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

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16 C H A P T E R 2 This chapter provides an overview of the laws and regulations that set the major parameters for airport P3 projects. Federal laws and regulations that govern airports generally apply to P3s, just as they do to any other project delivery or financing mechanisms. Particularly important for P3s, any airport that has accepted federal funds is subject to FAA grant assurances. This includes Grant Assurance 25, commonly known as revenue diversion, which requires airport-generated funds from any source to be reinvested in airport operations and development and not utilized for other unrelated purposes [FAA, n.d.(a)]: All revenues generated by the airport and any local taxes on aviation fuel established after December 30, 1987, will be expended by it for the capital or operating costs of the airport; the local airport system; or other local facilities which are owned or operated by the owner or operator of the airport and which are directly and substantially related to the actual air transportation of passengers or property; or for noise mitigation purposes on or off the airport. There are two general mechanisms by which airport P3s are delivered without violating the FAA revenue diversion rule [FAA, n.d.(a)]. First, the AIPP enables the Secretary of Transpor- tation to waive Grant Assurance 25 in connection with the sale or lease of an airport to a pri- vate operator, permitting the public airport owner to use transaction proceeds for non-airport purposes and permitting the private operator to earn a reasonable rate of return on its invest- ment. The private operator obtains an airport operating certificate and takes on the responsibil- ities previously conducted by the airport owner. This type of transaction is particularly intended for existing airport facilities, where the public airport owner would benefit from upfront or ongoing transaction proceeds for non-airport purposes. Alternatively, selected airport facilities—such as terminals, ground transportation, parking, energy facilities, cargo, and so forth—can be developed and operated as a P3 outside of the AIPP, so long as the transaction proceeds to the airport owner are used for airport purposes, thus satisfying Grant Assurance 25. The public airport owner remains the airport operator under the FAA Part 139 operating certificate. This type of transaction is particularly appropriate for large construction or redevelopment projects, where the transaction funds are used for airport capital projects. Each of these two scenarios is described in the following subsection, “Federal Laws and Regulations.” In addition to federal laws and regulations, state and local procurement laws affect whether and how airports can enter P3 agreements. The applicable rules differ across the 50 states and are impacted by local municipal law. Federal Laws and Regulations Airport Investment Partnership Program The AIPP, known until 2018 as the APPP, was enacted in 1996 and previously amended in 2003 and 2012. The AIPP provides the framework for U.S. Department of Transportation grants Legal and Regulatory Context for Airport P3 Transactions

Legal and Regulatory Context for Airport P3 Transactions 17 of exemptions from certain federal obligations to allow for long-term leases or sales of public airports. The AIPP is effectively the only method for privatizing an airport for monetization or asset recycling. The FAA has published submission and review procedures for applications to sell or lease an airport under the program. Before the 2018 amendments to the AIPP, no more than 10 airports could receive approval under the program, with at least one such airport being a general avia- tion airport and no more than one such airport being a large hub airport (FAA, 1997). Those limitations were lifted in 2018. Airports may choose to enter into such a transaction as a way to improve airport operations and management or enhance capital expenditures at the airport that could not otherwise be funded by an airport owner. Another key benefit of a P3 under the AIPP is that the Secretary of Transportation may permit proceeds from the lease or (solely in the case of a general aviation airport) sale of a primary airport to be used for non-airport purposes if the transaction is approved (1) by at least 65% of the scheduled air carriers serving the airport and (2) by scheduled and nonscheduled air carriers whose aircraft landing at the airport has a total landed weight of at least 65% of the total landed weight at the airport. To qualify for the benefits of the AIPP, a transaction must involve the sale or lease of an entire airport [U.S.C. § 47134(b)(1)(A)(i)]. The new private operator in an AIPP transaction also obtains a Part 139 operating certificate and becomes the airport, even if the public airport owner retains actual title to the airport. Thus, a P3 limited