VERY IMPORTANT Hangar Reversion (Lease/ownership) Language FAA

[FastGlasair]

More good news for the aviation community. On the heels of the California legislation that clarified the FAA’s language stating a hangar can be leased for longer than 50 years, (just no single lease term for greater than 50 years without FAA approval), please see the following ruling on public enemy number one, REVERSION ! Thanks to AOPA and Brad Schuster for the heads up.

Subject: This just in from AOPA General Counsel RE: Part 16 Ruling expressly confirms that reversion is NOT a required means to terminate a lease and therefore, not reverting is NOT a violation of FAA compliance

In this complaint from a former part time airport manager against the city he worked for (as I read it), he felt that because the City was not enforcing or requiring reversion, the City was in violation of grant assurances. The findings and conclusions of this Part 16 complaint make abundantly clear that the FAA does not require reversion. Period.

16-05-19 Clarke v. City of Alamogordo. The Complainant alleged that failure to invoke lease reverter clauses violated a variety of grant assurances. The Director’s Determination has some great language, including:

Grant Assurance 5, Preserving Rights and Powers. FAA does not construe Respondent’s refusal to invoke its reverter provisions and claim improvements on airport property, as a donation. Nor are such acts necessarily a violation of Grant Assurance 5… Complainant may contend that failure to enforce the lease amounts to a donation, however refusal to invoke the ‘reverter clause’ provisions is not a violation of the FAA Grant Assurances. Therefore, with regard to Respondent’s refusal to invoke the reverter provisions in its aeronautical leases, FAA finds that such action was a decision within the right of the Airport and the parties to the contract, and not a violation of Grant Assurance 5.
Grant Assurance 22, Economic Nondiscrimination. Alamogordo appears to have treated the tenants the same because it has not exercised the reverter clauses… Therefore, based on the analysis above, Respondent is not in violation of its obligations under Grant Assurance 22.
VIII. Findings and Conclusions.

i. Respondent’s failure to invoke the reverter provisions in its aeronautical leases does not constitute a violation of Grant Assurance 5, Preserving Rights and Powers.

ii. Respondent’s failure to uniformly include and enforce ‘reverter’ provisions in its aeronautical leases does not constitute a violation of Grant Assurance 22, Economic Nondiscrimination, since Respondent never enforced the reverter provisions on any of its aeronautical leaseholders.

iii. Respondent’s failure to invoke ‘reverter’ provisions and charge fair market value rent for reverted aeronautical leasehold improvements is not a violation of Grant Assurance 24, Fee and Rental Structure.

iv. Respondent’s failure to invoke ‘reverter’ provisions in its aeronautical leases does not constitute a prohibited use of airport revenue or revenue diversion, and does not violate Grant Assurance 25, Airport Revenue.

Hope this helps!, Brad Schuster

Northwest Mountain Regional Manager

Aircraft Owners & Pilots Association (AOPA)

Tel: 202.851.7502

[MikeOH]

Ugh, I need a layman’s translation, please!

[ttflyer]

2 hours ago, MikeOH said:

Ugh, I need a layman’s translation, please!

I tried and it turned into bla bla bla....  So glad I'm not a lawyer...

[FastGlasair]

1 hour ago, ttflyer said:

I tried and it turned into bla bla bla....  So glad I'm not a lawyer...

Plenty of lawyer types here, to give more detailed insight.

 

Reversionary clauses or “reversion” here has to do with hangar ground leases, where the hangar is owned by someone other than the airport but the ground is leased to the hangar owner by the airport.

In recent years many airports have added the reversionary language to the ground leases indicating that as an example after the first (only) 25 year lease is done. The hangar building ownership reverts to the airport. Many airports have tried to place the onus for these policies onto the FAA that they must do so under the FAA grant assurance programs (receiving FAA airport improvement funding).

Bottom line, the only limits by the FAA are that each lease duration cannot exceed 50 years (without prior FAA permission) and that subsequent lease renewals can again not exceed 50 years. Nothing indicated by the FAA to deny or limit any subsequent renewals.

