Airport Beacon Report

Transcription

1 Airport Beacon Report October 2005 BEST PRACTICES FOR SUBLEASING By Michael A. Hodges, MAI, President/CEO A sublease is an agreement in which the lessee in a prior lease conveys the right of use and occupancy of a property to another. It s found in many forms throughout an airport. Most fixed base operations sublease office or hangar space within their facilities; many cargo carriers sublease extra space in their building to other carriers; even in airline terminals, often the concession space is leased to a master developer, who enters into various subleases with concessionaires. While such agreements are commonplace on airports, the way that people handle them are not. For this discussion, the focus will be on airport sponsors and FBOs, and the issues they face with subleases. The FBO Sublease FBOs commonly enter into sublease agreements for office space within the terminal building, sublease of hangars or space within hangars, T-hangars leases, and tiedown/parking agreements. With all of these different facilities, the general rule of thumb is for the FBO to charge what the market will bear. However, the difficulty can come when deciding when something is better than nothing for the space, or whether holding out for the right tenant that will pay a market rate makes the most sense. At times, FBOs will even give away space, if the subtenant will purchase enough fuel. It s all about making sure that every tenant and user of the facility contributes their fair share to the operating costs of the FBO business. However, the fair share is not the same for every tenant, even when occupying the same hangar. The FBO must weigh the risks with the potential rewards from each individual tenant. Fishing Season Opens in Alaska! Why is this important for the airport to know? Well, if you have a percentage rent clause in your FBO lease, if they are giving away rent, you are giving away rent. Also, if they are subcontracting services required under Minimum Standards or lease terms, and you would normally be scheduled to receive a percentage of the revenues generated from these services, then you need to make sure that you are receiving a percentage of the revenues from that subtenant, instead of just a percentage of the rents they are paying to the FBO. In addition, consider the opportunity costs associated with FBO subleasing. Is the airport potentially foregoing revenues from directly leasing other space on the airport? While subleasing by an FBO is a standard business practice, make sure that the airport is not subsidizing the subtenants as a result. Liability Concerns In these days of skyrocketing insurance costs, every FBO must carefully consider the liability it takes on 1

2 A Little Visibility Trouble on Final when it puts a plane in its hangar or moves it around on the ramp. This applies whether the customer is a based tenant at the facility or just an overnight tenant. Unless an FBO can get the customer to sign a hold harmless waiver or similar agreement - which may will not do - the operator must carefully factor the risks associated with housing the aircraft in a facility, and charge accordingly. Nevertheless, even with an agreement, a certain level of risk exists. (Operators may worry that if they charge a different fee to a customer signing a waiver versus one that doesn t, they will face a charge of discrimination. This is not the case, if one can justify why a different rate is being charged.) It s becoming commonplace for today s FBO to sublease space and operating rights to various specialized businesses (maintenance, avionics, charter, flight training, aircraft sales) to meet the terms of their Minimum Standards, which may require that it provide these services as part of the FBO agreement. But the FBO may come to the conclusion that is makes more sense to have companies that specialize in these services provide them under subcontractor agreements. There s nothing wrong with this approach; in fact, in many cases it s the best business decision that an FBO can make. However, it s important that the FBO carefully consider all of the implications and potential liabilities of such arrangements. One such issue is insurance. An FBO which enters into an agreement with a subtenant who will be providing services required under their master lease, is effectively entering into a partnership with the subtenant. As such, it s necessary to make sure that the subtenant has at least the same level of insurance as required of the FBO, the master leaseholder. While this may seem like common sense, there are a surprising number of FBOs around the country who are incurring a high level of risk because they have failed to force their subtenants to maintain the appropriate insurance level. In such instances, the FBO s insurance will be required to make up the difference if a claim is filed beyond the coverage provided by the subtenant. Once again, the question may be: Why is this significant for the airport sponsor? Well, if the subtenant is not adequately insured, and the FBO is not adequately insured, who do you think is next in the liability line? If your tenants are not adequately insured (and their tenants), then the airport potentially picks up the remaining liability. I am not a lawyer, but I can probably be safe in assuming that Week 1 of lawyer school includes a lesson entitled: Who has the deepest pockets? Rent Consideration What about rent? As mentioned, some FBOs will give office, and/or other space away if the customer purchases enough fuel to pay his or her part. However, this is not as common in today s business environment. It s more common to charge at least something for the occupancy rights to space within the facility, while fuel contributes to the operation of the business. This is good for the FBO and the airport. No one should have a free ride. When determining what the market rent is for space, it comes down to what the operator is willing to take and what the customer is willing to pay, with consideration to each party s alternatives. For example, an operator may be competing with another FBO on the field for a hangar tenant, or may be competing with an office building down the street if the potential office tenant is an aircraft sales or 2

