Lease adjustments in an unstable economy

Unfortunately, other businesses experienced a major shock when they received their airport letter. Some airports indicated an intention to increase rents significantly, despite no or little market information to support such an increase.

Airport sponsors like King County in Seattle, owners and operators of Boeing Field, proposed a 60 to 100 percent increase for their 2009 scheduled adjustment over the last adjustment in 2006. The increase imposed upon tenants at Boeing Field ultimately ended up lower; yet, despite clear evidence of 30 to 40 percent declines in local real estate values and airport activity, there was a sizeable increase.

For tenants that were on a five-year adjustment cycle that started in 2004-2006, there were some periods of rapid increases realized in the early years. Unfortunately, over the past two-plus years, all of the growth realized prior to mid-2008 was wiped out … and more. In fact, most FBOs are struggling to get back to 2003 or 2004 levels.

So, is it an airport’s responsibility to adjust their rates downward if the lease terms do not require them to do so? Is there a dangerous precedent if a scheduled increase is skipped? Is it in the best long-term interest of the airport and its tenants and users to continue to table needed capital projects?

In my opinion, it’s not an airport’s responsibility to modify lease terms solely to benefit the tenant. If the market shoots up and the airport doesn’t have the ability to adjust rents, should an airport reasonably expect a tenant to offer to pay more rent? Probably (absolutely) not. However, leases are the ultimate form of a public/private partnership. Each side has something to gain from the other’s success.

From a valuation standpoint, the challenge in determining appropriate rates and charges at airports is that they are always based on historic data. The reality is that we are probably in an environment where data from 2003 and 2004 is more representative of today’s aviation marketplace.