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

The land on which the County’s three airports are located include some valuable locations with commercial development potential

5. Commercial Development and Property Management

• The County’s three airport properties contain valuably located land with commercial development potential. Many airports in California lease some of their property to non-aviation commercial enterprises which in some cases generate rental income in excess of their aircraft storage rent and fixed base operator lease income. A survey of ten airports that have actively developed non-aviation commercial activity reported median annual revenues from this source of $733,386 in FY 1998-99. In comparison, non-aviation commercial revenue in Santa Clara County for the same year amounted to only $47,340.

• By promoting non-aviation commercial development at Reid-Hillview and the South County airports, the Department could generate additional revenue without increasing the number of aircraft or operations at the airports. The additional revenue would provide an increased level of reserves and funding for future airport needs and repayment of past General Fund contributions.

A number of regional and general aviation airports throughout California have developed parts of their airport properties to accommodate non-aviation commercial enterprises. The types of businesses found on airport property at the airports surveyed as part of this audit include:

The presence of these type of businesses at the airports surveyed contributes significantly to their revenues and their ability to build up their reserves and invest in improvements to their facilities. Table 5.1 below presents a summary of the annual revenue contribution for Fiscal Year 1998-99 of non-aviation commercial enterprises at ten airports in California. The table presents actual FY 1998-99 revenue from this source, total revenues for the airport, and a brief listing of the types of businesses leasing land or space from the airport.

Table 5.1

Revenue from Commercial Non-aviation Tenants

At Selected California Airports

¹ Based on first 9 months actual revenue from FY 1998-99, annualized for the full year

²Based on FY 1997-98 actual revenue; FY 1998-99 data not available at time of survey

³ Adjusted from $2,643,677 total revenues reported in County financial documents; excludes one-time FAA grant, State funds, and other one-time revenues

As presented in Table 5.1, the median annual revenues at the ten surveyed airports was $733,386, which amounted to 55 percent of median total revenues of $1,530,862 at those airports. The Santa Clara County Airports Division’s revenues from commercial non-aviation sources in FY 1998-99 were only $47,340, or 2.7 percent of total adjusted revenues of $1,752,520.

It should be noted that not all of the other airports surveyed enjoy a high level of non-aviation commercial revenue. The ten airports listed in Table 5.1 were selected from the eighteen airports that responded to the survey because they have significant revenue from this source. The other eight respondent airports reported either no income or income of less than $100,000 per year from this source.

Given the availability of strategically located undeveloped land at the County Airports and the need for increased revenue for the Airport Enterprise Fund, promoting non-aviation commercial development on the County’s airport properties is a sound direction for the Department to take. It would provide a new source of revenue for the Fund without increasing air traffic and it would diversify and stabilize the Division’s revenue sources in the event of a downturn in the general aviation market. While the Palo Alto Airport agreement between the County and City of Palo Alto may limit commercial development at that site, both Reid-Hillview and South County airports have undeveloped land that could potentially be developed for non-aviation commercial purposes.

A review of the experience at other airports that lease land to non-aviation commercial enterprises revealed a mix of business types. As shown in Table 5.1, the types of businesses frequently include commercial offices, golf courses, light industry, car rental agencies, and car dealers. A few of the airports surveyed also lease land to hotels, restaurants, and other retail businesses. Lease provisions vary at the airports surveyed with the most typical arrangement a flat lease payment based on the number of square feet rented. Some airports require a base rental payment and a percentage of gross revenues for some of their tenants. The latter arrangement is typically used for enterprises such as hotels, restaurants, and golf courses as compared to office leases.

The commercial facilities found on other airport properties are often developed and managed by a private developer/property manager under a long-term lease. The developer typically constructs the commercial complex in a designated area of the airport and then assumes responsibility for managing sub-leases with multiple tenants. Such an arrangement allows the airport to collect non-aviation revenue while avoiding the additional administrative tasks and costs of managing the commercial property such as rent collection.

Some of the airports surveyed for this audit are in the process of or have recently developed some of their property for commercial purposes. These airports have an advantage over some of the airports whose commercial development occurred in the past because they can determine the most advantageous parcel size for development and the mix of enterprises that will produce the highest and most stable revenues. To make these determinations, many of the airports that have recently expanded or plan to soon expand commercial activity have used commercial real estate consultants.

The Airports Division of the Roads & Airports Department is in a position to control commercial development on its property and to maximize this new, stable revenue source. With the assistance of experienced, knowledgeable consultants, critical factors such as land values, the most advantageous mix of uses, and cash flow from commercially developed land at the County airports could be determined.

Potential Impediments to Commercial Development

FAA Requirements

Potential impediments to commercial development at the Santa Clara County airports include Federal Aviation Administration (FAA) or other regulatory restrictions and any County or Department policies that are not favorable to this type of development. In terms of the FAA, the primary purpose for the use of airport land is delineated in the FAA’s Airport Compliance Requirements as follows:

"The owner of any airport developed with Federal grant assistance is required to operate it for the use and benefit of the public and to make it available to all types, kinds and classes of aeronautical activity…: Airport Compliance Requirements, Section 4-13, U.S. Department of Transportation Federal Aviation Administration (October 2, 1989)

The FAA also requires that the Department maintain and adhere to an Airport Layout Plan, which depicts the entire property and identifies the use of all existing and planned facilities. Changes in the Airport Layout Plan are subject to approval by the FAA in accordance with the following:

Reduction or Change in Aviation Use Property. Changes in aviation needs may make it desirable to convert dedicated aviation use property to revenue-production property. The conversion may receive FAA approval provided the present/future civil aviation needs are met or assured and the public benefit in civil aviation is enhanced. In all such conversions, FAA shall require assurance that all such converted property will be used to produce Fair Market Value (FMV) for civil airport purposes…in support of the owner’s endeavor to make the airport as self-sustaining as possible. Airport Compliance Requirements, Section 4-18 d, U.S. Department of Transportation Federal Aviation Administration (October 2, 1989)

This second requirement clearly allows conversion of airport property from aviation to non aviation uses if it enables the airport to be as self-sustaining as possible. Commercial development at the County airports, particularly South County, would definitely improve the ability of the Airports Division to be self-sustaining.

