Evaluating and Implementing Airport Privatization and Public-Private Partnerships (2021)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

136 South Suburban Airport A P P E N D I X D Project Vignettes Transaction Highlights • This vignette shows the complexity of navigating the political processes of a P3, particularly as the actors change over time. • A request for interest can help to ascertain interest and appetite for the project as well as solicit information from potential developers about the financial feasibility of the project. • Timing the transaction to meet market conditions is essential. This project has evolved over a nearly 20-year period and demand for the asset is still uncertain. Source: South Suburban Airport Ultimate Airport Land (Web Archive) Location: Peotone, Illinois (Will County) Project Scope: Airport Pre- development (master plan, environmental studies), Implementation/ Delivery Delivery Method: To Be Determined (TBD) Total Capital Cost: $1.1B Term: TBD Status: Expressions of Interest (pre- development) Airport Owner: Illinois DOT Private Partner: TBD Located approximately 43 miles south of Chicago in Peotone, Illinois, South Suburban Air- port (SSA) represents a vision for a third Chicago airport that would provide “commercial passenger service, cargo operations, as well as corporate and general aviation activities.” With limited capacity to expand Midway and O’Hare Airports, SSA offers the commercial advantage of its proximity to the greater Chicago regional aviation market. Beginning in the early 2000s, the Illinois Department of Transportation (IDOT) pursued the land acquisition needed to preserve the option of developing an airport [FAA, n.d.(c)]. IDOT committed $200 million to site selection, master planning, environmental analysis, and additional land acquisition, which resulted in a Tier 1 Record of Decision from the FAA. IDOT then issued a financial feasibility report in May 2013, which demonstrated the agency’s ability to fund the proposed capital improvement plan for the airport as well as receive federal funding through the AIPP and indicated that the rates and charges would be comparable to regional airports. In May 2013, a bill passed in the Illinois General Assembly, which encouraged the use of a P3 to develop SSA, with an agreement term of up to 75 years. Through the issuance of an RFI in March 2017, IDOT is evaluating the feasibility of various P3 structures, where the developer oversees a combination of development, financing, operating, and maintaining the airport. Current studies focus on a 5-year inaugural airport program with one runway, six to nine gates, cargo operations, and general aviation facilities. Per a 2002 study cited by IDOT, the department expects “between 20,000 and 170,000 passengers during the first year” after the first phase is operational. The ultimate airport vision looks more than 20 years ahead, envisioning “six parallel

Project Vignettes 137 Location: Baltimore, Maryland Project Scope: 250-room hotel adjacent to terminal Total Capital Cost: N/A Term: N/A Status: Cancelled Airport Owner: Maryland Aviation Administration, Maryland Department of Transportation Private Partner: N/A runways and a passenger terminal complex with 250 gates on approximately 20,000 acres.” IDOT issued an RFI in March 2017 to seek the input of developers that would “perform other phase 1 predevelopment work including conducting a feasibility analysis, and formulating a financing and business plan.” IDOT received six responses to an RFI released in March 2017. In its RFI, IDOT describes its interest in using a PDA to develop SSA because “an early partnership with an experienced private sector airport developer and collaborative development approach could provide the commercial and technical expertise and financial investment that would accelerate Project implementation and operational and commercial success.” Baltimore-Washington International Thurgood Marshall Airport Hotel Transaction Highlights • This vignette illustrates the importance of market conditions at the time of the procurement. The competitive response to a procurement is tied to developers’ evaluation of whether the project is financially feasible. • Allowing flexibility to respondents to develop an asset to meet market demand improves the probability of success. More than 65,000 passengers travel through Baltimore-Washington International Airport each day (ACI 2016), for a total of 25 million passengers per year. Baltimore-Washington Inter- national Airport is connected to the regional highway network, mass transit system, and Port of Baltimore, and this connectivity contributes to the airport’s larger passenger market share as compared to its regional counterparts, Ronald Reagan National Airport and Dulles Inter- national Airport. Despite the airport’s commercial traffic, the airport lacks some of the amenities offered at large hub airports, namely a hotel adjacent to the airport. A nearby Four Points by Sheraton hotel was located adjacent to Baltimore-Washington International Airport’s daily garage, but the 201-room hotel closed in late 2013. Beginning in 2015, the airport’s owner, the Maryland Aviation Administration, began seeking a developer to