Who Actually Captures Value from the Dirt?
As demand for aviation infrastructure grows, so does the value of the land beneath it. But as airport real estate becomes increasingly valuable, an important question emerges: Who captures that value?
Depending on the scenario, the answer can be everyone.
That, of course, is the ideal situation. Achieving this state requires airports, developers, aircraft owners and other stakeholders to remain in sync.
Seeking Symbiosis
When describing the economic landscape of an airport, it is useful to draw a parallel to nature.
Symbiosis describes a close relationship between different organisms in which the parties interact in ways that can benefit one another. A familiar example is the relationship between bees and flowers: the bee gets nectar while the flower is pollinated.
This mutualism occurs at the airport too when multiple parties benefit from a relationship.
Examples include a developer building new hangars in a constrained market and the airport authority awarded a grant to improve its runways or taxiways. In this scenario, the airport and developer have a productive relationship in which both parties benefit from the other’s contribution.
Airports and Developers Seek Value
One of the most significant tools airports have is the ground lease. For developers and investors, long-term leases can make it possible to justify substantial investments in hangars, infrastructure, and other facilities.
A master development, for example, can support large-scale infrastructure through a long-term ground lease. FBO master developments operate under a similar concept but are specifically designed around FBO operations.
That model can be particularly important at airports where ground rents are low enough to support new construction that might otherwise be difficult to justify economically. In those situations, the airport provides the land while the private party provides the capital and assumes the risk associated with developing the property.
Ultimately, there must be a balance between the cost of improvements, the length of the lease and the value those improvements create. The shorter the lease term, the faster an investor must recover its capital. If rents are kept low enough to make facilities broadly accessible but the lease is too short to support the investment, the proposed project may not make financial sense.
If the investor succeeds, the airport should benefit too and vice versa.
Facing Reality
The reality is that the relationships at airports are not perfect and symbiosis is not always achieved. Oftentimes one party (a developer, an airport, or its users) comes out ahead, or the other parties perceive them in that position. There may be negative impacts of being out of equilibrium.
Another truth is that airports continue to evolve and expiring ground leases are one of the points at which relationships regularly change. Lease renewal is an important reflection time for an airport’s current management, who has to assess a real-time estimate for the facility’s value.
A lease signed decades ago may have made perfect economic sense at the time. But what happens when the value of the airport has increased dramatically since then? Who should capture that additional value: the airport or the developer?
If the airport decides not to renew the lease and will instead own the facility themselves, there are many new factors for them to consider – from labor costs to insurance expenses. This may be their first time operating such a business.
And if the airport decides to rent the facility back to its former owner, it is a balancing act of determining the best price. Increased rent may put pressure on the tenant’s margins and potentially make the leasehold difficult to sustain.
Airport management must also consider its obligations to existing tenants. Under FAA Grant Assurance 22, Economic Nondiscrimination, airport sponsors that accept applicable federal assistance must make the airport available on reasonable terms and without unjust discrimination to aeronautical activities. Those obligations provide an important framework for evaluating lease terms, rates, and the treatment of users.
Everyone Can Still Win
How can a symbiotic relationship be achieved so that both parties clearly understand the value the other provides?
That may be the real measure of a successful airport development. The goal shouldn’t necessarily be for one party to capture all of the value. It should be to create enough value that both parties believe they are better off because the other was there.
With both sides acting in good faith and understanding one another’s goals, symbiosis is possible at the airport. And it may be the best way to create lasting value from the ground up.