport property will be considered a capital cost of the airport and, therefore, a permissible use of airport revenue where it is designed and constructed exclusively for airport use and inte- grated into the airport terminal complex.298 Incidental use of such facilities by non-airport passengers is permissible as long as the project is designed exclusively for airport users and “does not have a general transportation function.”299 Other than airport capital projects, on- or off-airport “local facilities” may be funded with airport revenue where such projects or project components are (1) owned or operated300 by the airport owner or operator, and (2) directly and substantially related to air transportation of passengers or property.301 Sub- sidy of the local transit system is not considered ‘operation’ of the system by the airport.” A project or project component is “directly and substantially related to air transportation of pas- sengers” if it is both intended primarily for airport passenger use (including airport employees and airport visitors) and projected to be used primarily by airport passengers.302 While a project primarily must be intended for and used by airport passengers, airport revenue may be used for local facility projects that serve airport and non-airport passengers, provided: (1) “Airport funds cannot be used for portions of the project that are not necessary for the purpose of serving airport 296 Letter from Susan L. Kurland, Assoc. Adm’r for Airports, FAA, to John L. Martin, Dir. of Airports, S.F. Int’l Airport (Oct. 18, 1996). Note that a subsequent U.S. DOT Office of Inspector General audit concluded that some of these costs were not eligible for airport revenue funding because they were not on airport property or owned by the airport proprietor. See Office of Inspector Gen., U.S. Dep’t of Transp., Report No. AV-1999-056, Use of Airport Revenue for the Bay Area Rapid Transit District Extension to the San Francisco International Airport (1999). 297 See Karaskiewicz, supra note 260, at 9. 298 Bulletin 1, supra note 37, at 4. 299 Id. at 5. 300 “Owned” means that “the airport owner or operator holds legal title to the facilities for which airport revenue is used,” and “operated” means that “the local or state government or authority that owns or operates the airport is legally responsible for the operation of the ground access facility (e.g., transit system) and operates the facility with its own employees or through a management contract with a private firm or other public agency.” Id. at 4. 301 Id. at 4. 302 Id.

36 ACRP LRD 40 activities. Accordingly, it is not intended primarily for air- port passenger use and could not be paid for with airport revenue.306 Funding for the Airport Terminal Station • The Airport Terminal Station would be considered an air- port capital project, since it would be located on the airport, designed and constructed exclusively for airport use, and integrated into the airport terminal complex. Accordingly, its entire costs could be covered using airport revenue. 3. Revenue and Property Use to Promote Airline Competition and Aeronautical Service Generally a. Key Factors, Issues and Strategies Airport proprietor interest in promoting more air service at airports is nothing new,307 but the growing importance of air- ports to local economies and strong competition for lower-cost air travel have increased the perceived need to promote compet- itive air service at many airports. Moreover, federal obligations to promote activities directed toward competition308 and airport 306 An argument could be made for airport revenue funding of a pro-rata share of Commercial Station costs if the airport proprietor could demonstrate use (e.g., re-boarding) of the station by airport passengers and the station construction was part of a larger project that primarily was intended for airport passenger use. See Karaskiewicz, supra note 260, at 27. 307 Megan S. Ryerson, Incentivize It and They Will Come? How Some of the Busiest U.S. Airports Are Building Air Service with Incentive Programs, 82 J. Am. Plan. Ass’n 303, 305-06 (2016). 308 See Grant Assurances, supra note 45, §§ (C) (23), (C) (39). • The portion of Segment A that is on airport property is owned by the airport proprietor and thus may be eligible for funding if it is intended for and primarily used by airport users (e.g., passengers and airport workers). However, be- cause this trackage will serve the Commercial Station and Terminal Station, not all passengers using it necessarily will be airport users. Accordingly, airport revenue could be used only for a prorated amount of this segment based on the per- centage of expected passengers who would be airport users. Funding for Segment B • Segment B, which would be owned by the airport propri- etor on airport property and serve only people traveling to and from the airport terminal, would meet the standard for constituting a capital project and therefore could be fully funded using airport revenue. Funding for the Off-Airport Station • The Off-Airport Station is not on airport property and not owned or operated by the airport proprietor. Therefore, air- port revenue could not be used to fund any costs associated with that station’s construction. Funding for the Commercial Station • The Commercial Station, although on airport property, is intended to provide access to nonaeronautical commercial may be funded with airport revenue if the project is (1) located primarily on airport property, and (2) the off-airport portion is an inseparable part of the system. See Karaskiewicz, supra note 260, at 27. Figure 4: Hypothetical example showing proposed passenger rail connections.

ACRP LRD 40 37 mote the airport to a relevant audience at an off-airport event.316 While the relevant audience for general airport advertising or marketing could be expected to be potential airport customers, the relevant audience for community efforts also could include a broader local audience targeted to “enhance community ac- ceptance.” 317 Airport proprietors must recognize that while the FAA allows airport revenue to be used for promotional activi- ties, such expenditures must be “reasonable in relation to the airport’s specific financial situation.”318 There is no highlight in the determination of reasonableness—as in other similar situ- ations, FAA makes such judgments based on the unique facts and circumstances. The line between what constitutes airport promotion ver- sus general economic development can be tricky. For instance, market ing and advertising costs for promoting an airport and its services are permitted, but only insofar as those efforts can be connected back to the airport in a tangible way. Spending is permitted where a local attraction or event, such as a sports game or music festival, clearly promotes air travel, but only if there is a clear and expressed link between those efforts and pro- motion of the airport and its services. Available guidance and investigations suggest that promoting an event merely because it is high-profile and, therefore, could attract additional air pas- sengers by itself likely is not sufficient to justify use of airport revenue.319 The onus for justifying a sufficient connection is on the airport proprietor. One means of establishing such a link is holding promo- tional activities on airport premises. An example of permitted use from the Revenue Use Policy is spending for an on-airport promotional event aligned with a large sports event in a nearby city.320 Another real-world example: Building on the popular- ity of the Austin, Texas, music scene, including major annual music/media festivals such as South by Southwest and Austin City Limits, the Austin-Bergstrom International Airport per- missibly spends $50,000 per year on marketing efforts that in- clude live music within the airport terminal.321 Of course, such events still must be tied in some way to air travel or other ser- vices provided by the airport. Using airport revenue to stage an on-site event that was completely unrelated to the airport or air travel likely would not be permissible under federal airport rev- enue restrictions.322 From a practical standpoint, many airports 316 Id. 317 Id. 318 Id. at 7703-04. 319 Cf. id. at 7718 (discussing an on-airport event related to the Super Bowl); Office of Inspector Gen., U.S. Dep’t of Transp., Report No. R4-FA-7-035, Diversion of Airport Revenue: Dade county Aviation Department (1997) (highlighting a number of prohibited or only partially allowed sponsorships of both small and large local entertainment events). 320 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7718. 321 Airport Compliance Div., FAA, ACO-100, Compliance Review of the Austin-Bergstrom International Airport 2 (2014) [hereinafter AUS Compliance Review], https://www.faa.gov/ airports/airport_compliance/media/austin-final-report.pdf. 322 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7720. self-sustainability309 effectively encourage airport proprietors to prioritize competitive access. At the same time, federal restric- tions on airport revenue and property use limit the availability of these resources for promotional activities. Within the existing regulatory framework, airport revenue and airport property can play an important role in promoting growth and competition at airports, but regulatory restrictions confine how these resources are leveraged. (1) Use of airport revenue for marketing and advertising. The legislative and regulatory tightening of restrictions on airport revenue in the 1990s resulted in refinement and clarification from the FAA on how airport revenue may be used for activi- ties directed toward promoting competition at airports.310 At the time, the FAA determined a critical distinction centers on the statutory prohibition on airport revenue use for “general economic development, marketing and promotional activities unrelated to airports or airport systems.”311 The FAA has inter- preted this language to permit “the use of airport revenues for promotion of the airport,” while prohibiting airport revenue spending on activities broader than airport promotion—e.g., general regional economic development.312 The Revenue Use Policy permits airport revenue to be used for “[t]he full costs of activities directed toward promoting com- petition at an airport, public and industry awareness of airport facilities and services, new air service and competition at the airport (other than direct subsidy of air carrier operations…), and salary and expenses of employees engaged in efforts to pro- mote air service at the airport.”313 However, the Revenue Use Policy also establishes that airport proprietors cannot spend air- port revenue on promotional expenditures that are unrelated to the airport or airport system. Charitable giving also can be characterized as a form of promotion. Airport revenue cannot be spent on community or charity efforts unless such spending is directly and substantially related to airport operation.314 One important indicium pro- vided through examples in the Revenue Use Policy appears to be a relationship between the nature of the event and the air- port by expressly highlighting the nexus to the airport in some way—e.g., through an invitation for an airport official to speak at a public event.315 Another is the opportunity to expressly pro- 309 See id. § (C) (24). 310 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. 7696, 7718 (Feb. 16, 1999); Policy and Procedures Concerning the Use of Airport Revenue, Supplemental Notice of Proposed Policy, 61 Fed. Reg. 66,735 (Dec. 18, 1996) [hereinafter FAA Supplemental Notice, Dec. 1996]. 311 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7703; FAA Supplemental Notice, Dec. 1996, 61 Fed. Reg. at 66,738. 312 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7703. 313 Id. at 7718. 314 Id. Where a contribution to a community event is very small (e.g., $250), “the value of the benefit will not be questioned as long as there is a reasonable connection between the recipient organization and the benefit of local community acceptance to the airport.” Id. 315 Id.

