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Innovative Revenue Strategies – An Airport Guide (2015)

Chapter: Chapter 8 - Case Studies

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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 8 - Case Studies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

8 1 Chapter 8 Case Studies 8.1 Overview of the Case Studies 8.2 Boston Convenon and Exhibion Center – Value Capture 8.3 Dallas/Fort Worth Internaonal Airport – FTZs and Value Capture 8.4 Indianapolis Internaonal Airport – Opmizing Concession Programs 8.5 McCarran Internaonal Airport – Innovave Leasing Program 8.6 Pisburgh Internaonal Airport – TIF/Parcipatory Lease 8.7 Springfield Branson Naonal Airport – Airport Operated Ground Handling 8.1 OVERVIEW OF THE CASE STUDIES The six case studies presented in this chapter explore in greater depth the applicaon of revenue development strategies discussed in the Airport Guide. Considerable me and detail went into the case studies to obtain actual financial results from implementaon of the strategies. Several case studies included site visits. The first two cases illustrate different aspects of value capture. The Boston Convenon and Exhibion Center (BCEC), although not an airport, provides an interesng example of how different jurisdicons and stakeholders came together to financially support a large facility that transformed Boston’s waterfront area. While airport sponsors have less experience with value capture techniques, the use of value capture for the BCEC development demonstrates the potenal of this strategy to finance large projects. Dallas/Fort Worth Internaonal Airport’s foreign trade zone (FTZ) illustrates how an airport sponsor can leverage its cargo and passenger operaons and its standing as a regional economic center to smulate economic value beyond the “airport gate.” Dallas/Fort Worth Internaonal encompasses 18,000 acres and spans five municipalies. The case study takes a hard look at mul party agreements made by the airport sponsor and the municipalies to develop the FTZ, to plan and build an airport city around the airport, and to share tax revenues. The Indianapolis Airport Authority took the opportunity to plan and completely redesign a new concession program as part of its new Midfield Passenger Terminal (Midfield Terminal) building complex. The program emphasized a focus on customer experience, an innovave approach to solicitaon of concessions, inclusion of many local businesses at the airport, and a lean management approach to oversee the program. The case study offers a window into innovave ways that an airport can design (or refresh) a concession program, recruit concessionaires, and manage the program.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 2 Two case studies—McCarran Internaonal Airport (LAS) and Pi­sburgh Internaonal Airport (PIT)—have maximized non aeronaucal revenue opportunies through real estate development. Clark County, Nevada, the owner of LAS, seized an opportunity to parcipate in real estate projects through joint ventures, public private partnerships (PPPs), and parcipatory leases not previously used by a municipal enty. Prior to 2008, the inial phases of the program produced new and significant sources of commercial revenue for the airport sponsor. Following the Great Recession, Clark County reposioned its real estate por”olio to take on less risk through more tradional ground leases. The Allegheny County Airport Authority (ACAA), which operates Pi­sburgh Internaonal Airport (PIT), faced the loss of the US Airways hub and a stagnant real estate market by forming a Tax Increment Finance District and offering a parcipatory lease to a local developer that converted a poron of ground rent in exchange for future payments of rent. The speculave office building quickly leased, and addional development of other commercial and industrial space followed. The last case study tells the story of how Springfield Branson Naonal Airport (SGF) expanded its fixed base operator (FBO) and fueling business into a full service ground handling company. The ground handling service became a valuable air service incenve, helped to retain airlines, and provided revenue to the airport sponsor. Each case study offers a different perspecve on how airport sponsors and local governments respond to unique opportunies for revenue development. In every instance, the airport sponsors demonstrated the ability to recognize the opportunity, engage leadership and stakeholders, and use forward thinking measures beyond tradional pracce. Airports considering similar approaches to revenue development must verify that each iniave is in compliance with Airport Improvement Program (AIP) grant assurances1 and in compliance with state and local laws. 1Specifically, FAA’s Policy and Procedures Concerning the Use of Airport Revenue, 64 Fed. Reg. 7696, February 16, 1999 (Revenue Use Policy).

CHAPTER 8 – CASE STUDIES 8 3 8.2 BOSTON CONVENTION AND EXHIBITION CENTER – VALUE CAPTURE Source: AECOM Projects via Flickr.comrview 8.2.1 History of the BCEC In the early 1990s, the commonwealth of Massachuse„s began to inves‡gate the feasibility of building new conven‡on facili‡es in several areas of the state, including a large facility in Boston. Proponents of a downtown Boston loca‡on, including the city administra‡on, acknowledged that a new facility would not generate enough revenue to cover its construc‡on and opera‡ng costs. Proponents maintained, however, that the addi‡onal tax revenue created by businesses dependent on conven‡on center ac‡vity and the jobs created would provide an economic benefit to the region and state that would far exceed the costs of the project. Furthermore, supporters contended the conven‡on center would s‡mulate private investment and development within the vicinity of the facility. The city and state decided to pursue financing through capturing some of this value generated at off site businesses that benefited from the conven‡on center. The Boston Conven‡on and Exhibi‡on Center (BCEC) provides an instruc‡ve example of how revenue genera‡on through off site value capture can help to finance a capital improvement project. Several public en‡‡es par‡cipated in the financing of the project. The city of Boston financed the land acquisi‡on, some of the site cleanup, and the prepara‡on costs of the project with short term notes and long term special obliga‡on bonds, while the commonwealth of Massachuse„s issued special obliga‡on bonds to finance construc‡on of the facility. In addi‡on, an occupancy tax for new hotels in Boston and exis‡ng hotels near the conven‡on center; sales taxes from businesses within the conven‡on center finance district; vehicle rental fees; a fee on tours in the city of Boston; and the sale of hackney licenses provided a dedicated revenue stream for repayment of the bonds. These revenue sources, which represent value capture derived from off site economic ac‡vity generated from the new conven‡on center, were specifically dedicated to note and bond repayment because incremental increases in each

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 4 could be ed directly or indirectly to the success of the convenon center. These techniques raised enough revenue to rere some of the bonds early and provide addional revenues for convenon center operaons, addional capital investments, and contribuons to commonwealth and city general funds. The example of the BCEC is relevant to airports. Airports create demand for similar types of off site services, generang economic development off airport through supplier relaonships, visitor spending, and business locaon benefits. In fact, the geographic area of influence of an airport for generang regional economic development, and the types of industries that benefit from proximity to an airport, are greater than those of a convenon center. For example, the Dulles Corridor in northern Virginia/metropolitan Washington, DC, is home to an esmated 575,000 jobs.2 Hartsfield Jackson Atlanta Internaonal Airport supports 317,000 jobs at firms that supply on airport businesses, businesses that benefit from visitor spending, and producon jobs that rely on air cargo.3 Thus, the off site value capture strategies used to finance the BCEC offer a high potenal source of revenues for financing new airports or airport improvements. 8.2.2 Revenue Sources In 1996, the Boston Redevelopment Authority and the Massachusežs Convenon Center Authority (MCCA) jointly commissioned a study to analyze the market and financial feasibility of the proposed BCEC. Published in March 1997, the results of that analysis: Outlined the need for a new convenon center in Boston Idenfied a site in South Boston for the facility Projected the costs of construcng the center Forecast the economic benefits of such a facility to the region in terms of job creaon, income, and addional tax revenues Idenfied alternave strategies for financing the facility through capturing the value created by the BCEC in the economy of the Boston region. The fiscal impact analysis focused on projecng the tax revenue resulng from the BCEC itself, as well as on business generated by the BCEC at off site establishments. Table 8 1 shows annual tax revenues the study projected to be generated by the BCEC. 2 NAI KLNB, hžp://dullestechnologycorridor.com/, and NAI KLNB, hžp://www.dullestechnologycorridor.com/Commercial Real Estate Why Choose Us Vienna VA.html 3 Landau, S. R., “Airports, Airport Cies, Airport Corridors, Aerotropolises, & Economic Development,” PowerPoint presentaon at 91st annual meeng of the Transportaon Research Board, Washington, DC, January 24, 2012

CHAPTER 8 – CASE STUDIES 8 5 Table 8 1: Projected Annual Tax Revenue Impacts of BCEC Revenue Sources Projected Annual Revenue ($ millions*) Personal Income Tax $13.7 Corporate Income Tax $3.1 Sales and Meals Tax $8.8 Property Tax $10.3 Hotel Tax $9.7 Total $45.4 *1997 dollars Source: C.H. Johnson Consul„ng, Inc.4 The study also iden„fied eight poten„al sources of tax and fee revenues for value capture previously used to finance conven„on centers around the United States. These included: Hotel room occupancy taxes Sales taxes Meals taxes Car rental fees Parking taxes/fees Airport access fees Tolls Development fees For the purposes of financing the BCEC, the study ul„mately focused on the first five techniques, as well as a $5 fee on all land and water based tours that originate in the commonwealth within the city limits of Boston. A major selling point for using these funding sources was that primarily out of town visitors, not residents, would be paying for the development of the BCEC. Figure 8 1 delineates the BCEC Finance District used for value capture purposes. The selected value capture techniques did not include income and property taxes derived from businesses that benefited from the BCEC, even though analysis showed that these two taxes generate the most revenue poten„al. However, MCCA never seriously considered these taxes as poten„al funding sources for a new facility, in large part because they more directly adversely affect residents. Furthermore, much of the income tax revenues came from indirect and induced jobs created in the 4 C.H. Johnson Consul„ng, Inc. for the City of Boston and the Commonwealth of Massachuse—s, Boston Convenon and Exhibion Center Technical Appendices Volume 1, March 1997, Fiscal Impact Chapter, pp. 12 13. BCEC Case Study Abbreviaons BANs Bond An„cipa„on Notes BCCFD Boston Conven„on Center Finance District BCEC Boston Conven„on & Exhibi„on Center BROEF Boston Room Occupancy Excise Fund MCCA Massachuse—s Conven„on Center Authority ROETF Room Occupancy Excise Tax Fund

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 6 Greater Boston region, rather than from jobs directly  ed to the conven on center. Value capture through property taxes on nearby land development was also una†rac ve because: The conven on center itself would not be paying property taxes (and, in fact, would take land off the tax rolls). The city and commonwealth were providing other incen ves to developers who chose to build hotels and other commercial establishments in proximity to the conven on center.5,6 BCEC financial strategists also took care to ensure that adopted value capture techniques would not create a compe  ve disadvantage for Boston in a†rac ng conven ons. For example, the research team collected data on hotel taxes for 38 conven on des na on ci es in the United States and found that the average rate for hotel taxes was 12.3%. The rate in the Boston area, including both state and city taxes, was 9.7%. The plan proposed a new 2.75% conven on center finance fee on hotel rooms in Boston and Cambridge, thus keeping the total hotel taxes and fees to 12.45%, very near the average for compe ng ci es.7 In November 1997, the Boston Redevelopment Authority released the Boston Conven on Center Development Plan. This plan included a feasibility study for the project with a land acquisi on and construc on  meline and a forecast of future revenues assuming combina ons of the value capture financing tools listed above. 8.2.3 Special Legislation Pursuant to the release of these two reports, the Massachuse†s Legislature adopted Chapter 152 of the Acts of 1997  tled, An Act Relave to the Construcon and Financing of Convenon and Exhibion Centers in the Commonwealth (the Act.) The Act detailed funding sources for financing the BCEC, as well as expansions to facili es in Springfield and Worcester, and for crea on of addi onal mee ng facili es in other regions of the Commonwealth. Similar special legisla on would undoubtedly be required if an airport authority or municipal airport sponsor were to engage in similar value capture finance. In keeping with the BCEC goals, the Act placed the majority of new tax burdens on visitors to the region, not on its residents. It authorized both the city of Boston and the commonwealth of Massachuse†s to establish conven on center financing funds to pay the debt service and interest on bonds issued for the 5 Johanna Storella, finance director of the Boston Conven on Center Authority 6 For example, Vertex, a pharmaceu cal company, received support from the commonwealth’s I cubed program. I cubed is similar to TIF, but uses state income tax rather than local property taxes to pay off infrastructure bonds. (Even though BCEC financing did not use state income tax revenue, developing in the adjoining area was eligible to use an cipated income tax revenues for funding under the I Cubed program.) About $50 million of infrastructure (streets, sewers, a park, etc.) will be done by the developer, who will then be reimbursed as Mass Development (a state agency) sells bonds that will be paid off with state income taxes from new and retained workers at the site. It is state money, but the city is a par cipant/advocate. This infrastructure will be deeded over to the city when the job is done. Vertex also got a property tax break worth about $12 million over 7 years, or about 15% 20% off their bill. Source: Boston Redevelopment Authority 7 In 2010, the state legislature passed a bill allowing municipali es to increase local hotel occupancy taxes by 2% (to 6%), and Boston chose to do so, making the total hotel occupancy tax in Boston higher than the 12.3% na onal average in 1997. This bill was part of a municipal relief package in response to cuts in state aid to municipali es. The extra revenue is not used to pay debt service on the BCEC.

CHAPTER 8 – CASE STUDIES 8 7 BCEC. The Act also idenfied specific state and local sources to provide a revenue stream for repaying the bonds. All of these sources represented value capture from off site economic acvity generated by the BCEC. The Boston Room Occupancy Excise Fund (also called the Boston Convenon Center Fund) established by the Act would pay for land acquision as well as some site cleanup and site preparaon costs. The Commonwealth Convenon Center Fund would use fees and taxes collected at the state level to repay bonds issued to finance construcon of the BCEC. The Act established a three ered catchment area for collecng revenues in the Boston area, with some specific taxes and fees collected in each. The areas are: (1) the cies of Cambridge and Boston; (2) the city of Boston only; and (3) the Boston Convenon Center Finance District (BCCFD). Table 8 2 idenfies the sources of revenue collected for both the state and city, and idenfies those specific to a determined catchment area. Table 8 2: Authorized BCEC Funding Sources Commonwealth Convenon Center Fund Convenon Center Financing Fee of 2.75% on room occupancy receipts in Boston and Cambridge, above the 5.7% state room occupancy tax All of the commonwealth’s exisng 5.7% room occupancy tax for exisng and new hotels within the BCCFD 5% tax on all sales at new retail shops within the BCCFD 5% surcharge on the cket price for any land or water based tours in Boston The commonwealth’s share of $10 rental vehicle surcharge for vehicles rented within Boston, $9 $2 per day surcharge on parking at any facility constructed as part of the BCEC Boston Room Occupancy Excise Fund City’s local opon room occupancy excise tax of 4% within Boston, with an allowance to increase the tax to 4.5%8 Proceeds from the sale of the first 260 hackney licenses sold within Boston ašer the effecve date of the Act City’s share of the $10 rental vehicle surcharge for vehicles rented within Boston, $1 Sources: Boston Redevelopment Authority and the Massachuseœs Convenon and Visitors Center Figure 8 1 idenfies the geographic region of the BCCFD and the area intended for BCEC related development. The BCCFD comprises an area of approximately 0.9 square miles roughly bounded by the Boston Harbor to the northeast, Haul Road and Pappas Way to the southeast, West 1st Street and Mount Washington Avenue to the southwest, and Atlanc Avenue to the west northwest. Figure 8 1 shows the locaon of the BCCFD within the cies of Boston and Cambridge and Figure 8 2 provides a more detailed map of the BCCFD within the South Boston neighborhood. Some taxes and fees paid into the Commonwealth Convenon Center Fund, as idenfied in Table 8 2, are only collected on acvies within this district. In this way, the BCCFD resembles a special assessment district. 8 The City opted not to increase the room occupancy tax to 4.5%.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 8 Three aspects of the approved funding sources are parcularly noteworthy. First, the financing strategy was developed to avoid use of exisng sources of revenue to the city and commonwealth general funds. Therefore, the Act allows for the use of state hotel room surcharges only on new hotels (i.e., those built a†er July 1997) outside the BCCFD, but allows the use of hotel occupancy taxes on hotels built prior to July 1997 within the BCCFD. The la‘er are the exisng hotels most likely to benefit from the new BCEC, and thus generate occupancy taxes as a direct result of the BCEC. The legislaon allows the city to use its share of hotel occupancy taxes from exisng hotel rooms as a revenue source for the Boston Room Occupancy Excise Fund.9 Second, the Act targets new fees and taxes to acvies that have a clear connecon to the convenon center, such as fees on rental cars, sales at new establishments within the BCCFD (which will directly generate business from visitors to the BCEC), and parking surcharges. The surcharge on tour cket prices also has a connecon to convenon center acvies, as convenoneers and conference a‘endees take advantage of such tours. Because these acvies e directly to the BCEC, the tax revenues and fees they generate represent value a‘ributable to the BCEC. Third, the legislaon defines specific geographic impact areas subject to the value capture fees and taxes. Three specific areas are idenfied: the BCCFD for the imposion of the state’s hotel tax on exisng lodging facilies and sales taxes on new businesses, the cies of Boston and Cambridge for imposion of the 2.75% Convenon Center Financing Fee on hotel rooms, and the city of Boston for local hotel room occupancy taxes and other fees, taxes, and surcharges. This ered impact area approach recognizes that the influence of the BCEC on off site businesses both varies by business, and diminishes with distance from the BCEC. The Act recognizes that the construcon of the BCEC is important for economic development and growth within the region, creang economic value outside its walls. However, it also recognizes that the facility itself will not generate enough revenue to cover its construcon and operang costs. Thus, the Act specifies three uses for the revenue deposited into the Commonwealth Convenon Center Fund: 1. Payment of the principal and interest on special obligaon bonds issued to finance the construcon of the BCEC 2. Maintenance of, or provisions for, any reserves for debt service and other capital expenses 3. Direct expenditures for any costs of the project and for operaon, promoon and markeng of the BCEC. The Act further authorizes MCCA to contribute excess fund revenue to the commonwealth’s general fund, if so requested. Boston Room Occupancy Excise Fund revenues first go to pay costs associated with administering the fund or for the payment of the debt service and interest. The city can withdraw excess funds and deposit them into the general fund.10 9 This type of development by an airport may be restricted to those ubiquitous hotel/motel districts that are found near many commercial airports. Like the BCEC district concept, the value capture nexus may not be discernible for hotel and restaurant development downtown or at a significant distance from an airport 10 Secons 8(b) and 10(c) of Chapter 152 of the Commonwealth of Massachuse‘s Acts of 1997