to one terminal or another portion of an airport would not be eligible for the AIPP. However, P3s for terminals and other portions of airports have proceeded outside of the AIPP. 2018 Airport Privatization Pilot Program/Airport Investment Partnership Program Amendments Under the 2018 amendments to the APPP, the name of the program was changed from “Airport Privatization Pilot Program” to “Airport Investment Partnership Program,” which removed the suggestion that the program was a temporary “pilot” initiative (H.R. 4, “FAA Reauthorization Act of 2018”). The 10-airport cap was removed, as well as the caps on general aviation and large hub airports [H.R. 4, § 553(a)(1)]. Under the prior law, each exemption under the APPP was authorized as an item that the “Secretary may grant” even if all the statutory conditions were satisfied. The 2018 amendments changed this so that the grant repayment and compensa- tion exemptions “shall” be granted if the Secretary allows the sponsor to use airport revenues for non-airport purposes [H.R. 4 §§ 553(a)(2) and 553(a)(5)]. Two new methods of participation in the program were authorized [H.R. 4 §§ 553(a)(3)-(4)]: • Multiple Airports: A public airport sponsor for multiple airports is now eligible to participate in the program. • Partial Privatization: The amendments allow a purchaser or lessee involved in a transaction under the program to be an entity in which a sponsor has an interest. This means that a sponsor may retain a portion of its ownership during a (continued on next page)

18 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Grants and Fees Under the Airport Investment Partnership Program When an airport enters into an AIPP transaction, the private operator, which becomes the airport owner, can continue taking advantage of certain funding streams that were available to the airport [U.S.C. § 47134(a)]. The AIPP statute explicitly states that the private sponsor may impose passenger facility charges (PFCs) “[n]ot withstanding that the sponsor . . . is not a public agency.” Similarly, the airport will remain entitled to receive apportionments of Airport Improvement Program formula grants, albeit at 70% of the cost of improvement instead of the normal 75% to 90% for publicly owned airports. Importantly, the AIPP also allows a private sponsor to be exempted from the airport’s obligations to repay federal grants and return fed- eral government property upon entering into a privatization transaction (U.S.C. § 47134(b)(2), 47109(a)(4), 47134(g)). The private sponsor, however, must comply with the grant assurances that the prior public operator made to continue these entitlements. These assurances include items such as minimum wage, economic nondiscrimination, reporting, and inspection requirements. One assurance is that [U.S.C. § 47135(f)]: if an arrangement is made for management and operation of the airport by any agency or person other than the sponsor . . . the sponsor will reserve sufficient rights and authority to ensure that the airport will be operated and maintained in accordance with Title 49, United States Code, the regulations and the terms, conditions and assurances in this grant agreement and shall insure that such arrangement also requires compliance therewith. While on its face this does not directly apply to AIPP transactions, it has been interpreted to be applicable. The lease agreement for San Juan’s Luis Muñoz Marín International Airport under the AIPP included a subordination provision in which the parties agreed the agreement would be subordinated to any existing or future agreements or assurances between the private lessee and the federal government (including any such agreements or assurances between the governmental entity and the federal government assumed by the lessee) (Luis Muñoz Marín International Airport Lease Agreement, 2012). This was a condition precedent to the granting of federal funds or the use of PFCs at the airport after the transaction. 2018 Airport Privatization Pilot Program/Airport Investment Partnership Program Amendments (Continued) public-private partnership, either as a partial owner of a lessee or as a partial owner, perhaps through an initial public offering. This type of airport owner- ship structure is common in Europe [H.R. 4 § 553(a)(5)]. Finally, the amendments authorize the U.S. Department of Transportation to make grants of up to $750,000 per application or proposed application for pre- development costs associated with applying to be part of the program, which would include financial, legal, and procurement consulting service costs. These grants would provide greater resources to airport sponsors that may benefit from a P3 but do not otherwise have the resources to study the concept or submit a preliminary application. Taken together, these amendments make the program into a more flexible, permanent program with greater incentives for participation [H.R. 4, supra n.21, at §§ 553(a)(6) and 553(b)].

