When negotiating an airport lease, one of the more important aspects of the lease that the tenant will be negotiating is the length of the lease term. An airport tenant generally desires to get as long of a lease term as possible such that the tenant can maximize its return on investment. The challenge with the Federal Aviation Administration’s (“FAA”) guidance on the issue of the permitted length of a lease term is that there is no black-and-white answer. The FAA does not provide any clear formulas or specific measurables to make this determination. Rather, the analysis is very fact-specific. This article examines the relevant FAA guidance applicable to the determination of the length of a lease term.
FAA Grant Assurances
Under federal grant programs, an airport sponsor will agree to certain federal obligations in the application for federal funding. Those federal obligations get built into the grant offer, thereby binding the airport sponsor upon receipt of the federal funds to develop the airport.
The primary grant program applicable to airport sponsors is The Airport Improvement Program (“AIP”), pursuant to the Airport and Airway Improvement Act of 1982 (AAIA), as amended. See 49 U.S.C. § 47101, et seq. When an airport sponsor accepts funds under the AIP, the airport sponsor agrees to comply with the FAA’s airport sponsor grant assurances (“Grant Assurances”).1
The Grant Assurances restrict an airport sponsor from a prohibited disposal of airport property. See Grant Assure 5. As such, a lease term cannot be so long that it would be considered a de facto disposal of airport property. Moreover, a lease term cannot violate Grant Assurance 22, which requires that an airport sponsor “make the airport available as an airport for public use on reasonable terms and without unjust discrimination to all types, kinds and classes of aeronautical activities” and contract with tenants “on a reasonable, and not unjustly discriminatory, basis.”
Relevant FAA Authority Concerning the Length of Lease Terms
The leading FAA guidance on point is Order 5190.6B, Change 3, effective date September 15, 2023 (the “Airport Compliance Manual”).2 The Airport Compliance Manual provides guidance to FAA employees on the implementation of the FAA’s airport compliance program. Under the airport compliance program, the FAA has the responsibility to ensure that airport sponsors comply with certain obligations that arise from FAA grant agreements and from deeds of property conveyance for airport use.
The Airport Compliance Manual makes clear that the “FAA does not review all leases, and there is no requirement for a sponsor to obtain FAA approval before entering into a lease.” Pg. 12-1. When an airport district office or regional airports division does review a lease, however, the Airport Compliance Manual provides that the term of a lease is one of “[t]he most important articles of a lease to review.” Airport Compliance Manual, Pg. 12-2.
The primary focus of the Airport Compliance Manual in determining whether a lease term is reasonable is ensuring that the length of the term is proportionate to the time needed for the tenant to provide a reasonable return on the tenant’s investment. Indeed, The Airport Compliance Manual provides the following guidance on determining the reasonableness of the length of a lease term: “Does the term exceed a period of years that is reasonably necessary to amortize a tenant’s investment? Does the lease provide for multiple options to the term with no increased compensation to the sponsor? Most tenant ground leases of 30 to 35 years are sufficient to retire a tenant’s initial financing and provide a reasonable return for the tenant’s development of major facilities. Leases that exceed 50 years may be considered a disposal of the property in that the term of the lease will likely exceed the useful life of the structures erected on the property.”1 (Emphasis added.) Page 12-2.
As this language clearly indicates, the FAA’s emphasis is that the length of the lease term should be proportionate to the time needed for the tenant to amortize its investment. As a corollary, the Airport Compliance Manual supports that if a tenant makes additional/new investments or improvements during the lease term, it justifies a renewed lease or lease extension to allow the tenant to realize a reasonable return on that additional investment.
That standard is echoed in additional FAA guidance. Specifically, on December 9, 2009, the FAA Airport Compliance Division2 published guidance titled Developing an Airport Leasing Policy – Best Management Practices for General Aviation Airports (“Airport Leasing Policy”).3 The Airport Leasing Policy acknowledges that a tenant’s objectives in an airport lease will include recouping invested capital and obtaining options, extensions, and renewals as needed to do so. Page 17. Importantly, the Airport Leasing Policy further provides that “FAA doesn’t generally support long term leases beyond the life of the asset” and that “[i]deally a new lease should support leasehold improvements.” (Emphasis added.) Page 18. Finally, it should be noted that the Airport Leasing Policy also specifically acknowledges a tenant’s objectives include options, extensions, and renewals of a lease.
The determination of whether the length of a lease term is a high fact-specific determination. Lawrence J. Minch and Janice Kay Thompson v. City of Cottonwood, Arizona, 2019 FAA Lexis 112, 127, FAA Docket No. 16-17-05 (January 18, 2019) (“Lease terms and amortization requirements are highly dependent on the circumstances of each prospective tenant and each individual airport. The 30-35 year term outlined in Order 5190.6B is a best practice recommendation left to the discretion of the airport sponsor.”) For example, the FAA has shown a willingness to provide much longer lease terms for a development lease as opposed to a facility lease because “[a] facility lease … is generally the leasing of an existing facility or space to a subtenant. It does not generally involve the development of infrastructure and multiple facilities over an extended period of years.” ALCA, et al. v. Miami Dade County, Florida, 2010 FAA LEXIS 234, 55-56, FAA Docket 16-08-05 (August 31, 2010).
The analysis concerning whether a lease term is reasonable and sufficient for an airport tenant to receive a reasonable return on investment needs to be determined on a case-by-case basis, considering the specific facts at issue.
State Law Considerations
In addition to the FAA factors discussed above, an airport tenant must also take into account any applicable state law standards or requirements that could impact the length of a lease term.
A relevant example is California. There is a California law that limits aviation-related leases between a local agency and a tenant to 50 years. There was confusion, however, as to whether the 50-year limit on airport leases applies to each lease extension or renewal, rather than cumulatively, for purposes of facility improvements and airport sustainability. As such, California passed Bill No. SB 654, which clarifies that the 50-year limit on lease terms applies to each lease term or extension/renewal, rather than cumulatively.
It is important for airport tenants to be aware of these types of state law considerations that could impact the determination of the length of a lease term.
The determination of the length of a lease’s term is a highly fact-specific analysis, which involves issues of federal, state, and local law. Given the complexities regarding this issue, and other issues generally involving the negotiation of an airport lease, it is recommended that you should contact aviation counsel to evaluate the issues and help guide you through the process.