CHAPTER 8 – CASE STUDIES 8-9 Figure 8-1: BCEC Finance District Source: Made with ESRI Business Analyst by EDR Group based on a map provided by Massachuse€s Conven‚on Center Authority.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-10 Figure 8-2: BCEC Loca on in the South Boston Neighborhood Source: Made with ESRI Business Analyst by EDR Group based on a map provided by Massachuseƒs Conven…on Center Authority. 8.2.4 Financing Strategy The financing strategy for the BCEC used each of the value capture techniques allowed under the Act, with the excep…on that the city of Boston chose not to increase its hotel room occupancy tax from 4% to 4.5%. The commonwealth established a Conven…on Center Fund, managed by MCCA. Value capture proceeds that originated from state taxes or fees went directly into this fund. The city established the Boston Room Occupancy Excise Fund (also called the Boston Conven…on Center Fund) for collec…ng city revenues. CITY OF BOSTON REVENUE STRATEGIES AND RESULTS The city capitalized the Boston Room Occupancy Excise Fund (BROEF) using value capture techniques, including the citywide 4% room occupancy tax, the $1 vehicle rental surcharge, and proceeds from the sale of hackney licenses. The city ini…ally issued short bond an…cipa…on notes (BANs) totaling $157.8

CHAPTER 8 – CASE STUDIES 8 11 million to fund land acquision and site preparaon costs, secured by the Room Occupancy Excise Tax Fund (ROETF). Table 8 3 shows the city revenues collected from each source from 1999 through 2002. In 2002, the city issued long term special obligaon bonds totaling $116.9 million. From 1999 through 2002, the greatest source of revenue came from the hotel tax.11 In 1999 and 2000, the sale of hackney licenses also contributed significantly to the BROEF, with sales dropping significantly a‘er 2000. The city was able to issue these bonds for only $116.9 million because $40.9 million of the BANs were paid off using the greater than expected receipts from some of the dedicated revenue sources. For example, revenue esmates for the sale of all 260 hackney licenses were $23 million; but the actual sale of the first 235 licenses generated $36.2 million.12 Between Fiscal Year (FY) 2003 and FY 2009, the average receipts from new hotel excise taxes averaged $6.8 million, car rentals fees averaged $1 million, and the sale of one addional hackney license ne™ed $3 million. Interest earnings fell to historic lows and contributed li™le to the fund. A‘er the debt fell below $100 million, the city refinanced using general obligaon bonds. Table 8 3: City of Boston Room Occupancy Excise Fund Historic Revenues, FY 1999 2002a 1999 Actual 2000 Actual 2001 Actual 2002 Esmated Fund Balance at Beginning of Year $213,200b $14,825,800 $37,417,200 $52,873,900 Hotel Excise Tax – Pre July 1, 1997, hotels $23,710,200 $25,079,900 $25,675,300 $19,809,300 Hotel Excise Tax – Post July 1, 1997, hotels $1,419,700 $2,671,300 $4,093,600 $4,143,500 City's Share of Vehicle Rental Surcharge $1,281,100 $1,045,500 $1,307,200 $1,300,000 Hackney License Sales $10,748,900 $21,049,500 $1,683,100 $2,732,000 Reimbursement from Commonwealth Convenon Center Fundc $1,758,500 $1,521,100 Interest Earnings $252,600 $2,210,000 $2,598,600 $1,100,000 Fund Balance Prior to Transfers to Pay Debt and to General Fundd $37,625,800 $66,882,000 $74,533,400 $83,479,800 Notes: a The table shows collecons for the 4 years during which BANs were outstanding. The city converted the BANs to long term special obligaon bonds in April 2002. The text describes receipts in subsequent years. b Boston established the room occupancy excise fund at the beginning of FY 1999 with an inial fund balance of $213,211 (a sum equal to vehicle rental surcharge receipts received from the commonwealth during the previous fiscal year). c The convenon center funding legislaon required the commonwealth to contribute to the costs of the land acquision if it exceeded $157.8 million. This reimbursement represents the commonwealth’s obligaon for land acquision costs. d Columns may not add up due to rounding. Sources: City of Boston, Auding Department and Office of Budget Management 11 The dip in the hotel tax revenues in 2002 corresponds to the recession of the early 2000s. 12 Boston Municipal Research Bureau, “BCEC Land Purchase Complete,” in Bureau Update, December 2006.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 12 The city rered all the debt incurred to finance the BCEC long before the 20 year period elapsed and was able to disconnue the ROETF and transfer remaining revenues to the general fund.13 The city connues to collect the 4% hotel tax, vehicle rental fees, and hackney license fees. These revenues all now go directly into the city’s general fund and finance regular city budget items. COMMONWEALTH OFMASSACHUSETTS REVENUE STRATEGIES AND RESULTS Revenues accumulang in the Commonwealth Convenon Center Fund pay the debt service on 30 year bonds issued to finance the construcon of the BCEC. So far, the revenue stream has exceeded the amount needed to repay the bonds. Table 8 4 details the revenues generated by the value capture techniques, starng in 2005, the year bonds were issued to finance construcon. Years 2005 through 2011 represent actual revenues collected to date. The table also shows projected collecons for every 5 years starng with 2015. The 2.75% room occupancy surcharge generates the most revenue because the surcharge applies to all hotel rooms in Boston, Cambridge, Worcester, and Springfield, no ma˜er where they are located or when they were built. The 5.75% room occupancy tax generates the second highest revenue for the fund. It generates less than the hotel room surcharge because it applies only to rooms within the BCCFD or rooms built in Boston and Cambridge a™er July 1, 1997. Between 2005 and 2011, revenues from these two sources totaled between 66% and 71% of the total revenues deposited in the Commonwealth Convenon Center Fund annually. Revenues from the vehicle rental surcharge have not grown substanally (and actually decreased in 2009 and 2010), while sales tax revenues have steadily increased. Thus, the percentage of revenues coming from the vehicle rental surcharge has decreased from approximately 18% in 2005 to 12.5% in 2011, while the revenues from sales taxes have increased from approximately 9% to 18.5% over the same period. Revenues from sightseeing tour taxes have fluctuated from a low of 1.8% of total revenues in 2009 to a high of 3.3% in 2011. The decreases in some revenue categories in 2009 and 2010 reflect the impacts of the global recession during that period. To date, MCCA has used funds from the Convenon Center Fund to pay debt service and interest on the bonds, help cover operang costs, finance capital reinvestments, and, at mes, contribute to the commonwealth’s general fund. 13 James Kennedy, City of Boston Office of Finance and Administraon, telephone conversaon of January 27, 2012, and follow up email of February 1, 2012

CHAPTER 8 – CASE STUDIES 8-13 Table 8-4: Commonwealth Conven on Center Fund, Base Case Scenario – No Addi onal Bonds Fiscal Year Room Occupancy Tax 5.7%a Conven on Center Finance Fee 2.75%b Vehicular Rental Surchargec,f Sales Taxesd,f Sightseeing Surchargee,f Total Taxesh 2005 10,785,200 24,857,300 9,203,800 4,530,300 1,185,900 50,562,400 2006 11,601,900 27,398,900 9,773,500 5,012,500 1,265,900 55,052,700 2007 15,771,100 30,656,600 10,369,000 8,008,300 1,542,000 66,347,000 2008 19,934,700 34,594,100 10,859,300 11,437,000 2,158,300 78,983,400 2009 18,940,700 31,752,600 9,961,700 11,940,300 1,322,200 73,917,500 2010 20,172,400 29,668,200 9,596,100 14,031,500 1,964,500 75,432,700 2011 22,479,200 33,351,500 10,551,900 15,736,800 2,785,700 84,905,100 2015 24,562,000 36,441,700 11,820,000 17,628,100 3,120,500 93,572,5008 2020 27,439,000 40,710,200 11,820,000 17,628,100 3,120,500 100,787,000 2025 30,653,000 45,478,700 11,820,000 17,628,100 3,120,500 108,855,400 2030 34,243,400 50,805,600 11,820,000 17,628,100 3,120,500 117,793,200 2035 38,254,400 56,756,600 11,820,000 17,628,100 3,120,500 127,773,300 2040g 42,735,100 63,404,500 11,820,000 17,628,100 3,120,500 138,902,000 2042g 44,671,100 66,276,900 11,820,000 17,628,100 3,120,500 143,710,300 Notes: a The 5.7% room occupancy tax comprises (a) all state room occupancy taxes collected on rooms in the Boston Conven€on Center Financing District (BCCFD), including all rooms built prior to and a†er July 1, 1997, and (b) taxes collected on rooms in Cambridge and Boston outside the BCCFD built on or a†er July 1, 1997. The July 1, 1997, date was 1 month a†er passage of Chapter 152 of the Acts of 1997, which authorized the Conven€on Center Fund. b The Conven€on Center Finance Fee is an addi€onal 2.75% fee charged on room occupancy in the ci€es of Boston, Cambridge, Springfield, and Worcester, established by the Act to help defray the costs of conven€on center projects in the commonwealth. The fee went into effect July 1, 1997. c A Conven€on Center Financing Fee of $10 is charged on every rental vehicle contract in the city of Boston, beginning in July 1997. Most ($9) of the fee goes into the Commonwealth Conven€on Center Fund, and the remaining $1 goes into the BROEF. d Sales taxes are collected on all meals, beverages, and other tangible personal property within the Conven€on Center Financing District sold at establishments first opened on or a†er July 1, 1997, and on any such goods sold at lodging establishments outside the district but within Cambridge and Boston, which opened on or a†er July 1, 1997. e A 5% surcharge is charged on the purchase price of any land- or water-based sightseeing or entertainment tour origina€ng or located in the commonwealth and conducted wholly or partly within Boston. All children's €ckets valued at less than $6, and organized youth tours are exempt. f Revenues from the vehicle rental surcharge, sales taxes, and sightseeing surcharge were held constant a†er 2012 to present a conserva€ve es€mate of future revenues. g The BCEC debt will be paid off in 2034. However, the projec€ons show con€nued collec€on of revenue because the commonwealth expects that bonds will be issued for the Springfield Conven€on Center some€me in the next 10 years, and those bonds will s€ll be outstanding in 2042. h Totals may not add up due to rounding. Sources: 2011-2015 occupancy tax, local op€on tax, and conven€on center finance fee projec€ons are provided by Pinnacle in the 2010 sufficiency report and for 2016 and beyond in their report dated October 13, 2009; 2011 vehicle rental surcharge provided by Pinnacle in the 2010 sufficiency report and assumes no growth therea†er; 2011 sales tax projec€ons provided by Pinnacle in the 2010 sufficiency report. Therea†er, sales taxes are grown at the same rate as provided in prior models as provided by MCCA. 2011 sightseeing surcharge provided by Pinnacle in the 2010 sufficiency report and assumes no growth therea†er.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 14 Pursuant to the provisions of Chapter 152 of the Acts of 1997, the Commonwealth Convenƒon Center Fund and the BROEF will be dissolved when all indebtedness and interest incurred under the Act has been paid off. Any fees and taxes that have accrued in the fund up to this point will then be deposited in the general fund of the commonwealth or city, respecƒve to their origin. 8.2.5 Partners and Stakeholders The financing for the BCEC was complex and required cooperaƒon from several groups. The city and commonwealth needed to work together to prepare the analyses that showed the value of the BCEC to the state and regional economies, and to idenƒfy financing opƒons without imposing substanƒal addiƒonal taxes and fees on residents of Massachuse”s. The Massachuse”s Legislature needed to write new legislaƒon and, ulƒmately, adopt Chapter 152 of the Acts of 1997, authorizing the development of the BCEC and the funding sources to repay debts and interest incurred to build the facility. The Boston City Council needed to vote to use room occupancy receipts and other fees to pay for the land acquisiƒon and site preparaƒon costs, and to sell the land acquired for the BCEC to Massachuse”s for $1. The commonwealth transferred responsibility for the development and operaƒon of the BCEC to MCCA. In addiƒon, hotel operators and tour companies fully supported the imposiƒon of increased taxes and fees on their products to pay for the BCEC. While these taxes and fees did not require their endorsement, their willing support made the process much easier. Lastly, both city and commonwealth needed to manage separate funds to pay off the debt and interest on the BCEC. 8.2.6 Implementation Issues Because the revenue sources established to pay for the BCEC included increases in allowable taxes, as well as the redirecƒon of exisƒng sales taxes to a specific use, special legislaƒon was required to establish the funding mechanisms for the BCEC. This was not a significant hurdle; studies showed that (a) the facility would create economic value for the commonwealth and (b) visitors shouldered most of the new taxes and fees. As shown in Table 8 2, the Act required the establishment of two new funds, the Commonwealth Convenƒon Center Fund administered by the state Treasurer’s Office and the BROEF administered by the city Treasurer’s Office. The legislaƒon: Allows for revenues collected through new taxes and fees to pay for administraƒve costs associated with the funds. The reporƒng for hotel taxes, sales taxes, tour fees, and rental car fees is the responsibility of the business operators. Establishes fee schedules. The government enƒƒes establish reporƒng requirements. Requires accounƒng of taxes collected at new retail establishments in the district, exisƒng hotels within the district, and new hotels throughout the ciƒes of Boston and Cambridge so that these revenues remain separate from total hotel occupancy and sales tax receipts.

CHAPTER 8 – CASE STUDIES 8 15 8.2.7 Applicability to Airports The value capture techniques used to finance the BCEC have direct relevance to airports. Like convenon center investments, airport investments can be jusfied based on the overall benefits of increased capacity and improved service to a region’s and/or a state’s economy. In fact, the off site economic value created by airports has a broader geographic reach and bolsters a broader base of industries than does convenon centers. In today’s global economy, many industries benefit from access provided by airports. As with a convenon center, a direct connecon exists between airport facilies and the success of nearby businesses, such as hotels, restaurants, vehicle rental businesses, taxi operators, and tour operators. The preponderance of hotels and rental car companies that locate near airports provides evidence that an airport creates value for these businesses. The BCEC provides an example of how state or local taxing authories can create a special district and fund new facilies with revenue from direct beneficiaries of the improvement. For larger airports, parcularly large hub airports, the value created by the airport extends both to a larger geographic area and to a broader range of businesses. For example, facilies near Schiphol Airport in Amsterdam, Logan Internaonal Airport in Boston, and the Washington Dulles Corridor near Washington Dulles Internaonal Airport in Virginia show that major corporaons locate near an airport to take advantage of access to domesc and internaonal markets. Given that most airports do not have taxing authority, implementaon of value capture techniques near the airport will require a joint effort among local and state taxing authories. Intenonal focus on visitor taxes and fees (not on residents or employees) and avoidance of redirecon of exisng local tax revenues to the project helped gain acceptance for the BCEC value capture strategy. In the case of the BCEC, the city of Boston and the commonwealth of Massachuse•s were clear partners in the project. The city fully supported using exisng revenue streams from the hotel occupancy tax to pay for the convenon center because it believed the economic benefits would more than offset the loss of these revenues for other projects. Because the economic benefit of an airport has a broader geographic reach than that of a convenon center, similar revenue sources could be tapped in communies further from the airport, although it may be more difficult to convince municipalies of the airport’s economic value as the distance from the airport increases. However, state legislaon can assign revenues from state taxes for a parcular project without involving local taxing authories. As with convenon centers, improvements and expansions of airports o—en are jusfied by the economic value they create in the regional economy in addion to the specific job creaon impacts of the facility. Airport economic impact studies are a useful tool to explain the value of an airport to the community, the region, and the state. Economic impact studies can also serve as a baseline analysis to invesgate the incremental impacts of an airport’s new facility or improvement. The incremental impacts are the candidates for value capture techniques. For example, capital investments at airports that lead to more direct flights to markets in other regions (both as an increase in service to markets

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 16 already served by the airport and in service to new markets) may lead to increased business ac€vi€es for local industry sectors near the investments. An economic analysis could quan€fy the cataly€c benefit to the region triggered by the capital investments and the resul€ng addi€onal local, state, or regional taxes generated. Controls on value capture revenues built into the BCEC legisla€on are also applicable to an airport situa€on. In the BCEC case, the state Conven€on Center Fund permits use of revenues for conven€on center opera€ng costs and other capital rehabilita€on projects, as long as revenues exceed the amount needed to cover the debt service and interest on the bonds. An airport or municipal fund could be set up to allow a similar use of excess funds. One caveat to the value capture techniques used to fund the BCEC is that tax receipts tend to fluctuate with the economy. Thus, substan€al reliance on tax revenues to fund opera€ng costs must recognize the ebb and flow of the economy as a risk factor. Although MCCA did not rely on value capture through property tax increases to help pay for the BCEC, MCCA did recognize that the new facility would increase property values in its vicinity. The state chose not to ask the city to give up any property tax increases to fund the BCEC. The city, however, offered property tax incen€ves to some new businesses that located in the district. Both Vertex Pharmaceu€cal, which located its headquarters in the area, and the Marrio” Renaissance Hotel were granted tax exemp€ons on the increased property values generated by their developments.14,15 The BCEC paid for the site prepara€on and the founda€on for the Wes€n Hotel, and the city provided them with a small tax break. Airport expansions may increase property values within the vicinity of the airport, and property taxes could provide another source of value capture funding, should the local taxing authority agree. 8.2.8 Lessons Learned The BCEC financing strategy provides several clear lessons that are applicable to the funding of capital improvements at airports. These include: The financing plan for the BCEC required mul€ple sources of funding, including value capture techniques. Airports also are likely to require various funding sources for large capital projects. Support for the BCEC gained trac€on ašer feasibility studies clearly demonstrated how local businesses would benefit from the project. The BCEC established measures to quan€fy project impacts and connect the added benefits of the conven€on center to specific taxes and fees. Compelling evidence helped recruit vendors, such as tour operators and taxi companies, to agree willingly to increased fees. 14 Under Massachuse”s law, up to 100% of the taxes that would be generated by the increased land value created by the development can be waived, crea€ng an incen€ve for the developer. 15 As men€oned above, Vertex also received a tax incen€ve through the State Infrastructure Investment Incen€ve (I Cubed) Program. I Cubed is similar to a tradi€onal TIF, but instead of property taxes, increases in state income taxes are used to pay off infrastructure bonds.

