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An introduction to the valuation of aircraft
Hangars-Part 2.
Hangars-Part 2. Subject:
Aircraft industry (Buildings and facilities)
Hangars (Valuation)
Lindsey, Timothy J.
Date: Spring, 2008 Source Volume: 76 Source Issue: 2
Event Code: 440 Facilities & equipment; 800 Capital funds & cash flow
Product Code: 4595180 Aircraft Storage NAICS Code: 488119 Other Airport Operations SIC Code: 3721 Aircraft; 4581 Airports, flying fields, & services
179535026 Full Text:
ABSTRACTThis article provides an overview of the general considerations for
the valuation and analysis of aircraft hangars. Hangars are a
special-use type of property with specific and unique considerations.
The article is presented in two parts. This, part two, discusses the
market analysis of airport characteristics; highest and best use; the
impact of ground leases on value; and the cost, sales comparison, and
income approaches to value. Aviation industry trends and characteristics
are briefly summarized and a valuation case study illustrates the
concepts. Part one, published in the Winter 2008 issue of The Appraisal
Journal, discussed hangar characteristics, valuation considerations and
property rights, the impact of fuel sales, and site considerations.**********This article is the second in a two-part series addressing the
valuation of aircraft hangars. It focuses on the market analysis of
airport characteristics, highest and best use, the impact of ground
leases on value, and the three approaches to value. Part one of this
article, which was published in the Winter 2008 issue of The Appraisal
Journal, discusses hangar characteristics, valuation considerations and
property rights, the impact of fuel sales, and site considerations.Market Analysis of the Aviation IndustryNationwide, the aviation industry is mature, with growth in various
segments but decline in other segments. Since 9/11, prices, gross
domestic product, and traffic volume have restabilized and grown. (1)
The impact of 9/11 on the aviation industry, although pertinent, is
beyond the purview of this article.Short-term aviation industry trends are difficult to gauge, as
industry statistics may be several years old before published. However,
we do know that in 2000, air transportation generated $53.4 billion, or
0.5% of the U.S. gross domestic product. (2) In 2005, there were 609,325
pilots, a decrease from 733,000 pilots in 1970. (3) Over the years, the
stock of aircraft and airports has consistently grown.Traffic volume is measured by number of passenger enplanements,
fuel consumption, and operations. An operation is aviation terminology
for aircraft takeoffs and landings. (4) Air traffic is classified by the
Federal Aviation Administration (FAA) into four categories: (1) air
carrier, which accounted for 28.7% of FAA control tower operations in
2005; (2) air taxi, 23.3% of FAA control tower operations in 2005; (3)
general aviation, 44.3% of FAA control tower operations in 2005; and (4)
military, 3.7% of FAA control tower operations in 2005.Certified air carriers are the most prominent sector of the air
transportation industry. The U.S. air carrier fleet consisted of 19,239
aircraft in 2005. During the past 30 years, the air carrier airline
industry has consolidated while serving an increasingly larger volume of
passengers and freight. The number of domestic and international
enplanements increased to 747 million enplanements in 2005, up 10% since
2000, recovering from an 8% downward spike in 2001. Also, air carriers
have been shifting away from piston aircraft to jet aircraft as shown in
Figure 1.Air taxis in 2005 constituted 60% of the air traffic fleet. Air
taxi commuter operations are aircraft capable of seating less than 60
passengers that are used for nonscheduled passenger service, air freight
service, medical evacuation, etc., or that use a three-letter company
The third classification of air traffic, general aviation, does not
provide scheduled public transportation. As shown in Tables 1 and 2, the
majority of general aviation aircraft is for personal use and is
predominantly piston aircraft.Market Analysis of Airports Airport ClassificationsAppraisers may want to consider an airport's position within
the matrix of competing airports in the regional and neighborhood
analysis. On the supply side, the United States had 19,847 airports as
of 2003, up 75% since 1970 (Figure 2). (5)Of the airports open to the public, 65% belong to the National Plan
of Integrated Airport Systems (NPIAS). (6) This plan is used to
administer public funds at the largest airports. About 92% of all based
aircraft are at NPIAS airports. NPIAS airports are further divided into
subcategories as shown in Figure 3.The N PIAS classifications include international airports, domestic
air carrier airports, commuter airports, reliever airports, and general
aviation airports. The FAA classifies these airports by the size of the
traffic hub as measured by the Standard Metropolitan Statistical Area
(SMSA). Domestic air carrier airports, which include international
airports as a special subcategory, serve the largest cities. Commuter
airports handle low traffic volumes of 2,500 to 5,000 passengers.
