The FBO Office Lease Agreement, Another Golden Egg

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Don’t look now, but there are two golden eggs in your grassy nest next to your fuel farm. The first one is your hangar lease agreement which we discussed in the last blog post. The second golden egg represents your office lease agreements which also deserve your undivided attention. 

Just like hangar lease agreements, office space should provide your FBO enterprise with recurring, unabated income. Written properly, an office lease agreement will provide a good source of passive revenue for years to come.

But there are pitfalls that you must avoid in securing a profitable office lease agreement. Here are a few to watch out for.

1.     Don’t combine your office lease in with a hangar lease. Make it a separate, stand-alone lease that compliments a hangar lease for a flight department but stands on its own merits.

Remember, office space is premium space that costs more to finish out. It includes heating and cooling, plumbing for hot and cold water and lavatory facilities. Also, tenant requests for finish-out upgrades should be priced into the cost-per-square-foot.

2.     Just like your hanger leases, don’t devalue your office space based on declared potential fuel sales. If a tenant wants to negotiate a deep discount on the cost of office space as well as hangar space, based on promised future fuel uplift, you should hold the tenant to measurable fuel uplift goals and put it in writing.

3.     Any fuel discounts should be specified as a certain amount off the posted retail fuel price. As we know all too well, the cost of Jet A and Avgas have been extremely volatile, so protect your margin and put it in writing.

4.     Know the cost of your facilities and value your office space based on a true cost-per-square foot.

5.     Use the right formula when writing your office space rental agreement. For instance, a triple-net formula has the tenant or lessee agreeing to pay for all real estate taxes, building insurance and maintenance. These are in addition to any normal fees expected under a lease agreement to include rent and utilities. In addition, the tenant can be responsible for a portion of costs associated with the upkeep, maintenance and repair of any common areas.

The second formula is to roll or bundle taxes, utilities, repair and maintenance in one simple rental fee per month. This is a common method employed where there may be multiple offices for lease with common areas, to include elevators and lobbies, with no separate meters for electricity and water.

Whatever formula or approach you take, keep in mind that the FBO economic landscape has changed. Fuel margins are under a lot of pressure to cover costs of doing business. The reality is that fuel margins can no longer pay for everything. For instance, insurance rates have steadily increased as well as the cost of labor. In addition, FBOs are paying more for traditional outsourced services.

Again, do your homework and value your office space based on true cost-per-square-foot. If you have a fairly active tenant who requires a lot of aircraft movements, your labor cost will be a factor.

Lastly, as discussed in a previous blog regarding hangar lease agreements, office lease agreements are also a sublease and must conform to your master lease agreement with the airport authority. Therefore, it is the right of the signatories of office subleases to know the contents of your master lease in order to comply with its contents.

In addition, any terms or rate increases outlined in your office sublease agreement should be similar to your master lease and the term of the sublease cannot be longer than the master lease term.

In our next blog post, another golden egg appears in your grassy nest that represents additional recurring revenue through writing an effective tie-down lease agreement.

ABOUT THE BLOGGERS: John Enticknap (404-867-5518) has more than 35 years of aviation fueling and FBO services industry experience and is an IS-BAH Accredited auditor. Ron Jackson (972-979-6566) is co-founder of Aviation Business Strategies Group (ABSG) and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training.

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