CHAPTER 8 – CASE STUDIES 8 17 The BCEC market analysis compared hotel costs and fees in compeng markets to exisng fees in Boston, then adopted fees only up to a level that ensured Boston’s hotel rates would remain compeve with other cies. This type of analysis can be helpful to convince the public and businesses that any new taxes or fees will not negavely affect their businesses, and this approach could be used with other types of taxes and fees. Cooperaon between different government enes is important to develop a financing plan that ulizes the wide range of potenal value capture financing techniques. Support is needed at state and local levels and may involve an airport authority and private partners. The legislaon that enabled the use of value capture techniques for the BCEC required support from the state, the Cies of Springfield, Worcester, Boston, and Cambridge, and the MCCA. Value capture techniques at airports are best suited to projects with idenfiable beneficiaries and quanfiable benefits. If the airport owns land available for commercial or industrial development, certain value capture techniques are a potenal opon to fund some aspects. If the airport adds value to surrounding off airport land, local government will have a primary interest in revenues collected with value capture techniques. The BCEC case study demonstrates a high level of cooperaon from various stakeholders for a common purpose.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-18 8.3 DALLAS/FORT WORTH INTERNATIONAL AIRPORT – FTZs AND VALUE CAPTURE Source: 2009 Airport Development Plan Update, Dallas/Fort Worth Interna„onal Airport 8.3.1 Overview The Dallas/Fort Worth Interna„onal Airport (DFW) case study illustrates how an airport can leverage its cargo and passenger opera„ons, and its standing as an economic center, to s„mulate non-aeronau„cal ac„vity on airport property and in the region around the airport. It also provides an example of how an airport sponsor and municipali„es can implement mul„-party agreements to share tax revenues.

CHAPTER 8 – CASE STUDIES 8 19 DFW is located near the cies of Fort Worth, Coppell, Euless, Grapevine, and Irving in Texas. DFW is home to Foreign Trade Zone (FTZ) 39, which was established in 1979. The 2,500 acre FTZ has established the airport as a major non aeronaucal commercial hub, with more than $1 billion of goods imported and exported through the FTZ each year.16 The FTZ has expanded to more than 1 million square feet on airport property. Business acvity in the FTZ has served as a catalyst for development of addional (non FTZ) airport property and for economic growth in off airport areas. Non aeronaucal on airport acvies include air cargo and passenger dependent businesses such as hotels, offices, retail stores, and industrial buildings. In addion, subzones of the FTZ located off airport in eight municipalies include 10 buildings and 4.2 million square feet of developed space. DFW management monitors economic impacts in terms of jobs created on airport and in subzones. It esmates creaon and support of 1,000 jobs because of the DFW FTZ,17 establishing a direct connecon between on airport acvity and economic development in the eight communies that house the subzones.18 Aside from minimal fee revenues, however, the economic value generated through companies using the FTZ is not shared with the airport or airport sponsors. DFW is implemenng an Airport Use Plan that will add a comprehensive airport city environment to its FTZ.19 The plan envisions an airport city environment as it develops land located in the cies of Irving, Euless, Grapevine, and Coppell (the “host” cies). Approximately 6,600 acres of land are available for future development for uses such as commercial retail, freeway commercial, hospitality and entertainment, corporate campus, office, flex office, industrial, transit oriented development (TOD) at Dallas Area Rapid Transit (DART) and commuter rail staons, aviaon support, aviaon related uses, and open space.20 As part of DFW’s vision, the airport and its municipalies are entering into tax sharing agreements that will divide tax revenues generated by this development among the host cies and the airport sponsor. The board of directors (the Board) has negoated a tax revenue sharing agreement with the cies in which the airport is located to allow the owner cies of Dallas and Fort Worth to benefit more directly from new revenue generang development on airport land located outside the cies’ jurisdicons. 8.3.2 Background on DFW GOVERNANCE DFW opened in 1974. The Cies of Fort Worth and Dallas jointly own and operate the airport, and the Board (a 12 member, semi autonomous enty) governs the airport. Owner cies appoint 11 members to the Board in proporon to their ownership stake in the facility, with seven members appointed by the city of Dallas and four appointed by the city of Fort Worth. The twel¤h posion, which is a non vong 16 Annual Report Foreign Trade Zone, October 1, 2009 – September 30, 2010: FTZ Annual Report – GP Zone #39, compiled by DFW staff and submi§ed to the U.S. Foreign Trade Zones Board of the U.S. Department of Commerce 17 Research supplied by Commercial Development Department of DFW 18 The DFW FTZ also has secondary sites in the cies of Dallas, Fort Worth, and Denison, Texas. Employment is not directly tracked at these “second sites,” but the scale of development and companies using these sites are reported. 19 h§p://www.dfwairport.com/pv_obj_cache/pv_obj_id_7A0FDFFB3F0BD2C93E0B3FACC6B0C7424A7A1C01/filename /LandUsePlan.pdf 20 h§p://www.dallascityhall.com/council_briefings/briefings0811/DFW LandUse_080311.pdf

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 20 member, rotates annually among the four non owner host ci es of Irving, Euless, Grapevine, and Coppell. The Board must seek approval for its annual budget, bond sales, and other similar measures from the city councils of the owner ci es, but can enter into contracts without such approval.21 SIZE AND ACTIVITY Encompassing about 18,000 acres, DFW is the second largest airport in the United States in terms of land area (behind Denver Interna onal Airport). It has seven runways, the shortest of which is 8,500 feet and the longest of which are 13,400 feet (four runways); an eighth runway is planned. With total 2011 opera ons of 646,803, DFW is the fourth busiest airport in the world in terms of opera ons. DFW is the eighth busiest airport in the world in terms of passengers served, with 20 passenger airlines (11 domes c) serving 191 des na ons. In 2011, some 57,806,918 passengers passed through the airport. In that same year, the airport handled 652,655 U.S. tons of cargo.22 DFW is a regional employment center, with approximately 60,000 on airport employees. The airport contributes an es mated $16.6 billion in economic ac vity to the North Dallas economy each year, suppor ng 305,000 full  me jobs throughout the region and genera ng $7.6 billion in payroll.23 FOREIGN TRADE ZONE DFW’s FTZ 39, established in 1979, comprises 2,500 acres of on airport land, as well as several off airport sites. It includes a 21 acre industrial park and two cargo distribu on centers that provide direct ramp access. The airport’s general use warehouse also is located within the FTZ. Approximately 460 people work at the on airport FTZ. The FTZ provides advantages to businesses that locate within its boundaries, including: Exemp ons from du es on imported products Inventory tax exemp ons for inventory imported into the FTZ or held in the FTZ for export Exemp on on “freeport property,” which is inventory held in Texas for 175 days or less Exemp on on leasehold proper es (i.e., buildings built on leased property) Current companies opera ng in the on airport FTZ include: American Eurocopter – manufacturer of helicopters and helicopter spare parts CEVA Logis cs – freight forwarders and the airport’s general purpose warehouse operator Dallas Cowboys Merchandising – producer and warehouser of Dallas Cowboys merchandise DHL Global Forwarding – freight forwarders NEC – manufacturer of telecommunica ons sets and parts Valeo Compressor North America, Inc. – manufacturer of vehicle air condi oning units A total of 7,273 acres of airport property are developed with runways, taxiways, terminals, roads, and commercial property. The Airport Master Plan iden fies an addi onal 6,500 acres of land available for 21 DFWIA Web Site h¥p://www.dfwairport.com/about/admin/index.php 22 DFWIA web site h¥p://www.dfwairport.com/visitor/P1_009559.php 23 DFWIA web site h¥p://www.dfwairport.com/visitor/P1_009559.php

CHAPTER 8 – CASE STUDIES 8 21 commercial development and open space, with development projected to occur over 30 years.24 In its land leasing policy, DFW iden„fies the following preferred airport related uses for future development: Avia„on related development requiring taxiway access (e.g., airline passenger terminals, air cargo terminals, airline maintenance and hangar facili„es) Avia„on related development not requiring taxiway access (e.g., freight forwarders, flight catering kitchens, air cargo processing facili„es, warehouse and avia„on fuel storage) FTZ development desiring proximity to avia„on facili„es (e.g., warehousing, distribu„on centers, manufacturing and assembly) Avia„on opera„ons and maintenance support facili„es (e.g., administra„on and maintenance buildings, u„lity plants, storage facili„es, police/fire/emergency medical facili„es) Commercial development of property located within the revenue sharing area of non cons„tuent municipali„es as stated in Senate Bill 569 or in the ci„es of Euless and Irving in a manner consistent with the exis„ng and planned airport uses and users Avia„on business and service related facili„es (e.g., reserva„on centers, office/business centers, avia„on training facili„es, travel related businesses) Consumer business ac„vity providing goods and services to employees and passengers (e.g., hotels, food and retail services, banks, automobile services, day cares, medical and dental services) Other development that cannot be accommodated by the ci„es and would otherwise locate in a different region or state if DFW land were not available25 Although these uses are preferred because of their interrela„onship with avia„on ac„vity, development will ul„mately go for the highest and best use of the property that will generate the greatest tax revenues. These are o›en hotel, retail, restaurant, and office uses. 8.3.3 Value Capture Through Tax Revenue Sharing The DFW owner ci„es and the host ci„es recognize that the airport creates a posi„ve influence on land values and marketability on all airport proper„es, both on and off airport. Host and owner ci„es consider the airport an economic development asset. The host ci„es derive a large percentage of their opera„ng budgets from on airport developments. Because much of the airport is located outside the taxing jurisdic„ons of the owner ci„es, they would not automa„cally accrue direct financial benefits from development that occurs on airport land. In order to share in the revenue generated by this development, the owner ci„es have pursued land value capture with the host ci„es through tax revenue sharing. REVENUE SHARING AGREEMENTS The ci„es of Dallas and Fort Worth have tax revenue sharing agreements with the ci„es of Euless, Irving, and Grapevine, and are seeking a similar agreement with the city of Coppell. The agreements allow both the host ci„es and the owner ci„es to benefit from new development on airport owned land. Each host city retains 1/3 of the increased revenue, with the owner ci„es spliŸng the remaining 2/3 based on their percentage ownership of the airport (7/11ths to Dallas and 4/11ths to Fort Worth). The agreement 24 FY 2012 Adopted Budget DFW cost center 25 Dallas/Fort Worth Interna„onal Airport Land Leasing Policy, issued by DFW

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 22 establishes base year (1998) revenues collected on the proper­es. “Increased revenues” are defined as revenues collected on the proper­es in excess of the base year revenues. This is similar to the structure of tax increment financing. Revenues shared include all of the following: Ad valorem26 taxes on property Sales and use taxes Mixed beverage taxes Other revenues received, credited to and/or collected by the host city from the property (including hotel occupancy taxes), excluding municipal court revenues27 The host ci­es are also awarded the same propor­on of all municipal court fines, fees, and costs resul­ng from cita­ons wri“en on the proper­es, excluding fees and costs collected as required by state law. Each host city agreement includes a clause that, should another host city nego­ate an agreement allowing it to retain a larger percentage of the increased revenue, then all host ci­es’ agreements shall be amended to allow the same. Under the revenue sharing agreements, the owner ci­es are obligated to promote development on the airport. At the same ­me, the airport sponsor has agreed not to compete directly with the owner ci­es for development. Thus, if there is poten­al development that could be sited in other areas of Dallas or Fort Worth, those sites will be promoted before airport sites. Further, un­l a revenue sharing agreement with Coppell is in place, the airport will not develop any airport land located within that city. The airport provides police services, fire protec­on, and infrastructure to development on airport property. Developers are responsible for building all new infrastructure required at each site. At this ­me, all the revenue accruing to the owner ci­es from these agreements goes directly into the general funds of the ci­es. It is not earmarked for airport opera­ons, maintenance, or capital projects, and has never been allocated for such costs. Presently, ci­es look to airports as revenue generators whose opera­ons support their on going ac­vi­es. However, the model in place at DFW could be replicated elsewhere so that all or some por­on of the revenue generated through this type of airport supported development is earmarked to finance airport ac­vi­es. CURRENT AND PROJECTED REVENUES Table 8 5 lists the acres of already developed land on the airport and their non aeronau­cal uses. Currently, these parcels generate approximately $63 million per year in tax revenues for the owner and host ci­es. Available land at DFW is located in 13 separate development districts, as defined by the airport and shown in Figure 8 3. 26 A tax based on the value of real estate or personal property 27 Interlocal Agreement between the Ci­es of Fort Worth and Dallas and Irving, dated November December 1998

CHAPTER 8 – CASE STUDIES 8-23 Table 8-5: Exisng Non-Aeronaucal Land Uses, 2012 Land Use Acres Cargo 345.0 Ground Leases 601.0 Hotel 6.2 Retail 4.6 Other Land Uses 141.0 Total 1,097.8 Source: Dallas/Fort Worth Interna†onal Airport Figure 8-3: DFW Development Districts Source: Jones Lang LaSalle, Dallas/Fort Worth Interna†onal Airport, Commercial Development Business Modeling, June 6, 2011 In 2011, DFW airport management commissioned a study to evaluate the revenue-producing poten†al of these districts when they are built-out. Table 8-6 shows the poten†al acreage and square footage of development by use in all 13 districts.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 24 Table 8 6: Addional Land Planned for Development Acres Square Feet Rooms Retail 290.1 2,021,160 n/a Restaurant 172.9 877,179 n/a Hotel 98.6 2,875,500 4,410 Office 572.8 11,198,962 n/a Industrial 983.7 16,466,000 n/a Air Cargo 217 1,649,000 n/a Theme Park 356 8,000,000 n/a Total 2,691.1 43,087,801 4,410 Source: Jones Lang LaSalle, Dallas/Fort Worth Interna€onal Airport, Commercial Development Business Modeling Table 8 7 shows annual cash flow and cumula€ve revenue poten€al to DFW, the owner ci€es, and the host ci€es with a full build out of airport land. DFW’s revenue comes from the ground rent and percent of sales (for retail and restaurant uses). The host city and owner city revenues come from the taxes and fees covered in the revenue sharing agreements. At full build out, DFW will annually receive between $105 million and $142 million in ground lease and percent of sales revenues. All other jurisdic€ons, including the host ci€es, school districts, and coun€es, will receive between $386 million and $412 million in tax revenue annually.28 Table 8 7: Projected Revenues at Full Build Out, 2038 Jurisdicon Total Stabilized Annual Cash Flowa Total Cumulave Revenuesa Esmates Conservave Market Conservave Market DFWb $141,695,892 $261,315,703 $8,900,880,254 $15,431,436,527 Owner Ciesc $96,818,134 $105,278,050 $4,733,610,579 $5,117,673,082 Other Jurisdiconsd $385,811,481 $411,743,764 $17,724,755,269 $9,136,862,315 Total $624,325,507 $778,337,517 $31,359,246,102 $39,685,971,924 Notes: a The total revenues for other jurisdicons include revenues that accrue to the counes and to school districts, in addion to the host cies. The revenues also include the base revenue collected prior to the execuon of the revenue sharing agreements. Therefore, the poron of revenue going to other jurisdicons is much greater than the one third of “increased revenues” that accrues to the host cies. b Net of debt service and on going infrastructure costs c Inclusive of exisng commercial development revenues d Inclusive of exisng tax revenues Source: Jones Lang LaSalle, Dallas/Fort Worth Internaonal Airport Commercial Development Business Modeling 28 The amount of tax revenue that accrues to the other jurisdicons is more than 1/3 of the total tax revenues because the airport only has revenue sharing agreements with the host cies, not the school districts or county. In addion, the total for the cies includes the base revenues that were collected prior to the revenue sharing agreements.