38 ACRP LRD 40 labeling or otherwise, the airport’s involvement, participation or sponsorship in a manner at least proportionate to the financial contribution.326 Just as with promotional materials, spending on advertis- ing must bear a connection to the airport. At a minimum, any advertis ing using airport revenue should display the airport’s logo and promote the airport to a relevant audience. Returning to the example from Austin, the airport’s promotional activities also include spending on print advertising promoting Austin as a national music event destination.327 The FAA has found this to be acceptable expenditures of airport revenue.328 During the notice and comment period for the Revenue Use Policy, the FAA considered, but ultimately rejected, establish- ing a maximum amount that airport proprietors could spend on marketing and promotion expenses without attracting FAA scrutiny.329 In explaining the final policy, the FAA instead stated it would expect expenditures of airport proprietors to comply with Revenue Use Policy restrictions. While it did not provide a limit on the amount of airport revenue that could be used for these purposes, the agency stated it could review spending on an ad-hoc basis to ensure it was reasonable in relation to the airport’s specific financial situation.330 These examples illustrate that the federal policy objective is to avoid the temptation by local governments, particularly those that own airports, to divert airport revenue to promotion of local economic engines that have no direct relationship to the airport. Ultimately, this is the lens through which airport pro- prietors must analyze each marketing opportunity. One inter- view participant discussed struggling over an airport propri- etor’s sponsorship of a golf tournament but ultimately decided that the spending was justifiable given the sponsorship cost, size and prominence of the event, marketing opportunity for the airport, and ongoing commercial relationship between the air- port and event sponsors.331 Other events, even those similar in nature or substance, might not meet the standard when viewed through the same analytical lens. Either way, walking through the analysis is a good first step to flagging potential issues. (2) Air service incentive programs and promoting airline competition. Another form of airport and air service promo- tion is financial incentives to airlines. While the Revenue Use Policy determined that direct financial subsidies to airlines are impermissible uses of airport revenue,332 it also deems use of in- direct incentives, such as fee waivers and discounts, to promote new service do not constitute revenue diversion as long as they 326 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7718. 327 AUS Compliance Review, supra note 325, at 10. 328 Id. 329 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7703-04. Several airport proprietors submitted comments suggesting that the FAA adopt such a “safe harbor” provision. Id. 330 Id. at 7704. 331 Telephone interview with Interview Participant No. 1. See infra App. B. 332 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7709-10. could (and do) justify hosting a range of activities and events, such as live music in airport terminals, on the basis that they serve a benefit to the traveling public or raise community aware- ness of the airport.323 However, when it comes to on-airport ac- tivities or events that do not serve the traveling public, such as on-airport car shows and charity walks/runs, the FAA generally requires airport proprietors to seek means of cost recovery and fair market value for use of airport property.324 The lesson from Austin is not that any airport can spend $50,000 to promote a local cultural event. Instead, it is far more nuanced and fact-specific. Austin’s music events generate con- siderable regional and national attention, attract air travelers, and contribute not only to the general economic health of the region, but specifically to economic activity at the airport. Such may not necessarily be the case at other airports or in other cities, at least to the extent that justifies airport revenue or prop- erty use for nonaeronautical activities or events. While the FAA has not been asked to opine on other special regional events, it seems likely that the agency would find it acceptable for airports to promote unique local events such as the Kentucky Derby (Louisville Muhammed Ali Airport), the Super Bowl (various airports), Jazz Fest (New Orleans Louis Armstrong Airport) or Art Basel Miami (Miami International Airport), which them- selves generate considerable air travel. While there generally are no highlights in FAA policy, promotion of events at the airport are easier for a proprietor to justify than events and activities off-airport. Airport revenue could be used for promotion of off-airport events, but the connection between the event and promotion of the airport must be clear. For instance, a golf tour- nament put on by a group expressly affiliated with the airport may be an allowable airport revenue expense, but sponsorship of a golf tournament unattached to the airport in any way likely would not be allowed.325 The Revenue Use Policy suggests that an airport proprietor would need to clearly indicate, through 323 See Lois S. Kramer & Mike Moore, Transp. Research Bd., Airport Coop. Research Program, ACRP Synthesis 57: Airport Responses to Special Events ch. 9 (2014). 324 See, e.g., E-mail from Richard Pur, Chi. Airports Dist. Office, FAA, to Tom Cleveland, Manager, DeKalb Taylor Mun. Airport (June 8, 2011, 2:47 PM), https://dekalbcountyonline.com/2011/06/city-of- dekalb-responds-to-faa-cornfest-letter/ (discussing the need for parking and sales taxes to cover the cost of a nonaeronautical festival on airport property); Megan Gaillard, Internal Audit Dep’t, Collier Cty. Airport Auth., Report 2014-4: Drag Strip and Go Cart Track (2014), https://www.collierclerk.com/images/resource-library/ pdf/internal-audit-pdf/2014-4%20CCAA%20Drag%20Strip%20 and%20Go%20Cart%20Track.pdf (detailing letter from FAA requiring fair market value for use of an inactive airstrip for drag racing). Use of airport revenue is just one aspect of nonaeronautical events the FAA will review; for instance, use of an airport that will result in partial or full closure requires FAA approval. FAA Order No. 5190.6B, FAA Airport Compliance Manual § 7.21(b) (2009). 325 Compare Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7718 (golf tournament sponsored by a “friends of the airport” committee permissible) with Office of Inspector Gen., U.S. Dep’t of Transp., Report No. AV-1999-052, Use of airport revenue, Denver international airport 16 (1999) (local chamber of commerce golf tournament sponsorship not permissible with airport revenue).