design, build, finance, and operate a full-service hotel adjacent to the terminal. The Maryland Aviation Administration projected that the hotel would offer 300 to 350 rooms with meeting space, local food and beverage offerings, a restaurant, and other guest amenities. The site of the former Four Points hotel provides around 2.5 acres for redevelopment. The Maryland Aviation Administration issued an RFP in 2015 and did not receive a submis- sion. Some developers indicated that the financial risk assumed with the project site was too great to bear. The existing project site would have required shuttle access and therefore the revenue potential was limited because the hotel would not be located within the terminal. The RFP also indicated that the hotel developer would be responsible for significant infrastructure costs, including providing a new access ramp from I-195, on-airport roadway improvements, and pedestrian connection to the adjacent parking deck. Other developers acknowledged that the hotel market surrounding the airport is crowded and further dampens developer interest in the site. In addition, the RFP put the onus on the hotel developer to conduct studies such as noise, height, and environmental constraints. Finally, the RFP was highly proscriptive about

138 Evaluating and Implementing Airport Privatization and Public-Private Partnerships what should be built (high-end, full-service hotel), and did not provide the flexibility to develop a profitable project. Los Angeles International Airport Consolidated Rent-A-Car Transaction Highlights • This vignette highlights a popular P3 opportunity at airports: car rental facilities. These facilities are “easy wins” for airports because there is a clear revenue stream to support project financing, and the project scope is beyond the typical capability of an airport and best suited for a developer in terms of managing the risks. In 2016, Los Angeles World Airports began the transaction launch for a public-private part- nership for the commercial development of a ConRAC facility for Los Angeles International Airport. The Los Angeles International Airport ConRAC project is a component of the airport’s infra- structure upgrade program called the Landside Access Modernization Program. The Land- side Access Modernization Program’s goal is to help ease traffic congestion that contributes to unreliable travel times to and from the airport, traveling in the terminal loop. Despite being a standalone project, the Los Angeles International Airport ConRAC project will trail the auto- mated people mover project, which is the train system that will connect LA’s metro station with terminals and airport facilities. Located 18 miles southwest of downtown Los Angeles, Los Angeles International Airport is the second most used airport in the United States and fifth in the world. Home to nine passenger terminals and 2 million square feet of cargo facilities, Los Angeles International Airport served just over 40 million enplaned passengers in 2017 alone. The ConRAC will host 23 rental car companies in a single, 5.3-million-square-foot customer service facility. The facility will be connected to the terminals by the automated people mover. The ConRAC will be located adjacent to the Interstate 405 freeway and contain 6,600 ready/return parking stalls, storage for 10,000 idle vehicles, 1,100 rental car employee parking spaces, and over 2,500 parking spaces for Los Angeles World Airports employees. The RFQ received responses from six bidding teams. Los Angeles World Airports shortlisted four teams in May 2017 and issued the draft RFP in November of the same year. Proposals were due in August 2018, and the project reached financial close on December 7, 2018, with LA Gateway Partners winning the final award. LA Gateway Partners’ full consortium includes the following: • Developer: Fengate Capital Management Ltd; PCL Investments USA, LLC • Design-Build Contractor: PCL Construction Service Inc. • Designer: PGAL, Inc. and AC Martin Partners • O&M Provider: Johnson Controls, Inc. • QTA Manager: MVI Field Services, LLC The $43 million equity contribution was provided by Fengate (83.3%) and PCL (16.7%). Location: Los Angeles, California Project Scope: Commercial rental car facility Delivery Method: DBFOM Total Capital Cost: $1,064 million Term: 28 years Status: Financial Close (7 December 2018) Airport Owner: Los Angeles World Airports Private Partner: LA Gateway Partners

Project Vignettes 139 Location: Phoenix, Arizona Project Scope: Commercial Facilities (hotel, office, parking) Delivery Method: DBFOM Total Capital Cost: TBD Term: TBD Status: Cancelled Airport Owner: City of Phoenix Private Partner: Project Cancelled Phoenix Sky Harbor International Airport, Commercial Facilities Transaction Highlights • This vignette demonstrates the value of input gathered from private industry during the RFI process and how it impacts the transaction’s structure. • While Sky Harbor shortlisted firms for an RFP, the procurement was cancelled due to uncertainty in the project’s risk profile. Cancellation is not necessarily an indication of “failure”; instead, it shows the owner undertook a deliberative process. In 2017, the City of Phoenix Aviation Department issued a request for