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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Page 6
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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Suggested Citation:"Chapter 1 - Introduction." National Academies of Sciences, Engineering, and Medicine. 2020. Estimating Market Value and Establishing Market Rent at Small Airports. Washington, DC: The National Academies Press. doi: 10.17226/25719.
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3 1.1 Setting the Stage ACRP Research Report 213: Estimating Market Value and Establishing Market Rent at Small Airports is designed to assist airport sponsors, airport management and staff, property developers, and others involved in property management and leasing at small airports with understanding industry best practices involving property development, establishment and adjustment of market rent, and leasing. Implementation of these industry best practices will assist in efforts to maximize an airport’s financial self-sustainability, as encouraged by Assurance 24, Fee and Rental Structure, of the FAA Airport Sponsor Assurances. This report will serve as a reference and will educate readers in the following areas: • Approaches to develop applicable policies for consummating airport property development and lease agreements; • Methodologies to estimate airport property market value consistent with FAA obligations and guidance; • Methodologies to establish and adjust airport property market rent (i.e., rent associated with airport land and improvements used for aeronautical and non-aeronautical pur- poses by commercial and non-commercial entities) consistent with FAA obligations and guidance; • Nuances associated with airport and airport property characteristics that impact airport property market value and market rent; and • Successful strategies to negotiate airport property development and lease agreements. The demands of managing airports on a day-to-day basis are significant and may pre- clude airport management and staff from acquiring the knowledge or experience to master each area of responsibility. This is especially true in one primary area—airport property management, which includes developing, negotiating, and executing development and lease agreements and establishing and adjusting market rents associated with airport land and improvements used for aeronautical and non-aeronautical purposes by commercial and non- commercial entities. An airport sponsor relies on revenues received from leasing airport land and improvements to plan, develop, operate, manage, and market the airport. Additionally, federally obligated air- port sponsors (including airport management staff) must comply with the Assurances, which require that airport sponsors maintain a fee and rental structure that will make the airport as self-sustaining as possible under the existing circumstances. Research has shown that many lessee complaints regarding land and improvement rent increases stem from disagreement regarding the methodology to be utilized or from a misunderstanding of the operational framework (e.g., the Assurances) for a federally obligated C H A P T E R 1 Introduction Airport sponsor assurances are certain FAA obligations with which federally obligated airports must comply to receive and keep Airport Improvement Program funds.

4 Estimating Market Value and Establishing Market Rent at Small Airports (or Airport Improvement Program–funded) airport by the current or prospective lessee, airport sponsor, or airport management and staff. Conflicts between the airport sponsors (lessors) and lessees also arise from a general misunderstanding of what is considered market value or market rent in general and how FAA requirements may impact the process to be utilized to set and adjust market rents. While the leasing principles, approaches, and definitions discussed here may be similar to those in a commercial/industrial off-airport environment, this report is uniquely tailored to discussing market value and market rent characteristics in an airport environment. Addition- ally, this report is intended to provide guidance to federally obligated airports. While areas of this report may apply to non–federally obligated airports, their applicability or limitations to non–federally obligated airports are not within the purpose of this report. 1.2 Purpose of the Report Limited guidance is available on the estimation of market value and the establishment and adjustment of market rent, as well as on the airport and property characteristics that impact market value and market rent. This report will thus serve as a valuable resource for the airport sponsor and airport management at small airports to assist in airport development efforts and will contribute toward the airport sponsor’s obligations to maintain compliance with the Assurances. For the purposes of this report, small airports are airports from the FAA National Plan of Integrated Airport Systems (NPIAS) classifications consisting of Primary Commercial Service Non-Hub, Non-Primary Commercial Service, Reliever, and General Aviation, including airport classifications delineated by the FAA General Aviation Airport Asset Study categories of national, regional, local, and basic. Estimating market value and establishing and adjusting market rent are not based on a direct science or mathematical model. Further, the appropriate methodology for these topics varies based on the type, use, and basis of the subject airport land and/or improvements, which can lead to misunderstanding the nuances. For this reason, this report promotes better relationships among airport sponsors, airport management, developers, and lessees by outlining industry best practices for estimating market value, as well as for establishing and adjusting market rent for airport property. This report also addresses methodologies for establishing and adjusting market rent, identification of airport property characteristics that affect market value and market rent, approaches for developing leasing policies, and best management practices regarding negotia- tion of development and lease agreements. 1.3 Overview of the Report The report is composed of six chapters and three appendices: Chapter 1: Introduction states the purpose of the report and presents key airport property terms that set the stage for this report. The chapter then presents real-world scenarios to provide context for the various key airport property terms while outlining the parties that have a direct interest in this report. Finally, this chapter outlines the multiple types of developers and lessees at small airports from an aeronautical and non-aeronautical perspective. Chapter 2: Understanding Market Value and Rent outlines the nuances and definitions of market value and market rent, as well as addresses common misunderstandings and confusion associated with the various interpretations. Compliance considerations and an overview of key FAA guidance pertaining to aeronautical, non-aeronautical, and not-for-profit uses are also addressed.