Reliever airports are a special category of general aviation airport
located in an SMSA of at least 500,000 and are capable of reducing
congestion at air carrier airports. General aviation airports are
private use or public use airports.As a separate element of classification, certificated airports
(also known as Part 139 airports) serve scheduled air carrier operations
with aircraft that seat more than 9 passengers and unscheduled
operations with aircraft that seat more than 30 passengers. These
airports must meet the more stringent FAA regulatory standards of 14 CFR
part 139, in terms of pilot experience, fire safety, security, and
airport design standards. The United States had 599 certificated
airports in 2004, of which 57 were used by the military.Airports vary widely, so when developing a market analysis, an
airport's infrastructure and services should be evaluated against
competing airports. An airport's competitive market capture is
against airports with similar NPIAS airport designations; size and
capacity characteristics; levels of infrastructure and services; and
runway approach type (visual, nonprecision instrument, and precision
instrument). An airport's financial situation is important too: Is
it well funded or is it running deficits?The Aircraft Owners and Pilots Association publishes the
AOPA's Airport Directory biannually, which is an excellent summary
of all pertinent airport infrastructure, services, and neighborhood
characteristics. (7) Airport infrastructure may be cataloged as shown in
Table 3. For more information about runways--number, width, length,
orientations, quality, and annual or hourly capacity--see the Federal
Aviation Administration's circular, "Airport Capacity and
Delay." (8)[FIGURE 2 OMITTED][FIGURE 3 OMITTED]Airport CapacityMany airports are assigned an Airport Reference Code (ARC). The ARC
establishes the largest aircraft that can utilize an airport. First, an
airplane's landing speed and characteristics are measured and
classified from A to D, lowest to highest, respectively. Second, the
airplane's size attribute, referred to as airplane design group
(ADG), is grouped by a roman numeral. (9) Table 4 shows the ADG
classification parameters.For example, the smallest planes, like a Cessna 150, can fly into
an A-I airport, or larger. A Gulfstream corporate jet with a wingspan of
77 feet can only land at a medium-sized airport (ARC of C-II) or larger.
(10) The mammoth Boeing 747 requires a D-V airport. The ARC and ADG
numbers are delimiting parameters for the market feasibility analysis.
(11)Large commercial aircraft are confined to airports with sufficient
runway strength. Highly technical engineering rating systems, known as
Pavement Classification Numbers in the United States, calculate how many
runway operations can support the aircraft's weight across the
ramps, runways, and at touchdown spots. The types and frequency of
airplane usage constrains the demand for hangar space and other
services. A medium-sized airport's runway design may be able to
land large aircraft, but the runway will deteriorate more quickly.The airport's capacity also determines the types and sizes of
aircraft and hence the associated demand for hangar square footage.
Airport capacity is a specialized discipline with numerous variables and
an extensive literature.Capacity may determine the competitive airports used in the
appraisal analysis. Capacity can be measured by operations per year, per
day, per hour; passenger or cargo enplanements; runway or taxiway
capacity; terminal area; parking lot; and apron, gate, and interairport
airspace capacity.An airport's operating statistics, planning documents, and
staff can delineate the mix of aircraft based at the airport and suggest
future supply and demand trends. Factors that influence an
airport's capacity include runway length and runway touchdown
thickness, radio frequencies, approach type (ILS, VOR, etc.), lights,
security screening services, custom services, emergency services,
control tower hours of operation, and elevation.Lastly, appraisers may want to consider neighborhood demographics
and economic development such as hotels, restaurants, highway
infrastructure, mass transit, and nearby office and industrial parks,
which create demand for commuter, regional, and general air
transportation.Highest and Best UseThe Dictionary of Real Estate Appraisal, 4th edition, defines
highest and best use as,The four criteria--legal permissibility, physical possibility,
financial feasibility, and maximum productivity--are used in analyzing
highest and best use for aircraft hangars.Legal PermissibilityIn terms of legal permissibility, use of airports and surrounding
parcels are affected by rules and regulations promulgated by the airport
authority and the FAA. For new construction at public airports, FAA
height and hazard regulations create a complex three-dimensional
airspace around airports and runways called imaginary surfaces, which
must be free of obstructions. (13) The following lists a number of
imaginary surfaces that limit the placement of landside buildings or
structures.* The horizontal surface limits structure heights to 150 feet.* The primary surface extends 200 feet from both ends of a
hard-surface runway. Also no obstacles are allowed across a
runway's primary surface width; the minimum width requirements are
specified in Table 5.* The approach surface slopes extend from the runway's end at
various shallow ratios for extensive distances.* The transitional surface slopes up from the edge of the primary
surface and approach surface slopes at a 14% slope (7 horizontal feet
per vertical foot).* Other imaginary surfaces extend farther away from the airport
into its airspace.The airport authority's master plan, development policies,
airport community, and architectural design standards impact the use of
the property, effectively limiting the highest and best use to an
aviation use. Conventional local zoning codes may not be as important an
element of comparison because the airport authority as a governmental or
quasi-governmental entity may function independently of local planning
and zoning authorities. On the local level, political relationships
between the airport authority, the local government, fixed base
operators (FBO), owner-operators, and developers are critical
considerations. A small circle of players impact the who, what, when,
and where of hangar-developed and ground lease conveyance. The ground
lease has long-term stipulations on the hangar's use.Physical PossibilityPhysically possible uses are constrained by the airport's
layout and boundaries; surplus or excess land; proximity to roadways;
taxiways, runways; topography; utility infrastructure; and environmental
and safety concerns. Economic utility is derived from the mission of the
likely users. To a pilot of small aircraft, a hangar is a house to
protect his or her investment and equipment. The plane may occupy the
hangar for extended periods.To a commercial operator, a hangar is a necessary overhead expense
or cost center associated with an airplane's downtime. The hangar
protects a major corporate asset and provides a safe, dry environment
for crews and for frequent light maintenance, known as A and B checks.