Legal and Regulatory Context for Airport P3 Transactions 19 One important issue that arises from the private operator’s continued use of PFCs for capital expenditures relates to the prioritization of PFC projects. Given that airlines may retain some responsibility to contribute to certain capital projects after a P3, as was the case with the Luis Muñoz Marín International Airport lease, the airlines have an interest in ensuring that PFCs are applied first to projects to which the airlines would otherwise contribute, rather than to projects for which the cost would be borne solely by the private operator. FAA regulations, however, do not permit airlines to control the use of PFCs. In the Luis Muñoz Marín International Airport use agreement, the parties agreed to an order of priority by type of project, where PFCs would be used first to fund projects to which airlines were also obligated to contribute. The parties further agreed that the private operator would use best efforts to seek alternative funding and utilize PFCs for such projects, subject to the private operator’s compliance with federal regulations. As part of the transition between public and private operators under the AIPP, there also must be an accounting of PFC funds collected by the private operator before the closing of the transaction (U.S.C. § 47135 6.2-6.3). In the case of Luis Muñoz Marín International Airport, the Puerto Rico Ports Authority provided an accounting of over $25 million in collected PFCs that were not disbursed or for which disbursement records were not available. The Puerto Rico Ports Authority then reimbursed those funds from the proceeds of the transaction to the private operator to make the PFC account whole. Airline Approvals Under the Airport Investment Partnership Program As stated previously, an AIPP transaction must obtain at least 65% approval of both the total number of scheduled air carriers and airlines with 65% of total landed weight at the airport in order to allow airport revenues to be used for non-airport purposes. (The other exemp- tions available under the AIPP do not require airline approval.) Additionally, the AIPP statute requires that “[e]very fee on the airport imposed on an air carrier on the day before the date of the lease of the airport will not increase faster than the rate of inflation unless a higher amount is approved” by those same supermajorities. This provides airlines with an effective veto in any AIPP transaction and poses a significant obstacle to achieving the key benefits of the AIPP if a proposed transaction is deemed unsatisfactory to the airlines. Indeed, when Stewart Interna- tional Airport in Newburgh, New York, became the first transaction completed under the AIPP, the parties were unable to obtain airline approval for revenue diversion [Congressional Research Service, 2017; 49 U.S.C. § 47134(c)(4)]. To address this issue, AIPP transactions will typically provide benefits to the participating airlines such as high-priority capital improvements and decreased airline fees and payments. Also, an AIPP transaction should include frequent discus- sions between the airlines and transaction parties starting at an early point in the process. Airline approval was successfully obtained for the Luis Muñoz Marín International Airport lease agree- ment and other proposed AIPP privatizations such at Chicago Midway International Airport. Other Airport Investment Partnership Program Regulatory Considerations: Communicating with the Federal Aviation Administration The FAA cautions that the process of transferring the airport from public to private control under the AIPP is “time consuming,” given the diligence, commercial processes, airline negotia- tions, and regulatory coordination required before a transaction can be completed (FAA, 2004). The FAA’s portion of the approval process includes both a preliminary and a final application: • The preliminary application is the first step of the approval process with the FAA. It includes a description of the objectives of the privatization initiative, a description of the process and

20 Evaluating and Implementing Airport Privatization and Public-Private Partnerships timetable for selecting an operator, a description of the airport property to be transferred, financial statements, and a copy of the request for proposals that will be used in the process. The FAA has 30 days to review the preliminary application (U.S. DOT, 1997). • The final application is comprised of eight parts: (1) parties to the transaction, (2) airport property (which will have already been prepared and submitted with the preliminary appli- cation), (3) terms of the transfer, (4) qualifications of the private operator, (5) requests for exemption, (6) certification of air carrier approval, (7) airport operation and development, and (8) assent to periodic audits. There is no timeline for the FAA’s review of the final appli- cation. Before the FAA can approve the transaction, it must give notice of receipt of the final application in the Federal Register and accept public comments on the application for 60 days. In the case of Luis Muñoz Marín International Airport in Puerto Rico, the entire transaction process took more than 3 years: the transaction’s preliminary application was approved in December 2009 and the final application was not approved until February 2013. However, AIPP transactions can occur in shorter periods of time; for example, the proposed 2008 transaction at Chicago Midway International Airport would have been completed in half that amount of time if the financial crisis had not resulted in failure to close. The FAA rules state that “FAA representatives will be available to meet with parties interested in an airport privatization project both before and after the filing of a preliminary application for exemption to discuss the Federal statutory requirements and policies that apply to applications Communications with Other Agencies: A Transportation Security Administration Case Study The TSA provides its approval through the adoption and approval of an airport security program (ASP), the contents and oversight of which are governed by regulations promulgated by the TSA. On the surface, the requirements of the ASP for a privatized airport and a governmentally operated airport are not different. However, the operations of the privatized operator will be new, and the ASP will need to be crafted specifically for the private operator’s operations and organizational structure (49 CFR § 1542). Because the content of the ASP is sensitive security information pursuant to TSA regulations, transaction team members and private operator staff or consultants whose jobs necessitate access to the ASP must be cleared by TSA to receive those materials or participate in the development of the ASP specific to the private operator. While historical practice has varied, the transaction process may need to have progressed to the point of identification of one to two finalists before clearance for sensitive security information will be granted (49 CFR § 1542.101). Further, depending on the normal cycle of review and updating of the airport’s existing ASP, the TSA may wish to embark on a two-step approach where a general update of the ASP to then-prevailing norms is first completed before a private operator–specific ASP is created in connection with the AIPP transaction. A two-step approach, to the extent pursued, will be more time intensive and may affect overall transaction timing.

