Guidebook for Air Cargo Facility Planning and Development (2015)

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82 8.1 Financial Planning for Cargo Facilities Financial planning is an important component of air cargo facility planning. A sound finan- cial plan addresses both the capital funding of the facilities and their operation. The financial plan answers key questions, such as: • How will the capital costs be funded, and is developing the plan financially feasible? • What options are available to the airport for funding resources? • Will the facilities be a benefit to economic development of the airport, the community, and the air cargo industry? • Will the facilities help the airport be as self-sustaining as possible? This section considers the development and financial alternatives available to the airport planner. 8.1.1 Alternatives for Developing Air Cargo Facilities When airport planners determine that additional air cargo capacity is needed, there are alter- natives for addressing additional capacity needs. These are: • Do nothing, • Redevelop existing facilities, • Repurpose facilities, and • Develop new facilities. 8.1.1.1 Do-Nothing Approach Airport management has the option of taking no action related to cargo facility development, which forces the airlines, integrated express carriers, and third-party air cargo ground handling companies to solve air cargo facility capacity issues themselves. Once the airlines determine their facility needs, they will initiate discussions with the airport planners concerning where their facility should be located. However, it is optimal for airport planners to be ahead of the planning cycle and in a position to guide development of these facilities to best serve the air cargo industry. Designation of land on the ALP for development of air cargo facilities is ideal, with input from the airlines, integrated express carriers, and ground handling companies included beforehand. 8.1.1.2 Redevelop Existing Facilities Whether or not the airport is experiencing overall growth in air cargo volume, some air cargo operators grow out of their existing facilities, leaving an opportunity for the airport to redevelop those facilities to meet another operator’s need at the airport. For example, if an integrated C H A P T E R 8 Air Cargo Facility Planning— Funding Strategies

Air Cargo Facility Planning—Funding Strategies 83 express carrier decides to construct a new air cargo facility and vacate its existing facility, the airport has the opportunity to renovate or revamp the vacated facility to provide capacity for smaller airline air cargo operators, non-cargo users, or ground handling companies. Assuming that the title to that facility has reverted to the airport, the airport could subdivide the facility into several bays, each with truck dock doors and access to the airport operations area. The airport could lease space in this converted facility to tenants and generate additional revenue for the airport. Another possibility is to lease the space to a ground handling company that could provide air cargo handling services to an airline or third party or use the space for GSE maintenance and administration offices. Ground handling companies seldom want to construct new facilities at an airport and usually lease space in existing facilities that are somewhat older and more economical. 8.1.1.3 Repurpose Facilities In today’s environment, airports may find that they have surplus air cargo space or even vacant air cargo facilities. In this situation, the airport may be best off converting that space to non–air cargo use or removing those facilities and making the land available for other uses. Example reuses are space converted to airport maintenance equipment repair and storage, de icing support space, automobile rental support space, GSE maintenance and repair, and air- line provision centers. 8.1.1.4 Develop New Facilities There are four approaches to developing new air cargo facilities at an airport: • The airport develops the facilities internally. • The airport outsources the development to a third party on leased airport land. • The tenant develops its own new facilities on airport land. • The airport and tenant develop a public/private partnership (PPP). 8.1.2 Cargo Facilities Developed by Airport Management Prior to an airport electing to develop an air cargo facility, securing necessary funding, and developing a pro forma business plan that projects a satisfactory return on invested capital, the airport needs to ensure that the tenants are committed to leasing space in the proposed air cargo facility. The best way to ensure that the prospective tenants will lease the facility upon comple- tion is to have the tenants execute a facility lease prior to breaking ground on the development. When a new air cargo facility is needed at an airport, the airport can serve as the developer, manage the design and construction of the new cargo facility, and, upon completion, serve as the landlord to the facility’s tenants. Whether the air cargo facility is a smaller multi-tenant facility or a larger, single-user facility, the development of a pro forma business plan is necessary to fore- cast the lease revenue to be generated, the cost of operating the facility, the cost of construction, the cost of funding, and the return on investment. When an airport is the developer, the airport is responsible for securing the development’s funding and long-term building maintenance and administration, as well as meeting tenant needs. Funding can come from several sources. The airport can use available cash but should be aware of the lost opportunity to fund other airport public infrastructure projects. Tax-exempt bonds could be sold to fund the development. Private financing through a bank or financial institution is an option but is probably the most expensive alternative. Airport Improvement Plan (AIP) funding through entitlements, passenger facility charges (PFCs), or FAA grants is another alternative. Entitlement funding for cargo projects is available if the airport handles over 100 million pounds of air cargo landed weight per year. Common-use infrastructure that is