Introduction 5 Chapter 3: FAA Guidance and Policies focuses on the applicable FAA guidance and policies that relate to estimating market value and establishing and adjusting market rent. Applicable FAA airport sponsor assurances, orders, policies, advisory circulars, and other guidance materials are examined. The impacts and advantages of a strategic airport business plan and primary management and compliance documents, as they relate to market value and market rent, are then discussed. Chapter 4: Estimating Market Value and Establishing Market Rent outlines the back- ground of estimating market value and establishing and adjusting market rent, as well as the importance of understanding their nuances. In addition, the chapter provides a decision framework and an explanation of the methodologies available for estimating market value and establishing and adjusting market rent. Chapter 4 integrates the results of a survey conducted as part of this research to further explain the importance of how market value and market rent are determined. Chapter 5: Airport and Property Characteristics discusses the roles airport, property (land and improvements), and off-airport characteristics play in estimating market value or establishing and adjusting market rent. In addition to identifying characteristics such as condition, access, and amenities, a matrix outlines an industry-consistent methodology for analyzing the identified characteristics. As a key aspect of a market-based approach, available tools to identify comparable and competitive airports are discussed, as well as methodologies for identifying similar properties. Chapter 6: Negotiation of Development and Lease Agreements is dedicated to outlining industry best practices for negotiating development and lease agreements. Negotiation is a broad concept, yet it can undoubtedly be integral in estimating market value and establishing and adjusting market rent. Negotiation goal setting and special considerations, as well as a best- practices approach to a dispute resolution process, are also outlined. There are three appendices to this report: • Appendix A: Glossary of Terms and Acronyms, • Appendix B: Bibliography, and • Appendix C: Comparable and Competitive Airport Resources. 1.4 Parties with Direct Interest in the Report While many entities will have an interest in this report, Figure 1-1 represents the two key perspectives with the most direct interest. Airport Perspective • Airport Sponsor • Airport Management • Property Managers Tenant Perspective • Lessees and Sublessees • Developers • Real Estate Agents • Banks and Lenders Figure 1-1. Parties with direct interest in this report.