ACRP LRD 40 39 later, the airport has seen significant growth, attributed at least in part to this innovative incentive program.339 One interview participant expressed regret that there was not more flexibility in the FAA’s regulation of ASIPs.340 The require- ments can be especially challenging, and tricky, for “destina tion” airports that rely on tourism. For airports that have friendly re- lationships with local economic development proponents, one alternative is to find a local partner, such as a tourism board, that is willing to devote its own non-airport revenue funding toward destination advertising, as one interview participant did.341 (3) Use of airport property to promote activities directed to- ward competition. Airport property also may be used to pro- mote activities directed toward airline competition at airports, particularly through development of additional facilities. Use of airport property to develop additional gates and facilities to enable more air carrier service is one example of using airport property to promote competition. 342 Decisions regarding use or expansion of airport termi- nal space and similar aeronautical facilities can create tension among airlines serving an airport. An example is when an in- cumbent airline objects to allocation of space for a new entrant. In this case, incumbent carriers may argue that airport revenue or property is being impermissibly used to unjustly and dis- criminately benefit particular airlines, among other grievances. One interview participant described such a situation in which an incumbent carrier objected to the airport propri- etor’s plans for a private entity to develop and operate ULCC terminal on airport property.343 The incumbent airline believed that the airport proprietor’s conduct violated its federal obliga- tions, including revenue use requirements. The airport propri- etor opined that an additional terminal was necessary based on a number of factors, including what it asserted was extensive documentation of existing gate constraints and actual and pro- jected passenger growth.344 To address the concern that it was incentivizing ULCCs at the expense of legacy carriers, the air- 339 Telephone interview with Interview Participant No. 5. See infra App. B. 340 Telephone interview with Interview Participant No. 7. See infra App. B. 341 Id. 342 In some cases, development of additional gate and terminal space may be required under an airport proprietor’s Grant Assurance obligation to “make the airport available as an airport for public use on reasonable terms and without unjust discrimination.” Grant Assurances, supra note 45, § (C) (22). A detailed discussion of this requirement is beyond the scope of this report. See, e.g., Letter from Carol Key, Manager, Seattle Airports Dist. Office, FAA, to David Waggoner, Airport Dir., Paine Field, Snohomish Cty. (Nov. 15, 2005) (on file with author) (concerning obligation of the proprietor of Paine Field in Everett, Washington, to make space available for a commercial carrier even though the airport did not have any airline terminal facilities). 343 Telephone interview with Interview Participant No. 2. See infra App. B. 344 Id. are not used in a discriminatory manner and are short-term.333 The FAA allows direct subsidies of airline service only as long as payments come from non-airport revenue or a non-proprietor entity.334 To provide further guidance in support of the Revenue Use Policy, the FAA published its Guidebook on Air Service Incen- tive Programs to assist airports in understanding the legal parameters of permissible air service incentive programs (ASIPs). The Guidebook was republished in 2010, after which a number of ASIPs were created.335 The ACRP also recently pub- lished ACRP Legal Research Digest 37: Legal Issues Relating to Airports Promoting Competition (2019), which comprehensively covers ASIPs. ASIPs provide opportunities to use airport revenue for pro- moting air service without directly, and impermissibly, sub- sidizing airlines. However, one interview participant noted that it believed the incentive/subsidy distinction made it difficult to assemble a sufficiently attractive monetary incentive, especially where airport charges and fees were relatively modest compared to other costs of operating at the airport.336 As an example, under the rationale provided in the Revenue Use Policy, an air- port proprietor could in most cases not pay for construction, equipment or other moving costs associated with introducing new service, because such costs would not normally be imposed on other airlines as a fee or charge.337 Airport proprietors that are party to a residual airport use agreement with signatory air carriers may face particular chal- lenges establishing an ASIP, since in such a case it may not cover the cost of providing incentives with charges levied on other aeronautical users without their express permission.338 An air- port proprietor needs to identify revenues outside the residual agreement to cover the cost of waived fees. In contrast, airport proprietors that are party to a compensatory or hybrid airport use agreement with signatory air carriers may have additional flexibility to fund incentive programs. One interviewed partici- pant described how, during their renegotiation of their com- pensatory agreement with airlines, they decided to incorporate incentives to promote increased air service at the airport. This was accomplished by including a revenue-sharing provision that was triggered by demonstrated increase in service by any signatory airline. Because this provision was part of the use and lease agreement and not an air service incentive program, the revenue use restrictions covering ASIPs did not apply. As such, there was no limit on duration of the incentive. Several years 333 Id. at 7709. 334 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7710, 7718. 335 See Ryerson, supra note 307, at 307. 336 Telephone interview with Interview Participant No. 8. See infra App. B. 337 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7709 (discussing rationale for permitting indirect subsidies and prohibiting direct subsidies). 338 ASIP Guidebook, supra note 222, at 23.

40 ACRP LRD 40 costs directly, rather than paying the airline to cover such costs to avoid the appearance or risk of a direct subsidy to the carrier.351 (2) Terminal development. The airport proprietor enters a 25-year ground lease (with a possible 10-year extension) with a private developer to build and operate a new terminal on unused aeronautical property at the airport. The terminal will feature low-cost facilities catering to ultra-low-cost carriers, although any airline may seek to use gates at the new termi- nal. Terms of the ground lease provide that the private opera- tor will build the terminal, assume rights and responsibilities for its operation, and pay the airport proprietor an annual fee in return for being granted authority to enter into subleases with aeronautical and nonaeronautical subtenants (including airlines) for use of the new terminal. To incentivize the pri- vate operator to assume risk of the project, the airport pro- prietor guarantees the private operator the right to terminate the agreement and recover its capital investment if passenger enplanements fall below a certain threshold for any two con- secutive 12 periods within the first five years of operation. On expiration of the lease term or earlier termination, the facility and improvements will revert to the airport proprietor. • The lease of unused aeronautical property for construction and operation of a new terminal by a private developer is a permissible use of aeronautical property. • The lease duration (25 years, with a possible 10-year exten- sion) is short enough to not constitute disposal of airport property requiring FAA approval. • The airport proprietor can use airport revenue to cover payments to the private operator for cost recovery of its capital investment, provided the private operator properly terminates because of insufficient passenger enplanements within the first five years. This payment would constitute compensation for the improved facilities provided by the private developer, which would vest to the airport pro- prietor and be considered an eligible airport capital cost. While the new terminal facilities will be designed to ap- peal to a particular type of air carrier (e.g., ultra-low-cost), there is no prohibition on use of airport revenue to build facilities that are more attractive to one business model than another, as long as any carrier could be allowed to use such facilities.352 351 Id. at 20. 352 While other federal obligations of airports—such as the obligation to provide airport access without unjust discrimination, as highlighted in Grant Assurance 22, and the prohibition on granting of exclusive rights, as outlined in Grant Assurance 23—generally are beyond the scope of this digest, reference is included here to illustrate how these obligations can intersect with airport revenue and property use. See Grant Assurances, supra note 45, §§ (C) (22), (C) (23). port proprietor expressly provided in the ground lease for the new terminal that any carrier could request use of the new facility.345 The airport proprietor also notified the FAA ahead of time about its plans and offered the agency an opportunity to comment. Later in the process, the airport proprietor relied on these measures to convince local officials of the propriety of its decision to expand.346 b. Hypothetical Examples (1) Promoting competition through ASIPs and gate/termi- nal development.347 A federally obligated airport proprietor seeks to promote targeted growth in air travel and competitive air service at its airport, which is facing rapid passenger growth and constrained gate access. To do so, the airport proprietor (a) establishes an ASIP and (b) engages with a developer to build and operate a new terminal for air service. The features of both activities are provided below. The ASIP provides for waiver of all applicable facility and landing fees for (i) any new entrant carrier (but not incumbent carriers) that initiates and maintains a threshold amount of service to any destination for at least 12 months, and (ii) any new entrant or incumbent carrier that initiates and maintains a threshold amount of service to three specified unserved destina- tions for at least 24 consecutive months. In addition, the ASIP provides that the airport proprietor will offer all qualifying new service or new routes $30,000 in advertising and marketing costs to promote the new service for the duration of the eligible incentive period. The ASIP provides that any airline defaulting on new service or new routes before the applicable incentive program ends must reimburse the airport proprietor for incen- tives received. • The ASIP’s promotions for new entrant and new route ser- vice are permitted under federal law. An airport proprietor may exclude incumbent carriers from incentive programs for new entrants at the airport for up to one year. Incentive programs for new service may not exceed two years. New route service incentive programs may be limited to defined unserved routes. • The waiver of fees, including applicable facility and land- ing fees, is a permissible incentive.348 The airport proprietor may not recoup these fees from other carriers.349 • The ASIP marketing incentives are permitted under fed- eral law. Airport revenue may be used to advertise the new service provided that the airport is featured prominently in the advertising. The air carriers may be mentioned in any advertising as well.350 The FAA advises that it is preferable for an airport proprietor to pay marketing and advertising 345 Id. 346 Id. 347 Entire hypothetical based on Airport Proprietor D. See infra App. C. 348 See ASIP Guidebook, supra note 222, at 19. 349 Id. 350 Id. at 17.