84 Guidebook for Air Cargo Facility Planning and Development not exclusively used by a single user may be eligible for grants either from the FAA or from local economic development agencies. Of all the alternative funding sources, grants represent the ideal source of funding. While there is a local matching payment required, grant funding is more cost-effective than the alternatives. The most important objectives when an airport is deciding whether to develop an air cargo facility in-house and is reviewing funding alternatives are to maximize the airport’s revenue and to ensure the ongoing financial sustainability of the airport. Airports can design the air cargo facility in-house, if they have the expertise on staff, or engage a private-sector architectural firm that specializes in the design of air cargo facilities or ware- houses. Once the concept design has been completed, airport planners need to ensure that the development conforms to state and federal environmental regulations. If federal grant monies are used, then an environmental assessment (EA) study will be required. Some airports complete this analysis as part of their master plan, but if not already completed and approved, then an EA is required to determine the specific environmental analysis needed. If the land is envisioned for future air cargo facility development, for example, the environmental analysis will be more complex and may require an environmental impact statement (EIS). If the land does not have to be significantly altered, the study could be much easier and a lot less expensive. Even if initial designation of a site for an air cargo development occurs through the development of an air- port master plan, an EA and subsequent environment analysis will eventually be required. The cost to complete the necessary environmental analysis usually ranges from $30,000 to $500,000, depending on the complexity of the land preparation envisaged. Environmental impact studies are usually outsourced to environmental firms that specialize in environmental analysis. Traffic and roadway studies may also be required, particularly in the busy gateway airport areas such as San Francisco, New York, and Miami. After the requisite airport layout plan has been approved by the FAA, and environmental analysis has been completed and found to be in compliance with National Environmental Policy Act (NEPA) rules, the airport’s architect can begin the detailed facility design, preparation of construction plans, and acquisition of the necessary permits. Like most other airport projects, competitive bids are required. At the completion of the bidding process, a construction company is selected, and the airport executes a contract with the company to build the facility. The selection normally requires the approval of the airport’s governing body, and the construction company has to produce the required insur- ance certificates and completion bonds before ground can be broken. Upon completion of the facility’s construction, the agency responsible for permitting and code compliance issues a certifi- cate of occupancy permitting the airport and its tenants to use the facility. The benefit of an airport constructing the facility itself is that the airport not only enjoys the ground lease revenue but also the revenue from leasing the facility to a tenant. Again, airport planners need to ensure that there is a favorable return on the airport’s invested capital and review all the risks associated with this type of development. Risks include loss of tenants due to airline mergers, third-party handler consolidations, and airline bankruptcies. 8.1.3 Cargo Facilities Developed by Third-Party Developers When an airport needs an air cargo facility built for a tenant, or when a tenant wants an air cargo facility constructed but does not want to lease the airport land itself, it will engage a third- party developer to lease the required land, design the facility, develop the site, and construct the facility. Third-party developers are interested in taking on projects of this nature provided that the tenant is a reputable company and a good credit risk. The developer will usually lease the land from the airport for 20 years, secure the necessary funding, and manage the entire design and construction process. The developer will go through the same vetting process outlined in the previous section to ensure that the development is economically viable, will complete the

Air Cargo Facility Planning—Funding Strategies 85 environmental analysis required, and will secure the necessary permits to construct the facil- ity. The difference is that the developer will ensure that the funding is in place and pay for the design, environmental studies, permitting fees, and construction. Once the facility has been constructed, the developer will lease the facility to its tenants. There are several large air cargo development companies that specialize in this kind of development. The benefit of having a third-party developer construct the facility is that the airport receives the ground lease revenue for the duration of the lease term and does not have to manage and fund the development but takes title to the facility on termination of the ground lease. Most cargo facilities have a useful life beyond the average ground lease term. After the title has reverted to the airport, the airport can lease the ground, the improved areas around the facility, and the facility itself for several more years, creating an additional revenue stream without having to invest any capital. While airport ground leases for air cargo facilities range from 20 years to 60 years, the average ground lease term is in the 30- to 40-year range. 