Memphis Airport, FedEx Discuss New 30-Year Lease

The airport authority today is expected to approve the first major lease for FedEx Corp. facilities off Democrat since the company moved here more than 30 years ago.

Rent in the 30-year lease - with options to extend it through 2058 - will be tied to increases in the Consumer Price Index or 13 percent price hikes every five years.

FedEx will have the option of paying whichever is smaller.

"What we are doing is recognizing the value of the airport to the community and providing a pathway that allows FedEx to continue to be an extremely valuable economic contributor to Memphis and to grow in the future," said Scott Brockman, finance director for the Memphis-Shelby Airport Authority.

"We all know the CPI won't rise with ruthless abandon. This way, FedEx can predict their rentals and we can predict our revenue flow," he said.

FedEx Corp. would not provide information until it has a fully executed lease, which Brockman expects will be in late January.

In 2006, FedEx paid approximately $7 million or an average of 24 cents a square foot in rent to the airport authority, half of what it made from its public and employee parking lots, which generated nearly $14 million in revenue this year, according to the authority's annual report.

The new deal includes no rent increases until July 2008, when some pieces of the nearly 29 million square feet of space that FedEx leases from the airport will be subject to a one-time 15 to 25 percent increase.

In 2013, rent on most of the parcels will increase either 13 percent or the difference in the Consumer Price Index from 2008 to 2013.

In the last five years, the CPI has risen 13.1 or an average of 2.6 percent a year, according to the Bureau of Labor Statistics.

"That is fairly modest compared to the statistical standard. The reason is because we've had low inflation since 1992," said spokesman Steve Reed.

By giving FedEx the option to take the lesser of the two increases, experts say the airport authority is doing what it can to ensure the company's future in Memphis.

"Intuitively, it sounds like Memphis has decided that the engine of its economic development is FedEx. The airport is not necessarily looking to maximize what it can take out of FedEx, but rather to take advantage of what FedEx brings to Memphis," said Mike Webber, president of Webber Air Cargo in Kansas City.

"I don't believe any single force has shaped Memphis post-'70s more than FedEx. I think the locals do well to err on side of caution to take care of their crown jewel."

Based on a study completed in 2004 by the University of Memphis, Memphis International Airport contributes more than $21 billion a year to the region's economic development. More than $19 billion comes from air cargo operations.

While DHL and UPS also have a presence at the airport, FedEx controls more than 90 percent of the cargo market .

"Airports have traditionally used used CPI as a measure," said Dick Marchi at the Airports Council International-North America.

"But because airfield construction costs have been inflating at higher than CPI rates at most airports for some years, people have been looking for alternatives."

In general, FedEx's new rates will range from 19 to 24 cents per square foot, depending upon improvements on the land and who paid for them.

"The rate is about average. Some companies pay more, some pay less," Brockman said.

Businesses that build their own facilities at the airport do not pay rent on the buildings. But at the end of the term, the improvements become the property of the airport.

The original FedEx lease was executed in the early 1970s. It has been amended at least 27 times as FedEx has grown and made improvements at the airport.

The new lease will be the first time all of the FedEx holdings at the airport are covered under one lease with increases tied to the CPI, one of the most recognized measures of cost of living.

While the rates do not increase until 2008, FedEx will pay more in 2007 because it will be bringing more land under its lease.

In the last few years, the company has made plans to add in excess of 100 acres at the airport, principally because it agreed to take over the 103 acres the Tennessee Air National Guard will give up as it relocates its base to the southeast corner of the airfield at Swinnea and Shelby Drive.

While FedEx has not said what it intends to do with the land, it is expected to spend hundreds of millions making improvements, which the airport authority considers an investment in Memphis.

"We've got to make sure we have a clear pathway for their growth and one that recognizes the capital contribution they make over the long term," Brockman said.

One of the most recent examples is the $150 million FedEx is investing in new hangars for the Boeing 777s it will begin receiving in 2009.

The new contract will take the company through 2038. Two additional options give it rights to the property through 2058.

The original FedEx lease was to expire in 2012. Because it involves many pieces of land that came under lease in varying timeframes, Brockman and the company wanted to avoid deadline pressures.

"We discuss our operating parameters on a regular basis. We knew we need to look at getting this lease consolidated and getting things wrapped up better."

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