3 insurance company. While these types of businesses might prefer to be on the airport, it s not a requirement, which gives them more alternatives. Everyone must carefully consider all of these factors when setting subtenant rental rates. Sponsor Policies From an airport perspective, a subtenant to an FBO can create some fundamental problems, depending upon the airport s overall situation. In some cases, an airport may not want an FBO to be able to sublease space to specialized aviation service operations (SASOs). (A SASO, or specialized aviation service operator, is generally recognized as an aviation business that provides one or more services on an airport, but does not and cannot provide fuel.) An airport sponsor may want the SASO to become a direct tenant of the airport, because there is significant space available on the airport that is needs to lease. Others don t want an FBO to be able to subcontract these specialized aviation services for fear that quality control may not be maintained and the airport will have limited recourse if the service is being provided by a subtenant. From an airport s perspective, these concerns can all be resolved by a carefully constructed agreement with specified lease requirements and default provisions crafted into the lease. Most importantly, if the primary leaseholder enters into any subcontracts to provide any services required within its lease, it is ultimately responsible for insuring that the level and quality of service is adequate. This also would extend the situation mentioned where the FBO requires all subtenants to maintain similar insurance minimums as required of the FBO. Ultimately, if something catastrophic does occur, the airport will be brought into the picture. (In this case, the one that can demonstrate that is exercised the most oversight will likely be the winner.) whereby they are indirectly paying a fuel flowage fee, then they are doing nothing to contribute to the operating and maintenance (O&M) cost of the airport. Even if the FBO pays additional rent in the form of a percentage of gross revenues, the subtenant s contribution to O&M is typically still minimal, only as small percentage of rent it pays to the FBO. Nevertheless, subtenants have the same rights and benefits to utilize the airport and generate revenue from the airport infrastructure as the primary leaseholder, yet they incur minimal risk and cost as a subtenant. Because of this issue, many airports are imposing or considering subtenant permits or license fees. Under these scenarios, subtenants are required to register with the airport and pay an annual permit fee and/or percentage of gross revenues. These fees are to insure that a subtenant is paying its fair share for the right and opportunity to operate a business at the airport. This registration can assist the airport in ensuring that the subtenant business is appropriately insured, licensed, and qualified to perform the services they offer. Even if a subtenant pays its percentage of gross through the FBO agreement (i.e., its gross revenues are added to the FBO s, then the percentage rent is applied), the annual registration is suggested to maintain the appropriate level of control over activities occurring on the airport. The airport sponsor will ultimately be held responsible if something goes wrong. This is even more prevalent in today s airport environment where security has become the number one issue. All tenants on an airport, whether direct leaseholders or their subtenants, need to be registered and recognized by the airport sponsor. Airport Fees Another issue that airports often have with subtenants is that unless they are buying fuel, 3