8.1.3.1 User/Tenant Developments Some airlines, integrated express carriers, and ground handling companies prefer to lease land at an airport and construct an air cargo facility to their own specifications. At many international gateway airports where the airlines have larger air cargo facilities, the usual practice is for the user or tenant to lease the land and construct or have a third party construct the facility. Normally, users or tenants in this case will engage a third-party developer to design and construct the facil- ity. The funding for construction of the facility would be provided by the user or tenant. 8.1.3.2 Public/Private Partnership One alternative to constructing an air cargo facility is to develop an arrangement with a third- party developer or tenant/user that allows the development of an air cargo facility to be financed through governmental loans at rates much lower than through a bank or commercial lending institution. The lower financing costs can take a marginally profitable project and make it more economically viable. At Anchorage International Airport, Alaska DOT, the airport’s sponsor, was able to secure state funding at favorable rates that improved the pro forma business plan for an air cargo devel- opment. The airport, however, had to take title to the facility and lease it back to the developer in order to qualify for the favorable state funding. While these public/private partnerships can be economically advantageous, they can be somewhat complex and require a fair amount of creativity. Another example of a public/private partnership is a case where an airport was able to secure funding from a state economic development agency to construct a facility. A third party was engaged to construct the facility, and on completion, the airport took title to the facility and leased it back to the ultimate user. The benefit of public/private partnerships is that the grant funding or state financing reduces the cost, which improves the overall economics of a development. In these cases, the airport benefits by leasing the ground and facility to the user and enhancing service at the airport. In this type of arrangement, the airport has the option of serving as the developer, engaging a third-party developer to construct the facility, or having the tenant be the developer. 8.2 Development of a Pro Forma Statement When an airport is interested in constructing an air cargo terminal and being the developer, it is imperative that the airport planners develop a financial pro forma statement. A pro forma statement is a hypothetical statement showing income and expenses that may be recognized in the future from a business venture or a real estate development. For an airport air cargo

86 Guidebook for Air Cargo Facility Planning and Development development, a pro forma statement captures the various sources of income that can be derived from the development; the expense associated with operating the facility, including debt ser- vice, if applicable; and the construction soft and hard costs. When all of the revenue and costs have been determined, the airport planners can calculate the net present value (NPV) of the development and the internal rate of return (IRR), which illustrates the financial viability of the development and return on investment. Table 8-1 illustrates the construction cost budget for the development of a 200,000-ft2 air cargo facility on 15.57 acres with 162,165 ft2 of warehouse space, 37,835 ft2 of office space, 217,800 ft2 Construction Cost Budget Infrastructure Costs Total Cost: $ Cost/ft2 % of Total Comments Site acquisition – 0.00 0.0% Ground lease – no acquisition cost Fees and allowances 300,000 1.50 1.4% Infrastructure fees and permits Title/document fees 15,000 0.08 0.1% May not be required because airport land Title insurance – 0.00 0.0% Lenders may require anyway Acquisition expenses 60,000 0.30 0.3% Contingency for unanticipated costs Total infrastructure costs 375,000 1.88 1.8% Financing Costs Total Cost: $ Cost/ft2 % of Total Comments Debt fee 210,000 1.05 1.0% Commission: third-party placement of debt Equity arrangement fee – 0.00 0.0% Loan closing expenses 157,500 0.79 0.7% Closing costs and legal fees Appraisals 25,000 0.13 0.1% May be required by lender Independent inspector 25,000 0.13 0.1% May be required by lender Construction period interest 735,000 3.68 3.5% Interest on debt during construction Total finance costs 1,152,500 5.76 5.5% Soft Costs Total Cost: $ Cost $/ft2 % of Total Comments Feasibility study and due diligence 75,000 0.38 0.4% May be required by lender Surveys and soil studies 50,000 0.25 0.2% Required for design Environmental studies 25,000 0.15 0.1% Required for jurisdictional compliance Mechanical and electrical 240,000 1.20 1.1% Specialized engineering Architecture 500,000 2.50 2.4% Building design and working drawings Civil/structural engineering 240,000 1.20 1.1% Required for design Site security and perimeter fencing 75,000 0.38 0.4% Construction site requirements Professional accounting 15,000 0.08 0.1% May be required Taxes and insurance 180,000 0.90 0.9% Construction insurance required Legal fees 150,000 0.75 0.7% Ground lease and professional services Administration and management 50,000 0.25 0.2% Developer overhead Travel and lodging 25,000 0.13 0.1% Developer overhead Development fee 860,000 4.30 4.1% Developer fee and profit Project management 210,000 1.05 1.0% Third-party project management Leasing commissions – 0.00 0.0% Third-party lease sales commission Soft-costs contingency 315,000 1.58 1.5% Unforeseen cost contingency Total Soft Costs 3,010,000 15.05 14.3% Hard Costs Total Cost: $ Cost $/ft2 % of Total Comments Warehouse and office 15,333,176 76.67 72.9% Construction of shell structure Tenant improvements – – 0.0% Finishing specified by tenant Specialized tenant improvements – – 0.0% Special finishing required by tenant Utilities hook up 75,000 0.38 0.4% Utilities connection from perimeter of site Signage and graphics 35,000 0.18 0.2% Tenant required and directional signage Hard-costs contingency 1,050,000 5.25 5.0% Percentage of total development cost Total Hard Costs 16,493,176 82.47 78.4% Total Development Budget 21,030,676 105.15 100.0% Source: Lynxs Group, RMJ Associates. Table 8-1. Airport-developed cargo facility construction cost budget.