6 Estimating Market Value and Establishing Market Rent at Small Airports The key interest from the airport perspective is ensuring compliance with the Assurances and other legal requirements. As well, the airport seeks to establish a methodology, consistent with industry best practices, to estimate market values and to establish and adjust market rents for land and improvements by type, use, and basis. This methodology should also outline reasonable and appropriate adjustments to market rents consistent with legal requirements. By determining reasonable and appropriate market value and market rent, the airport desires to enhance its financial position, as well as encourage the development and utilization of the airport. The airport perspective is represented by the airport sponsor, airport management, and property managers: • Airport Sponsors—a public agency or private entity with control of a public-use, federally obligated airport. • Airport Management—individuals responsible for the day-to-day operation and manage- ment of an airport. • Property Managers—individuals or departments dedicated to the operation, control, and oversight of all airport property leased or available for lease at an airport, including contract firms acting as agents for the airport sponsor. In many situations at small airports, airport management and property management may be represented by the same position within the airport organizational chart. The key interest from the tenant perspective is to identify opportunities for development and for securing lease or sublease agreements (on a long-term or short-term basis) under reason- able and appropriate terms and conditions. Additionally, the tenant desires to understand the methodology to be utilized by the airport sponsor to estimate market value and to establish and adjust market rent, as well as the adjustment mechanism and frequency throughout the lease or sublease agreement. The tenant perspective is represented by the most common private entities interested in leasing airport property: • Lessees and Sublessees—entities that have entered into a lease or sublease agreement that grants the right to occupy or develop airport land and improvements. • Property Developers—private commercial entities engaged in the construction and develop- ment of improvements on airport property (e.g., hangars, office buildings) to be managed and operated by third parties. • Real Estate Agents—private commercial entities engaged in securing a lease agreement allowing third parties the use of certain airport property. • Banks or Institutional Lenders—entities lending financial resources to developers, lessees, and sublessees. 1.5 Key Airport Property Terms In conjunction with the glossary of terms in Appendix A, certain key airport property terms pertinent to understanding this report are defined and outlined here through typical lease agreement scenarios consisting of (1) a land lease for fixed-base operator (FBO) aero- nautical development, (2) an executive hangar lease agreement renewal for aeronautical use, (3) a T-hangar lease agreement for aeronautical use, (4) a non-commercial hangar utilized for aeronautical purposes purchased by the airport sponsor, and (5) a non-aeronautical land lease agreement.

Introduction 7 As outlined throughout this report and specifically in Section 3.2 under Order 5190.6B, the Airport Compliance Manual, the requirement for market rates (value or rent) varies between aeronautical and non- aeronautical land and improvements. Land Lease for FBO Development Under this scenario, an FBO is desirous of signing a long-term lease agreement with the airport sponsor to engage in certain commercial aeronautical activities at the airport—essentially providing products, services, and facilities to the public for profit. This may be in response to a formal request for proposals process initiated by the airport sponsor, which outlines the specific products, services, and facilities the airport sponsor wishes or requires. Before initiating discussions with the airport sponsor, the FBO creates initial development plans that outline the proposed parcel size and improvements (e.g., general aviation terminal building, community hangars, office, shop, storage, apron, tiedowns). Utilizing the initial development plans, the FBO begins discussions with airport management. The FBO and airport management estimate the capital investment desired by the airport sponsor to ensure the FBO can sign a long-term agreement (e.g., 30 to 40 years) to lease aeronautical improved land at the airport on a wholesale basis (versus a retail basis). Airport management provides the FBO a copy of the airport’s minimum investment requirements (potentially addressed in the airport’s minimum standards or leasing policy). These requirements outline the capital investment needed for an FBO, based on the size (acreage) of the proposed leased premises (aeronautical improved land or aero nautical unimproved land), to secure a long-term agreement. Other key lease terms and conditions of the airport sponsor (e.g., reversion policy, rent adjustment mechanism and frequency) will also be included in the minimum investment requirements. Executive Hangar Lease Agreement Renewal Under this scenario, an existing executive hangar lessee approaches the airport sponsor with a desire to renew an existing agreement nearing the end of its initial 30-year term and two 5-year option periods. The lessee developed the original improvements and has been operating under an aeronautical improved land lease agreement. With the approaching reversion (whereby certain rights granted through a lease or sublease agreement terminate), the lessee is interested in leasing the aeronautical improved land and improvements (executive hangar, apron, office, vehicle parking) on a retail basis (as opposed to on a wholesale rent basis). Before executing a new lease, the airport sponsor agrees to establish market rent for the land and improvements to determine the appropriate lease rents to be paid by the lessee for the subject properties. Aeronautical improved land is airport land having improved access (airside and landside) and utilities to the property boundary. Aeronautical unimproved land is airport land without improved access (airside or landside) or utilities to the property boundary. Capital investment is an airport sponsor–approved investment a lessee (or sub lessee) makes to (1) the leased premises, which will, at the end of the lease term, revert to the airport sponsor or (2) the airport infrastructure, which will immediately revert to the airport sponsor. Commercial is an activity undertaken with the intent to generate or secure earnings, income, or compensation (including exchange or barter of goods or services), and profit, whether or not such objectives are accomplished. Improvements are all buildings, structures, additions, and facilities (including utilities, pavement, fencing, and landscaping) constructed, installed, or placed on or under any airport land. Triple net is when the lessee is responsible for all taxes, utilities, insurance, and maintenance associated with the leased premises. Term is the limited period for which a lease agreement between an airport sponsor and lessee is intended to last. Aeronautical is associated with activities directly related to the operation of aircraft. Lease rent is the monthly or yearly payments associated with a lease agreement, which is typically differentiated by the type of property (e.g., land, apron, vehicle parking, hangar, office, shop) and the use of property (aeronautical, non-aeronautical, commercial—FBO or Specialized Aviation Service Operator—or non-commercial). Market rent is the most probable rent a property should bring in a competitive and open market (i.e., willing lessor and willing lessee), reflecting the terms and conditions of a specified lease agreement, including the rental adjustment mechanisms, permitted uses, use restrictions, expense obligations, term, renewal and purchase options, and tenant improvements. Market rents can be established by various methods, including analysis of market rents at comparable airports, appraisal, and negotiation. Reversion occurs when rights (which may include the ownership and title to improvements made to the leased premises) granted through a lease or sublease terminate and return to the leasing authority. Said leasing authority, whether lessor or sublessor, can include the airport sponsor or a lessee thereof.

