Critical Airport Rental Areas for Aviation Service Providers
It may sound simple, but understanding (and managing) the details of your airport lease is critical for the airport service provider. Whether you are a Fixed Base Operator (FBO), a Maintenance, Repair and Overhaul (MRO) company or an Aircraft Charter and Management (ACM) company, if you provide direct service at the airport, your lease is not only your life blood and access to your customer base, but it’s also a huge component of your company’s value.
Aviation service providers generally work under a lease directly from the airport itself. Most leases are long-term to allow the lessee (the aviation company FBO, MRO, or ACM) the ability to achieve a return on the investment he must make to establish his business. Leases generally also confer the operating rights and restrictions under which the service provider must operate. However, because they are long-lived and infrequently mentioned in the daily provision of airport services, the opportunity for confusion arises and errors can fester for months or years until they are discovered and corrected. There are numerous examples of rental disputes that arose from a rent calculation misunderstanding only to fester for years until finally settled, often with the service provider charging a material charge on their profit and loss statement.
1. rental calculations. Obviously, most airport tenants are very conscious of the amount of rent they pay to the airport each month, whether it be for land or facility rental. Unlike a typical office or other facility rental, however, an airport rental may require additional variable rental payments based on activities. There are many types and structures, but common types of variable rent are fuel flow rates, a variable rent as a percentage of gross sales, additional rent in the form of recovery from tenants of fees and taxes incurred an airport etc Since these are variable, they are usually paid monthly by the tenant, but they only reconcile annually. Because FBOs tend to have the most different lines of business, they are especially inclined to have additional equity structures. Diligent management and clear communication with the airport (as well as mutually agreed upon reporting tools) are best practices to prevent an unintended consequence from piling up on both sides of the ledger.
two. Rights and restrictions of operation. Airport leases often clearly state what activities a tenant can (or is required to) do and what activities are prohibited. However, these categories vary, from very narrow to quite broad, depending on the intent of the airport; For example, is the airport trying to strictly manage scarce resources or is it trying to broadly stimulate growth and employment at the airport? In today’s fast-paced environment, it’s easy to contemplate adding a new service or product line without first determining whether that service or product is specifically allowed or prohibited in your current lease. You should always clearly understand your contractual rights and restrictions before committing to a significant outlay of resources, especially in the areas of time, personnel, and capital.
3. Maintenance repair. The responsibility for maintaining and repairing your facilities will largely depend on who built it and who now owns it. In some cases, the premises will be rented “where is, as is” and the tenant will be responsible for all maintenance and repair. Other times there are specific levels of maintenance that the airport lessor can provide (for example, “structural”) and the lessee will be responsible for others that fall below this level. Open communication with the airport is again the best tool in understanding who is going to pay for the next big repair problem.
Four. Leasing of premises. Similar to renting above, this sounds straightforward and it usually is. However, an older lease that has been subject to multiple amendments and assignments through multiple owners can be tricky. If you purchased the lease as part of a larger aviation service business and purchased title insurance at the time, you should be sure of the exact location, size, and features of the lease. If you acquired the lease through other means, such as a request for proposal process, you should review the description of the facilities in the lease and ensure that it is consistent with your understanding and current aviation operations and activities. If there is any doubt or ambiguity about what and where the actual lease is, you should seek help in understanding exactly what your rights are with respect to the lease.
5. Transfer and Change of Control. This is another area that can materially affect the business value of an aviation service provider. Most lease agreements require the consent of the (airport) owner to transfer a lease (as an asset) through an assignment (although it is common to have exceptions for transfers to entities that are subsidiaries or controlled by the current lessee). A change of control, which occurs when a lessee transfers more than 50% of the underlying interest in the business to another person or entity, generally also requires similar consent. Of course, this language varies from lease to lease 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 can have a material impact on your sales process, especially if you are selling only part of an airport service business. . However, there are different strategies to use when dealing with these types of provisions, and the best practice is to structure your business or sales process around these provisions and align the process structure to meet your ultimate objectives.
Airport leases for Fixed Base Operators (FBOs), Maintenance, Repair and Overhaul (MRO) companies, and Aircraft Rental and Management (ACM) companies have evolved and become more complex, especially at larger airports, and the aviation infrastructure necessary to perform these services continues. to become more expensive. To maximize your performance as an operator, you must have a complete understanding of one of your most important governing documents, your airport lease.