Air Cargo Facility Planning—Funding Strategies 87 of aircraft parking apron, 174,240 ft2 of truck access, and vehicle parking using average construc- tion costs. In the comments column, a description of each line is included along with whether the cost item is applicable in this example. Table 8-2 shows the basic components of a development financial pro forma statement for an airport air cargo development assuming that the land/facility is leased to the tenant on a triple net basis, with the tenant paying facility rent, facility operating expenses, taxes, maintenance, and insurance. For this development, a hypothetical development financial pro forma statement has been included to illustrate the financial plan for this development based on the assumed airport lease rates in Table 8-3. Some airports lease the ground, warehouse, offices, apron area, and parking area for one all- inclusive lease rate. In this example, the airport leases the ground at one rate, but then seeks to recover the cost to construct the apron and the parking lot by adding a premium over and above the ground rate for the improved areas. The airport also charges a different rate for the warehouse space and the office space in recognition that the office space, including tenant improvements, was more expensive to construct. It is assumed that the tenant will be leasing the entire development for at least 20 years, so a vacancy factor has been included in the pro forma statement in Table 8-2. The financial analysis assumes that the airport secured a 20-year loan to finance the entire development and amortized the capital investment over a 20-year period. Only the first 5 years of the development financial pro forma statement are shown in Table 8-4. Revenue Ground lease The revenue that an airport would receive from a tenant for leasing the parcel of land on which an air cargo facility development would be built. Any increase in the ground rent due to consumer price index (CPI) increases or ground rent appraisals should be included. Improved ground lease The revenue that an airport would receive from a tenant for leasing areas that have been improved, such as the aircraft parking apron, truck dock access area, or parking lot area. Any increase in the improved ground rent due to CPI increases or ground rent appraisals should be included. Facility lease The revenue that an airport would receive from a tenant for leasing the facility that the tenant would be occupying. This could be subdivided into warehouse space versus office space. Any increase in the facility rent due to CPI increases or facility rent appraisals should be included. Vacancy factor If any turnover is anticipated during the planning horizon, then the lost revenue due to a turnover vacancy should be included. Expense Maintenance The cost that the landlord/airport would incur annually to maintain the facility or the major components of the facility. Salaries The cost of the human resource required to oversee, manage, and account for an air cargo facility. This may consist of a portion of staff time required, but in any case the staff’s fully allocated overhead burden should be included. Debt service The cost the airport would incur to pay off the principal and interest on capital borrowed to finance the development. Usually there is an initial construction loan that is replaced with long-term financing. The principal and interest for the long-term financing would be included here. Income (the revenue less the expense) Capital investment The cost to construct the facility, which is shown on the same line as the income as a negative number. Net present value All costs and revenues in future years are discounted back to the base year. When the sum of the discounted revenues is greater than the sum of the discounted costs, the NPV is positive, and the investment is deemed to be financially viable. Internal rate of return The discount rate that makes the net present value of all cash flows from a particular development equal to zero. Generally speaking, the higher a project’s internal rate of return, the more desirable the project. Many organizations have an established hurdle rate or investment criteria. If the IRR is greater than the hurdle rate, the investment in the development is acceptable. Source: Lynxs Group, RMJ Associates. Table 8-2. Income pro forma statement.

