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.).

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

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

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.

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.

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

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.

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)

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

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)?

Questions and Answers

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?

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

Aeronautical Rents

Aeronautical Rents

Aeronautical Rents

Aeronautical Rents

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

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)

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.?

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

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).”

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

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

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

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)

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

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

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

Questions and Answers Questions and Answers