8 Estimating Market Value and Establishing Market Rent at Small Airports T-Hangar Lease Agreement Under this scenario, an airport sponsor utilizes market rent on a retail basis (as opposed to a wholesale rent basis) to lease small and medium T-hangars directly to the end user (i.e., aircraft owners and operators). Small T-hangars, typically less than 1,000 square feet, can accommodate most single-engine piston-powered aircraft (e.g., Beechcraft Bonanza; Cessna 150, 172, 182, and 210; Cirrus 20; Piper Arrow, Cherokee, and Saratoga). Medium T-hangars, typically ranging from 1,000 square feet up to 1,300 square feet, can accommodate most light multi-engine piston-powered aircraft (e.g., Cessna 310, Piper Seminole and Seneca). Before executing a lease agreement, the airport sponsor will establish an appropriate monthly rental rate for the existing T-hangars. Non-Commercial Hangar Purchase by the Airport Sponsor Under this scenario, an airport sponsor purchases an existing non- commercial hangar that was utilized by a private entity. The private entity entered into a long-term land lease agreement (e.g., 30 years) and constructed the hangar for the storage of aircraft on a non-commercial basis. Ordinarily, the lessee would fulfill the lease obligations through- out the remainder of the term, which ultimately would result in owner- ship of the improvements reverting to the airport sponsor. Upon a change in the utilization of the aircraft, however, the lessee approaches the airport management to determine if early termination of the lease agreement is possible. The airport sponsor conducts an appraisal, based on the highest and best use of the hangar facility for aeronautical pur- poses, to estimate the leasehold interest value held by the lessee for the remaining years of the term (as compared to the leased fee interest held by the airport sponsor). To aid in the flexibility of the airport and enhance its utilization, the airport sponsor may determine it is in the best interest of the airport to purchase the leasehold interest held by the existing lessee. Subsequently, the airport sponsor will conduct a public process to identify a new lessee. The new lease agreement will utilize a wholesale rent basis for the existing land and improvements as a means to repay the investment of the airport sponsor (in purchasing the leasehold interest) as well as enhance the airport’s financial position. Non-Aeronautical Land Lease Agreement Under this scenario, the airport sponsor has entered into a lease agreement for the non-aeronautical use of airport land. Upon identi- fying the non-aeronautical improved land on the airport layout plan (ALP) and receiving concurrence from the FAA, if necessary, given the clarifications included in the FAA Reauthorization Act of 2018, the airport sponsor executes a lease agreement for the non-aeronautical use of land at a market rent, based on the conclusions of an appraisal. This appraisal is conducted to ensure the airport land utilized for non-aeronautical purposes is leased (by estimating land market value and utilization of a reasonable rate of return) at market rent. Retail rent is charged directly by an airport sponsor or lessee to an end user, typically on a gross basis (i.e., taxes, utilities, insurance, and maintenance are the responsibility of the lessor). Retail rent may also include additional services and amenities, including, but not limited to, aircraft towing and access to common areas. T-hangar is a hangar that typically has the capacity to store only one aircraft, usually not larger than a cabin class multi-engine aircraft. This type of hangar derives its name from its shape (in the form of a “T”), which increases the efficiency of the design so as to accommodate the wingspan and the tail section of an aircraft. T-hangars may be stand-alone structures or they may be combined and “nested” so that the tail sections of the “T” configuration interlock to form a single congruous structure. Wholesale rent is rent charged directly by an airport sponsor to a lessee (typically not an end user) on a triple- net basis (i.e., taxes, utilities, insurance, and maintenance are the responsibility of the lessee). Wholesale rent also does not include additional services and amenities. Highest and best use is the reasonable, probable, and legal use of vacant land or an improved property, which is legally permissible, physically possible, appropriately supported, financially feasible, maximally productive, and results in the highest value. Leased fee interest is the ownership interest held by the lessor, which includes the right to receive the lease rent specified in the lease plus the reversionary rights when the lease expires. Leasehold interest is the right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease. Market value is the most probable price a specified inter- est in real property is likely to bring under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, assuming the price is not affected by undue stimulus giving due consideration to all available economic uses of the property. Non-commercial is not for the purpose of securing earnings, income, compensation (including exchange or barter of goods and services), or profit. Non-aeronautical activities are not directly related to the operation of aircraft. Non-aeronautical improved land is airport land having landside access and utilities to the property boundary, but no airside access. Non-aeronautical unimproved land is airport land without landside access or utilities to the property boundary and no airside access.

