Short-Term Lease, Long-Term Investment

FBOs Struggle for Sound Lease Agreements

FBOs and other on-airport aeronautical service providers (ASPs) have long struggled with using private funds to invest in their facilities on leased land on airports. Short-term lease terms often limit an FBO’s ability to take advantage of favorable lending practices and commercial tax rules related to depreciation and amortization.

The General Aviation Infrastructure and Investment Coalition (GAIIC) was created to begin a dialogue about leasing provisions with FBOs and airports, as well as to increase visibility within Congress of the concerns surrounding private investments by ASPs. The GAIIC represents a cross-section of FBOs from across the country, including large FBOs with multiple locations as well as independent FBOs. In fact, more than 250 FBOs operated by more than 27 owners are represented.

Sam Whitehorn, executive vice president of McBee Strategic Consulting, who represented the GAIIC in negotiations with airport representatives, explained the issue the GAIIC sought to resolve: “FBOs need to know their construction investment is a sound one. Once we started the dialogue, we realized a lot of money is sitting on the sidelines because FBOs can’t take advantage of tax incentives.”

Best Practice Guidance

Several months ago, the GAIIC partnered with Airports Council International – North America (ACI-NA) to develop a best practices guide for airports and FBOs negotiating lease agreements. The best practices outline the following guidelines for an airport land lease:

  • The lease term should reflect the level of capital investment required to develop the needed improvements to the leasehold as outlined in the sponsor’s minimum standards or lease requirements;
  • The lease term should provide the FBO/ASP the ability to take maximum advantage of the IRS amortizations schedules, when possible;
  • Where the agreed to lease term is shorter than the period required to fully amortize the capital improvements, lease provisions should ensure that FBO/ASPs can take advantage of the IRS amortization schedules; airport sponsors should request a certified schedule to verify the amortization and depreciation of the FBO/ASP facility investment; and,
  • Upon agreement between existing FBO/ASP and airport sponsor that a new capital improvement is required to meet demand in the market, and such investment is made by the FBO/ASP, extension of lease term and/or provision for a buy-out of the unamortized capital costs of such improvement should be negotiated.

Following the guidelines developed by the GAIIC and ACI-NA could allow an FBO with a 15-year land lease to amortize construction expenses over 20 or 30 years, for example. And we aren’t talking about sprucing up a bathroom at an FBO.

One estimate indicates some $1 billion is available for private construction projects on airports, but sits unused or goes to off-airport commercial projects because short-term land leases prevent on-airport ASPs from taking advantage of tax incentives. These funds could be used to build general aviation hangars, maintenance facilities, and more.

Eric Byer, vice president of government and industry affairs for the National Air Transportation Association (NATA), believes these best practices can help stimulate economic growth and create jobs.

“The aviation industry has experienced difficult times in the past few years. These best practices have the potential to make airport sponsors and FBOs better partners, helping airports become significant economic drivers for local communities and our nation as a whole,” he comments.

The GAIIC and ACI-NA agreed on the best practices guidance in February. “The concept had a lot of pushback from the airport community originally, mostly because of misunderstandings of the overall concept and potential benefits of the best practices,” says Whitehorn.

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