2. 2017 Annual Conference Association of California Airports
South Lake Tahoe, California
September 14, 2017
Session title
The blocking and tackling of general aviation revenue generation - best practices approaches for setting and adjusting general aviation rents and fees and pursuing other potential revenue generating opportunities
Session description
During this session, Paul will discuss the fundamentals of general aviation revenue generation including best practices approaches for setting and adjusting general aviation rents and fees. Additionally, Paul will discuss best practices approaches for pursuing other revenue generating opportunities (e.g., aeronautical and non-aeronautical development, fuel storage facility development, through-the-fence development, etc.).

3. Airport Rent Monopoly Board Aviation Management Consulting Group
Understanding the
Airport Rent Monopoly Board
Presented by:
Jeff A. Kohlman, Managing Principal
Aviation Management Consulting Group
Robert Decker, MAI, Owner
Decker Associates

4. Discussion Framework Airport Sponsor Assurances
Primary Management and Compliance Documents (PMCDs)
General Aviation Leasing/Rents and Fees Policy
Aeronautical Rents
Non- Aeronautical Rents
Appraisal
Questions and Answers

5. Airport Sponsor Assurances
22. Economic Non-Discrimination
Sponsor will make its airport available as an airport for public use on reasonable terms and without unjust discrimination to all types, kinds, and classes of aeronautical use
Each commercial aeronautical activity (operator) shall:
be subject to the same rates, fees, rentals, and other charges as are uniformly applicable to all other such operators making the same or similar uses of the airport and utilizing the same or similar facilities.

6. Airport Sponsor Assurances
24. Fee and Rental Structure
Sponsor will maintain a fee and rental structure for the facilities and services at the airport which will make the airport as self-sustaining as possible under the circumstances existing at the particular airport.

7. Primary Management and Compliance Documents
Definition
Govern the operation, management and development of an airport
Rules and Regulations
Use of the Airport
Leasing/Rents and Fees Policy
Leasing of Airport land and improvements and setting and adjusting rents and fees
Minimum Standards
Engaging in commercial aeronautical activities on the Airport
Development Standards
Developing (modifying) improvements on Airport land
Purpose
Contribute to the financial health of an airport
Facilitate orderly development
Promote the provision of quality products, services, and facilities
Protect health, safety, interest, and general welfare of the public
Reduce the potential for and help facilitate the successful resolution of conflicts/disputes, complaints, and lawsuits

8. Aeronautical Rents FAA Requirements
Methodology for aeronautical rents must be:
reasonable
justified, and
consistently applied
Goal of being as financially self-sustaining as possible given the circumstances that exist at the airport (Assurance 24)
Rent can be established using…
Rent study (best practices approach)
Negotiation
Considered a “market” transaction as long as it’s an open market, parties act prudently and knowledgeably, and the price is not affected by undue stimulus
Appraisal (circuitous approach)
Should “only” be used - if required by agreement or legal requirement
By definition, appraisal implies value and value is not the same as a rental rate.

9. Aeronautical Rents Establishing rents… Rent Study
Rental rates for similar aeronautical land and/or improvements at comparable airports are analyzed to derive a market based rental rate
Also, consider national, regional, and competitive airports
Process
Profile subject airport and property
Identification of comparable airports
Identification of similar leased property
Similar land and/or improvements
Similar use
Commercial (FBOs or SASOs)
Non-Commercial
Identification of on-airport comparables
Compilation and analysis of data
Segregate rent (by component)

10. Aeronautical Rents
Identification of comparable airports (key elements)
Infrastructure: number, configuration, and capacity of runways, taxiways, ramps/aprons
Approaches: precision verses non-precision
Control tower
Number and type of aviation businesses: FBOs and SASOs located at the airport
Amount of land: available for development and related land use considerations
Type of market: demographics, number of airports, supply and demand
Activity levels: based aircraft, aircraft operations, and fuel volumes

11. Aeronautical Rents
Identification of similar leased property (key elements)
Use
Aeronautical versus non-aeronautical
Commercial verses non-commercial
Non-traditional
Civil Air Patrol, Non-Profit, Government Agencies, Etc.
Size
Location and access
Landside and airside access to/from the leasehold
Airport infrastructure
Utilities
Lease terms and conditions
Type, quality, condition, and functional utility
Are there any restrictions on the development of land, the availability of utilities, and the ability of the land to support aircraft (aeronautical use)?