Dedicated maintenance hangars serve an important function:The hangar is a cost center, and the goal is to make the aircraft
available to fly as soon as possible. The prorated cost of the hangar
plus the maintenance labor and material costs divided by the flight
hours between service checks equals the cost per flight hour. Slow
turnaround in maintenance work can push maintenance to outdoor ramps or
at the gate. (15) Changing user needs, like higher maintenance standards
and techniques, evolve rather than remain consistent.Maintenance hangar demand comes from a proportion of an aircraft
fleet or based aircraft. Maintenance hangars are used for C-level checks
(every 12 to 18 months) and major overhaul D-level checks (every 4 to 5
years), but more frequent, less intensive A and B checks may not require
maintenance hangars. The number of maintenance hangar or dock spaces
needed ranges from 15% to 30% of the based or fleet aircraft.Financial FeasibilityFinancial feasibility for aircraft hangars is driven by the market,
which extends to local and regional operations, itinerate traffic (an
exogenous demand factor), and endogenous hangar demand created to
support the based and itinerate aircraft. Busy airports generate
internal hangar demand. As the number of aircraft increase, there is
greater demand for mechanical and repair service hangar space. The
Washington State Department of Transportation Aviation System Plan
illustrates this point:An airport's historical operations data and master plan
suggest trends. Fundamental analysis also takes into consideration the
stock of based aircraft, trends (e.g., shift from smaller propeller
planes to business jets, or possible emergence of very light jets),
market area growth, and office and government space growth.Supply and demand for hangar space is correlated with the ARC
ratings that affect the size of aircraft most likely to use the airport
in the present and into the future. Supply and demand can be segmented
into small, medium, and large bays. (17) Forecasts can be segmented by
each type of aircraft user. AirportSystems: Planning, Design, and Management recommends the analysis
of different scenarios:Airports have financial, operating, and political pressures, both
local and national, which may stymie or propel future development or
expansion. Each market varies. On the supply side, if an FBO has a
master ground lease on vacant land, there may be pressure to convert
this into paying subleases, increasing hangar supply.Case StudyA ease study will be presented next to illustrate various concepts
in the valuation of aircraft hangars. The improvements of the subject
aircraft hangar are as shown in Figure 4 and the subject's market
area is described in Table 6.Leasehold Valuation with a Ground LeaseIn the valuation process the three approaches to value--the cost
approach, the sales comparison approach, and the income capitalization
approach--are derived from at-market interests. Fee simple (FS)
equivalent property interests are premised on perpetual and
unpartitioned rights and cash flows. With aircraft hangars, however,
land and building are rented and utilized as a single entity.
Consequently, an aircraft hangar ground lease violates the implicit
assumptions of the three approaches to value. The leasehold (LH)
analysis of an aircraft hangar, then, has three critical considerations:1. The income stream is partitioned into different interests.2. The leasehold and its income stream are not perpetual.3. The probability of lease renewal may add reversionary value.[FIGURE 4 OMITTED]Partitioned InterestsThe property's market income stream is partitioned into the
residual cash flows as follows:[I.sub.O] = [I.sub.B] + [I.sub.L]where:[I.sub.O] = Income overall (NOD [I.sub.B] = Income to building
(hangar) [I.sub.L] = Income to landThe land component is partitioned as follows:[I.sub.L] = [I.sub.L, SLII] + [I.sub.L, SW] + [I.sub.L, LF]where:[I.sub.L] = Income to land at a market level, equivalent to fee
simple rent[I.sub.L, SLII] = Subleasehold's income to land= [I.sub.L, FS market] - [I.sub.L, LH] (hangar user)[I.sub.L, SW] = Sandwich leasehold's income to land= [I.sub.LH] - [I.sub.LF] (FBO)[I.sub.L, LF] = Leased fee's income to land (airport
authority)The leasehold interest can be positive when the market rent is
greater than the contract rent or negative when the market rent is less
than the contract rent. The residual interests can be valued by direct
capitalization or by a discounted cash flow analysis. In this article,
direct capitalization is discussed because it demonstrates the
interaction of rates, yields, values, and time.Table 7 shows the subject's net operating income as
partitioned.Nonperpetual TermsFigure 5 shows the nonperpetual income stream as partitioned over
time. Time is significant to a leasehold value. When the leasehold is
very long (40+ years), the reversionary value approaches zero. When
value is premised upon a stable perpetual income stream, direct
capitalization is appropriate and simple, and it can be capitalized as
follows:[V.sub.perpetual life] = I / [R.sub.perpetual life]However, as the leasehold gets closer to expiration, the
capitalized leasehold building and land values diminish in comparison to
the [V.sub.perpetual life]. A longer lease generates more income, but
the increase in value diminishes exponentially with each additional year
(Figure 6).This requires an adjusted or loaded capitalization rate, or
the use of a discounted cash flow analysis.The capitalization rate can be adjusted through two types of
interrelated techniques: the percent of leasehold recaptured and the
Inwood premise.Percent of Leasehold Recaptured. The percent ofleasehold recaptured can be multiplied against the perpetual value
to reflect the value of the remaining leasehold. It is calculated by
dividing the present value of an annuity (i.e., the Inwood coefficient)
by a present value of a perpetual annuity, as shown in the following
equation.% of leasehold recaptured = [V.sub.leasehold] / [V.sub.perpetual
life]= 1/[R.sub.adjusted] / 1/[R.sub.perpetual life]= [a.sub.n] [??] / 1/[R.sub.perpetual life]= 1 - 1 / [S.sub.n]To demonstrate the algebraic linkage, the percent of leasehold
recaptured can alternatively be loaded into the capitalization rate.[R.sub.adjusted] = [R.sub.perpetual life] / % of leasehold