Legal and Regulatory Context for Airport P3 Transactions 21 under” the AIPP statute. Because of the length and complexity of the AIPP process, potential transaction parties should make use of this availability to communicate regularly with the FAA during a proposed transaction. In the case of the proposed sole-source AIPP transaction that was considered in November 2016 for Westchester County Airport, New York, the parties chose to file a preliminary application even though a private operator had already been identified, includ- ing draft transaction agreements instead of a request for proposals. Although this format did not specifically conform to the FAA rules, the preliminary application was accepted (Airport Privatization Pilot Program: Preliminary Application for Westchester County Airport, White Plains, NY, 2016). Given the complexities and levels of approval required for this process, it is imperative to commence engagement with the TSA on the ASP matters. The transaction team should engage actively with all available channels of the TSA on the matter, including the regional staff, applica- ble national staff, and local staff. This approach will help accomplish more than just the approval of the ASP. The goal of the process is not only to produce a TSA-approved ASP for the trans- action but more importantly to ensure a smooth transition of security operations. Open engage- ment between the on-the-ground TSA staff and the private operator’s security staff will foster cooperative working relationships that will help ensure safe and secure airport operations after the transaction is complete. P3s Outside of the Airport Investment Partnership Program While the AIPP provides key benefits to transaction parties in the event of a lease or sale of a full airport, there are instances where a P3 can be beneficial for an airport even without these benefits. This is even demonstrated within the AIPP itself; although Stewart International Air- port did not obtain approval to use airport revenue for non-airport purposes, the airport was able to use the proceeds from its AIPP lease to improve roadway access to the airport and make improvements to Republic Airport, another airport owned by New York State and considered by the FAA to be included in the same airport system as Stewart. There are other forms of P3s outside of the program itself, which result in greater levels of retained control by the public operator while still providing certain benefits to airport stake- holders (“Stewart International Airport Final Application Under the Airport Privatization Pilot Program,” 1990). The private development or operation of one terminal or other essential air- port infrastructure, for instance, would not qualify for the AIPP’s exemptions but could provide an improved experience for airport customers. The key distinction from AIPP’s predecessor program, APPP, is that the airport operating certificate is not transferred to a private entity, and the private entity enjoys revenue only from the agreed-upon activities in the transaction agreement. This approach has been taken in several recent airport developments, such as the P3s for the redevelopment of New York LaGuardia Airport’s Central Terminal B, the ultimately cancelled Great Hall project at Denver International Airport, and the consolidated rent-a-car (ConRAC) facility and automated people mover projects at Los Angeles International Airport (LaGuardia Gateway Partners, 2016; Ferrovial, 2017; Los Angeles World Airports, 2018b; Los Angeles World Airports, 2018c). In a P3 that proceeds outside of the AIPP, the airport continues to be eligible for federal grants and retains control over PFCs (FAA, 2013). Those funds can be put toward capital improve- ments such as terminal development, as part of the P3, but would continue to be run through the public airport owner.

