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HomeMy WebLinkAbout15 - Appendix H - Ground Lease Termination AnalysisAppendix H Ground Lease Termination Analysis Aiiport Airport Business Solutions Business "Valuation and Consulting Services to the Aviation Indushy" N- 10014 N. Dale Mabry Highway, Suite 101, Tampa, Florida 33618 -4426 Solutions Phone (813) 269 -2525 Fax (813) 269 -8022 Mr. Harvey Bragg Procurement Officer Jackson County Administration Office Jackson County Courthouse Room 214, 10 S. Oakdale Medford, Oregon 97501 RE: Ground Lease Termination Provision Analysis Rogue Valley International- Medford Airport Medford, Oregon Dear Mr. Bragg: February 14, 2006 Per the request by Jackson County, we are pleased to present this document, which represents a Ground Lease and Termination Provision Analysis for the Rogue Valley International- Medford Airport in Medford, Oregon. The following report provides our assessment and analysis of various and potential reversionary policies for ground leases at the Airport, as well as our recommendations for consideration. In the development of this document, Airport Business Solutions researched many sectors of the local, regional and national airport market, expanding as necessary to gain sufficient and comprehensive data to yield adequate and supportable conclusions. Moreover, we surveyed multiple industry leaders and similar operations, and spent considerable time with meetings, interviews, phone conversations and e -mail correspondence with many tenants, elected officials, and Airport staff. The following document outlines our findings and recommendations. We appreciate the opportunity to provide our professional services to Jackson County. If you should have any further questions, please advise. Sincerely, %ael -ct6 Michael A. Hodges, MAI 6661 Nroln Bobbi Thompson President /CEO Executive Vice President Solutions as Unique as the Problems .. . Office Locations: Tampa, FL * Fort Myers, FL " Denver, CO * Boston, MA * Jacksonville, FL Ground Lease Termination Provision Analysis of the Rogue Valley International- Medford Airport Reversion Policy Submitted to: Mr. Harvey Bragg Procurement Officer Jackson County Administration Office Jackson County Courthouse Room 214, 10 S. Oakdale Medford, Oregon 97501 Date of Report: February 2006 ', Airport Business Solutions Ground Lease Termination Provision Analysis Jackson County Airport Authority Rogue Valley International- Medford Airport February 2006 SECTION I Section I Page 1 INTRODUCTION JA.0 S O The Rogue Valley International- Medford Airport _ CS(RUNTY (FAA Identifier MFR) is the third largest commercial service r' e_.= ' , n airport in Oregon serving seven counties in southern Oregon and northern California. The Airport offers commercial air service provided by America West (operated by Mesa Air), Horizon Air, United Express, and Delta Connection (both operated by Sky West). These carriers offer approximately 60 arriving and departing flights daily to and from San Francisco, Portland, Eugene, Seattle, Los Angeles, Phoenix, Denver, Las Vegas, and Salt Lake City. The Airport also serves general aviation traffic, including extensive corporate and business travel, and has three Fixed Base Operators (FBO) that provide a full range of services including the sale of both 100LL /Avgas and Jet -A fuel, major airframe and power plant repairs, aircraft sales, flight training, aircraft rental, and aircraft charters. The Airport has experienced an estimated 50 percent growth in activity and now exceeds 500,000 commercial passengers annually. The updated Master Plan has indicated multiple infrastructure improvements to the airside and landside of the Airport. Cargo activity has shown considerable growth with the Foreign Trade Zone and the cold storage functions feeding the interest of international flights. The purpose of this report was to conduct a Ground Lease Termination Provision Analysis, also known as a "Reversionary Policy Analysis ", on a contractual basis for the Jackson County Administration Office. Airport Business Solutions (ABS) has provided different options to Jackson County to provide the most in- depth analysis and a single policy recommendation which is in accordance with all applicable local, State and Federal laws, regulations, and ordinances. ABS will make this recommendation based on our research and analysis and what has become the most reasonable and non - discriminatory resolution to this important issue. BACKGROUND At a public meeting in April 2000, the Jackson County Board of Commissioners adopted a policy requiring that the title to leasehold improvements vests with the County at the termination of a ground lease at the Airport. As a result of the new policy, all new contracts signed after the effective date of the new policy included the "reversion" clause. A complaint was filed and the FAA responded to the complaint in February 2001 upholding the County's position. Another complaint was filed on behalf of the Oregon Pilots Association with Senator Gordon Smith, who responded in May 2002 with a copy of the FAA letter and a statement that he supported the standard reversion clause. -- Aii port Business Solutions Ground Lease Termination Provision Analysis Jackson County Airport Authority Rogue Valley International- Medford Airport February 2006 Specifically, the County's adopted policy states: 1. The lease or agreement or any extension of current leases or agreements as of the date of this policy will have a provision that at the completion of the term of this lease or agreement the title of the improvements will vest with the County. 2. The length of the lease or agreement is to allow the lessee, contractor, or developer to amortize the investment during the terms set forth therein. The term of the lease should take into account the capital investment involved. 