recapturedTable 8 demonstrates the percent of leasehold recaptured for the
case study subject.[FIGURE 5 OMITTED][FIGURE 6 OMITTED]The Inwood Premise. The Inwood premise is R = Y - [DELTA] x
1/[S.sub.n{??]]. (19) The Inwood premise is adjusted to reflect a
capitalization rate loaded for the reversion of the property at the end
of the leasehold. If income is level, Y= [R.sub.perpertual life], and if
the hangar reverts to the landlord at the termination of the lease (n),
[DELTA] = -100% then the adjusted model is as follows:[R.sub.adjusted] = [R.sub.perpetual life] - (-100%) x
1/[S.sub.n{??]][R.sub.adjusted] = [R.sub.perpetual life] + 1/[Sub.n][??]In the case study this is computed as9.65977% = 9.3% + 0.35977%The model can be expanded to reflect increases in the land and
building income and value as follows:[R.sub.perpetual life] = [Y.sub.perpetual life] - [A.sub.perpetual
life]where A is the future change in income or value. (20) By
substitution into the previous Inwood premise,[R.sub.adjusted] = Y - a + 1/[S.sub.n[??]], or = Y - a + (Y - A) /
[S.sub.n] - 1, or= (Y - A) / 1 - 1/[S.sub.n]where the future value component, [S.sup.n] = [(1 + Y).sup.n], is
discounted at the yield (Y - A). The percent of leasehold adjustment is
calculated in the same manner, using (Y- A) as the discount rate.Having determined the capitalization rate to the building's
subleasehold, the income (if any) to the land's subleasehold
position is valued. This land capitalization rate can be adjusted by a
nonperpetual value. (The case study will simply multiply the value by
the percent of leasehold recaptured factor.)Overall capitalization rates ([R.sub.O]) are relatively easy to
determine in the marketplace from a number of different approaches. The
relationship between the overall capitalization rate, the land
capitalization rate, and the building capitalization rate is defined by
the following equation:[R.sub.O], = (L x [R.sub.L]) + (B x [R.sub.B])where L and B are the land and building values, as a percentage of
total value. Table 9 illustrates rate extraction for the case study
using this formula.In general appraisal theory, land capitalization rates are
generally lower than the overall capitalization rate, and building
capitalization rates are generally higher than the overall
capitalization rate:[R.sub.L] < [R.sub.O] < [R.sub.B]This relationship occurs because land is stable and less risky than
a building. A building, in contrast, has a limited economic life,
greater economic risk, and includes an entreprenenrial incentive,
requiring a higher capitalization rate in order to recapture the
building investment. Likewise, leased fee rates are lower than leasehold
rates:[R.sub.LF] < [R.sub.SW] < [R.sub.SLH]The subleasehold income is capitalized into the subleasehold value
as shown in the following equation and in Table 10.[V.sub.L, SLH] = [I.sub.L, SLH]/[R.sub.L, SLH] x % of leasehold
recapturedIn conclusion, three interests constitute the total value of the
aircraft hangar property. The hangar (sublessee) receives the present
value of [I.sub.B, SLH]. and [I.sub.L, SLH] (see shaded area of Figure
5) until the sublease's expiration:[V.sub.B+L, SLH] = [I.sub.B, SLH] + [I.sub.L, SLH]/[R.sub.adjusted,
O, SLH] = [I.sub.B,SLH]/[R.sub.adjusted,B,SLH] + [I.sub.L,
SLH]/[R.sub.adjusted, L, SLH]The FBO (lessee) receives the present value of [I.sub.L. SW]-until
expiration:[V.sub.L, SH] = [I.sub.L, SW]/[R.sub.adjusted, SW]The airport authority (landlord) receives the present value of the
income during the leasehold and the reversionary value, if the lease is
not renewed. The reversionary value would be discounted by a present
value factor from time n to the appraisal's effective date at time
0:[V.sub.B + L, LJ] = [I.sub.I, LF]/ [R.sub.L, LF] + [I.sub.B
reversion, LJ]/[R.sub.B] x [(1 + [Y.sub.B]).sup.n]or = [I.sub.L, LF]/{R.sub.adjusted] + [I.sub.L reversion,
LF]/[R.sub.L] x [(1 + [Y.sub.L]).sup.n] + [I.sub.B reversion,
LF]/[R.sub.B] x [(1 + [Y.sub.B]).sup.n]Reversionary ValueThe probability of lease renewal might add reversionary value to
the hangar sublessee. As the end of the sublease approaches, both tenant
and landlord have an incentive to write a new lease. A new lease can
occur well prior to the expiration of the old one. If the new lease is
modeled to occur before the expiration of the first lease, appraisers
should make sure not to double count income streams or values.The binomial options pricing model can value the probability of the
future lease renewal in the reversion. The possibility of future renewal
is bounded between the 0% probability of renewal and the 100%
probability of renewal.The reversion occurs after the lease expiration year (n) plus any
anticipated lag times for vacancy. The expected value, E(V), is the
probability-weighted overall reversionary value ([V.sub.O reversion,
SLH]) discounted to a present value:E ([V.sub.O reversion, SLH]) = (P(r) x [V[V.sub.O reversion, SLH])
+ (P ([logical not] r) x $0)/[(1 + Y).sup.n]where [V.sub.O reversion, SLH] equals the [V.sub.B reversion, SLH]
plus the [V.sub.L reversion, SLH].The reversionary value of the building ([V.sub.B reversion, SLH])
equals the value of the depreciated building at the lease's renewal
plus the value added from the cure of physical depreciation minus the
cost to cure (i.e., a capital expenditure) minus the functional
obsolescence from any deficiency requiring modernization, minus the loss
in remaining contributory value of demolished/removed components from
the original structure, and minus holding costs and the time value of
money arising from delays or downtime during a renovation. This net
capital repair can have a positive, negative, or breakeven effect on the
reversionary value.E ([V.sub.reversion]) = P(r) x [[V.sub.B reversion, SLH]/[(1 +
[Y.sub.B, SLH]).sup.n] + [V.sub.L reversion, SLH]/([1 + [Y.sub.L,
SLH]).sup.n]] + $)Lease Renewal. The probability of lease renewal requires careful
judgment. When the renewal decision is far in the future, the impact of
receiving or not receiving a lease renewal is small. As the decision
nears, the impact becomes significant.Past behaviors and suggested future intentions are the best
quantitative predictors for judging the probability of lease renewal.
