Table of Contents

Introduction

Section 1

Section 2

Section 3

Section 4

Section 5

Section 6

Section 7

Section 7c

Section 8

Appendix

Letter

Management Audit of the Airports Division

Airport Division Audit
12/11/99

3. New Hangar Construction

• Additional occupied hangars would provide more revenue for the Airport Enterprise Fund.

• Once the hangars are paid off, they could provide as much as $771,000 in additional annual revenue to the Airport Enterprise Fund.

Survey Results

According to a survey of general aviation airports in California conducted by the Management Auditor, 58.8% of the airports surveyed reported that they planned to construct hangars in the near future, including almost all of the San Francisco Bay Area airports that responded. Furthermore, all of the San Francisco Bay Area airports that responded to the survey reported a waiting list for hangars. This, combined with the fact that there is currently a waiting list of 114 individuals for hangars at Reid-Hillview suggests that considerable demand exists in the San Francisco Bay Area in general, and in Santa Clara County in particular, for additional hangars.

As discussed in Section 1 of this report, it appears that leasing hangars directly is much more profitable for airports than simply collecting lease payments from FBOs who themselves lease hangars. The hangars at Palo Alto Airport, for example, provide only a fraction of the income obtained from the hangars leased directly by the Department at Reid-Hillview Airport. The survey results reflect the same pattern.

Reid-Hillview Airport

Department staff have completed an analysis of the costs of constructing 76 new hangars at Reid-Hillview Airport, each with a concrete foundation and electrical service, approximately 1,298 square feet in size. Department staff report that 76 is the number of hangars of that size able to fit on the available land at the airport. The analysis concluded that the cost of constructing the hangars would be approximately $4,243,000, or $43 per square foot. The proposed hangars would be constructed on existing tie-down spaces, with no increase in the overall based aircraft capacity of Reid-Hillview Airport.

Based on discussions with staff at other airports who are constructing or have recently constructed hangars, with a hangar manufacturer and with staff of the CalTrans Airport Loan Program, it appears that the costs of constructing the proposed hangars at Reid-Hillview Airport estimated by Department staff are quite high. Airport staff at Watsonville, for example, have reported that the Tee hangars recently constructed there cost in the neighborhood of $22 per square foot. Staff at the CalTrans Airport Loan Program have indicated that the hangar construction projects they finance cost in the neighborhood of $20 per square foot. Staff at Nunno Corporation, a hangar construction company, have indicated that a cost of $43 per square foot is extremely expensive, and related that a bid was recently completed for hangar construction at Sonoma County Airport with a cost of approximately $28 per square foot, including extensive utility work. Accordingly, a cost of $30 per square foot appears to be a more reasonable, but still conservative, estimate for the costs of constructing hangars of the type proposed at Reid-Hillview and South County. Based on $30 per square foot, the total cost of hangar construction would be $2,959,500, $1,283,500 less than the estimate prepared by Department Staff. The tables below include financing details for this lower construction cost.

The following table details the financing of the proposed new hangars if they were to be rented at the same rate as the current rate for the Old County Hangars, $298 per month. There are two financing scenarios. The Department could obtain a loan and pay a fixed amount each month (Fixed Payment) as with a standard residential mortgage, diverting any subsequent additional proceeds from cost of living adjustments or other lease increases to the Airport Enterprise Fund.^* Alternatively, the Department could utilize the full lease proceeds in future years to pay down the balance of the loan (Accelerated Payoff). Both scenarios assume an annual lease adjustment of 3% and an interest rate of 4.8%, the rate currently available from the CalTrans Airport Loan Program. In light of the current waiting list, 76 hangars appears to be a reasonable number to construct with the expectation that they will be occupied immediately.

Table 3.1

Reid-Hillview Airport

New Hangar Financing at Current Old County Hangar Rates

	Department Estimate		Auditor Estimate
	Fixed	Accelerated	Fixed	Accelerated
Interest Rate	4.8%	4.8%	4.8%	4.8%
Amount Financed	$4,243,000	$4,243,000	$2,959,500	$2,959,500
Initial Monthly Payment	$22,648	$22,648	$22,648	$22,648
Last Monthly Payment	$22,648	$38,557	$22,648	$32,291
Additional Revenue Resulting from Difference Between Debt Service Payments and Inflation-Adjusted Lease Amounts1	$4,407,894	$0	$978,098	$0
Years to Payoff	29	20	15	13
1For accelerated financing, all additional revenues from cost of living adjustments would be used to make early debt service payments.