CHAPTER 8 – CASE STUDIES 8 25 8.3.4 Implementation Issues The degree of difficulty in establishing revenue sharing agreements has varied with the host cies. Agreements with Euless and Irving were established in 1998 without too much difficulty. The cies of Grapevine and Coppell, however, emerged as less willing partners. All of the airport terminals are in Grapevine and, for years, all tax revenues from terminal acvies accrued to that city, while the airport sponsor provided all public services for these uses. State legislaon was required to force Grapevine to enter into a revenue sharing agreement. The legislaon included a grandfathering provision that allowed Grapevine to accrue all revenue from some development around the terminals. Coppell has yet to enter into a revenue sharing agreement with the host cies. The airport and the host cies will not allow development on any of its land not already covered by a revenue sharing agreement unl such agreements are reached. By entering into revenue sharing agreements with the owner cies early on, the host cies of Irving and Euless acknowledged that the land value generated by the airport far exceeds the development value of the land without the presence of the airport. The reluctance of Grapevine and Coppell to enter such agreements illustrates the difficulty of convincing a municipality to give up some of its potenal tax revenues to another enty. 8.3.5 Unique Features of DFW The DFW case study is unique because Dallas and Fort Worth own a vast amount of undeveloped land on the airport. In this case, the cies of Dallas and Fort Worth have the advantage of controlling the land that benefits from proximity to the airport. Because these cies own the land, they can prevent the property from developing and adding any addional revenues to a host city’s tax base unless the host city agrees to the revenue sharing agreement. This is exactly what has occurred on property located in Grapevine and Coppell that is not currently subject to a revenue sharing agreement. In many cases in the United States, the airport sponsor does not control much land associated with the airport or off airport parcels. In these cases, structuring revenue sharing deals may be more difficult. Legislave acon by the state may be required to implement such agreements. 8.3.6 Lessons Learned The Dallas/Fort Worth Internaonal Airport case study demonstrates that airports create addional value for development sites in their vicinity. Value is generated from economic acvies that are directly related to the airports, either through the FTZ or because of commercial/industrial development on airport owned land in the four host cies. With tax agreements in place with three of the four host cies, Dallas and Fort Worth can capture a poron of the enhanced real estate value generated from airport related development in the other host cies. The primary lesson learned though this case study is that, through creave partnerships with the cies surrounding an airport, local governments (and potenally airport sponsors) can capture financial benefits from increased land values.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 26 Other lessons learned from this case study include: Airports generate land value for development parcels in their vicinity, a€rac‚ng a range of ac‚vi‚es, from airport dependent cargo opera‚ons to airport suppor‚ve hotel development to offices whose workers and visitors benefit from proximity to the airport. An FTZ can be a catalyst for airport area development, a€rac‚ng businesses that use the airport and businesses that benefit from the incen‚ves offered by the FTZ. Ownership of land that benefits from airport proximity provides leverage when nego‚a‚ng revenue sharing agreements. By crea‚ng a suppor‚ve development environment with business incen‚ves such as an FTZ, a cri‚cal mass of development was a€racted to the vicinity of the DFW airport. Although owner city revenues generated through off airport development go into the general funds of both Dallas and Fort Worth and are not earmarked for the airport, an airport sponsor can choose to allocate all or part of such a revenue stream to support airport ac‚vi‚es. To ensure this revenue stream to the airport, documents alloca‚ng revenues should clearly indicate the methodology that calculates the airport share. Airport centric development can be in compe‚‚on with regional city centers, which may affect the vibrancy of both an established downtown and an emerging airport city. This impact can be mi‚gated through non compete agreements. In the DFW case, airport sponsors agreed not to market land for development when suitable sites existed in either downtown Fort Worth or Dallas. In addi‚on, poten‚al tenants are required to cer‚fy that they considered loca‚ng in Dallas and Fort Worth, but could not iden‚fy a suitable site. In rare cases, the airport has received direc‚on from one or both ci‚es not to pursue a tenant because the ci‚es’ economic development departments were interested in the prospect. DFW is one of just a few airports with large holdings of developable land that provide leverage for nego‚a‚ng revenue sharing agreements with the municipali‚es in which the land is located. State legisla‚on may be required for revenue sharing agreements for airport related development that is not located on land owned by the airport or its owner city. In cases where the airport does not own the land that benefits from proximity to the airport, the airport or owner city could develop incen‚ves, such as direct airport connec‚ons to development parcels, to encourage revenue sharing agreements. Municipali‚es also may be encouraged to develop revenue sharing agreements with airports that demonstrate the importance of the airport as a major regional employment center and economic engine. Other planning/zoning techniques may also be used to create an incen‚ve for coopera‚on among jurisdic‚ons. For example, overlay design zones to focus development, with density and use benefits that increase developer return, as well as overall tax revenues, might be applicable if market condi‚ons support increased development next to or near the airport that otherwise might not occur.

CHAPTER 8 – CASE STUDIES 8 27 8.4 INDIANAPOLIS INTERNATIONAL AIRPORT – OPTIMIZING CONCESSION PROGRAMS Indianapolis Internaonal Airport, Midfield Terminal 8.4.1 Overview In 2008, Indianapolis Internaonal Airport (IND) opened itsMidfield Terminal building complex. Among several notable firsts, this new terminal showcased a brand new concession concept and program. With the new facility, the Indianapolis Airport Authority (the Authority) took the opportunity to plan and design a new concession program. The IND experience shows innovaveways an airport can design a concession program as well as recruit andmanage concessionaires. The Indianapolis concession program also has received accolades from the industry. In 2009,Airport Revenue News (ARN) awarded IND three “2009 Best Concession” awards in themediumairport category: Best Concession ProgramDesign Best Overall Concession Program Best ConcessionManagement Team (edwith Nashville and San Antonio) ARN also recognized the Authority’s concession management team for developing a responsive, efficient, accessible, and partner oriented approach to their concession program, labeling the management as industry innovators. ACI NA29 also recognized the Authority and its concessionaires 29 ACI NA

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 28 for the quality of its retail program and its food and beverage program, as well as for the “green” iniƒaƒves of its concessionaires. In 2014, for the third ƒme, ACI awarded IND the ƒtle of “best airport in North America” for service quality performance. Many innovaƒve aspects of IND’s program make it a rich case study for concession programming ideas and ways to manage a concession program that maximize net revenues to the airport sponsor. 8.4.2 Objectives The Authority’s overall objecƒve for the concession program was to maximize benefits for the airport and the traveling public. Several innovaƒve elements of the Authority’s philosophy and execuƒon of the concession program stand out. AUTHORITY CONTROL OVER CONCESSION PROGRAMDEVELOPMENT The Authority maintains control over concession program development and concession management. For the new terminal, airport staff employed a direct leasing approach with concessionaires, so that no middlemen were involved. Staff worked with individual concessionaires to ensure that the public received the highest quality offerings and services. They also cra–ed financially feasible contractual terms that would benefit both the concessionaire and the Authority. Individual concessionaires agreed to (1) contract for the construcƒon of improvements and (2) pay for tenant improvements themselves. The Authority’s responsibiliƒes included the review and approval of concession layouts, approval of construcƒon plans, and monitoring of construcƒon projects to ensure they follow approved plans. FOCUS ON CUSTOMER EXPERIENCE FIRST, NOT REVENUE The Authority focused on providing customers with a great experience. The Authority reasoned that a customer service–oriented concession program would drive revenues by offering a high quality, diverse mix of retail goods, foods, and beverages, and by solving bo™lenecks at security lines so customers could enjoy the Central Plaza without worrying about arriving at the gate on ƒme. EMPHASIS ON LOCAL BUSINESSES AT THE AIRPORT The concession concept called for strong parƒcipaƒon from local businesses to reinforce the unique aspects of the “Indianapolis experience” and to support the local economy more directly. To that end, the Authority focused on a™racƒng businesses that best represented Indianapolis history and tradiƒons. INNOVATIVE APPROACH TO SOLICITATION OF CONCESSIONS The Authority did not use the customary request for proposals (RFP) process to select concessionaires. Staff met with hundreds of concessionaires to determine the industry’s range of concession offerings and the relaƒve quality of these offerings. The Authority released a request for le™ers of interest (RLI) with extremely low entry barriers to a™ract the highest level of parƒcipaƒon. This approach permi™ed Authority staff to select a mix of local and naƒonal concessionaires that would match the needs and wants of the IND customer. Concessionaires were selected and assigned concession locaƒons based on the Authority’s concession design.

CHAPTER 8 – CASE STUDIES 8 29 An important aspect of this process is an Indiana statute that permits the Authority to select concessionaires via direct negoaon—a process not allowable for many airport sponsors. However, this process is crical to the execuon of the Indianapolis model, and may benefit other airport staff who can obtain this type of contracng flexibility. CUSTOM CONCESSION AGREEMENTS The Authority’s objecve was to create a business arrangement that would permit the concessionaires to thrive, to serve the customers, and to avoid an environment of high concessionaire turnover (that can result in poor service to customers). Therefore, the Authority negoated unique arrangements with each concessionaire. Negoaons focused on (1) quality of the customer experience; (2) quality of the offering; and (3) unique terms and condions for each concessionaire to promote the sustainability of each concession. LEANMANAGEMENT APPROACH The Authority developed and implemented its concessions program with a staff of three and currently manages the program with the same number of staff. During the program development phase, the Authority hired outside consultants to advise on the overall concession plan, selecon of concessionaires, and negoaon of concession agreements. However, the Authority maintained control over the enre design, contractual, and administrave process of the concession program. MID TERM RETURN TO NEW CONDITION The Authority’s requirement for mid term refurbishment of each concession is not limited to a fixed dollar amount as is usual pracce in the airport industry. Instead, concessionaires are contractually obligated to refurbish their facility to its opening day state (called “opening day fresh” in the leases) at the mid point of each concession agreement. 8.4.3 Background on the Airport This secon provides an overview of the Airport’s governance and historical airport passenger and cargo acvity. AIRPORT GOVERNANCE The Authority has extensive powers to operate and manage its system of five airports and a heliport. The Authority’s board consists of nine vong members: the city of Indianapolis appoints five members and Marion, Hamilton, Hendricks, and Morgan (advisory) counes appoint one each. Authority members serve for a 4 year term and can be reappointed. The board hires the execuve director, who is responsible for overseeing the day to day management of the airport and for planning, development, and implementaon of airport system projects. COMMERCIAL/AIR CARGO SERVICE Several airlines serve the airport, including: American Airlines, Air Canada, Delta Airlines, Froner Airlines, Southwest Airlines, United Airlines, and US Airways. Together, these airlines averaged 133 daily departures with service to 35 daily nonstop desnaons in 2014. IND is also a FedEx hub. The airport is

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-30 FedEx’s second-largest facility in the world, and ranked as the eighth-largest domesƒc cargo facility in 2013. Table 8-8: shows domesƒc and internaƒonal enplaned passengers for 2011 and 2013. Table 8-8: Indianapolis Passenger Enplanements, 2011 and 2013 Enplaned Passengers 2011 2013 Domesƒc 3,757,552 3,583,432 Internaƒonal 12,917 15,286 Total Enplaned Passengers 3,770,469 3,598,718 Source: Indianapolis Airport Authority, Airline Acƒvity Report, December 2011, 2013 FACILITIES Located 7 miles west of downtown Indianapolis, Indiana, IND occupies approximately 7,500 acres of land in Marion and Hendricks Counƒes. Two of the airport’s three runways—Runway 5R-23L, at 10,000 feet long, and Runway 5L-23R, at 11,200 feet long—are equipped with Category III precision instrument landing systems. Runways 5L-23R and 5R-23L have the necessary separaƒon for simultaneous independent operaƒons. Figure 8-4: IND Runways Source: Indianapolis Airport Authority

CHAPTER 8 – CASE STUDIES 8-31 In 2008, a er many years of planning and an extensive land acquisiƒon program, the Midfield Terminal was completed in the area between the airport’s two main runways (Figure 8-5). The heart of the terminal building is Civic Plaza, a central gathering point modeled a er the circular shape of Monument Circle, Indianapolis’s central public space (Figure 8-6). Civic Plaza was designed as a funcƒonal space to (a) concentrate passengers before security checkpoints and (b) enhance the customer experience by offering a beauƒful public space where visitors could relax and enjoy local Indianapolis restaurants and shops. Figure 8-5: IND Midfield Passenger Terminal Source: Indianapolis Airport Authority

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 32 Figure 8 6: Midfield Terminal – Civic Plaza Source: The Indianapolis Star Table 8 9 shows the key dimensions of the airport’s new terminal building. Table 8 9: Key Terminal Dimensions Terminal Area Space Total Terminal Area 1,200,000 sq. ˆ. Central Baggage Processing Area 165,000 sq. ˆ. Retail Space 90,000 sq. ˆ. Domes‘c Baggage Claim 55,000 sq. ˆ. Terminal Frontage on 1,000 ˆ., Two Level Curb Front 500 ˆ. Length of Each Concourse 1,300 ˆ. Width of Each Concourse 100 ˆ. Source: Indianapolis Airport Authority 8.4.4 Concession Program Design and Implementation OPPORTUNITIES PRESENTED BY THE NEW TERMINAL The Midfield Terminal gave the Authority the opportunity to establish new policies, goals, and approaches to the concession program, and to design a program that maximizes contact with passengers from the ‘me they enter the terminal to the ‘me they reach the gate.

CHAPTER 8 – CASE STUDIES 8-33 PASSENGER FLOWS AND TERMINAL DESIGN IND’s Midfield Terminal serves as a good example of how terminal design can both op‚mize concession revenue poten‚al and improve the overall level of service to the traveling public. Figure 8-7 shows the terminal’s three major concession areas: Civic Plaza, and the connectors of Concourses A and B to the landside building. All enplaning passengers pass through Civic Plaza and con‚nue on to either Concourse A or B; deplaning passengers also must pass through Civic Plaza. Figure 8-7: Terminal Layout and Passenger Flow Diagram Source: Indianapolis Airport Authority The terminal building layout offers passengers different retail, food, and beverage opportuni‚es. In each area of the terminal, the Authority has placed concessions that are appropriate for a passenger’s progressive movement toward the gate. Civic Plaza offers more pre-security concession choices than most airports, providing accommoda‚on for airport staff and passenger meeters and greeters in the pre-security area. Food and beverage choices in Concourses A and B allow for leisurely sit-down op‚ons, quick-service restaurants, and “grab-and-go” opportuni‚es. Most aircra• gates can be seen from the concession concentra‚on areas in the concourse. Strategically designing the terminal and placing concessionaires as such increases the passengers’ ‚me to shop or dine before flights. In summary, the terminal building design facilitates the op‚miza‚on of concession revenues and passenger services by: Increasing the percentage of concession customers by concentra‚ng passenger flows through Civic Plaza before security screening and crea‚ng a revenue genera‚ng area that many airports forego or have abandoned

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 34 Providing a mix of concessions in spaces at appropriate locaons that offer customers a broad selecon of service and product choices Integrang food and beverage with retail to create synergy and encourage spending across various retail categories IMPORTANCE OF FAST THROUGHPUT AT PASSENGER SCREENING AREAS Consistent and predictable passenger screening throughput can posively influence concession revenue for both pre and post security locaons. IND has two large, well staffed passenger screening areas adjacent to Civic Plaza. According to airport officials, there are rarely appreciable lines at security. Reliably short security wait mes encourage passengers to dwell longer in the pre security concession area without the fear of a delay. AIRPORT AUTHORITY’S ACTIVE ROLE Previous Management Agreement with British Airport Authority-Shaped Approach The concession program evolved over several years beginning in 1999. Many of the program’s details grew out of the Authority’s experience with a previous airport management contract with the Brish Airport Authority (BAA). The Authority retook direct management of its operaons a–er the terminaon of the BAA contract in 2007. Management Approach The Authority implemented a direct contracng approach for its concession program to ensure strong customer service, representaon of local brands and businesses, and maximized revenues. Airport staff solicited interest from concessionaires; determined the priority mix of food, beverage, and retail space; negoated vendor contract agreements; and, ensured contractual compliance from concessionaires. Strategic Goals The Authority adopted the following goals to guide concession program development: Opmize concession space at a level that could be supported by airport passenger traffic Convey a sense of place and identy with Indianapolis Project quality and friendliness and a high level of service to customers Achieve a mix of concessions that are financially sustainable Balance sustainability for the concessionaire with revenue generaon for the Authority Strive to be the best new concession program in the United States and a model for other airports to ulize CONTRIBUTION OF CONCESSION REVENUES Table 8 10 shows the major sources of operang revenue at the airport in 2011. Concession revenue was 12.2% of total operang revenue and remains an important overall contributor to airport operang revenues. Parking and airline revenues were the two largest sources of revenue. The Authority also received considerable revenue from leases, the Indianapolis Maintenance Center (IMC), and the FedEx cargo facility.