The other FAA stipulation that could bear on potential commercial development at the County airports is the requirement that any new development not take place in the safety zone and not exceed runway height requirements. FAA regulations state that " airports…are obligated to prevent the growth or establishment of obstructions in the aerial approaches to the airport".

Local Requirements and Restrictions

Potential impediments to non-aviation commercial development at the local level could include land use restrictions and an unwillingness to negotiate long term leases with commercial developers and property managers. Air carrier and general aviation airports in California that have developed some of their property for non-aviation commercial purposes report that long term leases are necessary to enable developers to obtain project financing. Finally, a local impediment could be resources. Some funding will have to be made available up front before any new revenues are generated for the services of commercial real estate and business development advisers. Ongoing costs once commercial development has taken place will include some maintenance of the new facilities and some administrative costs for managing the property.

Staffing Impact of Increased Non-aviation Commercial Development

Overseeing non-aviation commercial development and property management would expand the duties performed by the Airports division management staff. This could potentially have an impact on staffing requirements and costs for the division. If additional staffing were needed, this would add to the division’s costs and could potentially worsen its financial position until new commercial development revenues begin to be realized. However, a review of the staffing levels at the surveyed airports listed in Table 5.1 revealed that the median number of management/supervisor employees is three.

The positions most frequently found at the respondent airports are shown in Table 5.2. As can be seen, airports with significantly more commercial activity on their properties are managing without more staff than currently exists at the Roads & Airports Department’s Airports division. Even though the Santa Clara Airports staff are responsible for three airports, commercial development activity would be limited to only two airports: Reid-Hillview and South County. Also, it should be noted that two of the surveyed airports, Contra Costa County (Buchanan and Byron Airports) and Redding, both manage two airports with three management/supervisor staff each and annual non-aviation commercial revenues of $1.4 million and $181,000 respectively.

In conclusion, it appears that current staffing in the Santa Clara County Airports division is sufficient to assume responsibility for initiating commercial development at the airports, particularly once the now vacant Assistant Director position is filled and assuming that assistance in this endeavor would be provided by commercial real estate consultants.

 Table 5.2

Frequency of Management and Supervisor Positions

at Eight Surveyed Airports

Other Property Management Issues

Part of the South County Airport property is currently being used by the Roads Maintenance Division of the Roads & Airports Department for portions of its South County yard. The site contains an office building, storage facilities, and a warehouse. Road maintenance equipment is stored at this site for the use of the Roads Maintenance division staff assigned to the southern portion of the County. The South County road crews meet at the office building each morning to get their equipment and tools before driving to their work sites in Department vehicles and then return to the location at the end of the day.

The Roads Division pays nothing to the Airports Division for the use of this land even through it prohibits the Airports Division from using this for any other revenue-generating purpose. When inquiries were made about this situation during the course of this management audit, Department personnel indicated that they would pursue this issue internally. The most recent report from Department staff is that the fair market value for rent for the site is currently being determined. We concur that rent should be charged to the Roads Fund for use of this site. Even though the owner and lessee are in the same department, the Roads and Airport funds are separate and there is no reason the Airport Enterprise Fund should be shortchanged in the interest of the separately funded Road Fund.

The Airport Department currently leases property to the San Martin Lions Club for $1 per year, on which the Lions Club has constructed a meeting hall. The current lease is due to expire on December 31, 1999, and the Lions Club has requested a renewal for a period of five years.

The Lions Club utilizes this hall for its own functions, but also rents out the hall to individuals and groups for $25/hour and $700/night on weekends. The Lions Club derives significant revenue from this rental activity, and the Department should examine the possibility of including some provisions for sharing this revenue with the Department, or increasing the lease rate, in light of the fact that the property itself is only leased for $1 per year.

Recommendations

It is recommended that the Director of the Roads & Airports Department:

1. Direct the Director of County Airports Operations to engage the services of a real estate/business development consultant to assist in identifying alternative non-aviation commercial development possibilities for surplus County airport land including potential revenue generation from different mixes of businesses;

2. Coordinate plans for non-aviation commercial development with the forthcoming new Master Plan process;

3. Prepare a proposed policy for approval by the Board of Supervisors allowing long term leases on County airport lands for non-aviation commercial development purposes;

4. Prepare a proposed policy for approval by the Board of Supervisors stating that all revenues generated by non-aviation commercial development on County airport property must remain in the Airport Enterprise Fund, consistent with Federal Aviation Administration regulations;

5. Direct staff to finalize determination of a rental amount for the South County Roads Division yard located on South County Airport property and to begin charging the Road Fund for rental of this site;

6. Direct staff to develop a policy on revenue sharing for airport tenants that uses rent at their facilities for other uses.

Costs and Benefits

Since the benefits of non-aviation commercial development on County airport land will depend on the amount of land so developed and the type of businesses leasing space, a precise estimate of the financial benefits of this type of development cannot be precisely estimated at this time. However, it should be noted that at ten air carrier and general aviation airports throughout California surveyed as part of this audit, median revenues from non-aviation commercial tenants amount to approximately $779,000 annually.

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Last updated on 3/26/02