First and foremost, aviation is the mission, revenue source, and the
passion of the airport administrators, FBOs, and tenants. To them, the
hangars are ancillary attributes of business (if not outright banal
attributes) until they need hangars.The local political mood affects the likelihood of lease renewal.
Some airport authorities desire long-term relations with stable tenants.
If the FBO has been a responsible operator, renewal of the master lease
is more likely. If the hangar tenant is an honorable member of the
airport community, renewal of the sublease is more likely. Some airport
authorities with hangar waiting lists and political pressures may eschew
the appearance of favoritism and may desire the reversion of the hangar.If noise or emissions complaints rankle the neighbors, if the
airport is not financially self-sufficient, if airport/runway expansions
upset the citizens, or if various authorities are inclined toward
cronyism, then non-airport governmental authorities are likely to
intervene in the airport's operation. Lease and sublease renewals
in such situations become more closely scrutinized.Future Value of Buildings. In considering the reversionary value,
the contractual ground rents are likely to increase. Additionally, three
forces affect the future value of the building.The first factor that affects the future value of the building is
depreciation, or the deterioration of the building's components
that eventually decay the structure to the point of demolition.The second factor affecting future value of the building is
repairs. One condition for the sublease's renewal may be the
refurbishment or replacement of the hangar's exterior walls to
offset its depreciation. These net capital repairs may or may not create
value. At the time of construction, capital repairs (adjusted for future
inflation) may include compliance with new building and fire codes.The third factor, cost-push inflation, may appreciate the existing
hangar structure's value, based on the principle of substitution,
as a new structure will increasingly become more expensive to build new.
(21) Eventually, the force of the cost-push inflation may be
substantially offset by the physical depreciation rendering the
reversion value in the present value near zero.The expected reversionary value in the case study is described in
Table 11 and computed in Appendix II-B.Three Approaches to ValueCost ApproachDue to the relatively small aircraft hangar market, the cost
approach becomes an important indicator of value. As described in The
Appraisal of Real Estate, 12th edition, sometimes the only market
evidence is represented through the cost approach.Because cost information is available directly from the market, it
is significant that someone actually paid money to construct the
improvements, or intended to do so, upon a particular site. As applied
to aircraft hangars, the cost approach is applied in a typical manner
with the usual considerations.The utilization of the cost approach must rely on the
appraiser's judgment. A unit-in-place or quantity survey is more
likely to be reliable than summary cost statistics. Some cost manuals
survey vendors rather than collect empirical data from actual
construction projects. Consequently, costs may be incorrect for
special-purpose properties. Rapid increases in steel prices, for
example, over the last several years may be poorly reflected in the
data. Where numerous light steel-frame construction companies compete in
regional markets, more than one source of cost information improves
reliability. Because of the specialized nature of hangar doors, these
costs may have to be researched from private construction companies, not
from the popular cost estimation manuals.As structure size increases, cost per square foot can increase
exponentially. As the free span lengthens and the square footage
increases, stronger and thicker trusses or girders are required. (23)
Higher ceiling clearances result in greater structural loads and more
exterior wall and cladding area. As heating, ventilation, and air
conditioning (HVAC) and utility service requirements increase, the
building carries heavier gauge piping. Larger structures can have higher
quality materials, because the aircraft and personnel are more
expensive. Floors must support heavier aircraft (live load). Larger
structures tend to have more amenities. All of these factors increase
the dead load. As the dead load mass increases, cost increases. As an
extreme example, Lufthansa's maintenance facility with rail link
designed for four Airbus A380 bays is 527,000 square feet, and cost
between $340 and $370 per square foot. (24)Entrepreneurial incentive appears to be similar to other general
commercial property types, although exact rates will differ and the
presence of external obsolescence may nullify any entrepreneurial
incentive. To determine depreciation, all typical appraisal techniques
are applicable, including market extraction, age-life method, cost
manual tables, matched-pair analysis, or multiple regression analysis of
comparable sales or rents. (25) As a caveat, to extract building
residuals and to compare properties with leasehold interests, much
greater analytical care is required.Functional obsolescence is impairment in a property's utility.
Because of experimentation in architectural design and because of unique
specifications by owner-developers, obsolescence can occur in a variety
of forms. For example, suppose a tandem laid-out hangar necessitated
backing out the front plane to retrieve the plane in the rear. This
obsolescence could possibly be measured by the capitalized cost in
personnel time and equipment to retrieve the plane and reinsert the
plane in the front. (26) This obsolescence would be a subtraction or
adjustment in the three approaches to value.However, suppose the rear hangar space was rented at the same
rental rate as the bay fronting the apron to a moving company who used
it as a warehouse because of its street access and loading dock.