ACRP LRD 40 41 ment.358 Furthermore, under the APPP, airport proprietors still needed to repay the federal government for funding and prop- erty received, unless the Secretary of Transportation decided to waive this requirement.359 Similarly, the Secretary had discre- tion to waive (or not waive) federal airport revenue restrictions regarding revenue generated by the airport’s private purchaser/ operator.360 The FAA Reauthorization Act of 2018 amended the APPP, addressing some of these challenges in an effort to make the program potentially more enticing for airport proprietors to uti- lize. The Secretary no longer has discretion to require an airport proprietor to repay the federal government for federal funding and property received and, likewise, does not have discretion to designate the private purchaser/operator’s revenue to be subject to federal airport revenue restrictions.361 The changes also allow for plans for partial privatization362 of an airport to qualify under the program, now known as the Airport Investment Partnership Program. However, airport proprietors of primary airports still must consult and obtain at least 65 percent approval from tenant airlines for their revenue generated from lease of the airport to be free from federal restrictions on airport revenue.363 It is yet to be seen whether changes to the AIPP will generate significant new interest in participation. Certainly, the removal of the Secretary’s discretionary approval regarding airport rev- enue designations should help add some certainty for airport proprietors and prospective private purchasers whose interest in privatization is generation of non-airport revenue. How- ever, even with further loosening of airport revenue restrictions under the AIPP, full privatization may not be the silver bullet for an airport proprietor’s problems. Previous research conducted by the ACRP and federal government has indicated that for many airport proprietors and private investors, the extra layer of bureaucracy included in the APPP was too burdensome.364 Other airport proprietors prefer to retain more control over their airports for political reasons.365 Continued reticence regarding full privatization was re- flected in the interviews conducted with airport proprietors. When asked about the recent changes to federal law generally and airport privatization in particular, some airport proprietors generally were hesitant to say that such changes immediately would impact their outlook on privatization, at least without more guidance from the FAA on the meaning and interpreta- 358 See id. at 15 tbl.2.2. 359 Id. at 47. 360 Id. 361 FAA Reauthorization Act of 2018, Pub. L. No. 115-254, §160, 132 Stat. 3186, 3220 (2018) (amending 49 U.S.C. § 47134 (2019)). 362 Partial privatization contemplated under the new statutory provisions would require that the airport proprietor be an equity partner with the private sector. Many state constitutions do not allow a public entity to hold an equity interest in a private-sector entity, so this revision may have limited applicability. 363 Id. 364 Sheri Ernico et al., supra note 353, at 56; GAO-15-42, supra note 354, at 23, 42. 365 Sheri Ernico et al., supra note 353, at 9. 4. Privatization and P3s353 a. Key Factors and Specific Issues Although it has attracted the attention of policymakers for some time, and despite legislation intended to facilitate experi- mentation in this realm, full airport privatization has yet to be- come an attractive option for U.S. airports. Recent changes to the FAA’s airport privatization program are intended to generate more interest among airport proprietors and investors. While full privatization has not been successful in the United States, the private sector has a robust and longstanding presence in the U.S. airport market. There are a number of innovative examples of private sector involvement in development and operation of airports through subcontracts, management con- tracts, joint development agreements and many other forms of cooperation. (1) Full privatization. Full airport privatization has not lived up to expectations of federal policymakers. Virtually all commer- cial service airports are publicly owned and operated, a legacy of the manner in which the aviation industry has developed in the United States. The federal Airport Privatization Pilot Program, first established in 1997, was intended to remove some of the regulatory barriers, particularly those restricting the use of air- port revenue, to provide more incentive for airport proprietors to sell their airports.354 Only two airports have been privatized under the APPP, and one of those reverted to public control.355 Several factors have been suggested as causes of the lack of interest in full privatiza- tion, and of the APPP specifically, including higher financing costs for private versus public debt, lack of state and local prop- erty tax exemptions, and high costs of transitioning from public to private.356 Moreover, many airports interested in privatization are seeking to leverage the economic potential of their airports to cover other local financial shortfalls, such as outstanding debt service or underfunded pension plans. 357 Prospective public purchasers also expected a portion of revenue generated from the operation of a purchased airport to be profit. However, limitations on airport revenue use remained a pos- sibility under the APPP. An airport proprietor’s revenue from privatization still would be considered airport revenue unless at least 65 percent of tenant airlines agreed to waive the require- 353 This digest is not intended to provide a comprehensive evaluation of privatization or public-private partnerships. For a more detailed analysis of those issues, see William J. Estes, Transp. research Bd., Airport Coop. Research Program, Permitted Airport Involvement in Economic Development Efforts (forthcoming); Sheri Ernico et al., Transp. Research Bd., Airport Coop. Research Program, ACRP Report 66: Considering and Evaluating Airport Privatization (2012). 354 See U.S. Gov’t Accountability Office, GAO-15-42, Airport Privatization: Limited Interest Despite FAA’s Pilot Program 10 (2014). 355 Id. at 14. 356 Id. at 7-8, 21-22. 357 Sheri Ernico et al., supra note 353, at 51.