12. Questions and Answers

13. Aeronautical Rents Segregate Rent (By Component) Real estate
Unimproved (raw) land
Improved land (with access and infrastructure to the “lease” line)
Improvements (aircraft apron, vehicle parking)
Facilities (terminal building, hangars, office, and shop space)
Non-real estate (business)
Percentage rents (gross receipts)
Are they being charged in lieu of rent?

14. Aeronautical Rents Adjusting rents Methodology Frequency
Mechanisms (basis)
Negotiation
Fixed
Index (e.g., CPI, PPI, etc.)
Rent Study
Combination
Alternating
Frequency
Regular (periodic) adjustments throughout the lease term
Whenever an option is exercised
If options are granted in the lease agreement
Whenever the lease term is extended
Capital investment translates into term

15. Aeronautical Rents

16. Aeronautical Rents

17. Aeronautical Rents

18. Aeronautical Rents

19. Aeronautical Rents Adjusting rents Methodology Frequency
Mechanisms (basis)
Negotiation
Fixed
Index (e.g., CPI, PPI, etc.)
Rent Study
Combination
Alternating
Frequency
Regular (periodic) adjustments throughout the lease term
Whenever an option is exercised
If options are granted in the lease agreement
Whenever the lease term is extended
Capital investment translates into term

20. Non-Aeronautical Rents
FAA Requirement
Rates charged for non-aeronautical use of an airport must be based on fair market value (rent)
Process
Profile subject property
Identification of similar leased (or fee simple) property
Similar land and/or improvements
Similar use
Compilation and analysis of data
Segregate rent (by component)

21. Non-Aeronautical Rents
Identification of similar leased property (key elements)
Use
Commercial verses non-commercial
Zoning designation
Highest and best use
Size
Land
Improvements
Location and access
Landside access to/from the property
Utilities
Lease terms and conditions
Type, quality, condition, age, and functional utility
Are there any restrictions on the development of land, the availability of utilities, etc.?

22. Appraisal
Appraisal
An appraisal is typically performed when a “value” is desired or required to facilitate the sale, acquisition, or financing of airport property
In some cases, a value may be used (or may be required by the lease agreement) to calculate rent
Can be used to determine the value of the interest held by a lessee (leasehold interest) or lessor (leased fee) in land and/or improvements
Depending upon the current rent, market rent, and remaining term of an agreement, leasehold interest can be significant

23. Appraisal Leasehold interest Leased fee estate
“The interest held by the tenant (lessee) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.”
Leased fee estate
“The interest in a property that remains with the owner (lessor) after the right to use and occupy the property has been conveyed to another (this right is usually granted by a lease for a specific period of time).”

24. Appraisal Appraisal Fundamental approaches to value Cost Approach
Sales Comparison Approach
Income Approach

25. Appraisal Cost Approach
Current cost of replacing facilities and site improvements less depreciation plus the market value of the land (assumed vacant)
Most effective in valuing relatively new developments

26. Appraisal Sales Comparison Approach
Direct comparisons of similar properties that have sold in the same or similar markets
Sales typically reflects the transfer of leasehold interest and going-concern
Real estate and business value are difficult (if not impossible) to separate
As a result, this approach is only used when valuing non-commercial properties

27. Appraisal Income Approach
This approach is based on an estimate of the property’s net income potential
Measures the present worth of anticipated future benefits using:
Discounted cash flow (DCF) analysis
Direct capitalization technique (direct capitalization)
Net income (which is estimated using comparable rental rates) is discounted or capitalized (using an appropriate rate of return) to arrive at an indication of value
Lease term
Less than 10 years (direct capitalization)
10 years or more (DCF)
Escalations
More frequent (DCF)
Less frequent (direct capitalization)

28. Appraisal Reconciliation Appropriateness of each Approach
Quantity of the market information
Quality/Accuracy of the market information
Rounding vs an exact estimate

29. Appraisal Establishment of Fair Market Value Appraiser Qualifications
Knowledge and experience
General aviation industry (FBOs and SASOs, and commercial and non-commercial)
Recent experience appraising aeronautical properties
Approaches
Consider and use the most appropriate (applicable) approaches to value
Cost, Income, and Sales Comparison
Explain why other approaches were not used

30. Appraisal Establishment of Fair Market Value… Appraiser…
Other Considerations
Highest and best use is aviation-related
Property will be located on the airport
Property will have access to the infrastructure and amenities of the airport

31. Questions and Answers
Questions and Answers