CHAPTER 8 – CASE STUDIES 8 35 Table 8 10: Esmated 2011 Operang Revenues ($000s) Revenue Sources Amount % of Total Airline Passenger $38,710 28.5% Airline Cargo (Landing Fees) $9,250 6.8% Parking $40,057 29.5% Concessions/Car Rental $16,647 12.2% Rented Buildings and Other Areas $17,335 12.8% IMC $9,516 7.0% Other $4,380 3.2% Total $135,895 100.0% Source: Indianapolis Airport Authority IMPLEMENTATION OF THE CONCESSION PROGRAM Planning and Stafing The concession program was 9 years in the making. The Authority started developing concession space requirements from 1999 to 2002. The space requirements were re visited during subsequent phases of concept planning and design development, which concluded in 2004. The new Concession Plan doubled the amount of concession space previously available in the old terminal. Authority staff developed the program. Staff included a concession development manager supported by two addi˜onal staff members. The Authority hired outside consultants to advise them on the development of the Concession Plan and the nego˜a˜on of concession agreements. A™er the comple˜on of the terminal, three staff members work in concession management, which involves concession agreement compliance, performance measurement, and resolving issues as they arise. Concessionaire Selection Process Indiana state law permits public agencies to select concessionaires directly rather than go through an RFP process. The Authority developed a program that involved direct selec˜on of concessionaires by pušng out an RLI. This approach was popular among exis˜ng concessionaires because it allowed them to demonstrate their working knowledge and experience in the IND market. It was also popular among new concessionaires, who could apply for space without naviga˜ng through a cumbersome and costly process. To achieve its goal of construc˜ng a concession program that reflected local values and culture, the Authority conducted an outreach program from 2005 through 2007. Through the outreach program, the Authority spoke with many businesses interested in concession space. Interest in the concession program was so high that the airport received RLIs reques˜ng five ˜mes the available space for concessions. The Authority worked through a selec˜on process that established a synergis˜c mix of concessions in the three primary areas of the terminal. The final concession mix met three condi˜ons: First, its diversity ensured that the Authority would be targe˜ng the wide spectrum of passengers who frequent

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-36 the airport; second, the Authority avoided under-merchandising the market by carefully determining the spending power of the Airport’s passengers; finally, because the Authority generated considerable interest in the concession program from local businesses, it was able to avoid contrac‡ng with concessionaires that were geographically generic. The staff established a concessionaire selec‡on commiŠee that evaluated various combina‡ons of concessionaires in order to determine the final mix in each of the three areas. The commiŠee sought to include a mix of na‡onal and local concessionaires that represented a wide variety of dining and retail op‡ons that met the Authority’s strategic goals and that appealed to a wide spectrum of travelers. Ul‡mately, the commiŠee recommended a final list of concessionaires with which the Authority nego‡ated concession agreements. Kiosks were also planned for Civic Plaza to feature seasonal or special-event merchandise. Concession agreements were 5, 7, or 10 years in length and depended largely on each concessionaire’s ini‡al capital investment. Each agreement required that concessionaires refurbish and refresh their establishment midway through their lease. The concession agreements also required the concessionaires to install u‡lity meters so the Authority can invoice them for the cost of u‡li‡es. On-Going Concession Marketing Program The Authority is involved with concession marke‡ng and promo‡on through brochures, concession directory boards, web-based adver‡sements, special events, banners, menu boards, and signs. In addi‡on, the Authority reserves certain loca‡ons in the terminal for concessionaires to adver‡se their products. As a convenience for customers, the terminal layout, down to the loca‡on of individual concessionaires, is available on Google Maps. The Authority also markets with social media outlets, including Facebook and TwiŠer, to make informa‡on available to passengers and customers while they are in the airport. Concession Failure/Replacement — Flexibility for Change The Authority designed the program to op‡mize flexibility for change by avoiding exclusive contracts, not conveying unqualified rights to space, restric‡ng the concessionaires’ right to change, reserving the right to take space back from failing concessionaires, op‡mizing the mix of prime and individual concessionaires, and not having to go through an extended request for proposal process for Final Concession Mix at IND Champps; Cold Stone Creamery (two loca‡ons); Giorgio’s Pizza; Green Leaf’s & Bananas; Qdoba; South Bend Chocolate; Vinea Wine Bar; Areas USA Inc.; HUB Convenience; RELAY; USA Today; Travel Zone; Ar‡zan/Fruits & Passion; HDS Retail-North America; 96th St. Steakburgers; Café Patachou; Face‡me (in partnership with RDG Concessions); King David Dogs; Pacific Ou©iŠers (in partnership with RDG); Starbucks; Wolfgang Puck; HMSHost Corp.; Brooks Brothers; Civic Plaza Travel Mart; CNBC Indianapolis; Cultural Crossroads; Hoosier MarketPlace; Indiana MarketPlace; Vera Bradley; The Paradies Shops; Camden Food Co.; Harry and Izzy’s; Indy 500 Grill and Retail Store; Shapiro’s Delicatessen; SSP America; Borders; Brickyard Authen‡cs; Brookstone; Copper Moon Coffee (CC Holdings); Enroute Spa; Harley Davidson; Johnston & Murphy; Just Pop In; Lids; McDonald’s; Naked Tchops‡x; Natalie’s Candy Jar; T.G.I. Friday’s; Sterling Works; and Travelex

CHAPTER 8 – CASE STUDIES 8 37 replacement concessionaires. Although several concessions did not succeed, because of the flexibility of their program, the Authority was able to replace troubled concessions quickly. This was accomplished by maintaining a “hot list” of prospects through regular communica†on with concessionaires that par†cipated in the RLI process and on going coordina†on and communica†on with the concessions community. Performance Standards Airport staff defined clear performance, development, and opera†ng standards in the concession agreements and ac†vely managed the program to ensure that concessionaires perform to these standards. Performance standards have included hours of opera†on, requirements for responding to customer complaints, minimum management qualifica†ons, dress code, staff training, signs, merchandising, cleanliness of facili†es, and recycling. Some performance standards are generic, whereas others are tailored for each individual concession agreement. Of par†cular significance to the Authority were performance standards related to the “feel” of the concession spaces. For example, sit down restaurants both pre and post security are required to u†lize china (i.e., non plas†c) plates and silverware instead of plas†cware. In addi†on, the concessionaires are contractually required to meet or exceed the quality standards of their non airport counterparts. Performance Monitoring The Authority has a staff compliance representa†ve who monitors concession performance, concession appearance, hours of opera†on, customer complaints, and dress code compliance. Consistent performance monitoring is one of the primary audit techniques that the airport relies on to ensure that concessionaires’ term agreements are followed and that concession establishments appear “opening day fresh” throughout the dura†on of the concession agreement. The Authority also has a “mystery shopper” program to monitor and measure the quality of service and the customer experience. Mystery shoppers perform specific tasks, such as purchasing products, asking ques†ons, registering complaints, or behaving in a certain way, and then provide detailed feedback about their experiences. In addi†on, the Authority periodically conducts performance audits that are based on terms s†pulated in each concession’s individual agreement. The Authority makes the scores and findings of the performance audits available to individual tenants. FINANCIAL ASPECTS OF CONCESSION AGREEMENTS Important financial elements of the concession agreements are the pricing policy, financial basis, minimum capital investment, mid term refurbishment, u†lity expenses, and a performance guarantee. Pricing Policy Concession agreements include a provision that requires post security concessionaires to offer food, beverages, merchandise, and services at no more than 110% of off airport “street” pricing. Concessionaires located in Civic Plaza must offer 100% “street” pricing. The higher allowable rate for post security concessions reflects the addi†onal logis†cal costs that concourse establishments incur, primarily for screening and delivering all merchandise to the concession.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 38 Financial Basis The financial return to the airport from each concession is based on a privilege fee expressed as a percentage of gross revenues (sales) against a minimum annual guaranteed (MAG) amount. The Authority nego…ated a prac…cal MAG amount in a manner that would not adversely affect the sustainability of concessions. Once established, the MAG is reset each contract year to an amount equal to 85% of the amount paid to the airport during the previous 12 month period, or the first year MAG, whichever is greater. Through discussions with the concessionaires, the Authority establishes the percentage of gross privilege fee for each concession individually. The level of the privilege fee is designed to appropriately compensate the Authority while not adversely affec…ng the sustainability of each concession. Minimum Capital Investment Nego…a…ons with each concessionaire also establish a minimum required level of capital investment. The minimum capital investment for each concession reflects the likely cost of construc…ng quality improvements consistent with the quality of the new terminal building. The expecta…on of the par…es is that the actual construc…on cost will exceed the minimum investment requirements. The minimum investment includes both so“ costs and hard costs. The Authority requires each concessionaire to provide auditable documenta…on of incurred construc…on costs to verify that each concession has met its minimum capital investment requirement. The Authority has a “claw back clause” requiring concessionaires that spend less than the minimum capital investment to pay the difference to the Authority. The Authority has not needed to exercise this op…on with any concessionaires. Mid-Term Refurbishment Concessionaires are required to cover all costs associated with refurbishing their establishment to opening day condi…on at the mid point of the lease term. Utility Expenses Concession agreements include a requirement that each concessionaire install a u…lity meter and reimburse the Authority in full for u…li…es used. Performance Guarantee The Authority also requires a performance guarantee in the form of an irrevocable le—er of credit or performance bond equal to 15 months of the MAG. ACTUAL FINANCIAL RESULTS – SALES AND REVENUE Table 8 11 es…mates net revenue to the Authority for terminal concessions. Assuming that the Authority received an average of 10% of gross sales, concessions delivered approximately $67 per square foot of retail terminal space. Extrapola…ng, 100% of gross sales would be approximately $600 $700 per square foot, exceeding the gross sales of some major food, beverage, and retail establishments in the United States. For example, in 2011, gross sales per square foot at Walgreens were $672 per

CHAPTER 8 – CASE STUDIES 8 39 square foot; at CVS Caremark, $666; and at Urban Oui ers, $532.30 The IND results also compare favorably or exceed the gross sales per square foot of many regional shopping centers.31 Revenue per square foot and per enplanement has remained rela‘vely stable through 2013, despite a 6% decline in passenger enplanements. Table 8 11: IND Concession Revenue per Square Foot, 2010 and 2013 2010 2013 Food/Beverage and Retail Revenue $6,024,246 $6,017,806 Passenger Enplanements 3,770,383 3,535,015 Approximate Retail Terminal Space (Square Feet) 90,000 90,000 Revenue per Square Foot $66.94 $66.86 Source: Extrapolated from Indianapolis Airport Authority Records and FAA ATADS Because of IND’s innovave concession program, food, beverage, and retail sales received a significant boost with the new terminal. Table 8 12 shows that food and beverage sales increased from $2,205,045 in 2007 (the last full year of operaons in the former terminal building) to $3,525,415 in 2010. Food and beverage revenue per enplaned passenger increased from $0.53 to $0.94 in 2010 and was $0.99 in 2013. Retail sales have increased from $2,106,107 in 2007 to $2,519,155 in 2013. Retail revenue per enplaned passenger has increased from $0.51 to $0.71. Table 8 12: Comparison of New Terminal Versus Old Terminal Results 2007a Old Program 2010 New Program Inial Increase 2013 Results Food/Beverage Revenue $2,205,045 $3,525,415 $3,498,651 Enplaned Passengers 4,142,657 3,770,383 3,535,015 Food/Beverage Revenue Per Passenger $0.53 $0.94 75.7% $0.99 Retail Revenue $2,106,107 $2,498,831 $2,519,155 Enplaned Passengers 4,142,657 3,770,383 3,535,015 Retail Revenue Per Passenger $0.51 $0.66 30.4% $0.71 a Last full year of operaons in the former terminal building Source: Indianapolis Airport Authority records and FAA 127 reports CONCESSION PROGRAMASSESSMENT The Authority’s concession program demonstrates that a well planned, acvely managed concession program centered on the customer experience can drive revenue increases. In summary, the program’s highlights are: Aesthecs – Concession units are contemporary, visually interesng, well constructed with high quality materials, and inving to potenal customers. 30 RetailSales.com 31 h‹p://money.usnews.com/money/blogs/flowchart/2009/06/26/americas most profitable malls

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 40 Capacity – Concessions are appropriately sized to meet customer demand even during seasonal and daily peaks. The Authority also planned for kiosk space that can accommodate seasonal changes and special events, such as the Indianapolis 500 and the 2012 Super Bowl. Customer Service – Concessionaires and airport staff monitor customer service and its impact on sales and revenue. The Authority periodically conducts customer service seminars to train both airport and concessionaire staff in customer service to achieve a uniform experience for the traveling public. Revenue Produc on – The Authority has demonstrated that revenue producŒon is not an end in itself; rather, it is the result of execuŒng a well conceived concession program that meets the needs of the traveling public. Sense of Place – A key element of the Authority’s concession program is projecŒng a sense of place through terminal building architecture, design features, and concessions that offer local food and retail concepts that differenŒates the airport from other airports. Value – Value for money is a key element of the Authority’s concession programs. The Authority has adopted a street pricing policy that ensures the traveling public will receive value in their purchases. Variety – The Authority has provided a rich range of choices in food and beverage, retail, and service concessions. The choices ensure that the customer will find something they want, which will contribute to higher sales for the concessionaire. The “Wow” Factor – The Authority’s concession program provides unique, visually interesŒng, and exciŒng opportuniŒes to shop and dine. This adds to the overall passenger experience at the airport. 8.4.5 Lessons Learned Although the opportunity to completely redesign a program is rare, the Indianapolis Airport Authority chose to build its new concession program from the ground up. In the process, airport staff toured other airport concession programs, spoke with a large number of concessionaires and industry experts, and held many internal strategic planning sessions to establish a vision and a set of goals for the new concession program. This rigorous approach resulted in a deep understanding of important principles for design, implementaŒon, and management of a concession program. Key consideraŒons are discussed in this secŒon of the case study. CONCESSIONS COMPETITIVELY POSITION THE AIRPORT IND is located in a highly compeŒŒve area of the country. The airport competes for passengers with airports in CincinnaŒ, Dayton, Columbus, Chicago, and Louisville. For this reason, the Authority concluded that it had to opŒmize the passenger experience at the airport. A major element of the experience is the “wow” factor achieved through the IND concession program. The Authority designed a sŒmulaŒng concession program that is an incenŒve to ašract passengers to the airport. CONCESSION SPACE COST RECOVERY AND BENEFITS TO THE AUTHORITY The fully allocated cost of all “rentable space”32 in the terminal building is $95 per square foot, which is the terminal building cost center residual rental rate33 that the airlines paid for terminal space at IND in 32 “Rentable Space” means the total amount of space for rent in the terminal building available to airlines, concessionaires, or any other rent paying tenants.

CHAPTER 8 – CASE STUDIES 8 41 2010. The terminal building cost center residual rate includes the cost of space finishes and tenant improvements for airline public view space, which has a high level of finish, and for non public space, which has a compara‚vely lower level of finish. The Authority provides these finishes and tenant improvements for the airlines and other non concession tenants and amor‚zes the cost of improvements in the rental rate paid. Terminal space provided to concessionaires was unfinished concrete shell space with u‚li‚es roughed into the leaseholds. As shown in Table 8 11, concessions ne…ed the Authority approximately $67 per square foot in percentage rent. However, concessionaire investment in improvements (required by the Authority) added to total concessionaire occupancy costs per square foot as follows: Total occupancy cost = minimum annual guarantee or percentage rent + amorzed tenant improvements. Concessionaires at IND invested approximately $31.5 million or, on average, $350 per square foot, for tenant improvements.34 Assuming these improvements are amor‚zed over a 10 year concession agreement term at an annual cost of capital of 5.0%, they result in an annual tenant improvement amor‚za‚on cost of $4,080,000 or approximately $45 per square foot. When the amor‚za‚on per square foot ($45) is added to the concession revenue (percentage rent) per square foot ($67), it produces an es‚mated return of $112 per square foot per year ($45 + $67 = $112). Therefore, the net benefit to the Authority equals $112 per square foot per year. When compared with the terminal building cost center residual airline rental rate ($95),35 the concessionaires are covering the Authority’s cost to provide the unfinished concrete shell space to them. Furthermore, fixed capital costs make up a significant por‚on of the terminal building costs. These costs will not substan‚ally increase in the near future. Concession revenue to the airport sponsor is based on the concessionaire’s gross concession revenue. Therefore, over ‚me, an increasing number of passengers, higher concession sales, and infla‚on will improve this revenue source for the Authority. CRITICAL PLANNING FOR CONCESSION PROGRAMS The early planning process for IND was unusual in a number of ways. The Authority’s 9 year ‚meframe for the development of the concession program is much longer than the 1 to 2 year ‚meframe used by most airports to redesign concession programs. The Authority first decided on a concession philosophy and concept. Next, staff a…ended a series of concession conferences and talked with various airport operators and concessionaires to determine best prac‚ces. This networking effort gave staff a very good list of contacts to use for the recruitment phase. The RLI process was an effec‚ve way to scan the 33 This methodology calculates all the expenses allocable to the par‚cular cost center and deducts the revenues that are allocable to or sourced from that par‚cular cost center. The net requirement is then divided by the appropriate divisor (e.g., square feet and landed weight) to derive the rate or fee (Vanden Oever, K., et. al., ACRP Report 33: Guidebook for Developing and Managing Airport Contracts, Transporta‚on Research Board of the Na‚onal Academies, Washington, DC, 2011, p. 10). 34 Jeremiah Wise, Indianapolis Airport Authority 35 This methodology adds all airport expenses and deducts all revenues to arrive at the airline rates and charges (Vanden Oever et. al., p. 10).