Here in Ogden, Utah we have been in a legal battle with the city for about 4 years. They have inserted reversionary language into renewals that a majority of hangar owners have refused to sign. This has not been the precedence here for about 70 years and not what our leases stated until recently, in fact quite the opposite. From 10 to 60 years ago we were in writing & told quite the opposite. This is confirmed by the 2 prior airport managers before this debacle began buy the newer administration.

Evidently similar things are happening throughout the US. Including Bend Oregon, Clarke County, Nevada. To name just a few. It’s like a virus spreading around the nation

[MikeOH]

@FastGlasair

Well, that helps...a little.  I'm still not understanding this ruling...it sounds like the city can't somehow blame/involve/?? the FAA in regards to revisionary language in leases?  So, what does that mean/do/help?

From what I understand you wrote, the leases are expiring on the LAND, the airport/city is trying to renew those leases with a revisionary clause and owners aren't signing (don't blame them).  Is that correct?  If so, does this ruling actually PREVENT the airport/city from inserting the revisionary clauses?  It didn't sound like it.  So, how does this help?

What happens to the hangars if the owners do not sign a new lease either with, or without, the revisionary clause?

Still confused in SoCal

[FastGlasair]

3 minutes ago, MikeOH said:

What happens to the hangars if the owners do not sign a new lease either with, or without, the revisionary clause?

That's what our lawsuit is about. 

Many airports have tried to blame the FAA for adding the reversionary language, saying they had no choice.

[PeteMc]

5 hours ago, FastGlasair said:

Bottom line, the only limits by the FAA are that each lease duration cannot exceed 50 years (without prior FAA permission) and that subsequent lease renewals can again not exceed 50 years. Nothing indicated by the FAA to deny or limit any subsequent renewals.

I'll wait for one of the Lawyers here to decipher the original post of what CA is doing.  But @FastGlasair's post is your basic US Gov policy...  They do not want to give NON ENDING leases to anyone on a property where they are also involved in the land/space.  They're just saying they want an end where, IF NEEDED and NOT MANDITORY, there is a way out for them.  They are NOT say you can't renew forever, they just want the "breaks" every so often (50 years in this case) to be able to say "we're out!"

 

[Z W]

This seems to be a copy/paste of an email from someone at AOPA.  Can you post the actual Part 16 ruling by the FAA, if there is one?  Or if you have the docket number, that would work.

I'm interested in this topic but what is in here is not something that can be evaluated or understood.

[midlifeflyer]

I haven’t read the case itself, but if the post is accurate it makes sense.

Airports receiving federal funding have to meet a series of requirements, called “grant assurances.” There’s a whole series of them. Non-discrimination and fair labor standards are among them. If you want to get seriously into the weeds, there’s the almost 700 page AC 5190.6B airport compliance manual.

The one being discussed here comes down to, .don’t give airport property away.” That’s why airport property is leased, not sold. The compliance manual requires the airport have the right to get the property back (“reversion”) and that the property be leased for fair market value, while allowing a lessee hangar builder a return on investment. The net result is this language in the compliance manual:

So, most airport ground leases are limited. Most common provisions I’ve seen have an initial term, plus one or two renewals at the tenant’s option, with the total not exceeding 50 years.

But the key is that the airport has the *right* to terminate. There’s nothing saying that the airport and an existing tenant can’t negotiate a new lease when the old one ends. Or even go month-to-month.

Sounds like the lawsuit was claiming that the airport must take the property back and can’t allow the tenancy to continue. I would expect that position to lose and don’t see anything particularly noteworthy.

[midlifeflyer]

On 12/21/2023 at 2:55 PM, FastGlasair said:

In this complaint from a former part time airport manager against the city he worked for (as I read it), he felt that because the City was not enforcing or requiring reversion, the City was in violation of grant assurances. The findings and conclusions of this Part 16 complaint make abundantly clear that the FAA does not require reversion. Period.

I looked further and I'm confused.