42 ACRP LRD 40 by a private-sector entity.”373 P3s are attractive because of their potential to leverage the respective strengths of the public and private sectors, such as expertise, flexibility and access to financ- ing.374 Importantly, P3s also can help reduce financial risk for public entities by allowing private entities to assume additional risk (and reward) for airport development. As with full priva- tization, however, P3 implementation success should not be taken for granted and instead should result from clear goals, careful planning and diligent execution.375 In the context of restrictions on airport revenue use, P3s provide promising opportunities to leverage airport resources— particularly airport property and access to air passengers—to improve facilities, services and airport revenue. Airport propri- etors also can rely on private partners to tap financing and as- sume some or all of the financial risk involved in airport devel- opment projects. However, successful P3 arrangements require an understanding of respective interests and intended goals to ensure interests are aligned contractually and operationally. One interview participant noted how important it was to bring in experienced in-house and outside counsel early in projects to avoid missing important legal implications that can stall or block deals.376 One critically important legal distinction in the context of P3s is the longstanding differentiation between revenue gener- ated by airport proprietors, which is considered airport revenue and subject to requirements to reinvest in the airport, and rev- enue generated by private airport tenants, which is not subject to federal airport revenue restrictions.377 This differentiation makes it possible to attract private participation and investment, since potential profits derived from such an investment are not restricted and limited as they would be for an airport proprietor. Privatization of service delivery already is standard proce- dure at many airports, particularly with respect to services such as cleaning, maintenance, bus operations, etc.378 These are per- formed in service to the airport, and airport revenue may be used to pay for them as an airport proprietor would pay if it con- ducted these services itself. Management contracts—in which a private party manages one or more existing airport facilities or, in some cases, the entire airport—similarly may be paid with airport revenue, as would any other airport operating cost, as- suming the airport proprietor is paying a reasonable price for services offered.379 373 Id. 374 Id. at 1-2. 375 See id. at 2. 376 Telephone interview with Interview Participant No. 6. See infra App. B. 377 FAA Order No. 5190.6B, FAA Airport Compliance manual § 15.6.a (2009); Revenue Use Policy, Feb. 1999, 64 Fed. Reg. 7696, 7716 (Feb. 16, 1999). This excludes private parties who take full control of an airport and assume the role of airport proprietor (e.g. full privatization). Other federal obligations also apply to private entities doing business at the airport. 378 P3 Introduction, supra note 377, at 3. 379 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7700; Delbert Johnson d/b/a Two Dogs Aviation v. Goldsboro-Wayne Airport Auth., tion of such changes.366 Another interview participant believed that neither the program nor the changes addressed the real ob- stacle, which was political reticence to cede control of airports to a private entity, because many local governments perceive the airport to be their “crown jewel.”367 On the other hand, one inter view participant said that the changes to the AIPP had con- vinced their airport proprietor to consider participation, but only now that partial privatization was available.368 These results reinforce the conclusions reached from sec- ondary research, which suggest that airport proprietors need to consider full privatization with eyes wide open. This means conducting adequate due diligence and setting clear goals for privatization, establishing a transparent process for privatiza- tion, and including stakeholders in the process.369 (2) Partial privatization: Public-private partnerships and joint development. A key lesson learned over the past number of years is that airport proprietors may not need to pursue full privatization to receive its benefits. As one recent federal report stated, “[p]ublic-sector airport owners have found ways to raise private-sector investment in their airports and attract exper- tise without ceding control of their airports.”370 Indeed, many airports are turning to various forms of P3 models new and old—from management contracts to developer-financed and -operated facilities and long-term leases of properties—in an effort to reduce costs and promote airport development.371 This is in addition to the wide swath of more modest or traditional forms of partial privatization, such as service contracts and outsourcing for various airport duties and functions, as well as private tenancy of aeronautical and nonaeronautical businesses on airports. Critically, these partial privatization strategies de- pend on the fact that revenue generated by private entities is not considered airport revenue (although the airport proprietor still must receive fair market value for nonaeronautical airport use). While there are many definitions, P3s in their broadest sense constitute a contractual relationship between public and private entities that allocates responsibility for service delivery, capital investment and risk assumption.372 In the context of airport development, the term “P3” often specifically refers to projects through which “services or investments that traditionally have been provided by an airport proprietor are instead provided 366 Telephone interview with Interview Participant No. 4, Interview Participant No.7. See infra App. B. 367 Telephone interview with Interview Participant No. 6. See infra App. B. 368 Telephone interview with Interview Participant No. 5. See infra App. B. 369 See GAO-15-42, supra note 354, at 38-40. 370 Id. at 28. 371 See GAO-15-42, supra note 354, at 4; Sheri Ernico et al., supra note 353, at 11 fig.2.1. 372 Peter J. Kirsch, Stephen H. Kaplan & Adam M. Giuliano, Kaplan Kirsch & Rockwell LLP, P3 Airport Projects: An Introduction for Airport Lawyers 1 (2017) [hereinafter P3 Introduction], https://www.kaplankirsch.com/portalresource/P3_ Airport_Projects_An_Introduction_for_Airport_Lawyers.pdf.

ACRP LRD 40 43 transaction as an alternative to jointly developing the project with the private developer, which it was prevented from doing based on state and federal legal restrictions.385 The examples above demonstrate that airport proprietors with sufficient cash flow can deploy capital in ways that offer far higher rates of return, while maintaining a comfortable risk level for the airport proprietor. Indeed, one interview partici- pant suggested that airports can do a more effective job at iden- tifying projects or elements of projects that are well within the airport proprietor’s comfort zone, allowing the proprietor to accept more risk in those areas while relying on private partners to shoulder the risks of development that are outside the propri- etor’s scope of responsibility or expertise.386 Another critical element of federal airport and property legal framework is the FAA’s acceptance of facilities and other prop- erty improvements in lieu of monetary exchange for the fair market value of nonaeronautical property (see also discussion above concerning ground access projects, value capture and P3s).387 This interpretation has massive implications for P3s, as it provides private parties an opportunity to bundle profit- making commercial facilities and activities with delivery of co-constructed facilities and infrastructure that can be used to repay airport proprietors for use of airport property, as required under federal law. Airport proprietors and local governments see the benefit in this arrangement through privately subsidized construction of useful facilities and infrastructure requiring no or reduced capital contribution from the airport proprietor. This opportunity expresses itself most fully in P3s involving develop- ment rights in exchange for infrastructure investment, although it also may play a role in various forms of P3 design-build- finance-operate-maintain arrangements. This avenue has been used successfully to spur development and encourage private funding of public transportation facilities that serve airports. One such project was the Port of Portland’s development of an extension of the existing Metropolitan Area Express (MAX) light rail system to the Portland International Airport, which the Port owns.388 There, the Port entered a rent- can assume when investing public funds. In addition, under Grant Assurance 5, Preserving Rights and Powers, an airport proprietor cannot encumber airport property or cede its ability to be an airport unless the subject property is nonaeronautical property bought with proprietor funds. 385 Id. 386 Id. 387 Boca Airport, Inc. v. Boca Raton Airport Auth., FAA Docket No. 16-00-10, Determination of the Director of Airport Safety and Standards 39 (Apr. 26, 2001) (airport proprietors “may consider the value of assets that will eventually become lease fee improvements (improvements upon which rent will be assessed) in lieu of rent”); Wilson Air Center, LLC v. Memphis and Shelby Cty. Airport Auth., FAA Docket No. 16-99-01, Determination of the Director of Airport Safety and Standards 28 (Aug. 2, 2000) (“[T]he sponsor may accept capital investments in lieu of rent, once it has determined that such improvements benefit the sponsor and aeronautical users of the airport.”). 388 Recall from the previous discussion regarding ground access projects that the FAA permits an airport proprietor to make airport Likewise, airports traditionally have availed themselves of privatized project delivery mechanisms, most commonly design-build or design-bid-build contracts.380 Increasingly, air- port proprietors also are using the public/private airport rev- enue distinction in combined service/project delivery projects, providing more opportunities to leverage private-sector effi- ciencies while allowing airport proprietors contractual control over various elements of the project. Airport project develop- ment, operation and/or management through a special-purpose business entity formed by a group of airlines, known as an air- line consortium, is one longstanding form of private develop- ment on public airports, but increasingly non-airline developers or consortia also are participating in such endeavors. 381 Once again, it is permissible for an airport proprietor to use airport revenue to pay private entities for delivering, maintaining and operating airport facilities, as long as these are considered the airport’s capital or operating costs and of reasonable amounts.382 For those airport proprietors who are less risk-averse and more interested in pursuing financial self-sufficiency, there are further opportunities to become more actively involved in airport development beyond “dirt sales” of airport property, which offer low risk but also low reward. Of course, proprietors always must be sensitive to ensure their financial investments are prudent and reasonable. For example, one interview par- ticipant explained how in one instance, an airport proprietor offered to finance development of a renewable-energy genera- tion project on the airport. Not only was the airport proprietor able to negotiate reduced energy rates—which reduced airport operating costs—but, more significant, it was able to loan capital to the developers at a rate of return far higher than what that money otherwise would earn for the airport proprietor, using the on-airport infrastructure as collateral.383 And because the capital was going toward financing a project covering operating costs of the airport, the transaction did not violate airport rev- enue restrictions. In a similar example, an airport proprietor put airport money to work by purchasing and leasing equipment for operation of a new airport facilities development, in doing so earning a far higher rate of return on equipment rental than the average cost of capital.384 The airport proprietor arranged this FAA Docket No. 16-08-11, Determination of the Director of Airport Compliance and Field Operations 48-49 (Oct. 9, 2009). For a discussion of scenarios in which airport proprietors may use airport revenue to pay another public entity for service rendered, see the following subsection. 380 See P3 Introduction, supra note 372, at 4. 381 See Sheri Ernico et al., supra note 353, at 29, 45. Airline consortia are a specific and particular form of airport privatization, a discussion of which is beyond the scope of this digest. For more general information on airline consortia, see Paul B. Demkovich et al., Transp. Research Bd., Airport Coop. Research Program, Airport Cooperative Research Program Report 111: A Guidebook for Airport-Airline Consortia (2014). 382 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7700. 383 Telephone interview with Interview Participant No. 6. See infra App. B. 384 Id. Readers should note that states generally have laws and regulations that limit the type and amount of risk that local governments