88 Guidebook for Air Cargo Facility Planning and Development In this example, the NPV using a 9% discount factor is $820,559, which indicates that the sum of the discounted revenues is greater than the sum of the discounted costs and the investment is deemed to be financially viable. The IRR for this example is 10%, which represents a reasonable return on investment. 8.3 Air Cargo Facility Finance and Funding Airports are required by the federal government to be as self-sustaining as possible. Within this context, airports must often fund expensive projects. Funding sources for airport projects include the airlines, capital markets, state and federal governments, and the fees charged by the airport itself for operations. Funding sources can vary by aviation function for a project. For example, funding options for apron areas differ from cargo warehouse options. On-airport development has many models, ranging from totally publicly owned to entirely privately owned. 8.3.1 Public Funding Users of the air transportation system pay for the costs of developing and running the U.S. National Airspace System (NAS), which includes public-use airports. Users include airline pas- sengers, air cargo carriers, private pilots, corporate aircraft owners, and air cargo shippers. For example, a portion of the U.S. air transportation infrastructure is funded by taxes on all aviation Lease Area Rate/ft2/year Area (ft2) Ground $2.40 478,126 Improved ramp $0.24 217,800 Warehouse $10.00 162,165 Office $15.00 37,835 Paved parking lot $0.12 174,240 Source: Lynxs Group, RMJ Associates. Table 8-3. Lease rates. Year Revenue ($) Capital 1 2 3 4 5 Ground lease 1,147,502 1,170,452 1,193,861 1,217,739 1,242,094 Improved ramp lease 52,272 53,317 54,384 55,471 56,581 Warehouse lease 1,621,650 1,654,083 1,687,165 1,720,908 1,755,326 Office lease 567,525 578,876 590,453 602,262 614,307 Parking lot lease 20,909 21,327 21,754 22,189 22,632 Total Revenue 3,409,858 3,478,055 3,547,617 3,618,569 3,690,940 Expense ($) 1 2 3 4 5 Maintenance 50,000 51,000 52,020 53,060 54,122 Management and accounting 50,000 51,000 52,020 53,060 54,122 Principal and interest 1,375,839 1,375,839 1,375,839 1,375,839 1,375,839 Other 25,000 25,500 26,010 26,530 27,061 Total Expense 1,500,839 1,503,339 1,505,889 1,508,490 1,511,143 Operating income (21,030,676) 1,909,019 1,974,716 2,041,728 2,110,079 2,179,797 NPV 820,559 IRR 10% Source: Lynxs Group, RMJ Associates. Table 8-4. Development financial pro forma statement.

Air Cargo Facility Planning—Funding Strategies 89 fuels. State and federal agencies tax this fuel to provide the funds needed to make the NAS work. Passengers on commercial aircraft pay the fuel tax as part of their ticket price. They also pay a 7.5% tax levied by the federal government on all passenger airfares. These funds are collected and then spent on labor and equipment to operate the NAS, but they are also distributed back to airports in the form of AIP funds and discretionary grants. 8.3.1.1 Airport Improvement Program The AIP is an FAA-administered grant program established by the Airport and Airway Improve- ment Act of 1982. The FAA provides AIP grants to airport owners/operators for airport construc- tion and safety projects. AIP grants are funded from the Airport and Airway Trust Fund, which gets its revenue from user taxes on airline passenger tickets, aviation fuel, and air cargo waybills. In addition to AIP grants, the trust fund pays for FAA operating costs (e.g., costs associated with operating the air traffic control system) and air traffic control system upgrades. In federal fiscal year (FY) 2011, the FAA Reauthorization and Reform Act of 2011 authorized the following for the AIP: $3.1 billion for FY 2011 and $3 billion for each fiscal year 2012 through 2014. AIP grants can be used for airport planning, airport development, or noise compatibility projects. Grants for airport development generally focus on projects associated with construction, improvement, and preservation of airport infrastructure, or the acquisition of land or equipment. Typical work items included under AIP development are (1) site preparation; (2) construction, alteration, or repair of runways, taxiways, aprons, and ground access roadways on airport property; (3) construction and installation of lighting, utilities, navigational aids, and aviation weather–related reporting equip- ment; (4) safety equipment required for certification of an airport facility; (5) security equipment required by rule or regulation; (6) snow removal equipment; (7) limited public-use terminal development at commercial service airports; (8) equipment to measure runway surface friction; (9) land acquisition; and (10) aircraft noise mitigation. AIP grants have not been made available for routine maintenance, construction of hangars, and revenue-producing public parking areas for most airports, but funding for maintenance, hangars, and revenue-producing areas is avail- able for non-primary airports and airports in the military airport program. AIP grants are either entitlement or discretionary funds. Entitlement funds are awarded to airport