Estimating Market Value and Establishing Market Rent at Small Airports (2020)

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55 6.1 Introduction Negotiation is an extremely broad yet common concept that takes place in many aspects of life—home purchases, employment, and almost every lease agreement for the use and occupancy of another entity’s property. While there is a common belief that negotiation must be legal in nature, negotiation can and often does occur in non-legal settings. As it relates specifically to this report and for airport sponsors, airport management, and airport property managers estimating market value and establishing and adjusting market rent, negotiation is not required, although it is typically expected on some level. Additionally, it should be noted that FAA policies do not negate or prevent negotiation. Conversely, the FAA indicates in the Policy Regarding the Establishment of Airport Rates and Charges that direct negotiation with aeronauti- cal users is a reasonable methodology. For this reason, airport sponsors, airport management, and airport property managers should understand the goals associated with a negotiation as well as a definition of success. This initial understanding allows airport management and airport property managers to implement negotiation best practices—the ultimate goal being a development or lease agreement that ful- fills the airport’s mission, vision, goals, and objectives, and that is a win-win for the airport spon- sor and lessee. In addition, all involved parties should understand, and airport sponsors must comply with, the Assurances and other federal guidance applicable to a particular situation. Further, the negotiation should be conducted with consideration given to the existing airport master plan, ALP, leasing policy, minimum standards, and other planning documents. Ensuring these documents are current and updated provides an applicable planning framework, as well as enhances the marketability of airport development opportunities. 6.2 Goals of Negotiation The type and success of a negotiation between an airport sponsor and an existing or pro- spective developer or lessee are often intrinsically linked to the goals of each party involved. As discussed in Section 3.3 of this report, the goals of any negotiation process from the airport sponsor perspective will be impacted by the mission, vision, goals, and objectives outlined in the strategic airport business plan (if existing and current). Additionally, the PMCDs (if existing) provide the negotiation process with a structured framework as well as guidance on many of the major negotiation elements. However, as with any type of negotiation, the goals of the existing or prospective developer or lessee may not be known or may not align with the mission and vision of the airport. The overall goal of any negotiation is to achieve the most favorable outcome possible for each entity involved, given the circumstances. However, as discussed in Section 1.4 of this report, C H A P T E R 6 Negotiation of Development and Lease Agreements

56 Estimating Market Value and Establishing Market Rent at Small Airports the perspectives of the airport and the developer or lessee may differ, which may lead to conflicting goals during the negotiation process. Similar to a compromise, a true negotiation will likely result in neither side attaining every goal as originally designed before the negotiation. It is for this reason that, from the airport perspective, it is important that each party involved (the airport sponsor, airport management, or airport property manager) understands which development or lease agreement terms and conditions can be negotiated and which are non-negotiable. These parameters allow for a nego- tiation in good faith with the overarching goal—the desired outcome—of consummating a development or lease agreement. Each negotiation element is not necessarily linked to the financial terms of a development or lease agreement. While the purpose of this report is market value and market rent, other terms and conditions of the development or lease agreement will likely be discussed and negotiated. Most often the terms and conditions include utilization of terminology, permitted and pro- hibited uses of the leased premises, length of term and option periods (if any), capital invest- ment requirements, rents and fees and adjustment processes (mechanism and frequency), and reversion. 6.3 Negotiation Best Practices There are many universal negotiation best practices. However, negotiation best practices are inevitably linked to and vary based on the type of entities involved. For example, the negotiating strategies of a large corporation may be different from those strategies employed by a small business or individual. As applies to this report, the negotiating strategies and flexibility of a governmental entity are likely different than those of a private business or individual. Best Practice #1: Identify Goals and Desired Outcomes After identifying the goals of the negotiation process from the airport sponsor’s perspec- tive, the airport sponsor, airport management, and airport property manager must begin to understand the entity on the other side of the negotiation process. The entity will ulti- mately impact the negotiating flexibility of both the airport sponsor and the prospective or existing developer or lessee. For example, the airport sponsor must understand negotiating strategies will vary widely between a short-term T-hangar agreement and a long-term lease agreement with required development aspects. The desired goals of the represented customer segment, as outlined in ACRP Report 77: Guidebook for Developing General Aviation Airport Business Plans, will likely vary among personal, business aviation, commercial, and governmental uses. In the case of a long-term development or lease agreement, the expertise and experience of the prospective developer or lessee can drastically impact the negotiation process in a positive or negative capacity. Best Practice #2: Conduct Homework Conducting the necessary homework on the other entity may uncover negotiating book- ends or perceived strengths and weaknesses. For example, if a negotiation has the potential for tangible impacts to the airport or surrounding community, this could be perceived as an advan- tage. Approximately 73% of respondents to the survey conducted for this research indicated that tangible impacts (e.g., increased fuel volumes, employment projections) are moderately to Negotiating is a true art form that requires experience, patience, and perseverance to be successful. Jeff Kohlman, Managing Principal Aviation Management Consulting Group Negotiating 101