If what you received is about the Clarke v. City of Alamogordo case, it's hardly new news. It was decided 17 years ago in 2006. And, while there is a lot of stuff going on and a lot of issues dealt with in its 38 pages,  it definitely does not say that reversion is not a grant assurance requirement.

What it says is more in line with what I thought it would say. 

Perhaps there's is more information, it's talking about a different case?

 

[Schllc]

So is the relevant part of this about the airport seizing the improvements without compensation to the party who built on the lease?

our airport has clearly noticed all property owners that if they deny the lease renewal they will not pay us for the improvements. 
it has never happened at this airport, but they make sure it’s understood…

[midlifeflyer]

Just now, Schllc said:

So is the relevant part of this about the airport seizing the improvements without compensation to the party who built on the lease?

our airport has clearly noticed all property owners that if they deny the lease renewal they will not pay us for the improvements. 
it has never happened at this airport, but they make sure it’s understood…

That part is a standard provision in commercial leases. Bank leases land for a new branch. Builds the branch. Lease says at termination, the building and all improvements belong to the landowner.

[FastGlasair]

23 minutes ago, midlifeflyer said:

Perhaps there's is more information, it's talking about a different case?

No, this is about general situations happening all across the country, often Airports management blaming the FAA for "making/requiring" airports to add reversionary language (or even require enforcement if they have it) of this language to leases, both new leases and renewals. The ONLY FAA requirements are leases should not normally exceed 50 years per issuance or for any additional renewal(s). The airports can't blame the FAA for airport breaches of previous leases or renewals, only contract laws would apply. If building a new hangar and reversionary language is included, nothing illegal about that if you agreed too it. You have no recourse at that point. You accepted the terms of the contract.

[Schllc]

2 minutes ago, midlifeflyer said:

That part is a standard provision in commercial leases. Bank leases land for a new branch. Builds the branch. Lease says at termination, the building and all improvements belong to the landowner.

I would submit that is a different arrangement, and not really analogous.
The airport doesn’t finance anything, the developer is not compensated nor are they provided any discount for developing the property.  Furthermore, the bank willing opts to lease instead of purchase. Most people who build on airport land would prefer to own the dirt, but this isn’t an option. 

[midlifeflyer]

1 minute ago, FastGlasair said:

No, this is about general situations happening all across the country, often Airports management blaming the FAA for "making/requiring" airports to add reversionary language (or even require enforcement if they have it) of this language to leases, both new leases and renewals. The ONLY FAA requirements are leases should not normally exceed 50 years per issuance or for any additional renewal(s). The airports can't blame the FAA for airport breaches of previous leases or renewals, only contract laws would apply. If building a new hangar and reversionary language is included, nothing illegal about that if you agreed too it. You have no recourse at that point. You accepted the terms of the contract.

Yep. Accepting the lease is the contract. But for the leases to be approved the Compliance Manual says it must at some point within 50 years, give the airport the right to take the property back. If the airport is saying they “must” take the property back as opposed to voluntarily entering or extending the lease, it is incorrect.

[midlifeflyer]

1 minute ago, Schllc said:

I would submit that is a different arrangement, and not really analogous.
The airport doesn’t finance anything, the developer is not compensated nor are they provided any discount for developing the property.  Furthermore, the bank willing opts to lease instead of purchase. Most people who build on airport land would prefer to own the dirt, but this isn’t an option. 

It’s not an option in my bank situation either. And the bank gets no compensation for the cost of the building unless it successfully negotiates for it. BTDT. In the airport situation, the owner can’t sell the property absent faa OK.   In the bank situation, the owner chooses not to sell the property. Thats the only difference.

[FastGlasair]

2 minutes ago, midlifeflyer said:

Yep. Accepting the lease is the contract. But for the leases to be approved the Compliance Manual says it must at some point within 50 years, give the airport the right to take the property back. If the airport is saying they “must” take the property back as opposed to voluntarily entering or extending the lease, it is incorrect.