As illustrated in the above table, using all of the lease proceeds in future years to make debt service payments can make a considerable difference in the duration of the debt service. In the case of the Department’s cost estimate, the term of the loan drops from 29 to 20 years. However, as will be explained in more detail later, such a payment strategy deprives the Airport Enterprise Fund of revenues that could be obtained from the proposed hangars before their debt is retired.

As detailed in Section 2 above, it appears that the County can charge more for the Old County Hangars than the current rate as specified in Table 3.1. The following table details the financing of the proposed hangars at the proposed new rates equivalent to similar transportable hangars, as explained in greater detail in Section 2.

Table 3.2

Reid-Hillview Airport

New Hangar Financing at Proposed Old County Hangar Rates

	Department Estimate		Auditor Estimate
	Fixed	Accelerated	Fixed	Accelerated
Interest Rate	4.8%	4.8%	4.8%	4.8%
Amount Financed	$4,243,000	$4,243,000	$2,959,500	$2,959,500
Initial Monthly Payment	$27,740	$27,740	$27,740	$27,740
Last Monthly Payment	$27,740	$43,218	$27,740	$37,280
Additional Revenue Resulting from Difference Between Debt Service Payments and Inflation-Adjusted Lease Amounts*	$2,287,010	$0	$729,683	$0
Years to Payoff	20	16	12	11
*For accelerated financing, all additional revenues from cost of living adjustments would be used to make early debt service payments.

As can be seen in the table above, charging a higher rate for the Old County Hangars, and therefore making larger payments on the construction loan, results in considerably fewer years of debt service. Fixed Payment financing of the construction costs estimated by the Department would require 20 years, instead of 29 as detailed in Table 3.1, and Fixed Payment financing of the construction costs estimated by the management auditor (at $30 per square foot) would require 12 years, instead of 15 as detailed in Table 3.1.

Given that the proposed hangars are considerably larger than the Old County Hangars, 1,298 square feet versus 934 square feet, it appears that the County could charge more per month for the proposed new hangars than the rate proposed to be charged for Old County Hangars, as detailed in Section 2. However, larger hangars generally are less expensive per square foot. As a result, the proposed rental rate for the new Reid-Hillview Airport hangars reflects a lower cost per square foot ($0.32 versus $0.35) but a higher total cost per month ($428.35 versus $365). The financing terms under such a higher lease rate are detailed below.

Table 3.3

Reid-Hillview Airport

New Hangar Financing at Proposed Higher Rates

	Department Estimate		Auditor Estimate
	Fixed	Accelerated	Fixed	Accelerated
Interest Rate	4.8%	4.8%	4.8%	4.8%
Amount Financed	$4,243,000	$4,243,000	$2,959,500	$2,959,500
Initial Monthly Payment	$32,555	$32,555	$32,555	$32,555
Last Monthly Payment	$32,555	$46,415	$32,555	$41,239
Additional Revenue Resulting from Difference Between Debt Service Payments and Inflation-Adjusted Lease Amounts*	$1,405,930	$0	$452,809	$0
Years to Payoff	15	13	9	9
*For accelerated financing, all additional revenues from cost of living adjustments would be used to make early debt service payments.

Under the financing scenarios detailed above, the term of payment drops further than in Table 3.2, from 20 years to 15 years for the Fixed Payment financing of the construction costs as estimated by the Department and from 12 years to 9 years for the Fixed Payment financing of the construction costs as estimated by the Management Auditor ($30 per square foot).

As can be seen in the tables above, the advantage of the Accelerated Payoff structure is that it results in a considerably earlier retirement of the debt owed for hangar construction. The advantage of the Fixed Payment financing structure, on the other hand, is that it would provide additional revenue, beginning in the second year, as the yearly inflation adjustment is applied to the lease rates. Given the financial condition of the Airport Enterprise Fund, the Management Auditors believe that the Fixed Payment Structure would be the preferable option, since it provides additional revenue before the debt is retired. As noted above, the additional revenue can be used only for debt repayment and project maintenance. Any additional revenue generated by the project must be kept in a trust account until the loan is paid off. Since the loans are made at below market interest rates, it appears that the County would benefit from keeping any excess revenues from the new hangars in the trust account, where it would earn more interest than the interest charged on the loan.

It appears that at either increased lease rate the construction of hangars at Reid-Hillview Airport would be feasible, however, given the availability of suitable financing and continued demand for hangar spaces.