Functioning as a mixed-use property, this ostensibly nullifies some or
all functional obsolescence.As another example, an overly-large hangar in a small airport may
be indicative of several possible scenarios: no obsolescence if multiple
small aircraft can functionally occupy the space, or functional
obsolescence for pockets of square (or cubic) footage underutilized by
housing a smaller plane, or external obsolescence because of acute
vacancy.Whereas the cost approach in its normal application presumes a
perpetual-life fee simple interest, the value of the building must be
adjusted, if necessary, to reflect a nonperpetual leasehold interest.
The percent of leasehold adjustment derived from the income approach can
be multiplied against the stabilized building value. The nonperpetual
subleasehold land value, if any, is added ([V.sub.L, SLH]). The
probability of a weighted reversion value (E([V.sub.reversion])) is
added. Combined, these equal the subleasehold value of the building and
land to the tenant ([V.sub.B+L, SLH]).Table 12 illustrates application of the cost approach for the case
study subject, and Appendix II-C provides a detailed analysis of the
building hard costs for the case study.Sales Comparison ApproachComparable sales data can be obtained from a variety of sources,
including national and local multiple-listing sales databases, local
brokers specializing in this product type, assessors, and recorders
offices. Since aircraft hangars are a special-purpose property, these
data sources may not adequately monitor aircraft hangar sales.
Additional field research may be necessary to correct for sloppy data
collection. Airport bulletin boards, aviation magazines, and aviation
Internet chat forums and Web pages can uncover additional data.Ultimately, airport authorities, FBOs, and other people onsite are
generally most knowledgeable about the activities in their own market.
These people seem to be receptive to impromptu conversations in the
field. Unlike time-stressed property managers and brokers of
general-purpose properties, onsite people are not paid on commission and
are not bombarded by telephone calls and e-mail requests for appraisal
data. Appraisers should treat information from onsite people
confidentially, though, for the airport is a small community of
long-term acquaintances, hobbyists, and professionals. Before wandering
the airport, an appraiser should check in with the airport authority and
FBO because of security concerns.The sales comparison approach with regard to aircraft hangars
should apply the typical elements of comparison following the usual
sequence of adjustments. The real property rights conveyed should adjust
for nonrealty components like business income and leasehold interests
arising from the comparable's ground lease. Whereas sales are
frequently of the leasehold value of the improvement, the value
incorporates the market's anticipated use of the property.To make a comprehensive property rights comparison, the
comparable's component interests may require a reverse-engineered
discounted cash flow analysis. As discussed previously in this article,
this includes market appreciation from cost-push inflation, changes in
sublease rates, term lengths, building depreciation, the likelihood of
having anything of value to sell to a subsequent user at the end of the
occupancy, and the possibility of reversionary value.For example, near the end of the long-term lease, a hangar
improvement may be sold at a substantial discount because there is a
finite term remaining until the hangar must be vacated. This might occur
if the seller does not have sufficient political connections or
motivation to get the ground lease renewed. The purchasing sublessee,
though, may be able to obtain a new sublease, thereby extending the
subleasehold interest, increasing the building's subleasehold
value.If there is a dearth of data, the trade area and the timeframe
might have to be dramatically increased. Great care must be made in
comparing one type or size of hangar to a different type or size of
hangar as this may result in a very misleading conclusion. Sometimes,
the only support for adjustments may be differentials indicated by cost
tables. In making adjustments, office space may be a large amenity or
included in the unit of comparison.Table 13 illustrates application of the sales comparison approach
in the case study.Income Capitalization ApproachLandlords may be investors specializing in aircraft hangars, the
airport authority, a local firm that has surplus hangar space available,
the FBO, or professional commercial aviation operators. To the last two
entities, the rental of a hangar may be as much of a business asset as a
real estate asset.The nature of the rental market for hangar space may be highly
subjective as there may be a limited marketplace. An experienced
developer and operator reported that hangar rent rates are particularly
difficult to determine even for people in the business. According to
Airport Planning & Management,Square footage can be a unit of comparison; however, in larger
hangars, a position is a unit of comparison. A position is a
nonquantified area that varies with the type and size of aircraft. A
hangar, therefore, can accommodate a flexible range of positions. In a
large hangar, the landlord may lease an agreed on number of positions to
several tenants. Because a tenant's fleet may consist of a variety
of aircraft, as the fleet arrives and departs, the aircraft actually
stored will change daily or weekly.Another method for generating income is the tuck. The tuck is where
aircraft with different wing heights overlap. Each aircraft owner pays
the same rate as if the planes exclusively occupied the hangar space.