If you are familiar with Mike Patey (of some aviation fame), his project of elite hangars at Spanish Fork, Utah airport that receives FAA grant assurance money. They are offering an initial 50 year lease term with the cities option for additional renewal(s) or alternatively purchase the hangars back at fair market value at the end of the first 50 years, or possibly even at a much later time.

[Schllc]

2 minutes ago, midlifeflyer said:

It’s not an option in my bank situation either. And the bank gets no compensation for the cost of the building unless it successfully negotiates for it. BTDT. In the airport situation, the owner can’t sell the property absent faa OK.   In the bank situation, the owner chooses not to sell the property. Thats the only difference.

The compensation the bank gets is favorable lease terms from the owner. If it wasn’t a better deal than owning and building they wouldn’t agree to the terms. 
the airport, at least here, doesn’t offer anything I’d consider favorable. 
A 25 year lease on a half acre parcel is about a million dollars up front, and 5k monthly. 
your improvements are diminished year over year due to the expiring lease term which cannot be guaranteed renewable. 

[midlifeflyer]

1 hour ago, Schllc said:

The compensation the bank gets is favorable lease terms from the owner. If it wasn’t a better deal than owning and building they wouldn’t agree to the terms. 
the airport, at least here, doesn’t offer anything I’d consider favorable. 
A 25 year lease on a half acre parcel is about a million dollars up front, and 5k monthly. 
your improvements are diminished year over year due to the expiring lease term which cannot be guaranteed renewable. 

Obviously, the bank has a bit more bargaining power and decides the lease is favorable. Probably for multiple reasons.. Same for multiple relationships I’ve see. Prime location. Expectation of income over the course of the contract. The best for the lessee are new shopping center leases where there’s rent credit for certain infrastructure improvements (“tenant finish”). The hangar builder has less options, but ultimately makes the choice that a lease is worth it despite the reversion. OTOH, the airport wants federal funding.

I’m not excusing or approving of the situation. Just trying to explain what it is.  And that the case mentioned doesn’t change anything as far as I can tell. 

[midlifeflyer]

14 hours ago, FastGlasair said:

If you are familiar with Mike Patey (of some aviation fame), his project of elite hangars at Spanish Fork, Utah airport that receives FAA grant assurance money. They are offering an initial 50 year lease term with the cities option for additional renewal(s) or alternatively purchase the hangars back at fair market value at the end of the first 50 years, or possibly even at a much later time.

I haven’t and won’t comment on someone’s description of a lease rather than the words in the paper. But renewal at the city’s option fits the overall concept - the right to take it back. A provision to purchase the improvements is a subject of negotiation and is probably a good business decision for that airport. 

[ttflyer]

I'm not clear why the FAA is even involved in these discussions (whether by the airport or the tenets).  Other then the well plowed ground about the 50 year lease requirement, this is between the land owner (the airport) and the tenet.  The airport wants ownership of the hangar at the end of a specified time.  Why wouldn't they?  It's their land. This is normal for lots of restate deals where the land ownership does not transfer to the entity leasing and making the improvement on the land.

For example we paid to build a very nice (multi million dollar) corporate hangar at our airport.  We lease the land at a very low sq/ft rate but pay nothing for the building for twenty five years.  At the end of 25 years, the building becomes the property of the airport and if we want to stay there, we will have to pay them a very hefty building sq/ft rate for the privilege.  This is completely normal...

And I'll add not exclusive to airports.  It can be any lease where land ownership does not transfer.

[FastGlasair]

56 minutes ago, ttflyer said:

For example we paid to build a very nice (multi million dollar) corporate hangar at our airport.  We lease the land at a very low sq/ft rate but pay nothing for the building for twenty five years.  At the end of 25 years, the building becomes the property of the airport and if we want to stay there, we will have to pay them a very hefty building sq/ft rate for the privilege.  This is completely normal...

And I'll add not exclusive to airports.  It can be any lease where land ownership does not transfer.

All well and good when it's upfront, no one is forcing you, if you don't like it, you don't do it. But changing the contract later when the original contract gives you "first right of refusal on this lease". It's quite a different story.