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 42 field of interested concessionaires and to control the planning and development process. The Authority used a single point of contact for concession communica€ons, which ensured that every group had equal access to informa€on. The forma€on of a diverse, talented, and knowledgeable selec€on commi‡ee was also instrumental in the success of the program. The Authority selec€on commi‡ee included internal concession staff plus a na€onally recognized independent concession consultant. The selec€on commi‡ee divided poten€al concessionaires into three categories: Core concessions Love to have concessions Eliminated concessions For IND, the concession planning process is on going. Mid term requirements to refresh each concession have Authority staff and concessionaires con€nuously engaged in the program and planning process. 8.4.6 Conclusions By taking charge of the en€re concession program, the IND airport staff seized the opportunity to consider the vision of the program, its implementa€on, and its management. As a result, staff set a solid founda€on to posi€on the concession program for future growth and increase net revenues to the airport sponsor. It is unusual for an airport to have the opportunity to rebuild a concession program from the ground up, but this case offers important insights for airports in different stages of concession program development or refreshment: A small staff of three to five can develop and manage a concession program. Concessions offer an opportunity to support local businesses and promote the regional iden€ty of an airport. A streamlined solicita€on process can encourage a high level of interest in an airport concession program and bring new par€cipants to the table. Concession space is highly valued terminal space that can deliver addi€onal revenue to the airport sponsor. A‡en€on to concession loca€ons and product offerings can enhance overall concession sales. Predictable and streamlined security can revitalize concession opportuni€es in areas located before checkpoints.

CHAPTER 8 – CASE STUDIES 8 43 8.5 McCARRAN INTERNATIONAL AIRPORT – INNOVATIVE LEASING PROGRAM 8.5.1 Introduction Airports that have developable real estate under their control can choose from among numerous potenal methods to capitalize on the airport’s unique posion as a transportaon center and to maximize non aeronaucal revenue opportunies through real estate development. Collecng ground rent is the most basic and tradional approach to airport property management. However, many innovave airport directors and business managers have structured other programs to create new revenue sources and to further smulate regional economic development opportunies that contribute to an airport’s growth. McCarran Internaonal Airport (LAS) is one of two case studies in this Airport Guide that serve as examples of innovave leasing programs. LAS’s aggressive development programs were conceptualized during a me when robust economic condions characterized the region. Officials at LAS seized the opportunity to parcipate in development projects by creang parcipaon mechanisms that were not previously or customarily used by a municipal enty. Forging creave programs allowed LAS to generate revenues in significant excess of what might have been realized by the more tradional approach of collecng ground rent. LAS’s approach required a tolerance for risks not typically associated with airports owned by a municipality or county; however, the inial phases of the program produced new and significant sources of commercial revenue for the airport sponsor.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 44 8.5.2 Background LAS occupies approximately 2,800 acres of land in Clark County, Nevada, and is operated by Clark County Department of Avia„on (the Department). The Department also operates four general avia„on airports: North Las Vegas Airport, Henderson Execu„ve Airport, Jean Airport, and Overton Airport. Much of the land owned by the Department was acquired through a land transfer from the Bureau of Land Management (BLM) of the U.S. Department of the Interior. Pursuant to the Southern Nevada Public Land Management Act of 1998 (SNPLMA), BLM transferred 5,226 acres of land to the Department. Because much of the land was located within the airport’s noise abatement zone, its use and disposal were subject to airport noise compa„bility restric„ons. Before the land transfer, the airport had no control over the type of development that took place on off airport parcels within the noise abatement zone. The Act created the Coopera„ve Management Area (CMA) and gave the Department authority to sell the land within the CMA and to place deed restric„ons on its use; however, the Department had to receive fair market value for any sale, lease, or other transfer of land. The Department also had the authority to sell the land to another government agency. Figure 8 8 shows the parcels of land transferred to the Department. Many of the parcels received were not con„guous to the airport’s primary property and did not necessarily serve an aeronau„cal purpose. With a booming Las Vegas real estate market in the 1990s (which con„nued un„l the bust in 2007), the Department iden„fied an opportunity to capitalize on increasingly valuable and developable real estate, while serving the intended purpose of acquiring land to be deed restricted for compliance with the applicable law and the noise compa„bility restric„ons referenced above. In addi„on to genera„ng addi„onal revenues, one of the Department’s primary goals was to consolidate as much land area as possible within close proximity to the airport and eliminate residen„al and other incompa„ble uses. By trading acquired proper„es, the Department could impose deed restric„ons that would restrict further residen„al development and help decrease noise contours.

CHAPTER 8 – CASE STUDIES 8-45 Figure 8-8: CMA Plan Area and Proper es Acquired through SNPLMA Source: McCarran Internaonal Airport Land Use and Disposal Plan, 2000 Standard ground leases were inially idenfied as the best opon for development of land in the CMA; however, with ground leases, the Department was subject to a bond ordinance that required them to impose a unilateral rent adjustment on non-aeronaucal tenants every 3 years. Because of the Las Vegas land boom, rent adjustments every 3 years rendered an airport ground lease una’racve for most potenal tenants. The Department would have been required to adjust rents based on explosive growth in real estate values. With the potenal for significant rent escalaons every 3 years, it was nearly impossible for a tenant to predict rents and determine project feasibility. Because the Department was mandated by the bond ordinance to maintain its ability to cover its bond debt, it needed to find alternate ways to lease and develop non-aeronaucal airport properes. LAS owned a substanal por•olio of properes acquired for noise migaon by eminent domain or by virtue of the land grant from the BLM. All revenue produced from the land in the CMA, either by sale or lease, was divided 85% to the BLM, 5% to the state of Nevada, and 10% to the Department. The

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 46 par cipatory leases were used as a mechanism to jumpstart airport compa ble development at a me when housing development was the highest alternate (and incompa ble) use. Prior to the par cipatory lease program, the Department had inves gated par cipa on in joint ventures with developers. With a residual ratemaking base on the airfield and a compensatory arrangement36 on the terminal and the development areas, the Department stood to generate non aeronau c revenue that could be used as the Department deemed fit in a compensatory lease structure. The airlines serving the airport ini ally agreed to crea on of an entrepreneurial fund of $10 million to spur development op ons. Soon, however, it was determined that county ordinances precluded local government units from becoming investors per se. S ll, the Department could par cipate in other aspects of revenue generated by a lease beyond merely collec ng ground rent. 8.5.3 Lease Participation Structure The par cipatory leases ul mately used by the Department were structured to operate in a manner similar to a joint venture. In general terms, airport land to be allocated to a par cular development was independently valued so that an es mate could be made for a return on the Department’s land contribu on. The real estate developer would contribute equity or simply arrange for the construc on financing and permanent financing. The modeled pro forma would reflect a gross rent to be received from the end user tenants. The debt service associated with any development financing would be deducted, as well as the opera ng costs. The cash equity contribu ons by the developer, if any, and the land value contributed by the Department would carry a preferred return. The net rent would then be split equally between the developer and the Department. Table 8 13 illustrates the calcula on. Table 8 13: Example of the Lease Parcipaon Structure Lease Participation Structure Total Revenue Less Debt Service Less Actual Expenses and Other Approved Costs Less Capital Improvement Expenditures and Approved Reserves Equals Available Net Revenues Distribution: 50% to Department 50% to Developer Source: McCarran Interna onal Airport 36 Compensatory cost centers are those that calculate all expenses for the specific cost center and divide that cost by the applicable divisor (e.g., square feet or landed weight). The divisor for the terminal in a compensatory methodology is generally rented space. Revenues are not deducted in this methodology to calculate rental rate or landing fee (Vanden Oever et. al., p. 10).

CHAPTER 8 – CASE STUDIES 8-47 The first such development ulizing the above structure was a 14-acre tract on which a 400,000-square- foot warehouse space was developed. The Department split $2,000,000 annually with the developer. If the Department wants to proceed with a parcipatory lease, the developer selected by the Department presents a pro forma (financial analysis) for the proposed land development that is subject to review by the Department. The Department obtains a land appraisal for the subject property and, based on the pro forma and appraisal, if the Department determines that posive cash flow will be generated by the development, then the parcipatory lease arrangement is pursued and terms of the parcular transacon are negoated. Two examples of successful parcipatory leases are described in this case study: the Blue Diamond Business Center and Beltway Business Park. BLUE DIAMOND BUSINESS CENTER-BUILDING 2, LLC Overview of the Development Blue Diamond Business Center is a 110–acre master- planned business park that was started in 2005 and today encompasses more than 1.5 million square feet of exisng and planned industrial office and warehouse space. The park is located in the southwest industrial submarket near Interstate 15 and Blue Diamond Road and very near to Blue Diamond Crossing, another LAS development project that includes a 530,000-square-foot power center anchored by Target and Kohl’s. Blue Diamond Business Center Lease Agreement In 2005, the Department entered into a lease agreement (Lease) with Blue Diamond Business Center- Building 2, LLC, a special purpose enty37 formed for the development of certain commercial facilies including retail, office, warehouse, or similar compable use. Pursuant to the Lease with Blue Diamond (Developer), the Developer was responsible for providing any required construcon or permanent financing for the development of the facilies. The Department acted as a parcipant in the project with the Developer, in accordance with the terms of the Lease. In its role as a parcipant, the Department was entled to receive 50% of the project’s net revenue (defined as the amount of available cash aœer allowable deducons had been made from total revenue). Total revenue included all rents and other income collected with respect to the leased property. Allowable deducons included: Debt service Actual expenses authorized in an approved budget, including the cost of any maintenance and operaons, or other approved project costs Capital improvement expenditures 37 A special purpose enty is an enty formed for the limited purpose described in its organizaon charter. A special purpose enty is usually created to limit liability of its organizer and its capitalizaon reflects the extent of the risk that the organizer has agreed to assume.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-48 Management fee A reasonable reserve for maintenance and operaons or any reserve required by any lender under any approved financing Repayment of any equity contribuon plus return on equity contribuon The management fee ranged from 3% for industrial space to 4.5% for office space to 5% for retail space, and was paid to cover all property management administraon expenses. It is worth nong that the Department was able to achieve its primary goal of ensuring that the property would not be used for any purpose incompable with airport operaons. The Department also maintained approval rights over the construcon standards and the plans and specificaons to ensure that the property would be developed as a first-class commercial facility. Addionally, the Department maintained approval rights over the subleases to be extended to the end users of the project. To the extent that the Department was required to make any equity contribuon for the development, the net revenues would first be applied to provide an 11% pre-negoated rate of return on that equity. With respect to the Department’s equity contribuon, the pares acknowledged that the Department received fair market value for all leases. The Department’s return on equity was then based on the fair market value of the property that it contributed to the development. BELTWAY BUSINESS PARK, LLC Overview of the Development Source: Lochsa Engineering In 2001, the Department entered into a Lease Opon Agreement (Lease) with the Thomas and Mack Development Group to develop 298 acres of land within the CMA. The opon was granted to Beltway Business Park, LLC, another special purpose enty created for the purposes of developing the property. The business park was planned as a 400-acre facility located on the south side of the Southern I-215

CHAPTER 8 – CASE STUDIES 8 49 Beltway between Jones and Decatur Boulevards. At build out, Beltway Business Park (Beltway) was envisioned to have approximately 5 million square feet of office, distribuˆon, and retail faciliˆes. Beltway Lease Agreement Although the transacˆon with Beltway is similar to that of the Blue Diamond Business Center, the structure of the agreement was slightly different. It again reflected the creaˆve techniques used by the airport’s business development staff. The Department granted Beltway an opˆon to lease the property in accordance with a pre negoˆated form of lease. The opˆon extended to all or any porˆon of the property provided that (1) the opˆon could not be exercised for fewer than 40 acres and (2) the property had to be either conˆguous to other porˆons of the opˆoned property leased by the developer or otherwise located to develop the opˆoned property in an orderly progression. The Department retained the right to adjust the acreage upwards or downwards for each opˆon exercised. Beltway agreed to pay the Department an opˆon fee which, in lieu of a direct payment by Beltway, could be considered as an equity contribuˆon by the Department and, thereby, receive the same priority for payment as the Beltway’s equity contribuˆon under the Lease Agreement. Beltway and the Department agreed that the iniˆal value of the opˆon fee was $78,000. This amount was subject to an upward or downward adjustment during the first year of the Lease based on 10% of the appraised value of the opˆoned property (appraised as raw land) to an amount equal to 1% of any lease value. To illustrate how the opˆon fee was calculated, consider the following: Appraised value = $6.00 per square foot Lease value (10% of appraised value) = $0.60 per square foot per year Opˆon fee value (1% of lease value) = $0.006 per square foot per year For each area of land placed under a Lease, Beltway would take a pro rata share of the opˆon fee and make priority payments to the Department for the pro rata amount of that fee related to each project as part of the Department’s equity contribuˆon. The arrangement enabled Beltway to apply for a credit toward the opˆon fee in the amount of approved costs of all development work for the build out of the opˆoned property (such as survey costs, engineering, environmental work, soils, drainage studies and/or infrastructure placement required for the development). The foregoing development costs were treated as an equity contribuˆon by the Department, thereby receiving the same priority payment as the opˆon fee. The approved development costs were considered Beltway’s contribuˆon under the Opˆon Agreement. The ground lease was then structured similarly to the lease described in the Blue Diamond transacˆon above, with total revenue calculated. To reach net revenue, the debt service, approved budgetary expenses, capital improvement expenditures, a 3% management fee, and a maintenance and operaˆon reserve were deducted. The balance was then split 50/50 between the Department and Beltway. Once again, due to the use restricˆons imposed on the Lease, the Department was able to ensure its goal of consolidaˆng as much area as possible away from incompaˆble land uses such as residenˆal.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-50 The Department retained the right of recovery of the leased premises to the extent that it was necessary for airport or other public uses. Furthermore, the Department mi†gated its risks by retaining a right to convert the deal structure to a flat ground rent if the an†cipated improvements for the development were not made within 36 months of the Lease. The ground rent was set at the fair market value for unimproved real estate at its loca†on, with considera†on given to the impact of the deed and lease restric†ons on the value of the property. The ground rent structure then con†nued un†l the improvements were completed. 8.5.4 Results of the Leasing Program In the early 1990s, faced with a BLM plan to auc†on proper†es in southern Nevada in 2.5 acre to 5 acre tracts without deed restric†ons, the Department recognized the need to take ac†on. By reaching agreement with the BLM, no residen†al property would be sold within the noise contours of the airport without the Department’s approval. The land sat for 8 to 10 years without the ability to sell, and the area began to suffer as a result. By recognizing the advantage of commercial and industrial development in a growing Las Vegas market, the Department was able to obtain the necessary deed restric†ons on proper†es and to convert neighborhoods to airport-compa†ble uses, while developing new non-aeronau†c revenue. Furthermore, the cash used for capital projects did not hit the rate base and, thereby, avoided Airport Improvement Program (AIP) or federal funds, which allowed the Department the freedom to use the cash revenues as it deemed fit. Figure 8-9 shows the revenues collected for land rental in calendar year (CY) 2011. The Beltway Business Park represents approximately two-thirds of the annual land rental revenues on CMA proper†es.38 Figure 8-9: Total Land Rental Revenues for CMA Properes, CY 2011 Source: Clark County Department of Avia†on 38 Land rental revenues on CMA proper†es are shared with the BLM and the state of Nevada. Blue Diamond Business Center, $177,983 Beltway Business Park, $4,096,579 Rainbow Arroyo Commons, $1,652,835 Arroyo North Phases I & 2, $146,675