information and qual- ifications for a P3 for commercial development near the Phoenix Sky Harbor International Airport. Phoenix Sky Harbor International Airport is the 13th busiest airport in the country (2017) with over 21 million enplaned passengers and with service by 18 domestic and international air carriers. The airport has started construction on an extension of the Phoenix Sky Harbor Inter- national AirporSky Train automated people mover system that connects the airport’s terminals and east end parking facilities to the METRO Light Rail (regional public transit system). The extension, which is anticipated to carry more than 80,000 passengers per day, will extend west to the rental car center and will include a multimodal station near 24th Street and Buckeye Road called the West Ground Transportation Center (GTC). The West GTC removes ground transportation traffic from the central terminal area as well as supports a new west economy parking solution comparable in customer service to the existing east economy parking facilities currently served by the Sky Train. The west economy parking supply is smaller with less convenient transportation to the terminal facilities. The airport is positioned at the center of the metropolitan area, but most users traveling from the western half of the region travel through or past the west entrance to Phoenix Sky Harbor International Airport to get to the bulk of economy parking at the east end of the airport. The new Sky Train station also makes nearby land more attractive for public-facing/supporting uses. Thus, Phoenix Sky Harbor International Airport determined that there was some market demand for hotel/ commercial office use in the area. Following the RFI process, Phoenix Sky Harbor International Airport decided to pursue a two-part RFP. In the first step, the airport would select a team to use the DBFOM delivery method to develop a new parking structure, with a minimum of 3,000 spaces, and provide the airport with an on-airport parking concession service. In September 2018, the airport shortlisted three developers for parking: Manchester Airports Group, Sky Connect Partners, Oaktree, and 24th Street Partners. In the second step, the airport would select a team to privately develop and operate a 200-room hotel with options to develop office and/or retail adjacent to West GTC. The aviation department was considering a lease agreement of up to 50 years for the hotel devel- opment. Phoenix Sky Harbor International Airport shortlisted three developers in September 2018: Manchester Airports Group, Sky Connect Partners, and 24th Street Partners. The procurement was eventually cancelled due to the uncertainty of the project risk profile.

140 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Chicago Midway Airport Privatization II (2013) Transaction Highlights • This vignette focuses specifically on the transaction that occurred after 2008 in Chicago at Midway Airport. It shows that procurement processes may be restarted if conditions are better suited to reaching financial close. • This vignette also highlights the strength of relationships that Midway Airport and the Office of the Mayor had with airlines and how their input into both transactions was vital to the transaction moving forward. Chicago Midway Airport explored and awarded a privatization contract in 2008. After global market turmoil, the transaction was ultimately cancelled, as detailed in ACRP Report 66 (Ernico et al. 2012). In 2013, the city, led by the Office of the Chief Financial Officer, began a new attempt to privatize the airport. Since the overall intent and procurement process was similar to the transaction in 2008, there was less friction involved and effort needed in beginning the process. For instance, Chicago Midway Airport found a willing partner in their lead airline carrier, Southwest, who was inter- ested in the predictability and stability in capital expenditures that would result from a private operator. Chicago Midway Airport’s airlines continued to collaborate in the privatization process, picking up from the previous transaction. In the first attempted transaction, the city’s objectives were clear and there was not a sig- nificant change in the second transaction. The primary difference between the first and sec- ond transaction was the financial mechanism, which set a maximum amount that the private operator could recover from airlines, which was then escalated over time. Since 2008, the city has changed the threshold established in the first transaction, but not the theory of the mechanism. However, private operators reacted differently to the change in the financial threshold between transactions. The second privatization effort began with six interested operators, which then dwindled to three operators during RFP negotiations, and finally, only one operator remained in the procurement process. The city decided to end the procurement process because there was not sufficient competition to justify an award to a private operator. An unexpected benefit from the second attempt is that the experience of standardizing performance-based operating standards for the airport was successful. The collaboration between the airport, the city, and the airlines created a solid foundation for the airport moving forward, whether it is run by the city or a private operator, and contributed to the speed and efficacy of its current modernization effort. Location: Chicago, Illinois Project Scope: Privatization Total Capital Cost: $4.4 billion ($2.4 billion in upfront payment) Term: 39 years Status: Cancelled Airport Owner: Chicago Depart- ment of Aviation Private Partner: N/A

