The Elusiveness of Market Rent

I have been in the aviation industry for over 20 years, and much of that time has been spent evaluating aviation real estate. I have analyzed fixed base operations (FBOs), cargo facilities, airline maintenance operations, and just about every type of...


I have been in the aviation industry for over 20 years, and much of that time has been spent evaluating aviation real estate. I have analyzed fixed base operations (FBOs), cargo facilities, airline maintenance operations, and just about every type of aeronautical real estate project and business one can imagine (and some that one probably can’t). One of the consistent issues I have faced over the years is the argument over the comparison between off-airport real estate and on-airport properties. More specifically, I have spent considerable time trying to educate airports, aviation businesses, and other appraisers as to why it is inappropriate to compare the two.

Let me start by discussing a basic real estate principle: property rights. Real estate is comprised of a bundle of rights, and the most common property ownership is fee simple estate. (This is likely what you own with your personal house.) The full bundle of rights in fee simple ownership relates to the fact that you own the property and have the ability to occupy it, lease it, modify it, tear it down and rebuild it, or any other number of things. With leased property, like what you find at airports, the full bundle of rights is broken down into two parts: leased fee and leasehold interest (also known as leased fee estate and leasehold estate).

If a property is leased, the airport sponsor has the leased fee interest, while the tenant maintains the leasehold interest. The airport’s leased fee interest is basically made up of the right to receive rent in accordance with the terms and conditions of the lease agreement, as well as the right to ownership of the property (with or without the leasehold improvements) at the termination of the lease, also known as reversion.

On the other side, the tenant’s leasehold interest is comprised of the right to occupy the property over the term of the lease, in accordance with the terms and conditions of the agreement. There are typically certain obligations on the tenant such as capital investment and/or operational requirements, but the primary obligation is to pay rent.

The significance of the initial discussion of fee simple, leased fee, and leasehold interests is that these basic real estate principles are the primary reason that comparing on-airport and off-airport are as different as comparing apples and oranges; in fact, I might argue that you are comparing oranges and candy orange slices. Yes, they are both orange in color and you can eat them, and the candy orange slices might even taste a little bit like an orange, but other than that they are very different. These differences are significantly more evident when evaluating aeronautical land on an airport, but are also prevalent with non-aviation real estate on airports.

Some basics
Okay, so what are the differences? Let’s start by addressing the basic difference: off-airport real estate is not generally subject to the same development restrictions as on-airport property. Limitations include restrictions on airport property being limited to aviation use, the impact of FAA regulations, an airport’s minimum standards and rules and regulations, lease terms and conditions, lease terms tied to a specific level of capital investment, and the impact of reversion clauses in a lease. (A reversion clause is a passage in a lease that requires that at the end of a lease, all leasehold improvements revert to the ownership of the airport, or the airport has the right to require that the tenant remove all improvements and bring the property back to a vacant state. As such, a reversion clause in a lease has an even greater impact when a lease term is limited to a period of time that does not provide an adequate term for the tenant to amortize the capital investment.)

In addition, another significant impact is typically the fact that most leases provide for a review and adjustment of rents at various intervals during the term of the lease. This provides a level of uncertainty as to the cost of occupying the property over time.

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