Negotiation of Development and Lease Agreements 57 very important. Additionally, as also outlined by the survey results, respondents indicated that utilizing an independent third party to estimate market value or establish market rent before the negotiation enhances the airport’s ability to initiate these discussions with realistic expectations. Best Practice #3: Develop Positioning Perspective Before initiating discussions, the airport sponsor, airport management, and airport property manager must create an environment to ensure the airport perspective is seen in the most positive position. A key aspect of positioning is communication during the negotiation process. It is also beneficial for airport management to remain in constant communication with lessees throughout their lease terms. This will assist in building trust, which will be key in negotiating at the end of their respective terms. The airport perspective must be knowledgeable, honest, realistic, and consistent (Figure 6-1). Best Practice #4: Understand Perceptions and Best Practice #5: Create Early Success As the initial discussions and negotiations begin, it is imperative to understand the level to which perceptions can impact the desired outcome. Before creating a legal discussion or focusing on the nuances of a lease agreement, key individuals must meet, discuss, and ultimately come to an understanding of the business terms of the agreement. For example, before discussing indemnification and insurance requirements (though both are important concepts to be addressed in the development or lease agreement), the key individuals need to find agreement on the overarching concepts of the negotiation (e.g., development of a new FBO in compliance with the airport’s minimum standards with a long-term agreement). This early agreement pro- vides the foundation for moving forward in the negotiation process, building on early successes before tackling potentially contentious issues. Best Practice #6: Document Progress As the negotiation progresses, it becomes more and more imperative to document the early successes and agreed-upon business terms. As indicated through a majority of the interviews conducted for this research, conducting the negotiation through written records ensures clear communication. This early documentation also provides the underlying framework for development of a memorandum of understanding (MOU), which is discussed in Section 6.5 of this report. By memorializing the key business terms in an MOU, the key individuals can Be Knowledgeable Understand local market conditions Research recent agreements Be Honest Truthfully represent the airport's position Negotiate in good faith Be Realistic Define attainable goals Understand what can be achieved Be Consistent Do not "move the goal posts" Do not add to or change goals Figure 6-1. Key positioning aspects.

58 Estimating Market Value and Establishing Market Rent at Small Airports be confident that the details of the development or lease agreement will not derail the overall negotiation process. 6.4 Development and Lease Agreement Considerations As stated previously, the FAA does not approve development or lease agreements, nor is an airport sponsor required to seek FAA review before executing a development or lease agree- ment for aeronautical purposes (except in unique circumstances such as, but not limited to, a lease term exceeding 50 years or non-aeronautical use of aeronautical land and improvements). However, if an airport sponsor is desirous of an FAA agreement review, the FAA will review and recommend action on the following issues: • Determining if a lease has the effect of granting or denying rights; • Ensuring the airport sponsor has not entered into an agreement that would surrender its capability to control the airport; • Identifying terms and conditions that could prevent the airport from realizing its full benefits; and • Identifying restrictions that could prevent the airport sponsor from meeting the airport sponsor’s obligations (e.g., assurances). An FAA review will also ensure compliance with Assurance 22 (Economic Nondiscrimination) as applicable to commercial aeronautical operators, civil rights requirements, and general sub- ordination. Additionally, the FAA outlines certain best practices that should be considered when negotiating a development or lease agreement, as follows: • Agreements should be in written form; • Agreements are 25–50 years for tenant-financed construction, as this time frame is consistent with the Internal Revenue Service depreciable life for commercial buildings (39 years); • The FAA may support an agreement term exceeding 50 years for either aeronautical or non-aeronautical development if a business case can be made and the FAA Office of Airport Compliance is consulted; • The FAA must determine that airport land is no longer needed for aeronautical purposes before it is used for non-aeronautical purposes; • Long-term ground lease rents should be indexed to support periodic adjustments over the agreement term; • Ownership of fully amortized improvements should revert to the airport sponsor at the end of the agreement’s term; and • Leases to a single aeronautical service provider should be limited to the amount of land the service provider can demonstrate it actually needs and can put to immediate productive use. The challenge for airport sponsors, airport management, and airport property managers is to successfully implement each of these concepts into every agreement negotiation—especially as the negotiation increases in potential tangible impacts or becomes impacted by political influences. To meet this challenge, some airport sponsors have proactively elected to develop a leasing policy or rent policy, which as discussed here, provides a structured framework to the negotiation process and guidance on many of the major negotiation elements. Leasing Policy As one of the PMCDs and consistent with industry best practices, a leasing policy sets forth the parameters to be used by an airport sponsor for leasing land and/or improvements for commercial or non-commercial and aeronautical or non-aeronautical purposes. Developing a leasing policy, removed from a lease agreement negotiation process, allows the airport sponsor,