22 Evaluating and Implementing Airport Privatization and Public-Private Partnerships State and Local Laws Governing/Enabling Legislation In addition to federal laws and regulations, state and local law play an important role in autho- rizing government entities to use alternative project delivery for airport development projects. At the highest level, state law governs available project delivery methods within the state, in addition to the agencies authorized to use those methods and the processes for implement- ing a project under the available methods. Numerous states have adopted laws concerning P3 project delivery, and the legal landscape for P3 procurement is rapidly changing, with several states having adopted or amended their P3 laws in the past few years. For example, during this period, several states have broadened authorization for state-level P3 projects including New Hampshire, Kentucky, Oklahoma, and New Jersey. At the same time, states such as California, have seen their P3 authorizations expire. Other states prohibit P3 project delivery altogether at the state level, including New York. The scope of capital projects eligible for P3 project delivery varies widely across jurisdictions. Certain states broadly authorize P3 as a project delivery method for nearly any type of project. Others broadly permit P3s to deliver transportation projects generally, while others limit P3 to specific types of projects or, in some states, specific projects. In certain states, another layer of the regulatory framework is added, which is delegation to an independent agency, by either statute or regulation, of the authority to determine which projects are eligible for P3 delivery. Local laws have similar limitations on the scope of eligible projects and the way projects may be deemed acceptable for P3 delivery. In addition to state-level P3 laws, subdivisions of the state, such as municipalities and counties, may have separate authority to enact laws that authorize P3 project delivery, such as pursuant to home rule powers or state statutes. In certain cases, this may permit cities and counties to enter into P3 agreements even where a state or state-level agency could not itself enter into such an agreement. For instance, the State of Illinois has statutes that enable the execution of a P3 only for specific projects (e.g., for the Illinois Department of Transportation to execute the Illiana Expressway or managed-lane projects); however, the City of Chicago was able to pur- sue a P3 structure for Chicago Midway International Airport because the City was the owner/ operator of the airport and has very broad constitutional home rule powers. By contrast, many municipalities and counties that do not enjoy home rule powers may lack the basic authority to proceed with a P3 project without additional state authorization. Even where a municipality or county enjoys home rule authority, state authorization may be needed for certain aspects of the transaction, such as granting property tax exemption for property leased by a private operator, as was the case in the City of Chicago projects. Further, depending on the organization of the airport’s operating authority, certain airport projects may not be constrained by state and local project delivery and procurement laws. For example, although New York State does not authorize P3 project delivery, the Port Authority of New York and New Jersey (PANYNJ), an interstate compact with jurisdiction over certain regional transportation projects, is not restricted by New York law. Even though LaGuardia Airport is situated entirely in New York, PANYNJ is delivering the LaGuardia Central Terminal Redevelopment Project as a P3. PANYNJ is a special form of interstate authority approved by the U.S. Congress. Another example is the Los Angeles World Airports P3 procurements of an automated people mover system and a consolidated rental car facility. The State of California does not currently have a statewide enabling statute for P3s. Because Los Angeles World Air- ports is a City of Los Angeles department that is governed by a seven-member Board of Airport Commissioners, it was able to procure the automated people mover project under Los Angeles City Charter Section 371(b) and Ordinance No. 183585. This municipal code provision grants

Legal and Regulatory Context for Airport P3 Transactions 23 the Board of Airport Commissioners the ability to authorize its executive director to use alter- native project delivery methods and the competitive sealed proposal selection process for select capital improvement projects related to the airport Landside Access Modernization Program. Governance structure, then, and its corresponding procurement abilities are an important determining factor for the regulatory authority to execute P3s at airports. In addition to state, local, or special law, several states empower authorities that oversee project delivery to promulgate regulations that provide procedures and guidelines for P3 project delivery that are more precise than the statutes. Regulations and agency guidelines are other sources that must be consulted to ascertain relevant parameters for a P3 project. Depending on the authority vested in the agency and the breadth of the state’s P3 statute, airport operating authorities should consider the applicability of any restrictions in these guidelines and evaluate whether they apply to an airport project. For example, several state departments of transporta- tion have developed P3 guidelines setting the parameters for P3 transportation projects, and whether these parameters would potentially constrain an airport project in the state should be evaluated. Factors to Consider Under Applicable Law State, local, and special P3-enabling