owners/operators through a formula based on the number of enplaning passengers and cargo tonnage. Discretionary funds are intended to pro- vide flexibility for the FAA to meet important national airport system needs. They are used to fund capacity enhancement, noise abatement and compatibility projects, and safety and security improvements. AIP funds are distributed as either a grant, which is reimbursed as funds are expended by the airport owner/operator, or under a Letter of Intent (LOI). An LOI is a document that conveys the FAA’s intention to obligate AIP funds to an airport for a specific capacity-related project over a multi-year period. Because the federal budget is only appropriated on a 1-year cycle, with an LOI, an airport can begin a project using bonds or short-term loans with the expectation of receiving reimbursement as the project progresses. In order to obtain AIP funds, the FAA requires an airport to have a 5-year Airports Capital Improvement Plan (ACIP), which details and prioritizes the airport’s capital improvement needs for AIP funding. In addition to an ACIP, the project must be on an approved ALP and have envi- ronmental analysis in the form of an EA or an EIS. Most U.S. public airports have received FAA AIP grant funding for parts of their facilities, especially the airfield. Because of this, the airports are subject to federal grant assurances/obligations, which may create limitations on their ability to market and provide favorable terms to developers, notably the need for fair market value, revenue diversions, and limitations on duration of leases.

90 Guidebook for Air Cargo Facility Planning and Development 8.3.1.2 State/Local Government Grants Many state and local governments provide funds for airport improvements that may fund air cargo development. Each airport will need to research and coordinate with local and state government agencies to see which grants can be applied to airport cargo projects. 8.3.1.3 Passenger Facility Charges PFCs are imposed on enplaning passengers, usually $3 or $4.50 per enplaning passenger, and can be applied to FAA approved projects. PFCs are collected by the airlines when passengers purchase tickets and forwarded to the airport owner/operator, less a handling charge. To be eligible for PFC funding, a project must (1) preserve or enhance capacity, safety, or security; (2) reduce noise or mitigate noise impacts; or (3) enhance airline competition. PFCs are considered local (not federal) funds, but the FAA still approves the imposition and use of PFCs, and PFC-funded projects require consultation with the airlines. As with AIP grants, PFCs may be used to construct non-exclusive– use terminals and related facilities, but certain revenue-producing portions, such as concessions, parking facilities, and rental car facilities, are excluded. If PFCs are collected at $4.50 per enplaned passenger, the airport owner/operator must forgo 75% of its AIP entitlement funds. 8.3.1.4 Debt Financing Many airport sponsors such as municipal or county governments have the ability to finance capital projects by borrowing money and incurring either short-term or long-term debt. These types of debt include general obligation bonds and revenue bonds. 8.3.1.5 General Obligation Bonds General obligation bonds, which usually require voter approval, pledge the full faith and credit of a municipal entity as security to the investor. This commitment is based on the entity’s abil- ity to levy property, sales, or income taxes. The entity gives the bondholders (investors) a first claim on its general fund, and the community pledges the ability to pass any legislation needed to increase general fund revenues to pay the debt service. 8.3.1.6 Revenue Bonds Revenue bonds are issued by an airport owner/operator for projects that are anticipated to generate sufficient revenue to pay the debt service. Unlike the general obligation bonds of a municipal entity, they are backed by a specific source or sources of revenue. They do not usually require voter approval. However, because the payment of debt service is limited to the revenue generated by the project, a feasibility study analyzing the projected revenues and operations of the facility being financed or improved is typically required to market and sell the bonds. Revenue bonds may be issued tax exempt for qualifying projects, including terminals, run- ways, hangars, repair shops, and land-based navigational aids. Construction of facilities such as airport hotels, retail facilities, industrial parks, and commercial office buildings at the airport generally do not qualify for tax-exempt status. Generally, most types of airport projects can be financed using revenue bonds. Revenue bonds may also be issued and backed by PFCs, either alone (stand-alone) or in combination with other sources of airport revenue (called double-barreled bonds). 8.3.2 Private Funding 8.3.2.1 Tenant or Third-Party Financing An airport may elect to use tenant or third-party financing for capital projects. For example, an airport might lease a parcel of airport land to a tenant to construct a hangar or cargo facility.