Negotiation of Development and Lease Agreements 59 airport management, and airport property manager to objectively analyze each aspect of a development or lease agreement before entering a direct negotiation. A contemporary leasing policy outlines those key areas of an agreement, including, but not limited to, use of the leased premises and prohibited activities, length of term and option periods, capital investment requirements, insurance requirements, reversion, and property maintenance. By creating a policy applicable to these key conditions of an agreement, the airport sponsor is not the only party to benefit. Potential and existing developers and lessees will have an opportunity to understand the expectations of the airport sponsor, requirements and processes for developing and leasing land and improvements at the airport, and desires pertaining to the leasehold improvements, which ultimately supports a more successful negotiation process. Rent Policy As one of the PMCDs, a rent policy sets forth the process to be utilized by the airport sponsor to establish market rent associated with leasing, occupying, and using airport land and improve- ments. Similar to the leasing policy, developing a rent policy without the impacts of an ongoing negotiation allows the airport sponsor, airport management, and airport property manager to consider the methodologies acceptable to the FAA for establishing market rent, as well as industry best practices. Further, the rent policy should address the mechanism and frequency for adjustments to rent for airport land and/or improvements. This policy provides the airport sponsor, airport management, and airport property manager with the necessary framework to establish market rent at the airport. Additionally, potential and existing lessees will gain an understanding of the airport sponsor’s perspective, which ultimately supports a more successful negotiation process. 6.5 Memoranda of Understanding As outlined in Section 6.3 of this report, the MOU provides a foundational step to any nego- tiation process. The MOU should outline the key terms and conditions agreed upon to date and may trigger payment of earnest money as evidence of the prospective or existing tenant’s good faith to enter into a development or lease agreement with the airport sponsor. Typically, the MOU will outline, at a minimum, the type of use, general description of the subject property, general description of any development and capital investment, outline of rental structure, and overview of term. Additionally, and as applicable, the MOU should outline the party responsible for any costs associated with an FAA airspace or environmental review. However, the airport sponsor must ensure that throughout the negotiation process it will develop and communicate a clear schedule of events. By ensuring the MOU (and remaining negotiation process) utilizes a clearly identified schedule, the airport sponsor creates natural exit points if the prospective or existing lessee is not fully engaged or responsive throughout the process, which is consistent with FAA guidance and the airport’s leasing policy (if any). 6.6 Dispute Resolution Negotiation processes can break down in a number of areas—and the financial terms of a long-term agreement may provide the perfect example. However, whether the negotiation of a new long-term agreement or the adjustment of underlying rental rates for short-term agreements (e.g., T-hangar agreements), the airport sponsor should establish a written dispute resolution process. Regardless of the internal perspectives of the airport sponsor, a dispute pertaining to market rent may be a question of when—rather than if.

60 Estimating Market Value and Establishing Market Rent at Small Airports To be proactive in this area, the airport sponsor, airport management, and airport property manager should develop a reasonable and agreeable dispute resolution process. This proactive approach provides the basis for keeping the negotiation as local as possible, which is consistent with FAA guidance. The FAA Policy Regarding the Establishment of Airport Rates and Charges states, “It is the fundamental position of the Department [FAA] that the issue of rates and charges is best addressed at the local level by agreement between users and airports.” Typically, a dispute resolution process addresses the options available to each party. A feder- ally obligated airport is obligated through the Assurances to maintain a fee and rental structure that will make the airport as self-sustaining as possible given its circumstances. It is therefore appropriate for the airport sponsor to estimate the initial market value or establish the initial market rent. In the event a party disagrees with the value or rent conclusion, the dispute reso- lution process should address the options available to this party. From the airport sponsor’s perspective, would it be appropriate for the party to conduct an objective determination of market value or market rent? If so, is the airport sponsor willing to modify the value or rent for the lease agreement? It may be appropriate for the dispute resolution process to identify bookends to address potential variances between value or rent conclusions, as well as trigger points when an additional third party may be engaged to make a determination based on the conclusions developed. 6.7 Chapter Review In addition to FAA guidance, approaches, and methodologies, this chapter outlined a best- practices approach to the undoubtedly integral process negotiation plays in certain situations pertaining to market value and market rent. Further, Chapter 6 identified development and lease agreement considerations and the MOU, as outlined in Figure 6-2. Best Management Practices Identify goals and desired outcomes Conduct homework Develop positioning perspective Understand perceptions Create early success Document progress Development and Lease Agreement Considerations FAA agreement review FAA best practices Leasing policy Rent policy Memoranda of Understanding Document key terms and conditions Outline rental structure and overview of term Create exit points if necessary to terminate relationship Figure 6-2. Chapter 6 key aspects.