laws vary widely but generally provide a similar frame- work. P3 legislation, in addition to delineating permissible types of projects, provides direction on such issues as procurement methods, selection criteria, financing options, term lengths, funding sources, right-of-way responsibility, data protection, and actions or authority that must remain with the government agency. Certain of these and other related issues may not be covered by specific P3 laws, but rather by laws of general applicability that must be considered in tandem with the P3-enabling legislation and federal law. Initially, P3 legislation often prescribes certain parameters for the process to procure a pri- vate sector developer. Frequently encountered requirements include whether a procurement must be a one-step or two-step process, whether the agency can accept unsolicited proposals for projects and the process that follows when it does, and the levels of authorization the agency must receive at each step in the process. Additionally, procurement laws provide the guide- lines for determining which proposal constitutes the “best value” to the agency, including such considerations as factors that must be evaluated when scoring proposals, the extent to which the agency must consider price, and mandatory information that bidders must provide during the procurement process. P3 procurement laws additionally govern the transparency of the selection process and procedures for protest, including the authority’s ability to proceed with contract execution in the event of a protest. State and local laws may impose limitations on the types of public funding for which a P3 project may be eligible. For example, some localities permit the issuance of private activity bonds or other public debt to fund P3 projects, while others may provide for or limit the extent to which a private developer is entitled to operation revenues or availability payments. Other laws pertain to the guarantees that the private developer must provide and specify certain mini- mum requirements for creditworthiness and other factors affecting the private entity’s ability to finance a project. Enabling statutes may additionally impose surety bonding requirements, including the amount of performance and payment bonds a private entity must obtain to bid on the project. The applicable P3 law will specify the types of P3 projects that are permitted, such as, for example, design-build-operate (DBO), DBOM, or DBFOM in the case of a construction-related project or a long-term lease in the case of existing facilities such as those in the AIPP. Other laws may address the term length of a P3 project or provide conditions under which the

24 Evaluating and Implementing Airport Privatization and Public-Private Partnerships handback date may be extended at the agency’s option. P3 legislation often considers right- of-way issues, including whether the private entity has the authority or responsibility to obtain property or right of way or additional right of way (including temporary easements) for the project, or whether the agency must undertake this task, as well as the management and use of project property or right of way over the term of the project. Additionally, P3 statutes, to the extent they permit the private party to collect revenues and perform functions typically under- taken by government agencies, govern such issues as data collection and protection and other privacy-related issues. For airports, this might include security information, the collection and dissemination of passenger data, and other methods of privacy protection for the sensitive data of passengers and operators, including airlines. Other Considerations In addition to the laws specifically applicable to P3 project delivery, airport operators must consider other laws to which a project may be subject. Major examples include • State and local open records laws and labor laws. Open records laws create unique consid- erations, as they are likely to encompass the private developer to the extent it is performing functions on behalf of the airport operating agency. The private developer must be aware that the records it develops about an airport project may be subject to public inspection and must consider the extent to which this could lead to the disclosure of proprietary or other confidential information. Private developers and airport owners may have to implement a process to manage the dissemination of public records that protects information exempt from disclosure, including personal data and security-related information. • State and local labor laws. These often apply regardless of the funding source or status of the operating authority, requiring consideration of issues such as contracting [minority business enterprise (MBE), women’s business enterprise (WBE), and airport concession dis- advantaged enterprise] compliance and labor unions. There may be additional local laws mandating that a certain portion of the labor used at an airport be composed of individuals residing in a limited geographic area. • State and local taxes. The private developer may be subject to these taxes including property, leasehold, and sales taxes. • Limitations on employee non-compete agreements. State law governs the extent to which a private entity may contractually limit an employee’s right to work for a competitor after leaving its employ. • Requirements intended to protect jobs or levels of wages and benefits for airport employees. In the proposed Chicago Midway International Airport lease transaction, state law would have required the lessee to offer employment on substantially similar terms to those of city employees working at the airport. Similar provisions were included in the San Juan lease agreement.