Air Cargo Facility Planning—Funding Strategies 91 The airport sponsor collects ground rent for the duration of a long-term lease (usually 20 or more years). At the end of the lease, the capital improvements constructed by the tenant usually become the property of the sponsor. In the case of third-party financing, the third party leases the parcel from the airport, constructs the improvements, and then rents them to one or more tenants. Airports have explored other ways of financing airport facilities that involve varying degrees of private-sector involvement in the management, capital investment decision making, financ- ing, and pricing of airport facilities and services. Another option that is available but not widely implemented is the privatization of airports, which is being encouraged as a financing option through the FAA’s Airport Privatization Pilot Program. 8.3.2.2 Cargo Facilities Funding Strategies There are five types of cargo facility development in what is called the Five Ps Development Model. They are: • Public Ownership—Airport sponsor owns the air cargo ground and structures. The airport functions as the landlord and leases the facility to aviation-related businesses while providing facility maintenance and upkeep. • Public/Private Partnership—Airport project financial transactions for special-purpose facili- ties accommodating one or more cargo tenants. Sometimes the developer is required to put its own equity capital at risk, but more frequently the project is financed with bonds that are secured solely from the revenues of the facility being financed. • Third-Party Development—Third-party development is a project delivery method in which an airport owner enters into a long-term ground lease (typically 30 years) with a third-party developer to design, construct, and operate a cargo handling facility. In some cases the third party develops the cargo facility for a single tenant where the term of the tenant’s lease may be coterminous with the third party’s lease. • Privatization (Long-Term Concession)—Under the full privatization models, the airport owner enters into a long-term lease/concession or sale of an airport with a private operator. Under a long-term lease or concession agreement, the airport owner grants full management and development control to the operator in return for the operator undertaking full capital improvements and other obligations (e.g., up-front payment, responsibility for outstanding debt). Under a sale, the airport is transferred on a freehold basis with the requirement that it continue to be used for airport purposes. • Private Ownership—The airport is sold to a private enterprise with the intent of continuing the facility as an airport. The five Ps can be viewed as a continuum of choice, as shown in Figure 8-1, ranging from com- plete airport sponsor control at the left to handing over the entire process to private developers at Source: Lynxs Group. Figure 8-1. Continuum of airport development models.

92 Guidebook for Air Cargo Facility Planning and Development the right. What is best for each airport and stakeholder in the process depends on a wide variety of data points and preferences, which are known as the Four Cs and are shown in Figure 8-2. Since the decision-making process usually starts at the airport, the airport’s point of view must be considered. Public or private development preferences and data points can be organized using the Four Cs methodology. The airport sponsor must determine its level of commitment in the cargo development by analyzing the facility capacity, the desired level of control, capital/ funding sources, and the costs associated with the project. The criteria considered by airports in airport development are as follows: • Capacity—Master planning air cargo facility capacity allows for the development, mainte- nance, and operations of air cargo facilities for future needs. Facility development must be timed to meet future demand without over or under building. • Control—Control can be variable and circumstantial if structured as such. Airport gover- nance may require airport management to have complete control of all airport development, or perhaps it allows various forms of cooperation with other parties with airport management oversight. • Capital—This issue is clearly one of the driving forces in selecting which of the five Ps is preferred. Most decisions to not self-develop are driven either by capital constraints or the recognition that available capital can be spent on other projects that have a higher return on investment than the proposed cargo projects. • Costs—Public institutions can often raise capital at far lower rates than private parties. This point alone guides many projects into the public domain. However, often the exact oppo- site is true when it comes to project pricing, particularly when the costs of expensive bid- ding procedures and procurement requirements are considered. The cost of risk must also be considered. Some public entities are averse to the risk of low occupancy or the potential of profitability miscalculations. Having a steady, guaranteed stream of income through partial or complete collaboration with private parties can be attractive. In other instances, the costs of having to share the positives may appear to exceed the benefits of partnering or turning projects over to third parties. An overarching factor of each of the Cs is risk. How much risk appetite does an airport or other stakeholder have for any particular project? Public institutions may be the only players who can absorb a highly speculative venture because the risks are too great for private players and financ- ing. Other times, any semblance of risk will drive public players out of the game because public mandates often do not accommodate project risk profiles typically associated with real estate development and investment. Each market, airport, and player mix creates a unique matrix of factors. This methodology allows each circumstance to be individually evaluated. Source: Lynxs Group. Note: ROC = return on capital. Figure 8-2. Criteria considered by airports in airport development.