CHAPTER 8 – CASE STUDIES 8 51 The Department has been able to parcipate in almost 40 development projects ulizing standard ground leases to the parcipatory leases described in this secon. Since the incepon of the development program, CMA properes have generated total revenue of $110,448,550. Table 8 14 shows the breakout of CMA revenues. Table 8 14: CMA Revenue Since Incepon CMA Revenue Land Rental $30,679,579 Easement Right of Way $1,430,049 Land Sales $77,675,830 Miscellaneous Land Usage $663,092 Total Revenue $110,448,550 Source: Clark County Department of Aviaon The real estate bust that began in 2007 set the Department on a path away from parcipatory leases to ensure steady cash flow and to avoid risks associated with parcipaon arrangements. Nonetheless, the Department recognized the need for a risk migaon provision. In response, it included provisions requiring parcipatory lease parcipants to complete improvements within a specified period of me or face restructuring of the transacon to a fixed ground rent for the me it takes the developer to complete the improvements. 8.5.5 Lessons Learned Flexibility in planning and decision making allowed the Department to react to changing Las Vegas real estate market condions. Although such flexibility is more typically seen in the context of an operang airport authority, LAS provides a clear example of what may be accomplished even outside of an authority context if elected officials empower their airport officials to solicit and act on creave proposals. The situaon of the Department at LAS may be unique, as most municipally run airports are usually subject to constraints imposed by state statute or county/city ordinances. Furthermore, elected officials must consider the polical implicaons of their decisions and would normally be recent to empower county/city employees with the discreon to undertake risk based acvies. Airport authories are, for the most part, only restricted by their enabling statutes and their own operaonal by laws and regulaons, in addion to their Airport Operang Agreement. Authority officials are, therefore, not as constrained in their ability to undertake risks. Furthermore, those elected officials who appoint board members enjoy the polical shield of an appointed board whose members must exercise independent business judgment. That said, the LAS program illustrates that, given the appropriate opons, airport revenue generang acvies may sll be used, even though an element of risk may be involved.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 52 8.6 PITTSBURGH INTERNATIONAL AIRPORT – TIF/PARTICIPATORY LEASE 8.6.1 Background Airport execuves must consider how best to maximize the generaon of income while maintaining an appropriate balance against risk; thus, the structure of real estate development projects is extremely important. The focus of this case study is on real estate development at Pi‰sburgh Internaonal Airport (PIT). It complements the discussion about joint ventures and parcipatory leases at LAS. PIT provides an example of how airport officials, faced with a stagnant real estate market, were able to capitalize on the airport’s presence and jumpstart development acvies. By ulizing creave financing techniques, such as formaon of a Tax Increment Finance (TIF) district, airport officials convinced a well established local developer to develop a speculave building (a building not pre leased, but rather built based on the speculaon that tenants will be a‰racted to the building). Addionally, the Allegheny County Airport Authority (ACAA) assumed some of the risk by converng a poron of the ground rent to parcipaon in future tenant rents. The speculave building was quickly leased, reflecng the true demand for office and industrial space in the area; and addional buildings quickly followed. The PIT case study reflects how the ulizaon of creave structures and a willingness to accept some risk can smulate new development acvity and thereby create new revenue sources for an airport. AIRPORT GOVERNANCE AND LAND PIT sits on 8,800 acres that was acquired in two phases. The first phase was during the 1950s and the second phase occurred in the early 1980s for development of PIT’s Midfield Terminal. In the earlier days, the Allegheny County Department of Aviaon, a funconing department of Allegheny County, served as the airport sponsor. Although the county had idenfied development of the airport land as a key element of its economic development plan, li‰le development acvity had occurred. Environmental clearance impediments and county bureaucracy stymied potenal development opportunies. In 1999, the county formed the ACAA and charged it with the tasks of not only overseeing all areas of airport operaons, but also jumpstarng the development efforts that had been part of the county’s

CHAPTER 8 – CASE STUDIES 8 53 original economic development agenda. Working hand in hand with the County’s Department of Economic Development, the ACAA embarked on an aggressive plan to develop pad ready development sites and complete infrastructure improvements such as roads and the installaƒon of water, sewer, and uƒlity connecƒons. One project, the Airside Business Park, was near compleƒon at the ƒme of the ACAA’s formaƒon, and iniƒal efforts focused on ensuring compleƒon of the final phase of that project. The ACAA hired a senior director of development whose primary responsibility was to expediƒously implement a real estate program. One of the first tasks undertaken was the preparaƒon of a Development Master Plan. The master planning process brought together all of the stakeholders who would be impacted by the development of the airport. The list included both Moon and Findlay Townships (the airport straddles both townships); the county; local economic development agencies; and the state. DEVELOPMENT PLAN The first step of the planning process was idenƒficaƒon of all of the assets that the airport might need for aeronauƒcal use for the next 50 years. These areas were set aside and reserved for future airport use. The balance of the property was approximately 3,800 acres. FAA, as part of the Airport Layout Plan (ALP), approved these parcels for non aeronauƒcal use. The next step was to analyze the comprehensive plans for Moon and Findley Townships to determine how development at the airport would fit with community plans. At the ƒme of the iniƒal study, water and sewer systems were in place for only 10% of the airport’s development sites. One element of the airport’s real estate development program included a strategy for providing transportaƒon and uƒlity infrastructure to the sites. Given the region’s challenging topography and the fact that many of the sites had been previously used for coal mining, it was determined that only 1,900 of the 3,800 acres were candidates for development. ACAA staff, along with planning consultants and representaƒves of Moon and Findlay Townships, looked at the most probable uses for the sites and se™led on warehouse distribuƒon, office, light industrial, tech/flex, and hospitality. The plans eliminated residenƒal as a potenƒal use and included retail development as a support funcƒon to the other uses. Also idenƒfied were several impediments that would need to be addressed: Need for infrastructure improvements Grading of pad ready sites Compleƒon of environmental permi¡ng Need to overcome community percepƒons that airport land developments had too many issues Terminaƒon of non performing agreements that ƒed up huge tracts of land Community percepƒons turned out to be a larger issue than originally anƒcipated. There was concern that airport development had regulatory issues not associated with other properƒes near the airport. Addiƒonally, many developers who presumed that they would be able to obtain rights to control tracts of land or lease property at relaƒvely minimal costs were frustrated to learn that federal mandates required that the airport receive fair market value (which would require appraisals to ascertain). Lastly, real estate brokers were under the misapprehension that ACAA could not pay commissions for on site

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 54 development and lease opportunies, so brokers tended to avoid showing airport properes. ACAA staff addressed each issue quickly and interest in the development sites increased rapidly. FINANCING THE INFRASTRUCTURE WITH A TIF DISTRICT Funding for the land development was a crical issue. A limited pot of funds was available from the airport, and addional funding clearly was needed. With the help of the county, local communies, and the economic development agency, the state agreed to fund projects on a case by case basis. The airport also used tax increment financing (TIF) to cover the gaps in funding. Faced with financing challenges, ACAA reached out to a well known industrial developer. ACAA proposed that they would be willing to enter into a risk sharing arrangement with respect to the development of the first building in a new warehouse industrial park, now known as the Clinton Commerce Park. The developer would be required to proceed with a speculave building. Addionally, as noted above, to ensure the necessary financing for the infrastructure work, the developer agreed to fund a TIF loan, secured by a guarantee from the commonwealth of Pennsylvania. This loan filled a gap in the funds needed to complete the grading, roadway construcon and ulity installaon for the park. Developers projected the Clinton Commerce Park, at the me of its inial development, to be 1.5 million square feet of large bulk warehouse buildings that would range from 200,000 to 500,000 square feet. The industrial park required substanal infrastructure improvements as a prerequisite to any potenal development. Those improvements—all public—included highway and road construcon; interchanges; traffic signal installaon; and electrical, sewage, and storm water upgrades, among others. The ancipated cost of the public improvements was $7.5 million dollars, roughly 40% of a total project cost of $18.5 million dollars. In order to finance the public improvements, ACAA approached the taxing bodies and the regional redevelopment authority to create a TIF district. As noted in the TIF Plan: Under the Airport Market Area Task Force, the Airport Market Area was idenfied by an expert panel from the Urban Land Instute as one of the key development opportunies in the Southwestern Pennsylvania region because of its proximity to the PiŸsburgh Internaonal Airport and the availability of potenal prime industrial development sites. The Clinton Commerce Park, a former Brownfield site that has been strip mined or undermined over the last 100 years, is a regional priority in the regional development plan for Southwestern Pennsylvania. The market concept is based on the potenal to create new, ready to go industrial capacity in the region. This ready to go industrial capacity will provide an opportunity for the region to compete naonally with high quality, compeve industrial space.39 The TIF structure involved the creaon of a TIF district that included the 150 acres of the proposed industrial park. The taxing bodies, including the local township, school district, and the county, agreed 39 TIF Plan – ACAA document

CHAPTER 8 – CASE STUDIES 8 55 to contribute 75% of the real estate revenues generated by the development that exceeded the tax base in existence when the TIF district would be established. Based on that commitment, the County Redevelopment Authority issued its TIF notes, which were payable from the posi„ve tax increments realized from the TIF district. ACAA arranged with the developer to purchase all of the issued TIF notes. Because of crea„on of the TIF district, the expected private investment—originally projected at $60 million dollars—is proving to be conserva„ve. The industrial park has produced many direct and indirect benefits to the local communi„es, the airport market area, and southwestern Pennsylvania, including: Direct and indirect jobs numbering 1,420 Annual wages of over $41,000,000 Over $850,000 in annual wage taxes ENGAGING THE FIRST DEVELOPER AND PARTICIPATORY LEASES ACAA a•racted developers by offering a low ini„al ground rent to the developer. Once the property was built and occupied, ACAA shared in a poten„al revenue stream that provided a greater return than mere ground rent and with limited risk. Accordingly, ACAA nego„ated a ground lease with the developer that included a base rent that phased in an addi„onal percentage rent (APR)40 based on occupancy. For the developer, this approach alleviated one element of risk associated with lease renewal. For ACAA, the lease included the benefit of APR over the base rent. The APR was structured so that each sublease (the lease for the built out tenant space) would have an APR component. The APR would apply to amounts in excess of the base rent to the sub lessee. ACAA then receives a percentage of the amounts in excess of that base rent figure. This structure also proved valuable from a compe„„ve standpoint, as the airport proper„es compete with off airport developable proper„es. The APR structure is as follows: Up to the first 20 cents ($0.20) of the effec„ve rent41 per square foot in excess of $3.50 per square foot shall be mul„plied by 10% and further mul„plied by the rentable square feet used to convert the Effec„ve Rent. Up to the next 20 cents ($0.20) of the effec„ve rent per square foot in excess of $3.70 per square foot shall be mul„plied by 15% and further mul„plied by the rentable square feet used to convert the Effec„ve Rent. Up to the next 45 cents ($0.45) of the effec„ve rent per square foot in excess of $3.90 per square foot shall be mul„plied by 20% and further mul„plied by the rentable square feet used to convert the effec„ve rent. 40 Although addi„onal percentage rent in the retail lease environment usually entails a base rent plus a percent of gross sales in excess of a base amount, the concept is unique with an office or industrial lease. 41 The effec„ve rent equals the normal base rent less the annual amor„za„on cost of addi„onal improvements over the lessee’s standard building finishes and any commission.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 56 Any addional effecve rent in excess of $4.35 per square foot shall be mulplied by 25% and further mulplied by the rentable square feet used to convert the effecve rent. For example: 1. Sublease of 100,000 square feet at a new rent of $500,000 2. Converted to square foot per year = $5.00 per square foot (PSF) 3. Assume the lessor receives 20% of the rent over $4.00 PSF 4. The $5.00 results in the following percentage rent calculaon: 5. $5.00 – $4.00 = $1.00 x 20% x 100,000 = $20,000 (This is in addion to the base ground rent.) 8.6.2 Lessons Learned ACAA controlled thousands of acres of developable property, but required creave deal structuring to spur a developer to risk the first speculave project. Establishing a TIF district, the county was able to install needed access and infrastructure to Clinton Commerce Park. By restructuring the tradional ground rent lease into one where the airport absorbed some of the development risk and shared in the benefits, ACAA was able to smulate further development. A›er the first building in the Clinton Commerce Park was completed in 2007 (and immediately leased up), not only did the developer then move to its second building, but new companies and developers entered into addional ground leases and ACAA now has 725,000 square feet of new Class A warehouse buildings completed. The park is generang significant revenue. ACAA has also established its reputaon as a creave and flexible landowner working with developers to take advantage of a unique real estate asset.

CHAPTER 8 – CASE STUDIES 8 57 8.7 SPRINGFIELD BRANSON NATIONAL AIRPORT – AIRPORT OPERATED GROUND HANDLING Ground Handling at Springfield Branson Naonal Airport 8.7.1 Overview At medium and large hub airports in the United States, airlines typically provide their own ground handling services or contract with a handling agent or another airline. These arrangements also occur at small and non hub airports as well, but some airports have elected to provide ground handling services directly to one or mulple airlines. There are a number of reasons a U.S. airport will offer ground handling services. The two most common are: (1) the departure or bankruptcy of a sole fixed based operator (FBO) at the airport or (2) the use of ground handling services as an air service incenve to a’ract or retain airlines. At Springfield Branson Naonal Airport (SGF), the airport sponsor has always owned and operated the FBO and fuel farm. In 2002, when the airport sponsor could not secure a third party to provide ground handling for the 80 to 100 charter aircra” that arrived annually, airport management decided to offer ground services to charters by cross ulizing airport personnel. Thus began a logical build out of airport provided above the wing and below the wing services to commercial and charter airlines. See Table 8 15 below for examples of these services.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 58 This case study explores how SGF developed its ground handling business and demonstrates how ground handling services have contributed directly to net revenues to the airport sponsor. Ground handling services also provided SGF with important indirect benefits in the form of retained air service and increased passengers. More passengers raised the amount of passenger facili…es charges (PFCs) and customer facility charges (CFCs) collected, and increased the airport’s eligibility for FAA AIP appor…onments.42 8.7.2 Background GROUND HANDLING SERVICES DEFINED Ground handling addresses the many service requirements of a passenger aircra‘ between the …me it arrives at a terminal gate and the …me it departs on its next flight. Speed, efficiency, and accuracy are important in ground handling services in order to minimize the turnaround …me (the …me during which the aircra‘ must remain parked at the gate). Aircraft ground handling includes ramp services (below the wing) and passenger services (above the wing). Table 8 15 lists the services in each category. Table 8 15: Examples of Ground Handling Services Below the Wing Ramp Services Aircra‘ parking, chock, unloading, loading, unchock, pushback Aircra‘ cabin services – lavatory service potable water, cabin cleaning/grooming Aircra‘ fueling Aircra‘ deicing Aircra‘ pushback Baggage and cargo handling Above the Wing Passenger Processing Ticke…ng, check in, baggage processing Gate passenger check in and related services Passenger support services Lost and found Check in counter services for the passengers Gate arrival and departure services. Passenger transfer and customer service counters, airline lounges, etc. Source: Compiled by KRAMER aerotek inc., 2014 42Each primary airport appor…onment is based on the number of passenger boardings at the airport (FAA Airport Improvement Program (AIP) Handbook, Order 5100.38C). If full funding is made available for obliga…on, the minimum amount appor…oned to the sponsor of a primary airport is $650,000, and the maximum is $22,000,000, in accordance with Title 49 U.S.C., Sec…on 47114(c)(1)(B). These funds are calculated as follows: $7.80 for each of the first 50,000 passenger boardings; $5.20 for each of the next 50,000 passenger boardings; $2.60 for each of the next 400,000 passenger boardings; $0.65 for each of the next 500,000 passenger boardings; $0.50 for each passenger boarding in excess of 1 million.