Project Vignettes 141 Transaction Highlights • Limiting competition and public transparency complicate the likelihood of success for a P3. • The political risk of a P3 is a key consideration. A change in County government led to the cancellation of this transaction. Location: White Plains, New York Project Scope: AIPP Monetization and Development Delivery Method: Manage, Operate, Maintain, Improve Total Capital Cost: $1,100M Term: 40 years Status: On Hold Airport Owner: Westchester County Private Partner: Macquarie Infrastructure Corporation Westchester County Airport is located 5 miles from White Plains, New York, and is around 30 miles north of Manhattan. The airport serves approximately 750,000 enplaned passengers each year and is currently managed by a private airport operator. The airport has two runways and a three-story main terminal with six gates, which cater to commercial, business, and general aviation. The airport’s privatization was challenged by county officials during the procurement for insufficient public engagement and lack of analysis around the value of alternative delivery within imposed limitations on airport traffic. In November 2016, County Executive Robert Astorino announced a sole-source partnership with Oaktree Capital Management for a 40-year lease of Westchester County Airport through the APPP. The process initially began as a private negotiation. In the sole-source agreement in November 2016, Oaktree agreed to a $111M upfront payment, followed by $5M in net revenue payments for the four following years and then roughly $2M annually for the rest of the 40-year lease. This annuity-like payment structure was created as a revenue stream that could be used to balance the county budget. The County Board of Legislators determined that a competitive process would result in the best deal for the county in January 2017. Three proposers consequently responded to the RFP in July 2017, with proposed teams including Ferrovial/Star America, Connor Capital/Oaktree Transportation Infrastructure, and Macquarie Infrastructure Company. The airport task force reviewed the bids, unanimously selecting Macquarie in November 2017. With Macquarie’s proposal from November 2017, Westchester County would receive a total of $1.145B over for the 40-year lease, providing $595 as a financial offer and committing the remaining $550M to maintain and improve the airport’s infrastructure. The county would receive $300M up front to cover various payments. Three days before this preferred bidder selection, Astorino lost his bid for re-election to George Latimer, who took office in January 2018. While the proposer selected under Astorino’s tenure, Macquarie, was put forth to the Board of Legislators, the board has not voted on the award. In May 2018, County Executive Latimer suggested he would put the privatization plans on hold, seeking more input before proceeding with the process. Simultaneously, he was potentially considering a discussion with all three bidders since no contract was officially signed by the board with Macquarie. Then, in August 2018, Mr. Latimer indicated the intent to “informally” continue discussions with bidders to retain grant funding from the FAA, while not committing to any tangible action in the short-term. The change in county executive leadership contributed to the disruption in the procurement process and delay to contract award. The political environment in which this transaction was attempted was further complicated by two issues that impacted the project’s financial feasibility for a private operator: inaccurate air Westchester County Airport Source: Westchestergov.com

142 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Terminals at John F. Kennedy International Airport have historically been developed and operated by airlines and private companies, without a focus on central planning or cohesion. Looking to mirror the major redevelopment at LaGuardia Airport, Governor Cuomo proposed a $13B project in January 2017 that would include the simultaneous redevelopment of the older terminals (1, 2, and 7), which were opened between 1960 and 2000. Cuomo presented recom- mendations to transform John F. Kennedy International Airport into a unified, interconnected airport that has improved rail transit and road access from Manhattan. The on-airport component of this “Vision Plan,” focuses on six areas: “(1) Creating a unified, interconnected terminal layout; (2) Redesigning the [airport access] traffic pattern; (3) Centralizing parking lots; (4) Ensuring world-class amenities; (5) Expanding taxiways; and (6) [Applying] state-of-the-art security technology.” In October 2018, Governor Cuomo announced a pro- jected cost of $13B, up from the initial $10B estimate, which focuses on the development of two international terminal complexes: The north