4 In other words, it is imperative that the airport know and understand their FBOs and their various lines of business. The more you work to understand their business, the better your relationship with your tenant, and the more opportunities you may have to come up with some non-traditional revenue opportunities from the tenants and their subtenants. Remember, a little knowledge can be a wonderful thing. However, it can also be a dangerous thing if placed in the wrong hands. CONCH FURY RACE TEAM 2005 WRAP-UP By Bobbi Thompson, Executive Vice President and Conch Fury Race Team Manager winners with a an average course speed of MPH. That was quite a race! The race was followed by a ride in the antique Fire Truck for the entire team down the crowd line of about 80,000. Winning that race forced us to compete in the BIG Unlimited Gold Race on Sunday. The top qualifier for that race had posted a 470 MPH qualification speed. HMMM! On Sunday, they tow all the Gold qualified aircraft in front of the main grandstands for Team introductions, so we sure got to have our 15 minutes of fame. We th were able to place 7 out of eight aircraft, and were thrilled with that. Our pilot was the first rookie to ever race in the Unlimited Gold on Sunday, and he won the Rookie of the Year award and recognition. For the past 41 years, the National Championship Air Races has been held in Reno, Nevada. The races bring together thousands of aviation and sports enthusiasts from around the world. During the five days of racing, aircraft reach speeds of over 500 mph, making it the fastest motor sport in the country. One of the teams that competed this year was the Conch Fury Race Team that was managed by Airport Business Solutions very own Bobbi Thompson. To provide insight, Bobbi wrote the following on this year s event: The 2005 Reno Air Races were very exciting and successful. The Conch Fury Race Team s aircraft this year was a 1949 British-made Hawker Sea Fury that weighs 12,500 lbs. with a 3,000 horsepower engine. The aircraft traveled from Key West to Reno s Stead Airport and back to Key West without a hitch, and the team only paid $15,000 for fuel - ouch! The aircraft did not experience any mechanical problems during race week, and on Tuesday we passed Tech Inspection and qualified at more than 405 MPH. We consumed more than eight rolls of duct tape and twelve bottles of wax (and unknown quantities of adult beverages) getting the aircraft ready for the final races. Conch Fury at 2005 National Championship If at any upcoming aviation event you see me and have a couple of hours, I will be happy to share all the details and pictures. Air Classic Magazine is doing a photo layout in this month s issue if you cannot wait for more details. Each day of qualification we improved our position in the Unlimited Silver Class with a starting position rd of 3 on Saturday. Saturday s Silver Race was flown st at 1400 and by 1420 we were proclaimed the 1 place 4

5 ASK ABS In each issue, we have included a section called "Ask ABS", where we request aviation-related questions from our readership. Each month we publish one question that we receive from our readers with a joint reply from our professional consulting team. Even if your question is not selected, all questions submitted will be responded to via . Please submit a question by ing Mark Davidson at the following: mdavidson@airportbusiness.net My airport has a wide variety of leases that have been developed over the years. How do I know when I need to update my leases or should I just wait until a new group is interested in becoming a tenant? Anonymous A problem that seems much too common, especially at general aviation airports, is the practice of reactive management especially when it comes to management and policy documents. Leases are critical documents at your airport and should continually be reviewed to ensure their applicability to industry standards and local conditions. OK, so that is in a perfect world! However, on an annual or at least biannual basis, the boiler plate lease language should have a cursory review to make sure it addresses all of the regulatory changes and the ever-evolving conditions at your airport. This is one of those areas where you can solicit help from downtown. For example: 1. Have your City/County/Authority legal department review your lease language 2. Have the risk manager review the insurance requirements 3. Make the review process a staff project. This not only can produce some interesting insights, but also helps your staff become more familiar with the leases 4. Develop lease summaries to help identify the core details that are most important in your leases. This will help you write better leases in the future. Is there a perfect lease? NO. But you can develop better leases over time, that will in fact, potentially save you some time in the future. Also, always remember to document everything in your leases, or at least in the files. Do not rely on we can just have a verbal agreement on that issue. Remember, if you are negotiating a 30-year lease, it is highly unlikely that either you or the tenant will be around for the full term of the lease. As such, make it easy on the next person in your position. Airport Business Solutions is recognized as the leader in providing valuation, analysis, and consulting services to airports and aviation businesses, and offers a diversity of backgrounds and experience which provides a new, creative, and "outside the box" perspective on a myriad of aviation issues and problems. In addition, our international affiliate, Airport Business Solutions International, AEC, has helped numerous airports worldwide with a variety of airport management and operational issues and problems. Problems at international airports are no different from those experienced at airports in the U.S., and the diversity of experience and breadth of knowledge of Airport Business Solutions International has been extremely valuable in achieving comprehensive solutions to those issues. For More Information Michael A. Hodges, MAI President/CEO Airport Business Solutions N. Dale Mabry Highway, Suite 101 Tampa, Florida Phone (813) Fax (813) mhodges@airportbusiness.net 5