CHAPTER 8 – CASE STUDIES 8 59 In the United States, small and non hub airports are the predominant airports engaged in ground handling services. These airports use ground handling services as a means to aract or retain air carriers that offer limited frequency service. To ini‚ate ground handling opera‚ons, airport management oƒen purchases used ramp equipment from airlines, third party contractors, and auc‚ons. Table 8 16 lists the equipment most necessary to support an airport ground handling opera‚on. Table 8 16: Examples of Ground Handling Equipment Required Ground Handling Equipment Towing with pushback tractors Lavatory drainage carts Water cartage (to refill fresh water tanks) Jet bridges and precondi‚oned air units Air start units (for star‚ng engines) Luggage handling (belt loaders and baggage carts) Air cargo handling (cargo dollies and cargo loaders) Catering trucks Refueling (refueling tanker truck or refueling carts) Ground power units (so that aircraƒ engines need not be running to provide aircraƒ power on the ground) Passenger stairs or jet bridge Wheelchair liƒs, if required Source: Compiled by KRAMER aerotek inc., 2014 8.7.3 Evolution of Ground Handling in the United States Since airline deregula‚on, the management and delivery of ground handling opera‚ons have changed as air carriers explored various business strategies to control markets, capacity, and opera‚ng costs. In the 1980s, airlines typically provided their own ground handling services at commercial airports. For most network carriers, labor contracts governed ground handling services and unionized airline employees provided the services. Compensa‚on paid to these employees was a living wage and oƒen included rich benefits programs. As airlines expanded hub and spoke systems, the number of markets served grew along with the opera‚ng expenses for addi‚onal airport sta‚ons. Other factors, including the growing presence of low cost carriers and vola‚le fuel prices, con‚nued to place pressure on network carriers to lower their opera‚ng costs and, more recently, to exercise capacity discipline throughout their systems. To reduce costs, airlines began to decouple ground handling services from union contracts and to outsource ground handling services to third party contractors at many airports, par‚cularly those airports where the airline had limited frequencies. Third party contractors were free to pay “market wages” with few benefits. If they served mul‚ple airlines, it was possible to cross u‚lize ground service crews and equipment, thereby lowering airline costs for the services.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 60 Today, when airlines have a large concentraon of service at a parcular airport, they typically self handle. If an airline leases gate space from another larger airline, ground handling is oƒen included in the lease. For smaller airports, third party contractors or the airport itself will usually provide ground handling services. 8.7.4 Beneits of Ground Handling by Airports This case study explores the benefits that accrue when smaller airports provide ground handling services as a means to generate addional operang revenues or to aˆract/retain air service. These benefits are summarized below. LOWER STATION COSTS FOR AIRLINES Airlines over the last decade have sought to lower staon costs at most airports, but especially at smaller airports where limited frequencies are offered. Some ways airlines have lowered staon costs include: the ulizaon of self check in staons; the preferenal or common use gate arrangements instead of exclusive use of gates; and the use of third party ground handling services and equipment. Airport provided ground handling is another opon that airlines have used. ACHIEVEMENT OF ECONOMIES OF SCALE BY SERVINGMULTIPLE AIRLINES Small and non hub airports, such as SGF, which are served by mulple regional carriers, charters, and ultra low cost carriers, can effecvely cross ulize both staff and equipment to provide ground handling services to airlines at a compeve price. OPPORTUNITY TO OFFER GROUND HANDLING AS AN AIR SERVICE INCENTIVE Some airports offer ground handling services at or below cost as an incenve to retain or aˆract air carriers. Travel companies like Allegiant Air have come to expect these types of incenves for service to a new city. ADDITIONAL REVENUE SOURCE Many airports are working to reduce their dependence on airline space rents and landing fees. Revenue from ground handling services is one revenue alternave for smaller airports. EXAMPLES OF AIRPORTS THAT PROVIDE GROUND HANDLING SERVICES Table 8 17 lists six airports that represent different types of ground service operaons. A more extensive discussion about SGF follows in the next secon.

CHAPTER 8 – CASE STUDIES 8 61 Table 8 17: Examples of U.S. Airports that Operate Ground Handling Services Airport City/State Airport Size Management Service Level Bangor Internaonal Bangor, ME Non Hub Division of Airport Full Service/FederalInspecon Lehigh Valley Internaonal Allentown, PA SmallHub Airport Authority Full Service/Passenger and GA Mobile Regional Mobile, AL Non Hub Airport Authority Full Service Quad City Internaonal Moline, IL SmallHub LCC First Fueling now Full Service Springfield Branson Naonal Springfield, MO Non Hub Division of Airport Full Service Front Range Airport Denver, CO GA Airport Authority Full Service Source: Compiled by KRAMER aerotek inc., 2012 8.7.5 Springield-Branson National Airport (SGF) SGF is a good case study because the airport offers a 10 year perspecve on airport provided ground handling services. The airport sponsor has owned and operated the FBO and fuel farm for years. However, in 2002, airport management gradually began adding ground handling to its por•olio of services offered to commercial and charter airlines. New Midfield Terminal at SGF

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 62 CHARACTERISTICS OF THE AIRPORT SGF is a publicly owned facility located on 2,791 acres.43 The airport is approximately 190 miles southwest of St. Louis and 150 miles southeast of Kansas City, Missouri. The city of Springfield owns the airport and an 11 member administra“ve board (Board) manages SGF. The city manager appoints the Board and the city council confirms members. The airport is a self suppor“ng facility. The city owns and maintains the terminal, runway/taxiway complexes, and naviga“on/ligh“ng systems, and it leases space to private companies in the airline, restaurant, and rental car industries. A new Midfield Passenger Terminal opened in May 2009. Reuse of the previous terminal by Expedia and the Missouri Army Na“onal Guard is one of the best examples of terminal reuse in the country. SGF func“ons as the primary air service gateway for southwestern Missouri and a des“na“on airport for visitors to the Branson, Missouri, entertainment area. SGF’s air service offerings are larger than what is typical for a metropolitan area of over 436,000 people and consist of access to mul“ple connec“ng hub airports. Total commercial departures from SGF are just under 10,000 per year, and they are split among four airlines. In 2012, American Airlines, United Express, Delta Connec“on and Allegiant Air served SGF. United Express offers connec“ng service to its hubs at Chicago O’Hare and Denver. American also provides service to Chicago O’Hare as well as Dallas/Fort Worth. Delta Connec“on serves Atlanta Hartsfield and Memphis out of SGF. In addi“on, Allegiant Air offers limited weekly service to McCarran Interna“onal, Los Angeles Interna“onal, Orlando Sanford, Phoenix Mesa Gateway, and Tampa St. Petersburg airports. With the excep“on of Allegiant Air, which operates a fleet of MD 80 aircra¢, regional aircra¢ provide all other air service. Figure 8 10 shows the nonstop des“na“ons served from SGF. 43 Springfield Branson Na“onal Airport Master Plan, Working Dra¢, February 2011

CHAPTER 8 – CASE STUDIES 8-63 Figure 8-10: Nonstop Des na ons from SGF, 2012 Source: Springfield-Branson Naonal Airport Master Plan Working Paper, 2011 GROUND HANDLING SERVICES Springfield-Branson Naonal Airport began to offer ground handling services in 2002. At that me, SGF had 80 to 100 charter flights flying to and from the airport each year. This relavely low level of charter acvity significantly narrowed the pool of interested independent third-party ground handling contractors and airlines on the field gave priority status to their own flights. Airport staff began to provide minor services to the charters in order to make up for the shor”all in ground handling services. In August 2002, the airport entered into a contract with the airlines serving SGF, spulang that SGF would provide boarding pass screening. This inial agreement was the foundaon for a connuously expanding ground handling program by the airport, which grew unl the recession of 2008. On April 14, 2004, SGF began providing ramp service for Comair for its three flights per day to Cincinna. The airport sponsor hired former airline employees to perform, manage, and supervise ground services. Delta Air Lines, Inc. parally trained airport employees who assumed ground service handling dues. At the same me, Comair launched its service to Cincinna; Northwest Airlines moved to a new wing of the terminal and created an addional security checkpoint. This doubled the SGF boarding pass screening staff requirements. In 2005, SkyWest (a Delta Connecon provider) came to SGF, offering two flights per day to Salt Lake City. Comair handled above the wing services and SGF provided below the wing services. Soon aŸer the

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 64 ini a on, SkyWest service was canceled. Subsequently, Atlan c Southeast (also a Delta Connec on provider) began service from SGF to Atlanta with two daily flights, for which SGF provided below the wing services. The same year, Allegiant ini ated twice weekly service to Las Vegas and within 6 months doubled the weekly frequency. For these flights, SGF provided both above the wing and below the wing handling. Allegiant con nued to expand and, at the end of 2006, ini ated two flights per week to Tampa, for which SGF provided ground handling services and passenger processing. July 2011 was SGF’s busiest month, when it managed all ground handling services for 107 Allegiant Air flights, which included: Charters Four flights per week to Las Vegas Two flights per week to Orlando Two flights per week to Tampa Two flights per week to Phoenix Two flights per week to Los Angeles FUELING The airport sponsor owns and operates the FBO, as well as nine fueling trucks sta oned on the airfield. On duty airport firefighters fuel aircraš. The FBO sells fuel to general avia on users and provides fuel storage and into plane fueling services for the airlines. Signatory airlines paid $0.04 per gallon and non signatory airlines paid $0.10 per gallon for these services. In 2011, the FBO generated over $2 million in fuel sales and fuel flowage fees. MANAGEMENT AND STAFF Airport’s Ground Handling Services Management Team SGF’s ground handling services management team consists of four leads and one manager. The management team has experience with the airlines and has a combined experience of 42 years in providing ground handling services. The airport’s management team has very low turnover rates. The key is to build a strong, long term management team that fully buys in to the opera on and is 100% focused on the opera on’s success. Staff Requirements The airport’s ground handling services staff consists of 24 employees. The four leads are full me employees of SGF. The other 20 ground handling staff are en rely contract employees. These employees are paid the market rate for their labor and have very limited benefits. Because of varia ons in the number of work hours and seasonality of the airport’s business, staff turnover is a material factor in managing the business. The airport experiences rela vely high turnover with the ground handling staff, which is normal and unavoidable for ground handling opera ons. Therefore, the airport con nuously recruits and trains new ground handling staff. Figure 8 11 shows SGF’s organiza onal structure for ground handling services ac vi es.

CHAPTER 8 – CASE STUDIES 8 65 Figure 8 11: SGF Ground Handling Organizaon Source: Springfield Branson Naonal Airport GROUND HANDLING FINANCIALMATTERS The principal inial start up for the SGF ground handling operaon included the acquision of equipment, the development of a pricing structure, and the coverage of any operang losses. Pricing Ground Handling Services SGF charges approximately $5 per aircraˆ seat for providing above the wing and below the wing ground handling services. Based on this pricing model, ground handling a regional jet with 50 seats would cost about $250 for an arrival and departure. A B737 with 135 seats would cost about $675 for an arrival and departure. For regular scheduled operaons, SGF discounts its $5 per seat rate based on the volume of acvity that it is asked to handle. The airport bases its discount rate on air traffic volume, effect on air services, and profit margins. SGF reports that there is a relaonship between the $5 per seat and their costs, but the discount rate is not calculated based on the costs. For services such as deicing, lavatory servicing, and boarding potable water, the airport charges addional fees. Capital Requirements To engage in aircraˆ ground handling, SGF required a complement of ground service equipment (i.e., aircraˆ pushback movers, tugs, baggage carts, air stairs, potable water carts, lavatory carts, deicing units, trucks, air start/ground power, etc.). As SGF began providing ground handling services, it was able to acquire surplus ground handling equipment at favorable prices from airlines, as well as from state and federal surplus sales. Equipment purchases for the SGF operaons were almost all surplus and relavely

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 66 low cost. Consequently, SGF was able to fund the acquisi­ons on a pay as you go basis from their budget, and equipment was not a barrier to star­ng the service. Ground Handling Revenue SGF has projected its ground handling services revenue in FY 2012 to be $508,000. The airport has budgeted ground handling opera­ng expenses for FY 2012 at $488,000, and projects net revenue of about $20,000 before capital and allocated costs. Proit/Loss SGF does not produce separate financial statements for its ground handling opera­ons. However, ground handling revenue and expenses are carried as a cost center embedded within SGF’s financial statements, enabling an assessment of net revenues generated. Table 8 18 shows financial results from FY 2011 for ground handling services, landing fees, into plane charges, and deicer sales. Table 8 18: Financial Results from Ground Handling and other Services, FY 2011 Revenues Amount Ground handling Allegiant Air $ 434,000 Other Carriersa $ 24,000 Charters $ 39,000 Landing Feesb Allegiant Air $ 124,000 Charters $ 23,000 Into plane Chargesc Allegiant Air $ 181,000 Charters $ 3,000 Deicing Salesc Allegiant Air $ 30,000 Total Revenues $ 858,000 Direct Expenses Wages/Benefits $ 448,000 Supplies $ 59,000 Total Direct Expenses $ 507,000 Net Benefit to the Airportd $ 351,000 Notes: a Ice, lavatory, and other services provided b Indirect revenue allocated to airfield area c Indirect revenue allocated to avia†on services area dNet benefit calcula†on does not include alloca†on of indirect charges such as administra†on and overhead. Source: Springfield Branson Na†onal Airport

CHAPTER 8 – CASE STUDIES 8-67 INDIRECT FINANCIAL BENEFITS OF GROUND HANDLING When ground handling is used as a means to aract or retain limited frequency air service, there are other indirect revenue benefits to the airport that result from increased passengers. Increased passengers will result in addi†onal PFCs, and CFCs such as parking, rental car, and concession revenues. Figure 8-12 tracks the growth in enplanements at SGF and at all U.S. airports between 2000 and 2010, and iden†fies important points when SGF ground handling responsibili†es increased, especially from 2004 up through 2007. Figure 8-12: Enplanement Trends and Build-out of SGF Ground Handling Services Sources: FAA Air Carrier Ac†vity Informa†on System (ACAIS) and Springield-Branson National Airport Figure 8-13 graphs SGF enplanement trends with commercial service-related opera†ng revenues: fuel sales, parking, and rental cars. Of interest is the period of expanded air service star†ng with a base year of 2004 through 2007. During this period, enplanements grew at an average annual rate of 5.3%. On the opera†ng revenue side, fuel sales grew annually by 6.4%; rental cars revenues, by 10.5%; and parking, by 14.2%. - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 580,000 600,000 620,000 640,000 660,000 680,000 700,000 720,000 740,000 760,000 780,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 En pl an em en ts a t S G F En pl an em en ts a t U .S . Ai rp or ts (0 00 ) U.S. Enplanements SGF Enplanements 911 Charters Airline Boarding Passenger Screening Comair Ground Handling Northwest uses Passenger screening Allegiant & SkyWest Enter/Use SGF Ground Handling Recession Fuel Price Spike

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8-68 Figure 8-13: SGF Enplanement and Operang Revenue Trends, 2002-2011 Sources: FAA Air Carrier Acvity Informaon System (ACAIS) and CATS 127 Reports for Springield-Branson National Airport 8.7.6 Issues for Airports Entering the Ground Handling Business RISK FACTORS FOR AIRPORTS As with any business, the ground handling services business has risks, such as operaonal liability, financial losses, and negave customer and airline relaons. In addion, the airport sponsor must be able to hire and fire staff based on individual needs and performance. Normal municipal employee rights and procedures must match private-sector principles and rules. In assessing the ground handling services business, an airport sponsor must analyze the labor market, turnover rates, profit margins, capital requirements, and barriers to entry. Realiscally, compeon among ground handling providers is sff, and the profit margins o“en are thin. Furthermore, the airport sponsor must be able to sell to the airlines the potenal benefits (lower costs, compeve services, and profit that inures to the airport’s benefit) of using the airport as the ground handling service provider. Airlines are not inclined to contract with the airport sponsor if the airport sponsor reinvests the profit from ground handling services into other areas of the airport. COMPETITION WITH THE PRIVATE SECTOR FAA grant assurances encourage airports to operate self-sufficiently. Over the years, a number of airports have decided to develop ground handling businesses. Today, most of the ground handling provided by airport sponsors in the United States is offered at non-hub and small hub airports, and it is possible that an airport will not have enough acvity to a–ract third-party ground handling companies. 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 SG F En pl an em en ts SG F O pe ra tin g R ev en ue s Enplanements Fuel Sales Rental Cars Parking

CHAPTER 8 – CASE STUDIES 8 69 In some markets, however, operang a ground handling service for the airlines means that airports must compete with private sector providers of ground handling services. Airports that must permit compeon are not able to be sole providers. Compeon from third pares, as well as an airline’s ability to service its own fleet within a market, can make it challenging for an airport to offer ground handling services. Most typically, airport sponsors will provide ground handling to fill a service gap. Sponsors should consider whether to offer these services at cost, as an air service incenve or as a revenue producing enterprise. 8.7.7 Lessons Learned In the United States, airport provided ground handling services are carried out mostly at small and non hub airports and have proven to be effecve under the following circumstances: When the private sector is not providing ground handling services at smaller airports, the airport must be prepared to provide this service or it will lose acvity. When engaging in private sector acvies like ground handling, an airport sponsor must use private sector rules that include cross ulizing employees or part me employees, paying market wages with liŠle or no benefits, and maintaining the ability to hire and fire quickly based on need and performance. When providing ground handling services, an airport should have an operaons head with experience providing the airlines with ground handling services. The provision of ground handling services can benefit an airport in three ways: (1) by accommodang airline acvity that would otherwise go elsewhere; (2) by providing air service development incenves (e.g., by offering ground handling services at less than market rates); or (3) by providing ground handling services at a profit to the airport. Airports that offer ground handling services retain control over the level of service provided to the airlines, passengers, and others. Ground handling services also facilitate increased opportunies to cross ulize staff (i.e., in administraon, maintenance, operaons, and support services). For instance, during the summer, ground handling services’ employees could assist with maintenance projects, and in the winter, provide deicing services. 8.7.8 Conclusions Springfield Branson Naonal Airport provides an excellent example of an airport that has effecvely engaged in the provision of ground handling to airlines that serve SGF. This enterprise has fostered an environment whereby mulple airlines serve this desnaon, resulng in increased direct and indirect revenues to the airport sponsor.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 8 70

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TRB’s Airport Cooperative Research Program (ACRP) Report 121: Innovative Revenue Strategies – An Airport Guide describes a broad range of tools and techniques to improve airport revenue streams, recover costs, and achieve operational efficiencies. The report identifies customer needs; airport-provided services and shared services, facilities, and equipment; revenue participation in real estate and natural resource development; value capture and other financing opportunities; and improvements to existing airport businesses.

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