44 ACRP LRD 40 allows the private entity to develop the property for commer- cial use consistent with other airport development. Under the lease, compensation to the airport proprietor is not monetary, but rather the private developer’s construction of the rail con- nection, whose value is in excess of the fair market value of the lease. On completion, the improved facilities will be owned by the airport proprietor. • The airport proprietor is permitted to lease the property rent-free in exchange for facilities valued at or above fair market value of the leased property. • The income earned by the private developer for develop- ment of the leased nonaeronautical property is not consid- ered airport revenue. (2) DBFOM terminal P3.394 An airport proprietor and a pri- vate developer enter a design-build-finance-operate-maintain (DBFOM) arrangement under which the airport proprietor leases a portion of its airport property under a long-term (35- year) lease in return for fair market value rent of the property and a percentage of the private developer’s gross revenue. Under the arrangement, the private operator is responsible for nego- tiating with commercial service airlines for use of the new ter- minal and granted exclusive concession rights for passenger- related amenities, as well as an option for terminal expansion. The airport proprietor retains oversight of the terminal design and received reimbursement for additional outside operating costs (e.g., police, firefighters, etc.). • The airport proprietor is permitted to lease the property for terminal development. • The lease rent and percentage of gross income provided to the airport proprietor under the lease are considered air- port revenue and subject to revenue diversion restrictions. • The income earned by the private developer from operation of the terminal is not considered airport revenue.395 5. Intergovernmental Cost Sharing, Payment for Services and Tax Revenue Sharing a. Key Factors and Specific Issues For the vast majority of airports that are owned or have close relationships with local governments, the allocation of revenue derived from airports always has been a fraught issue, and the line between permissible payments to cover costs of the airport and impermissible revenue diversion sometimes can be tricky. Understanding why and how revenue use restrictions also apply to these relationships is critical, although not always easy. (1) Use of airport revenue to pay for local governmental ser- vices and programs. In the past few years, there have been chal- 394 Hypothetical example based on Airport Proprietor E. See infra App. C. 395 Other federal obligations that are beyond the scope of this digest, including nondiscrimination and airport concession disadvantaged business enterprise requirements, remain in effect. free, long-term (85-year) lease with a private developer for a 120-acre portion of on-airport property that was designated for nonaeronautical development. In exchange, the developer’s parent company agreed to fund the construction of a 1.4-mile segment of a light rail line across the leased area, including two stations, continuing on to the airport, thereby connecting it with the existing MAX light trail system.389 Once completed, the light rail line was owned by the Port, but leased at no cost to TriMet, the public owner and operator of the MAX light rail system. The arrangement resulted in a deal in which the Port received a light rail line valued at above the fair market value of the land leased to the private development ($23 million vs. $14 million), thereby avoiding any issues regarding compliance with the FAA’s Revenue Use Policy.390 Furthermore, revenue the private developer received from its commercial development of the leased area was not considered airport revenue.391 As discussed above regarding full privatization, there still are many limitations on use of airport revenue in the P3 arena. One interview participant noted the limitations that airport revenue use restrictions placed on airport proprietors that prevented them from partnering with public-private consortiums to de- velop airport projects outside the U.S.392 While other private and parastatal international airport proprietors have been able to use their expertise and capacity in participating in airport develop- ment projects globally, this is largely off-limits for U.S. airport proprietors. Nevertheless, there still are many good opportuni- ties for domestics P3 projects that allow airport proprietors to leverage their strengths. b. Hypothetical Examples (1) Airport passenger rail access P3. 393 Taking the same facts in the hypothetical example for ground access described earlier, the airport proprietor is considering partnering with a private organization to develop intermodal rail access between its air- port and a nearby passenger rail service to provide access to the neighboring metropolitan area. The airport proprietor will seek to enter into a 70-year lease with the private developer for 100 acres of on-airport, nonaeronautical property. The lease property available at less than fair market value for ground access projects such as transit rights of way and facilities as long as (1) the transit system is publicly owned and operated (or operated by contract on behalf of the public owner), and (2) the facilities are directly and substantially related to air transportation of passengers or property. Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7721. 389 U.S. Gov’t Accountability Office, GAO-05-727, Intermodal Transportation: Potential strategies would redefine Federal Role in Developing Airport Intermodal Capabilities 13 (2005); Letter from John Brockley, Dir. of Aviation, Port of Portland, to Susan L. Kurland, Assoc. Administrator for Airports, FAA, and Lowell Johnson, Manager, Airports Div., FAA, at 7 (Dec. 16, 1998) (on file with author). 390 GAO-05-727, supra note 389, at 13. 391 Id. 392 Telephone interview with Interview Participant No. 6. See infra App. B. 393 Hypothetical example based on Airport Proprietor C. See infra App. C.

