It may sound simple, but understanding (and managing to) the specifics of your airport lease is critical for the airport service provider. Whether you are a Fixed Base Operator (FBO), Maintenance, Repair and Overhaul (MRO) company or an Aircraft Charter and Management (ACM) company, if you provide direct on-airport service your lease is your not only your life blood and access to your customer base, but it is also a big component of your company’s value.
Aviation service providers generally work under lease directly from the airport itself. Most leases are long term in order to afford the tenant (the aviation FBO, MRO or ACM company) the ability to achieve a return on the investment they must make to establish their business. Leases usually also confer the operating rights and restrictions under which the service provider must operate. Because they have long lives, however, and are not referred to often in the day-to-day provision of airport services, the opportunity for confusion arises and mistakes can compound for months or years until discovered and corrected. There are numerous examples of rent disputes that arose from a misunderstanding of the rent calculation only to compound for years until finally reconciled, many times with the service provider taking a material charge to their profit and loss statement.
- Rent Calculations. Obviously, most airport tenants are deeply aware of the amount of rent they pay to the airport on a monthly basis, either for ground rent or facilities. Unlike a typical office or other facility lease, however, an airport lease may require additional variable rent payments based upon activities. There are many types and structures but common types of variable rent are fuel flowage fees, a variable rent as a percentage of gross sales, additional rent in the form of recoupment from tenants of fees and taxes an airport incurs, etc. Since these are variable they are typically paid monthly by the tenant but only reconciled annually. Because FBOs typically have the most different lines of businesses, they are especially inclined to have additional variable rent structures. Diligent management and clear communication with the airport (as well as mutually agreed upon reporting tools) are best practices for preventing an unintended consequence from building up on either side of the ledger.
- Operating Rights & Restrictions. Airport leases typically clearly state which activities a tenant may conduct (or is required to conduct) and activities from which they are prohibited. These categories vary however, from very narrow to quite broad depending upon the intent of the airport; e.g. is the airport trying to tightly manage scarce resources or is it attempting to broadly stimulate growth and employment on the airport. In the modern hurried environment it is easy to contemplate adding a new service or product line without first determining whether that service or product is specifically allowed or prohibited under your current lease. You should always clearly understand your contractual rights and restrictions before making a commitment to a material outlay of resources, especially in the areas of time, personnel and capital.
- Maintenance & Repair. The maintenance and repair responsibility for your facilities will largely depend on who constructed them and who now holds title to them. In some cases the facilities will be let “where is, as is” and the tenant will be responsible for all maintenance and repair. Other times there are specific levels of maintenance the airport landlord may provide (e.g. “structural”) and the tenant will be responsible for others that do not rise to this level. Open communication with the airport is again the best tool for understanding who is going to pay for the next large repair issue.
- Lease Premises. Similar to rent, above, this appears straightforward and usually is. An older lease which has been subject to multiple amendments and assignments through multiple owners, however, may be tricky. If you purchased the lease as part of a larger aviation services business and bought title insurance at that time you should have assurance as to the exact location, size and characteristics of the leasehold. If you acquired the lease through other means such as a Request For Proposals process, you should examine the description of the premises in the lease and ensure it is consistent with your understanding and current aviation operations and activity. If there is doubt or ambiguity as to what and where the actual leasehold is, you should seek help understanding exactly what your rights are respective to the leasehold.
- Transfer and Change of Control. This is another area which can materially affect the value of an aviation service provider’s business. Most leases require a landlord’s (airport’s) consent to transfer a lease (as an asset) via an assignment (although it is common to have exceptions for transfers to entities that are subsidiaries or controlled by the current tenant). A change of control, which occurs when a tenant conveys more than 50% of the underlying interests of the business to another individual or entity, usually also requires a similar consent. This language varies from lease to lease of course and is less common in older leases. You should review this language in your lease and determine the consequences before you begin planning to sell your business as it may have a material impact on your sale process, especially if you are selling only a part of an airport based service business. There are different strategies to use in dealing with these types of provisions, however, and the best practice is to structure your business or sale process taking these provisions into account and aligning the structure of the process to meet your end goals.
Airport leases for Fixed Base Operators (FBOs), Maintenance, Repair and Overhaul (MRO) companies and Aircraft Charter and Management (ACM) Companies have evolved and become more complex, especially at larger airports, and the aviation infrastructure required to perform these services continues to become more expensive. To maximize your return as an operator, you have to have a complete understanding of one of your most important governing documents, your airport lease.
About Global Aviation Infrastructure
Global Aviation Infrastructure is a leading aviation management company which provides Fixed Base Operation (FBO), Maintenance Repair and Overhaul (MRO), Aircraft Charter and Management (ACM), and aviation infrastructure management for aviation asset owners, corporations, airports, private equity firms, family offices and financial institutions. For more information please visit www.aviationinfrastructure.com
For more information contact
Steven Levesque, Principal
+1 (843) 412-6881