Introduction 9 1.6 Identification of the Types of Developers and Lessees Multiple types of entities serve as developers and lessees of aero nautical and non-aeronautical property at small airports. Developers and lessees can include government entities (federal and state agencies typically acting as a lessee only), commercial aeronautical operators, non- commercial aeronautical entities, commercial non-aeronautical operators, and non-commercial non-aeronautical entities. Examples within each category are identified in Figure 1-2. The type of developer and, ultimately, the type of use may not be as clearly discernible as the examples in Figure 1-2. For example, hybrid uses or flex space can create particular challenges that may combine aeronautical and non-aeronautical uses. Additionally, utilization of airport land and/or improvements for a distribution center (i.e., packaging and fulfillment) with an aeronautical component (i.e., apron for aircraft parking and staging) may combine aeronautical and non-aeronautical uses. Aircraft manufacturers that have both aircraft assembly and service facilities at one airport pose a similar challenge. 1.7 Chapter Review This chapter sets the stage for the remainder of the report by introducing real-world scenarios to provide context to the key aspects of Chapter 1 (Figure 1-3). Government Commercial Aeronautical Non-Commercial Aeronautical Commercial Non-Aeronautical Non-Commercial Non-Aeronautical Federal Fixed-base operators Corporate aircraft storage and offices Car rental companies Charitable organizations State Specialized aviation service operators Business/recreation aircraft storage Ground transportation companies Quasi-governmental entities Local Commercial hangar developers Flying clubs Hotels and restaurants Air carriers Museums Gas stations and convenience stores Air cargo companies Civil air patrols Museums Figure 1-2. Types of developers and lessees. Purpose of ACRP Research Report 213 Definition of key airport property Identification of parties with a direct interest in ACRP Research Report 213 Discussion of types of developers and lessees Figure 1-3. Chapter 1 key aspects.

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Staff from smaller airports typically lack specialized expertise in the negotiation and development of airport property or the resources to hire consultants.

The TRB Airport Cooperative Research Program's ACRP Research Report 213: Estimating Market Value and Establishing Market Rent at Small Airports provides airport management, policymakers, and staff a resource for developing and leasing airport land and improvements, methodologies for determining market value and appropriate rents, and best practices for negotiating and re-evaluating current lease agreements.

There are many factors that can go into the analysis, and this report reviews best practices in property development.

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