Another approach is to pay the fair market value of the project. An appraiser would likely determine this using a discounted cash flow approach. Naturally the fewer years that remain on the lease, the less valuable it becomes. I am a part owner in airport projects that grant no compensation whatsoever, and two projects that the airport will pay fair market value.
So, what’s the best way to work with a developer? Once the tenant and airport have identified a site:
- Is an RFP issued for a developer for that site with no specific use? Or
- Is an RFP issued based on what has been identified as a use or uses to be developed on the site?
Both approaches have their pluses and minuses. In both cases one might be well served to be very open to what the local development, planning, and brokerage community thinks the target market is, what to build, and how to phase it.
Does the airport have personnel with the real estate knowledge to negotiate this kind of transaction, or should it consider a consultant to assist? One can get great input from developers, real estate agents, architects, planners, and consultants.
I think a very good case can be made for the airport doing the project itself. Determine what is wanted to see developed, plan the site, and market the parcels within the site to end-users or for a developer to build the multi-tenant building(s). All of the issues are the same, but the risk to the developer is substantially reduced because each parcel is a much smaller transaction. This would help open the process to a wider range of local developers who would be qualified for a smaller project that’s part of the larger site.
If a developer contacts the airport with an idea for a project, how is that handled? Is there a process for evaluating an unsolicited proposal? Will the airport select an appropriate location for the proposed use, qualify the developer, and negotiate a lease? Or, does it, by regulation or policy, always go out to the market with an RFP. Certainly a thorough and complete process of vetting the proposer and the project would be necessary to prevent criticism and second-guessing. However, being open to, or soliciting, ideas from the private sector may be a good way to discover some great ideas.
* * *
Many developers would not want to hold this kind of asset for a long term. What they do is develop. Their idea of a good time is to build a project that leases up at good rates and then sell it to a long-term investor. They make fees and then a profit when they sell, and then apply those resources to the next project. Some others may keep it in their portfolio for many years.
I believe airports are in the best position to develop a multi-tenant project. The airport should do the land planning and site development, unless the project is large enough to attract a national class developer with the ability to use non-project specific financing. The good news is that airports do bring in a lot of people and that will always get the interest of tenants and developers.