Aircraft leases provide the hangar owner with flexibility to generate
additional income above the contract rent. When the tenant's
aircraft is out of the hangar, the hangars may be rented overnight to
visiting aircraft at a premium.To obtain rental data, the airport's terminal or central
office may have a bulletin board with hangars available for rent and the
airport authority may have a waiting list for hangars owned by the
aviation authority. The FBOs are particularly knowledgeable about local
activities.Fuel sales and aviation services represent a significant source of
potential business income to a hangar complex. Other aviation services
include towing or on-demand, twenty-four-hour availability of an
airplane, such as an airplane fitted as a medical ambulance. In
developing the income capitalization approach, potential income from
fuel sales and aviation services should not be included because it
represents business value, and, accordingly, the management, labor, and
overhead expenses for fuel and service is excluded.Vacancy rates are developed by inferred analysis and fundamental
analysis. Inferred analysis takes into consideration current vacancy
rates of hangars that are of similar size, along with larger hangars
that can accommodate multiple planes. Demand for hangars of other sizes
can provide a helpful indication of supply and demand. Absorption rates
of new hangar product and waiting lists are insightful. The Aircraft
Hangar Development Guide advises as follows:Expenses can be handled on a triple-net basis, modified-gross
basis, or gross basis in the same market area and may be passed through
a community or homeowners association. Expenses can be itemized or an
expense ratio can be applied.Janitorial and management expenses may not be applicable to a very
small hangar, if they are considered part of the owner's general
use.Determining the management and maintenance costs may be
particularly difficult and subjective as this may be done as general
overhead associated with other business services by the hangar operator.
Business-related expenses, like management, should be partitioned from
the real estate component, which would commonly occur in a commercial
operator or FBO-owned hangar.Ad valorem taxation may or may not pertain to the building
sublease; local authorities may vary even within the same state. Other
expenses to consider include improvements to the land, and landscaping
and maintenance of employee parking or access roadways, if applicable.
(29)The ground lease is a liability or cash outflow diminishing its
value. A ground lease expense is not an operating expense and occurs
below the net operating income line.Capitalization rates are especially difficult to extract because of
the scarcity of comparable sales and the subjective nature of the
business and real property income streams. The mortgage-equity band of
investment approach is an appropriate approach for deriving a
capitalization rate. As a proxy, while admittedly very subjective,
capitalization rates from metal industrial buildings may provide a
starting point, because of the similarity in physical characteristics.
In concluding a capitalization rate, the remaining economic life of the
improvement and the remaining term of the lease should be considered.
Where these are shortening, and the lease renewal is unlikely, the
capitalization rate may be higher due to the depreciating nature of the
physical and financial investment in line with the Inwood premise.Table 14 shows application of the income capitalization approach to
the case study property.ConclusionEach market area differs substantially as to the availability and
reliability of data. All three approaches to value are recommended to
achieve the greatest level of confidence. Because aircraft hangars are
special-purpose properties, weak data requires additional fieldwork and
verbal confirmation to determine the market participant's thinking.In general, the cost approach is particularly insightful and
reliable for recently or newly constructed hangars, provided the market
is in balance. As a special-purpose property, the cost approach may have
to be relied upon to value older hangars, if only as a check of
reasonability.The cost approach model can misvalue a property. Cost can be
difficult to determine, for material and labor prices occur across a
broad spectrum and special components are difficult to price. In a
data-poor environment, depreciation, entrepreneurial incentives,
functional obsolescence, and external obsolescence are difficult to
derive. Because of the risk that the cost approach model implies a
priori feasibility, it is difficult to determine whether the market sees
all cost components as equally contributing to value.In addition to the cost approach, the sales comparison and income
capitalization approaches to value are needed. The three approaches to
value are a reflection of market conditions and the market
participants' current and future experiences and needs. Some
markets have extensive rental and comparable sale information, others do
not. For some markets, the income capitalization approach is the primary
approach to value. In other markets, the income capitalization approach
is unreliable, but if applied properly it may provide a check of
reasonability against the other two approaches or provide a basis for
rating a property and determining adjustments. The reconciliation and
conclusion of value, then, is similar to any property, type.Appendix II-A Selected Aviation Terms and ReferencesAir Carrier: An entity that undertakes directly, by lease, or other
arrangement to engage in air transportation. More specifically, the
commercial system of air transportation comprising large certificated
air carriers, small certificated air carriers, commuter air carriers,
on-demand air taxis, supplemental air carriers, and air travel clubs.