South County Airport

Roads and Airports Department staff have reported that the area around South County Airport is expected to develop significantly in the future as the business and residential areas of San Jose spread south. Most notably, Cisco Systems has reportedly bought property in the area to construct a new corporate headquarters. Staff expects that the demand for aircraft storage and operations in the vicinity of South County will increase, and allow for development and other revenue enhancing opportunities at the airport, such as an additional FBO and new hangars.

The Department conducted an analysis of construction of hangars at South County Airport, as at Reid-Hillview Airport. The Department examined the cost of constructing a mix of 77 hangars of various sizes, with a total area of approximately 107,900 feet, and estimated the cost of construction to be $4,231,000, or $39 per square foot. The Department selected 77 hangars because that is how many can fit on the airport property without increasing aircraft storage capacity through conversion of existing tie-downs to hangars. As in the case of the Reid-Hillview construction estimate, this cost seems excessive compared to hangar construction at other locations. The financial analysis below therefore also includes an estimate of the Management Auditor for construction costs at South County Airport, equal to $3,237,000, or $30 per square foot.

Additionally, it is not clear that there is sufficient demand to fill 77 hangars at South County with tenants. There appears to be excess demand for hangars at nearby airports, including Hollister, Watsonville and Reid-Hillview, but there is no guarantee of occupancy at South County. The Department should conduct a survey to determine whether sufficient demand exists before commencing construction of the new hangars.

To estimate revenue from the proposed hangars, the Management Auditor examined the proposed rate structure at Reid-Hillview Airport as detailed in Section 2, and applied a similar rate at South County Airport for similar hangars, less a discount to reflect that fact that there is less demand for aircraft storage at South County Airport, because it is a greater distance away from the center of San Jose.

Table 3.4

South County Airport

New Hangar Financing

	Department Estimate		Auditor Estimate
	Fixed	Accelerated	Fixed	Accelerated
Interest Rate	4.8%	4.8%	4.8%	4.8%
Amount Financed	$4,231,000	$4,231,000	$3,237,000	$3,237,000
Initial Monthly Payment	$31,709	$31,709	$31,709	$31,709
Last Monthly Payment	$31,709	$45,209	$31,709	$41,372
Additional Revenue Resulting from Difference Between Debt Service Payments and Annually Adjusted Lease Amounts*	$1,581,705	$0	$687,871	$0
Years to Payoff	16	13	11	10
*For accelerated financing, all additional revenues from cost of living adjustments would be used to make early debt service payments.

As can be seen in the above table, Fixed Payment financing of the proposed South County hangars could be completed in 16 years, based on the Department’s construction cost estimate or, in 11 years based on the Management Auditor’s cost estimate. As is the case with the Reid Hillview Airport Fixed Payment financing, the Fixed Payment financing of the 16-year loan based on the Department’s cost estimate would yield additional revenue, approximately $1,581,705 during the term of the loan and the Fixed Payment financing of the 11-year loan based on the Management Auditor’s cost estimate would yield approximately $687,871 during the term of the loan.

Currently, there is no waiting list for hangars at South County Airport, but it is expected that some of those currently on the waiting list at Reid-Hillview Airport would be willing to locate their aircraft at South County, and that, based on experience at Watsonville Airport, additional individuals would come forward to occupy hangars, once the plan for their construction is made public. Several years ago the Department conducted an informal survey of local pilots to determine demand for hangars at South County Airport, and found strong interest. The Department should conduct a new survey to confirm sufficient interest for the 77 proposed hangars before commencing construction of that number of hangars.

One possibility would be to construct the hangars in two or more phases, proceeding with a subsequent phase only once the previous phase has been leased. This plan would also help to solve a potential financing constraint, in that CalTrans Airport Loan Program staff have indicated that they do not generally finance projects as large as the ones proposed at South County and Reid-Hilllview. If the CalTrans funds were not available, the Department would probably have to pay higher rates on financing the proposed hangars, reducing the economic viability of the projects.

Conclusions

There is currently a waiting list for hangars at Reid-Hillview Airport, and a survey of other airports indicates that there are waiting lists at other San Francisco Bay Area airports, as well. This would seem to indicate that the Department is not meeting existing demand for hangars. Additional occupied hangars would provide more revenue for the Airport Enterprise Fund.

Recommendations

It is recommended that the Roads and Airports Department:

Costs and Benefits

Once the hangars are paid off, they could provide as much as $771,000 in additional annual revenue to the Airport Enterprise Fund.

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Last updated on 3/26/02