If you build that foundation… the business foundation, and the experience foundation, then the building won't crumble.—Henry Kravis
Like most FBO owners and operators, you probably wonder what your FBO is worth. To answer this question, you should start by asking another important question: What is my lease worth? That’s because they are inherently linked.
If you are thinking about capitalizing your investment or looking to sell your business, the first thing a banker or a buyer will assess is the value of your lease, especially the length and terms.
That’s why it’s such a critical component when figuring the intrinsic value of your FBO. You may have just put millions of dollars in building a fantastic infrastructure, but unless you have negotiated a long enough lease to amortize your investment, it’s easy to get upside down with little or no wiggle room.
With a long-term lease of at least 20 or more years, you have great value. However, if you have less than five years you have little or no value.
(Side Note: One of our most popular courses we conduct at the NATA FBO Success Seminar is “Developing a Favorable Airport Lease”. During this session we discuss many of the important elements of an FBO airport lease agreement. If you’re interested, the next one is in Atlanta November 8, 9 and 10. Contact NATA at www.nata.aero and look under Events, or call 800-808-6282)
For the purpose of this blog, let’s hit a few of the highlights we discuss in our seminar.
Length of Lease
First and foremost, the longer term you can negotiate the better. Let’s say you have negotiated a 20 or 25 year lease. You should also negotiate at least one additional option period of five years; two option periods would be even better. The goal should be to have at least 30 years on your lease including the option periods.
It is not unusual to get longer terms at some airports for large investments in facilities. I’ve seen leases of 40 and even 50 years. ‘The Longer the Better’ should be your mantra. When you are negotiating lease extensions, try to get at least back to this sort of term. You’ll need it to finance capitol projects and have a reasonable depreciation term.
However, in order to get this type of long-term lease, be prepared to invest in facilities and/or upgrades. Traditionally, the length of term is commensurate with a larger capital investment.
Big/Commercial Airport Lease Terms
So why are the big airports giving only five year leases and reliever and general aviation (GA) airports giving longer term leases?
During the recently held Airports Council International (ACI)–North America meeting in San Diego, there was a session titled “Fixed Base Operators and Airports—Strategies for a More Successful Partnership”. A detailed discussion was conducted concerning lease term length. It seems there have been some divergent opinions between some airports and FBO’s concerning lease terms.
At a few large airports, five year leases are all that have been granted. Some of the new FBO leases, included existing facilities, have high rental rates and gross revenue fees being paid to the airport authorities. In many of these cases, renovation of existing facilities was all the capital investment required by the FBO. Not surprisingly, General Aviation activity at these selected airports was not the priority for the airport authority. That’s because commercial airline operations took precedent at the vast majority of the operations.
In all appearances, both the FBO community and the airport community had a very open and fruitful discussion at the ACI conference. The results being that both parties appear to understand the lease term issues from each other’s perspective.
For the predominantly General Aviation airport sponsors, both parties understand that to get infrastructure built, a long-term lease is required. Fortunately, this was not difficult to appreciate.
During a recent meeting I had with one Airport Director, he fully understood the issues for the FBO. He realizes that for the FBO to be successful--to provide the high quality services that the airport and customers desire and make a reasonable profit--the FBO must have a good lease with a good term.
This practice will attract superior FBO operators who can make capital investments in hangars, new business operations and employees.
The All-important Minimum Standards Clause
This same airport director also mentioned that one of his first priorities, before commencing lease negotiations with an FBO, was the development of new up-to-date Minimum Standards provision to be inserted into the new lease.
I’m sure that many (most) FBO operators have Minimum Standards written into their lease—at least we hope you do. Minimum Standards are your basic protection for your business. In addition to your lease, they allow your FBO to operate within defined parameters.
Minimum Standards allow you to know
- What services you must provide
- What services you may provide
- What defines a full service FBO
- What your investment and facilities requirements must be
More than what defines your business, Minimum Standards protects your business from inequitable competition. If another FBO wants to operate at your airport, they must provide the same services, the same investment and the same facilities.
Since 1938, Congress has passed laws to improve safety and efficiency at Airports by, among other things, promoting competition among aeronautical users. This includes FBOs.
In order to promote competition, the Sponsor Assurances lease provision prohibits any party from obtaining or maintaining an exclusive right to perform services at an airport, and requires Airport Authorities (also called Sponsors) to not unjustly discriminate against aeronautical users of the airport. Minimum Standards, therefore, are your safeguard. It allows for fair competition and makes sure that your FBO will continue to be successful.
Other Lease Issues
These two issues are just examples of important items an FBO lease covers. Here is a list of other issues we cover at our FBO Success Seminar regarding leases:
- Term and option years
- Operating rights
- Payments: rental, gross revenue and out years to include escalators
- Building/ramp maintenance responsibilities
- Assignment-sale clause
- Termination-from FBO and Lessor
- Non-discrimination clauses
- Improvements, new buildings, renovations
- Insurance, Indemnity, Hold Harmless
- War & National Emergency
- Right of Entry
- Environmental Liability
The airport management and the FBO owners make success together for their mutual benefit. As we mentioned in our premise, the lease is your foundation, your value in the business and ultimately your protection.
If you have a particular question or would like to discuss a lease issue, please let me know. We would like to hear from you. Contact me at email@example.com
John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.