In a stunning reversal the Federal Aviation Administration recently did a 180° reversal of its position to enforce the FAA’s Grant Assurances requiring the Santa Monica Airport (SMO) to remain open for some additional 11 years.
As reported in the AOPA newsletter of February 2, 2017, “A deal between the FAA and the city of Santa Monica, California, became official Feb. 1 when the Honorable John F. Walter of the U.S. District Court for the Central District of California signed a detailed stipulation and order/consent decree that requires the city to keep Santa Monica Municipal Airport open and operating with reasonable services until Dec. 31, 2028, upon which time it has the option to close the facility.”
To say that the industry was shocked would be an understatement. As far as we can determine this has either never occurred before, or if a similar FAA ruling was issued long ago no one can recall such a ruling truly against the FBO industry.
So what can likely be the effect of this shocking reversal and ruling by the FAA? Well, if you’re an FBO owner or FBO chain like Signature Flight Support, Atlantic Aviation, Sheltair, and the others you might now wonder if your lease term with the airport, say 20, 30, or 40 years or more could be trumped by the airport deciding to bend to the occasional vocal minority of its constituents complaining about airport noise, congestion, or danger from airport accidents and move ahead with closing the airport much as the city of Santa Monica done.
Don’t think this is a far-fetched possibility. FBO Advisors LLC was involved in a similar situation approximately 15 years ago in Stuart Florida where the newly elected county commissioners made good on their campaign promises to vocal constituents to close the “noisy” Stewart Florida airport. FBO Advisors was retained to assist the
airports FBO operators in making their case to the county commissioners against closure. The process was long, expensive, and rife with politics as you can imagine. No matter that the Stuart Florida airport contributed to the economic base of this somewhat sleepy County, the newly elected county commissioners, one in particular who rode to office on the campaign promise to close the airport, were unsympathetic to put it gently to the benefits that an airport and FBO’s serve to the local community.
Back to the potential impact on existing FBO owners such as Signature Flight Support, Atlanta Aviation, etc. Whereas all of them made their decision to purchase a particular FBO at a particular airport based upon the business the FBO (via the airport) generated and the length of the concession granted in terms of lease term, say 30 years or 40 years, these FBO owners conducted extensive pro forma’s and amortization calculations to justify their initial investment.
So it’s not difficult to understand the potential devastating effect this shocking FAA ruling can have on the investment made by these FBO owners and FBO chains. If your pro forma was based upon a 30 year or 40 year amortization schedule and analysis and now you’re faced with a situation like in Santa Monica that Atlantic Aviation is facing, your recapture of your investment originally based upon say 30 years for example has now been shortened by 50% to only 15 years instead of the original 30 years you modeled. The word shocking is appropriate.
Do the FBO’s and FBO chains that might face a surprise accelerated shutdown of the airport or early termination of their lease have any options or redress? That’s yet to be determined and certainly the attorneys on both sides of the issue are going to have a field day, and an expensive one at that.
While we confess not to be attorneys, it strikes FBO Advisors that the early termination of a lease due to the city or county’s desire to close an airport is effectively a “condemnation taking” by the government
and if our conclusion is correct at the very least the FBO’s affected (Atlantic Aviation in Santa Monica for example) perhaps have a condemnation claim, a government “taking” as is described in some leases, and hopefully they can receive significant monetary damages from a court ruling in their favor.
At least that’s better than nothing.
Because of this shocking FAA ruling, fasten your seatbelts if you’re an FBO owner because you now have something new to worry about!
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