ACRP LRD 40 45 legal, disbursing and payroll services), although such costs will come under higher FAA scrutiny to ensure revenue is not being diverted.403 Indirect costs must be billed similarly to other com- parable units of the airport proprietor and may not be billed directly to the airport proprietor.404 Proper documentation is re- quired to show these uses do not constitute revenue diversion.405 Impact fees assessed by a governmental body that are used to cover the costs of actions necessary for airport development, such as environmental mitigation measures, are permissible, but all costs covered must actually be attributable to airport needs and properly documented.406 In one recent example, the FAA determined that the Port of Portland, owner of Portland International Airport (PDX), did not divert airport revenue by paying the City of Portland to cover the costs of off-airport stormwater and superfund pro- grams that were included as part of the City’s water bill charges to the port. PDX airline tenants filed a complaint with the FAA, arguing that since the airport had its own stormwater manage- ment system and the off-airport programs had nothing to do with the airport, use of airport revenue to pay for them violated federal law and the Revenue Use Policy. The FAA determined that the costs were allocated by a reasonable, transparent and not unjustly discriminatory methodology.407 In contrast, a 2014 audit conducted by the U.S. DOT OIG found that Los Angeles World Airports (LAWA), proprietor of Los Angeles International Airport (LAX), failed to adequately document spending nearly $8 million in airport revenue over six years for services ostensibly provided to LAX by the Los Angeles Police Department.408 In some cases, the OIG and FAA found that actual revenue diversion occurred, as when police assigned to LAX provided security at off-airport special events without credit or reimbursement to LAWA, and when the city charged LAWA for a K-9 bomb squad unit that was deployed for a number of off-airport events unrelated to the airport.409 Some interview participants flagged their relationship with local governments as a consistent challenge in the context of airport revenue use.410 One interview participant noted some reluctance to share airport revenue details with local municipal political officials, even though those officials had no direct con- 403 Id. 404 Id. 405 Id. 406 Id. at 7720. 407 Air Transp. Ass’n of Am., Inc. et al. v. Port of Portland, Oregon, FAA Docket No. 16-16-04, Final Agency Decision 7 (May 18, 2018), https://www.regulations.gov/document?D=FAA-2016-4972-0024. 408 Office of Inspector Gen., U.S. Dep’t of Transp., Report No. AV-2014-035, FAA Oversight is Inadequate to Ensure Proper Use of Los Angeles International Airport Revenue for Police Services and Maximization of Resources 2 (2014). 409 Letter from Calvin L. Scovel III to Tom Latham, supra note 396, at 3. 410 Telephone interview with Interview Participant No. 1, Interview Participant No. 7. See infra App. B. lenges to the manner in which utility and public service costs have been allocated between airport proprietors and local gov- ernments.396 Central to these issues is whether airport propri- etors are diverting airport revenue by overpaying for services shared with or offered by host or neighboring govern mental bodies, which at times ultimately can be controlled by the political body that oversees the airport. Pursuant to federal law, airport revenue may be used to cover operating costs of the airport.397 This includes “reimbursements to a state or local agency for the costs of services actually received and documented, subject to terms of the Revenue Use Policy.”398 One such example includes air travel costs of local government officials conducting business on the airport’s behalf.399 It also includes off-airport expenses incurred by a controlling local governmental body charged to the airport using cost-sharing formulas “calculated consistently for the airport and other com- parable units or cost centers of government.”400 Operating costs attributed to an airport calculated according to a cost-sharing methodology that is “reasonable, transparent and not unjustly discriminatory” may be paid with airport revenue.401 Critically, an airport cannot be charged for the same services differently from other units of government or ratepayers. More broadly, the FAA permits indirect costs of airport pro- prietor services to be covered by airport revenue only if they are part of a cost allocation plan in which those services are attrib- uted to costs that would otherwise be included as a cost or ex- pense for which airport revenue could be used.402 Indirect costs also may include a proportionate share of central service costs (e.g., accounting, budgeting, data processing, procurement, 396 See Air Transp. Ass’n of Am., Inc. et al. v. Port of Portland, Oregon, FAA Docket No. 16-16-04, Final Agency Decision (May 18, 2018), https://www.regulations.gov/document?D=FAA-2016-4972-0024; Letter from Calvin L. Scovel III, Inspector Gen., Office of Inspector Gen., U.S. Dep’t of Transp., to Tom Latham, Representative, U.S. House of Representatives (Apr. 9, 2014), https://www.oig.dot.gov/sites/default/ files/LAWA%20Letter.pdf. 397 49 U.S.C. §§ 47107(b) (1) (A), 47133(a) (2019); Boca Airport, Inc. v. Boca Raton Airport Auth., FAA Docket No. 16-00-10, Final Decision and Order (Mar. 20, 2003) (explaining that a governmental unit may recoup the costs of services provided to an airport but not make a profit from those services); Letter from Charles Erhard, Manager, Airport Compliance Div., FAA, to Timothy Edwards, Acting Exec. Dir., Susquehanna Area Reg’l Airport Auth., Harrisburg Int’l Airport (Mar. 20, 2007), https://crp.trb.org/acrplrd21/wp-content/ themes/acrp-child/lrd21/documents/2007_Edwards.pdf (payment to local county school district in lieu of taxes was for more than a permissible amount). 398 FAA Order No. 5190.6B, FAA Airport Compliance Manual § 15.9.a. (2009). 399 See Revenue Use Policy, Feb. 1999, 64 Fed. Reg. 7696, 7718 (Feb. 16, 1999). The Revenue Use Policy provides an example of “the costs of travel for city council members to meet with FAA officials regarding AIP funding.” Id. 400 Id. at 7720. 401 Air Transp. Ass’n of Am., Inc. et al. v. Port of Portland, Oregon, FAA Docket No. 16-16-04, Final Agency Decision 7 (May 18, 2018), https://www.regulations.gov/document?D=FAA-2016-4972-0024. 402 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7719.

46 ACRP LRD 40 are directly and substantially related to operation of the airport. Off-airport activities do not necessarily satisfy this standard if they merely increase efficiency or are more expedient; there must be a unique justification for the use of airport revenue.418 There also are grounds upon which an airport proprietor could justify spending based on a desire to “enhance community ac- ceptance” of an airport, but this type of spending generally is limited to minimal contributions.419 More broadly, revenue used for charitable or community purposes must be “reasonable in relation to the airport’s specific financial situation.”420 Airport proprietors also may not use airport revenue to pay for capital or operating costs associated with community use of airport property (discussed further below).421 The FAA also has deter- mined that local hiring programs, including those supporting low-income-worker and minority-owned firms, cannot be paid for with airport revenue.422 As with advertising and promotional expenditures, the FAA has declined to establish a specific ceiling on spending on community or charitable activities.423 In discussing pressures from local officials and commu- nity members to subsidize nonaeronautical governmental activities—such as paying for local bus service for non- aeronautical commercial/industrial development or locating a fire station on airport property free of charge—one interview participant noted that the FAA’s guidance on revenue diversion was helpful in providing airport management a legal basis for its decision to decline the charges.424 Familiarity with the basic principle of revenue diversion allowed the interview participant to flag these issues when they came up and seek clarification and support found in the Revenue Use Policy. (2) Use of airport property for nonaeronautical local govern- mental functions or public/communal activities. Implications of revenue diversion for use of airport property for public or community purposes long have been an issue at airports. The basic analysis of such uses is fairly straightforward but may not always be clear to local officials who may view publicly owned airport property like any other municipal property or funds and property of sister governmental units as interchangeable. They are not when it comes to airport revenue and property. Use of aeronautical property by another governmental sub- unit for nonaeronautical public purposes—such as public vehi- 418 Letter from David L. Bennett to Joseph J. Petrocelli, supra note 151. 419 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. 7696, 7718 (Feb. 16, 1999). 420 Id. at 7703-04. 421 Id, at 7,721. 422 See Steve Vockrodt & Bill Turque, FAA Rejects Use of Revenues from New KCI Terminal for Community Programs, Kan. City Star, https://www.kansascity.com/news/local/article217247750.html (last updated Aug. 24, 2018). 423 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7704-05. One commenter proposed to the FAA during the Revenue Use Policy rulemaking process to create a “safe harbor” for such expenditures. 424 Telephone interview with Airport Proprietor No. 5 representative. See infra App. B. trol over the airport’s budget.411 This was in large part because these officials, particularly those newly elected, were at times unaware of federal revenue use restrictions and would suggest reallocation of airport funds for impermissible purposes. The interview participant had found that working closely with the political official’s advisors and experts, in their case the city council audit department, was an effective means of ensuring that political officials avoided misunderstanding how airport revenue could be used.412 In this context, interview participants noted that it was very helpful to have FAA revenue use restric- tions and written guidance in hand to justify protecting airport revenue for airport purposes.413 While a local government providing a service to an airport is entitled to charge for services rendered attributable toward costs of airport operation, it cannot retain revenue from taxes on aviation fuel, even where aviation fuel is taxed as part of a broader fuel tax. Although this has been the law for some time, it has been only in the past few years that the FAA has aggres- sively pursued enforcement against non-airport proprietors.414 The FAA also has clarified that this law applies to all taxing local governments, not just airport proprietors, and that the agency by law is charged with enforcement with regard to all taxing governments. There is some consternation among airport proprietors regarding their responsibility for charges assigned to them or taxes assessed by local governments.415 In some cases, such as tax assessments, airport proprietors have no apparent authority over local or state governments that assess and allocate taxes.416 In other cases, such as charges or indirect costs that a local gov- ernment allocates to an airport, airport proprietors may, practi- cally speaking, lack the access, capacity or resources to be able to determine whether they are being fairly charged. One interview participant voiced concern about the level of detail and amount of resources necessary for an airport proprietor to satisfactorily confirm it is being correctly charged. This participant felt that an in-depth analysis of a local government’s cost allocation struc- ture was beyond the capacity and scope of an airport proprietor, particularly since municipalities already have external audits conducted on their finances.417 As discussed previously regarding use of airport revenue for promotional activities, airport revenue may be spent in support of community activities or uses, but only if such expenditures 411 Telephone interview with Interview Participant No. 7. See infra App. B. 412 Telephone interview with Interview Participant No. 7. See infra App. B. 413 Telephone interviews with Interview Participant No. 1, Interview Participant No. 5, Interview Participant No. 7. See infra App. B. 414 Proceeds from Taxes on Aviation Fuel, Nov. 2014, 79 Fed. Reg. 66,282, 66,283 (Nov. 7, 2014). 415 Telephone interview with Airport Proprietor No. 5 representative. See infra App. B. 416 FAA Proceeds from Taxes on Aviation Fuel, Nov. 2014, 79 Fed. Reg. at 66,284. 417 Telephone interview with Airport Proprietor No. 3 representative. See infra App. B.