3. If voluntary early termination (for other than default) is made by the County, provisions may be in the lease or agreement for using a depreciated formula for an equitable settlement. 4. This policy is to ensure that Jackson County has a long -term benefit for use and improvements of the County's real property. 5. Exceptions will be considered by the County Administrator on a case -by -case review. Section I Page 2 Rogue Valley International Medford A' 'rt AIRPORT MASTER PLAN WHAT IS REVERSION? For the purpose of this document, it is prudent to initially define what reversion really is. Reversion generally means that at the termination of a lease, or potentially at a specified point during the term of a lease agreement, that ownership of the improvements reverts to the Lessor. In this case, the Lessor refers to Jackson County, who is the owner /sponsor of the Rogue Valley International- Medford Airport. Essentially, it is the point at which the Airport can begin leasing land and improvements on a leasehold at their prevailing market rent, as opposed to just receiving ground rent. However, reversion can also take other forms. In some instances, reversion can mean that at the termination of a lease, the Lessor can require that the tenant who built the improvements remove them and bring the site back to its original unimproved state. This presence of a reversionary clause is standard within the aviation industry for a number of reasons. These include the provision for future revenue streams, maintaining a certain level of control over the development and maintenance of facilities on the airport, and the ultimate control/management over airport development as it may impact future airport expansion. However, it should be noted that there are numerous other alternatives in place at airports throughout the United States, to include provisions for the airport to purchase the improvements at lease termination. Seldom is there a provision for automatic or perpetual renewals of the lease at the prevailing ground rent only. Aiiport Business Solutions Ground Lease Termination Provision Analysis Jackson County Airport Authority Rogue Valley International- Medford Airport February 2006 REVERSION CONSIDERATIONS Section I Page 3 In approaching this complicated topic, ABS had to consider multiple considerations and options. The following presents some primary considerations. • Whatever the County finally adopts as their Airport's reversionary policy, it must be consistently applied to all existing and prospective tenants, and should be adopted by a Leasing Policy Ordinance to codify its approach. • The County must understand and address the condition of the buildings that it could take over in the next few years, and should complete a detailed building inspection for planning purposes. (i.e., What is the County willing to absorb in annual maintenance for reverted structures ?) • What will the cost be to ensure reverted properties meet local building codes and are attractive to prospective tenants? Can the County require certain maintenance activities be performed by existing tenants during the course of the lease and prior to reversion? • The current development activities on the Airport indicate that the private sector is willing and able to invest in the Airport. • The County must consider and understand the possible impact that could occur if a strict policy to universally invoke reversion, without the possibility for negotiation, which could cause tenants to not maintain their facilities in the later years of their lease. • What are the legal responsibilities that impact the County' s ability to make decisions about reversions? • The County has a fiduciary responsibility prohibiting the giving of money, property, or credit to any private entity. Based upon this concept, should the County only issue new leases on existing Airport leaseholds only if the tenant is willing to make reasonable reinvestment in their property? • Does the County believe that there is interest from prospective tenants in the leaseholds upon reversion? • How does the County ensure that there is no discrimination between prospective tenants and current tenants whose property has reverted? • Any adopted policy on reversions going forward must be in compliance with the Airport's Sponsor Assurances, also known as Grant Assurances, as stated in FAA Order 5190.6. This must be done in order to maintain an eligible status for future Federal grants, which are critical to the Airport's operations and maintenance. • Do the current structures and their locations meet current and future Airport development needs? • Without reversions how will the County manage property acquisitions needed for Airport development? • The County has an obligation to make the Airport as self - sustaining as possible. Does the current land use represent the highest and best, and most financially beneficial use for the leasehold property? • Is the County willing and able to take a more direct approach to leasing property? If leasehold improvements revert, the monthly or annual leases on additional hangars will represent a more direct approach. Aifport Business Solutions Ground Lease Termination Provision Analysis Jackson County Airport Authority Rogue Valley International- Medford Airport February 2006 Section I Page 4 On the following page, the range of options for the County is presented for consideration. In the preparation of this report, ABS carefully considered multiple decision paths as reflected in this graph in our analysis and recommendations. Our research and analysis considered all options reflected within the graph, compared each to the other regional airports, analyzed them with comments from Airport tenants, and researched the legal and federal requirements as impacted by each option. Aifport Business MEI Solutions