As oil billionaire John Paul Getty said, “If it appreciates, buy it. If it depreciates, lease it.”
If you are considering building a hangar, FBO terminal, or other airport structure, there’s no good reason to invest permanent equity in a fully depreciating asset that ultimately will revert to the airport. Historically, on-airport businesses have been required to commit their own capital to build such assets through a mortgage or outright cash investment. An alternative found in other industries for decades, Structured Lease Financing presents significant advantages and opportunities for airport business owners.
What Is Structured Lease Financing?
In the case of single-tenant retail operations and car dealerships, where the owner/tenant holds clear (“fee-simple”) title to the land occupied by the business, the owner initiates structured leasing first by selling the building and land to a third-party investor. (If the project is a new development, the construction also can be funded by an outside investor). Then the business owner leases back the building and land from the investor under a “triple-net lease,” wherein the tenant makes monthly rent payments to the landlord for use of the building, as well as: (1) all property taxes, (2) insurance, and (3) maintenance related to the property.
This model has been used by many large companies throughout the world to provide for smarter allocation of capital. United Technologies, owner of Pratt & Whitney aircraft engines, has more than $2 billion of operating leases, including the sale-leaseback of various office facilities.
Many non-aviation properties have used ground lease structures including the Empire State Building, and the San Francisco 49ers stadium. State Farm used structured lease financing to implement its rapid expansion in Atlanta, Dallas, and Phoenix.
Kimco Realty, a large owner of shopping mail retail properties, owns several properties that are leased on a triple-net basis to TJ Maxx and other big box retailers, where the tenant pays property taxes, insurance, and maintenance costs as well ground lease payments.
How Does Structured Lease Financing Work?
Most on-airport General Aviation facilities, like FBOs, are built as leasehold improvements on land owned by the airport authority: the aviation entity’s capital is tied up in building ownership with a long term ground lease for the underlying land.
For properties with such ground leases, in Structured Lease Financing, a third-party investor – an independent finance company or bank – either funds construction of or purchases the existing leasehold improvements (e.g. terminals and hangars) from the aviation business operator for 100% of cost or fair market value, as determined by an independent real estate appraiser. That investor then executes a triple-net lease with the business operator, typically with a term that runs concurrent with the underlying ground lease. At the expiration of the ground lease, the leasehold improvements revert to the airport authority absent any lease extensions.
How Does Structured Lease Financing Differ?
Other financing alternatives presently available to aviation business owners place them under significant financial burdens. Bond issuances typically incur high legal fees and mandate substantial interest reserves, requiring aviation businesses to raise more funds than necessary. That reduces the funds available to invest in building the business. Mortgage financing usually requires the owner to make a 20-30% down payment, eliminating the opportunity to invest this capital in other areas of the business. With structured leases, the aviation operation preserves cash by leasing the building(s) from a third-party owner so the capital instead can fund acquisitions, new locations, or partner buyouts.
Whether you are looking for financing to aid in the acquisition of a new location, construction of a new general aviation facility, or to buy out a business partner, a structured triple-net-lease 100% financing offers a flexible way to achieve your goals. BAA
Alessandra Christiani is an investment manager at Capital Aviation Group, the first provider of structured lease financing for aviation. Prior to CAG, she managed a $2 billion portfolio of debt and equity investments at Prudential.