terminal will be developed by JetBlue and the south by the Terminal One Group Association (TOGA). The Port’s timeline suggests the environmental analysis for the north and south terminals of John F. Kennedy International Airport will be complete by early 2019, followed by final lease agreements by the second quarter of 2019, and “environmental approvals/commercial and financial close” by early 2020. The first gates will open in 2023 and work will be completed by 2025. Despite the increased projected cost, the redevelopment is 90% privately funded, with the Port Authority providing $1B in capital and airlines or other private entities providing the remaining $12B. The project consists of the following three components: (1) Port Authority infrastructure (e.g., roadways, AirTrain improvements, utilities), of which $1B will be funded through the Port Authority’s capital plan and $2B through private means; (2) Terminal 1–3 sites, of which all $7B is funded through the private entity the TOGA and its financial partners (Carlyle/JLC/Ullico); and (3) Terminal 6–7 sites, of which all $3B is a private investment commitment by JetBlue’s JFK Millennium Partners and its financial partners (Vantage/RXR Reality/MWBE). Location: Queens, New York Project Scope: Redevelop north and south- side terminals (Terminals 1–3, 6–7); create ring road; connect John F. Kennedy International Airport to Manhattan via mass rail transit Delivery Method: DBFOM Total Capital Cost: $13B ($12B Private): 1. Gen’l. Infrastructure– $1B Port Funded, $2B (P) 2. T1–3 – $3B (P) 3. T5–7 – $7B (P) Term: 30 years Status: Several separate transactions at various stages. Airport Owner: PANYNJ Private Partner: Terminal One Group Association JFK Millennium Partners traffic forecasts in the 2014 master plan that influenced the upside available to a private operator and evidence of contaminated groundwater in airport wells that had the potential to increase redevelopment costs. Further, residential airport noise complaints escalated to 2,600 complaints in June 2018, which applied further pressure on the incoming county executive to distance the airport from the transaction. Transaction Highlights • The effort to redevelop terminals at John F. Kennedy International Airport shows how a complex, multi-faceted program may be packaged to be financed, designed, constructed, and operated using multiple private partners. • The design of the airport with discrete terminals made P3 easier since each airline or developer could design its projects to meet its individual requirements. • Closing on one P3 is challenging; trying to time three to close near simultaneously may not be realistic. John F. Kennedy International Airport

Project Vignettes 143 The governor’s plan also indicated an interest in retaining and expanding Terminal 4, 5, and 8, the newer terminals at John F. Kennedy International Airport. The plan also recommends using “Parcel M,” a vacant parcel for phased expansion of Terminal 8’s footprint. The TOGA is a consortium of four international airlines (Lufthansa, Air France, Japan Airlines, and Korean Air Lines) that was originally formed in 1994 to support the opening of Terminal 1; the consortium’s lease on the terminal will last until January 2023. TOGA will develop a 3 million-square-foot, $7 billion terminal with 23 international gates, replacing the existing Terminals 1 and 2, and building atop the demolished Terminal 3. This terminal will be operated by Munich Airport International. Though the exact equity split between airlines and financial sponsors is still undecided, “Mitsubishi UFJ Financial Group (MUFG) is one of the advisors for the equity sponsors. The sponsors are anticipating issuing more than $6 billion in tax-exempt bonds to fund the project. The Port Authority is able to issue tax-exempt debt on behalf of its private partners.” The conduit issuing entity for Terminal 1 is the NYC Industrial Development Agency. JetBlue selected JFK Millennium Partners as the preferred bidders in March 2016, led by Vantage Airport Group and RXR Realty. JetBlue will develop a 1.2 million-square-foot, $3B terminal with 12 international gates and 74,000 square feet of retail, which will replace Terminal 7 and the demolished Terminal 6. All John F. Kennedy International Airport terminal operators were invited to submit pro- posals and, independent of the Port, these operators selected their respective consortium partners. Through investment in John F. Kennedy International Airport, the Port Authority seeks to continue its momentum in private sector involvement with major New York hubs, particularly after the private sector successfully financed $3.9B of LaGuardia’s $4.5B central terminal building development. The Port Authority allocated $50M in February 2017 to retain a master and program plan- ning consultant (Mott MacDonald) as well as a program and project management consultant (HTNB) over the following year. Then, in December 2018, the Port Authority indicated con- tinuing lease negotiations for the north and south terminal complexes. Additionally, the Authority authorized $100M for phase II planning of “Early Works Projects,” which include “Capacity improvements for AirTrain JFK [and] a new Ground Transportation Center.”