Part 1 of 2
FBO Advisors, LLC background is heavily real estate (40+ years) and we have combined that knowledge and experience in applying it to our FBO and airport consulting activities over the years. We believe this is one of the factors why our consulting business, FBO Advisors, LLC has been so successful over these 40 years. We understand the real estate component of an FBO operation and sale transaction. So when this news that a private entity was building a new commercial terminal at Paine Field in Everett (north of Seattle) Washington, it piqued our interest.
- How was this real estate deal made?
- Why did the airport choose to go this direction, a private partnership?
- How did the private developer financially structure the 50 year lease, and what’s his return?
- Does this have any application to FBO owners at their airport for their private facilities?
In attempting to answer these questions (the first two questions shown above in this Part 1) we can only surmise some answers as few businesses care to share the intimate financial details of how they make transactions such as this work financially. (We have requested the public documents from the airport so that we can be more fully informed, but we are forced to make generalizations and hypothesize how this transaction came to be and makes sense for all parties.)
It’s no secret to anyone that local governments are in a cash squeeze. The two main contributors to a local governments coffers are mostly real estate taxes and sales taxes. Of course there is some government funding but with the government in a deficit and the confusion in Washington it’s difficult to predict any meaningful long going federal government contribution. So the local government is stuck with real estate taxes and sales taxes and those have been stagnant and/or in some cases declining. So when a local government, in this case a suburban airport, has a capital requirement a private entity can perhaps be the answer. This is obviously what happened at Paine Field.
We have personal knowledge, historically, of Paine Field having been engaged to conduct consulting work for the FBO years ago. And while our experience is dated we still understand the basics of that market. Paine Field is mostly a general aviation airport together with the famous Boeing aircraft factory where a large number of Boeing jets are successfully produced, tested, and sold from. It has a rich, rich history. And Paine Field’s past history, a military field, with long commercial 9,000 foot runways made it an excellent candidate for Alaska Airlines, Southwest Airlines to consider new service from this nearby Seattle suburb.
The only “problem,” no commercial terminal or facilities to serve commercial aviation. Lack of funds on the local airport level and step in visionary Brett Smith.
To delve deeper into this fascinating transaction we reviewed a recent AP news story.
“Smith is the founder and chief executive officer of Propeller Investments LLC., which secured a 50-year agreement with Snohomish County three years ago through a local subsidiary to build and operate the terminal in Everett, Washington. Operations are due to start in the fall, with announcements already made from Alaska Airlines, Southwest Airlines and United Airlines for up to 24 flights per day.”
“Brett Smith’s company is investing about $40 million to build the terminal. In the process, he wants to increase U.S. acceptance of a global trend: Putting commercial airport terminals in the hands of private companies instead of the government.”
“The deal stands out for U.S. airports because it’s structured as a public-private partnership, a model that divides the responsibilities of owning and operating public assets between governments and the private sector. It’s also notable because Propeller has no experience in building or operating airport terminals.”
It’s also notable because Propeller has no experience in building or operating airport terminals.
That certainly is understandable. The U.S. is essentially devoid of examples of airport privatization. Recent attempts or conversations such as at Westchester (HPN) and Morristown (MMU) have faced opposition from local constituents and airport and FBO users and owners.
The main argument against the privatization of airport facilities and airports in general from the users and FBO owners is that (in theory), the government does not collect rents at full market rent levels which a private sector operator most certainly does. Translation: rents will go up! The private operators argument is they will be providing new facilities and new amenities that the government owner and operator lacks the expertise to create let alone efficiently operate. This is generally a true statement as well. So somewhere in the equation it’s a balance between finding the capital funds to provide the needed new facilities versus the increased costs (think rent) that the FBO owner and airport users will be forced to bear. This is the basis for airport and FBO users opposition to airport privatization.
The Everett project contrasts with about 500 commercial airports across the U.S., where local governments own and operate most of the facilities. Those airports have relied on decades of federal funding and passenger fees to help finance infrastructure improvements. But traditional funding sources have remained flat since the turn of the century, failing to keep up with increased air travel demand as we mentioned earlier.
Airport privatization proponents point to efficiencies and variety of passenger amenities like stores and restaurants found in major European hubs such as London’s Heathrow and Frankfurt Airport, both of which are run by companies and rated among the 10 best airports in 2018 by Skytrax, an independent agency that ranks airports and airlines based on traveler reviews. No U.S. airports made the list this year according to the AP.
It is reported that almost half of airports in the European Union are either “fully” or “partially” private, according to a study by Airports Council International, an advocacy group made up of airport operators. It estimates U.S. airports will need to implement $100 billion of infrastructure works by 2021 to accommodate passenger and cargo volume growth.
What we have in the US is an aging infrastructure of airports in the U.S.. Partnerships with the private sector claim to help improve facilities and competitiveness.
We believe that answers the first two questions we posed at the start of this conversation:
How was this real estate deal made?
Why did the airport choose to go this direction, a private partnership?
About the privatization of airport facilities at smaller airports.
In our forthcoming Part 2 we will discuss:
- How did the private developer financially structure the 50 year lease, and what’s his return?
- Does this have any application to FBO owners at their airport for their private facilities?
Serving the FBO industry for more than 40 years