ACRP LRD 40 47 revenue, however, the income generated from community use must approximate the revenue that could otherwise be gener- ated, and some amount of rent must be paid.432 Uses for other governmental purposes, such as municipal vehicle parking, do not qualify as a community purpose.433 b. Hypothetical Examples and Explanations (1) Charitable giving.434 In an effort to generate good will with the community, a council member of a city that owns an airport inquires with the city airport department about the possibility of establishing charitable giving booths in an airport. The city airport department considers contributing the resulting dona- tions to the following charities: (1) the city’s local campaign to fight the local opioid addiction crisis; or (2) an on-airport non- profit providing layover comforts to military service members. The donation booths are expected to generate $50,000 per year. With respect to both options: • If the funds are collected directly through the airport, it would be considered airport revenue, because such funds would be “payments received by or accruing to the proprietor” or “revenue from proprietor activities on the airport.”435 Accordingly, it is subject to the same limitations as all other airport revenue, namely that it must be used only for capital or operating costs of the airport, the local system or other local facilities owned or operated by the air- port proprietor and directly and substantially related to air transportation of passengers or property.436 • If the funds were collected by a third-party entity, such as a nonprofit, on airport property, it likely would not be con- sidered airport revenue, since income or funds generated by tenants are not considered airport revenue.437 The charita- ble nature of the activities also likely means that the airport proprietor could provide space for the third party at the airport at less than fair market value, or even for free, if the third-party entity were a nonprofit or governmental entity. However, providing space for free would require a deter- mination that its use is expected to produce only de mini- mis revenue438 and not reasonably expected to be needed by an aeronautical tenant or “for airport operations in the foreseeable future.”439 If the location for donation collection were in an area that could otherwise be used to generate sig- nificant revenue, the airport proprietor also would have to 432 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7721, 7711. 433 Id. at 7711. 434 Hypothetical example based on Airport Proprietor F. See infra App. C. 435 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7716. 436 Id. at 7717. 437 FAA Order No. 5190.6B, FAA Airport Compliance Manual § 15.6.a. (2009). 438 As discussed above, the FAA has declined to establish a specific ceiling on what constitutes a de minimis expense. See Revenue Use Policy, Feb. 1999, 64 Fed. Reg.at 7704-05. 439 Id. at 7721. cle storage, police or firefighting—generally is not permissible, unless they are concurrent or interim uses for which the govern- mental subunit pays fair market value.425 More broadly, public and community uses of aeronautical property not directly tied to activities of an airport proprietor’s parent or sister govern- mental units must be considered one of the following “not-for- profit aviation organizations”: aviation museum, accredited aeronautical secondary or post-secondary school, or civil air patrol unit.426 Use of nonaeronautical land for governmental purposes is permissible, but the public entity using the land must pay the airport fair market value, and those payments will be considered airport revenue subject to revenue diversion re- strictions.427 One means of making these situations work for the airport and local governmental entity is to locate services both entities can use, such as firefighting, police services, etc. How- ever, as noted above in the LAX example, the parties need to be able to clearly allocate costs according to usage. One interview participant discussed how the airport proprietor and a local first responder unit negotiated for use of nonaeronautical property to ensure the airport paid for only those services it used, but that the first responder unit also was permitted to serve the local sur- rounding community if it had additional capacity.428 Property use by nonprofits or for community purposes, such as for a park or a recreational facility, follows the same stan- dards, generally requiring fair market value compensation.429 Land that is “not potentially capable of producing substantial income and not needed for aeronautical use” may be leased for such purposes at below fair market value rental rates or even possibly for no charge, as long as the function is related directly to operation of the airport.430 Examples of such community uses include interfaith chapels and USO facilities.431 For property that is capable of generating more than a minimal amount of 425 FAA Order No. 5190.6B, FAA Airport Compliance Manual § 21.6.f.5. (2009). 426 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7721. 427 Id. at 7710, 7712; Memorandum from Stephen H. Kaplan, Gen. Counsel, Office of the Sec’y of Transp., U.S. Dep’t of Transp., to Patricia D. Parrish, Dir. of Mgmt. Planning, U.S. Dep’t of Transp. (Sept. 26, 1994), https://crp.trb.org/acrplrd21/wp-content/themes/acrp-child/ lrd21/documents/1994_Parrish.pdf (regarding: Request for Legal Opinion for Resolution of Office Inspector General (OIG) Audit R9-FA-3-061). 428 Telephone interview with Interview Participant No. 1. See infra App. B. 429 See, e.g., Office of Inspector Gen., U.S. Dep’t of Transp., Report No. AV-1998-011, Airport Revenues—Galveston municipal airport, Scholes Field, Galveston, Texas (1997), https://rosap.ntl.bts.gov/view/dot/13010 (determining that failure to charge local department of parks and recreation for use of airport property constituted illegal revenue diversion). 430 Revenue Use Policy, Feb. 1999, 64 Fed. Reg. at 7710-11. The Revenue Use Policy specifically allows for use of airport property for nonprofit aviation museums and aeronautical higher education programs. See id. 431 See Kelly Yamanouchi, Hartsfield-Jackson to Strike Agreement with Airport Chaplaincy, Atlanta J.Const. (Jan. 31, 2019), https://www.ajc. com/business/hartsfield-jackson-strike-agreement-with-airport- chaplaincy/YOQGmzNER6Q4tvnvZ6ujRJ/ (quoting FAA statement).

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Understanding the permissible use of airport revenue is one of the most common legal issues faced by airport management. While there are some clear lines, there are several categories (such as utility fees) of potential expenditures of airport revenue that are not as clearly defined.

The TRB Airport Cooperative Research Program'sACRP Legal Research Digest 40: Permissible Uses of Airport Property and Revenue updates the background of economic and legal information presented in ACRP Legal Research Digest 2: Theory and Law of Airport Revenue Diversion. It focuses on the application of federal law and policy to specific categories of expenditures and uses and includes discussion of statutory law, policy, case law, and informal and formal guidance from the Federal Aviation Administration.

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