[midlifeflyer]

2 hours ago, FastGlasair said:

All well and good when it's upfront, no one is forcing you, if you don't like it, you don't do it. But changing the contract later when the original contract gives you "first right of refusal on this lease". It's quite a different story.

In all cases, it comes down to, what does the lease say? In this case, what does the right of first refusal say? Most common would be one which says the landlord will notify the tenant if the landlord receives a written expression of interest from someone to lease the property at the end of the term. The tenant is given a certain amount of time to agree to match it. Agree and it's yours. Don't and the landlord is free to lease it on those terms to the new guy.

If that's what it says, the problem isn't being "up front." It's very "up front." It means exactly what it says.  The problem is two-fold. One is that many hangar builders do not have experience with commercial ground leases, so most of the language is meaningless to them. The bigger problem is not understanding what it potentially means and getting a big surprise when the airport gets busier, hangar space becomes much more valuable, and someone else is willing to pay top dollar.  How big a surprise may depend on whether you have a rent adjustment clause and, if so, what it said. The other potential problem (and a nice mess for litigation) is when the landlord is sloppy about how they do it. 

[midlifeflyer]

3 hours ago, ttflyer said:

I'm not clear why the FAA is even involved in these discussions (whether by the airport or the tenets). 

Actually the FAA is not involved in the discussions. In fact, not being involved is what most of these decisions make a point of saying exactly that - they don't get involved in contract negotiations or contract disputes. What the FAA describes its job as is:

The Airport Compliance Program does not control or direct the operation of airports. Rather, it monitors the administration of the valuable rights pledged by airport sponsors to the people of the United States in exchange for monetary grants and donations of Federal property to ensure that the public interest is being served.

Basically, the FAA provides funding for airport improvements and has rules about what airports must do to be eligible for the grants. Like a lot of this stuff, the rules are a combination of federal statutes, regulations and guidance documents. Ultimately it comes down to , you want my money; here's the rules on using it. 

The way the FAA gets involved in these disputes is a "Rule 16" complaint.  It's FAR Part 16.  Someone complains to the FAA that the "grant assurances" are not being met. If successful, the FAA has some remedies, most of which hare tied to the funding (FAR 16.109), so even if he wins he might not get anything himself out of it. 

In the case  cited by @FastGlasair, the Assurances Clark complained about were that the airport was in effect alienating the land by renewing leases, giving preferential economic treatment to some airport users over others, and not charging rents to geared toward making the airport self-sustaining.

 

[Z W]

I still wish someone would post the name of the new decision, if there is one.

I have a real estate law practice and have spent some time in this area.  The FAA opinions are often necessary to share with the airport authority to get them to allow development.  You may be dealing with a small group of city council members who are not experienced with complicated commercial ground leases.  Their attorney may have never seen the issue either.  When approached by someone who wants to build a hangar, they may think they need to "negotiate strongly" and insist on short-term leases and high ground rents that make it impossible to build economically.  They tend to quickly forget they're getting an improvement that should last 100+ years built at their airport at no cost to them.  

Lately I've been seeing some airport authorities push back for any lease terms beyond 20 years.  I've had an "aerospace engineer" tell me the FAA requires payment of "fair market value" for ground rent, to the tune of several thousand dollars per year, under a building built by the tenant (they do not, it says so right in the FAA's published guidelines).  This type of thing is really holding aviation back and is the reason so many airports have vacant land sitting there unused while pilots have trouble finding hangar space.

This is one area of aviation law where I can say the FAA really helps the pilots.  All their guidance basically says, don't give the ground away, but otherwise, let people build hangars and they don't want to get involved, other than approving the location and height to make sure it's not an obstacle to takeoffs and landings. 

The Part 16 enforcement cases I've seen even all make sense - they will get involved if the airport is leasing ground to non-aviation businesses when there are aviation businesses who want the space. 

The email quoted above sounds like this decision would be another good decision for pilots wanting to build hangars.  But you can't really rely on someone else's summary of an opinion.