[Note: Each of these carrier designations has specific definitions.]Airport and Airway Trust Fund: Fund established by Congress to pay
for improvements to the nation's airports and air traffic control
system. Money in the fund comes solely from users of the system,
principally via taxation of domestic airline tickets.Commercial Service Airport: Airport receiving scheduled passenger
service and having 2,500 or more enplaned passengers per year.En Route Center: Formally known as an Air Route Traffic Control
Center (ARTCC), it houses the air traffic controllers and equipment
needed to identify and direct aircraft, primarily during the en route
portion of their flights.Essential Air Service (EAS): Government-subsidized airline service
to rural areas of the United States, which continued after the Airline
Deregulation Act of 1978.General Aviation: All facets of civil aviation, except facets of
those air carriers that hold a Certificate of Public Convenience and
Necessity. All civil aviation operations other than scheduled air
services and nonscheduled air transport operations for taxis, commuter
air carriers, and air travel clubs that do not hold Certificates of
Public Convenience and Necessity.Nonscheduled Service: Revenue flights not operated as regular
scheduled service, such as charter flights, and all non-revenue flights
incident to such flight.Revenue Passenger Enplanement: A revenue passenger boarding an
aircraft in scheduled service, including origination, stopover, and any
connections. Generally corresponds to a flight coupon. Does not include
through passengers.Turbojet: The original designation for a "pure" jet
engine whose power is solely the result of its jet exhaust.Turboprop: A type of engine that uses a jet engine to turn a
propeller. Turboprops are often used on regional and business aircraft
because of their relative efficiency at speeds slower than, and
altitudes lower than, those of a typical jet.Widebody Aircraft: Generally considered to be any airliner with
more than one aisle in the passenger cabin. Examples of widebody
aircraft include the Boeing 747,767, and 777; the Lockheed L-1011; the
McDonnell Douglas DC-10, and the Airbus A300 and A310. Technically, any
aircraft with a fuselage diameter in excess of 200 inches may be
considered a widebody.Source: The Airport Transport Association of America
http://www.airlines.org (Reprinted with permission.)Appendix II-B Valuation of the Expected Value of the ReversionThe hangar's reversionary value is estimated by forecasting
the replacement cost new of the hangar. Both the cost and the income
capitalization approaches are forecasted. The replacement cost new, from
the year 2002 (time n = 0) cost approach, is projected for 37 years of
inflation (n = 37), one year after the ground sublease expires.The building income residual, which has an effective age of 6 years
and life of 50 years, is de-depreciated to estimate the building income
as if new.The income, as if new, is inflated at 3% to the year of reversion,
2040.Income, anticipated to be received at the end of the year, is
capitalized back to the reversionary value at the time of lease's
expiration (n = 37). This assumes that the building's reversion
capitalization rate remains stable and it is not loaded for any risk or
depreciation factors.The two forecasted reversionary replacement costs are both
reasonable and are reconciled to $5,700,000.Assuming that the hangar will not require new skin, i.e.,
replacement of exterior walls, depreciation is subtracted from the
replacement cost new to determine the reversionary value of the
building.This reversionary value is discounted back to present value as of
the effective date of the appraisal (n = 0). Again, for simplicity the
[R.sub.B] is assumed to be the same as the [Y.sub.B], where inflation is
offsetting appreciation. At a building yield rate of 9.3%, the present
value factor over 37 years is 3.7244%.[GRAPHIC OMITTED]The present value of [V.sub.B, reversion] equals $29,721 at the
effective date of the appraisal (n = 0).The chance that the lease will be renewed without the replacement
of the exterior skin is estimated to be 25%, resulting in an expected
value of $7,430. Due to the number of assumptions and the sensitivity of
variables to far-forward projections, it is not unreasonable to round
this to a zero expected value.It is likely that the exterior skin (walls and roofing) will need
to be replaced as part of the lease renewal terms, increasing the
probability of the renewal variable. These capital repairs may cure
physical depreciation adding to the reversionary value, yet at the same
time the capital repair cost maybe less than, greater than, or equal to
the expenditure. If the exterior walls still have some economic life,
premature demolition will result in a form of functional depreciation
taking into consideration demolition costs and salvage value. This model
can be refined to reflect the different economic age and economic life
of the short- and long-lived components.(1.) Bureau of Transportation Statistics, http://www.bts.gov.(2.) United States Bureau of Economic Analysis Survey of Current
Business, "Other NIPA and NIPA-Related Tables" (March 2006):
D-46.(3.) United States Department of Transportation Federal Aviation
Administration, Administrator's Fact Book (December 2006).(4.) See Appendix II-A for definitions of additional aviation
terms.(5.) Federal Aviation Administration, Report to Congress National
Plan of Integrated Airport Systems (NPIAS) (2007-2011), 1.(6.) Ibid.(7.) See http://www.aopa.org or http://www.sportys.com for
information on purchasing this book.(8.) Federal Aviation Administration, "Airport Capacity and
Delay," http://www.faa.gov/airports_airtraffic/airports/resources/
advisory-circulars/media/150-5060-5/150_5060_5.pdf.(9.) Federal Aviation Administration, "Airport Design,"
http://www.faa.gov/airports_airtraffic/airports/resources/
advisory_circulars/media/150-5300-13/150_5300_13_chg7.pdf.(10.) Ibid. The FAA Aircraft Characteristics Database at
http://www.faa.gov/airports_airtraffic/airports/construction/
aircraft_char_databasealso provides these codes.(11.) Aircraft sizes are also classified by operating weight empty.(12.) Appraisal Institute, The Dictionary of Real Estate Appraisal,
4th ed. (Chicago: Appraisal Institute, 2002), 135.(13.) Code of Federal Regulations, "Objects Affecting
Navigable Airspace," Title 14, Chapter 1, Part 77 (2004). See also
Federal Aviation Regulations Part 77, "Objects Affecting Navigable
Airspace," [section] 77.25.(14.) Gall E Butler and Martin R. Keller, ed., Handbook of Airline
Operations (New York: Aviation Week, 2000), 483-492.(15.) Austin Company, "Hangar Design--The Door to
Profitability," MRO Management (July 1999).(16.) Washington State Department of Transportation Aviation,
Aviation Division, http://www.wsdot.wa.gov/aviation/wsasp/ExecSummary.htm.(17.) Air Force Handbook (AFH) 32-1084, [section] 7.2.4.(18.) Richard de Neufville and Amedeo R. Odoni, Airport Systems:
Planning, Design, and Management (New York: McGraw-Hill, 2003), 59.(19.) Sinking fund factor: 1/[S.sub.n[??]] = Y / [S.sup.n] - 1,
where [S.sup.n] = [(1 + Y).sup.n].(20.) Appraisal Institute, The Appraisal of Real Estate, 12th ed.
(Chicago: Appraisal Institute, 2001), 561.(21.) Cost-push inflation is described as, "Rising prices
caused by increasing costs of production (labor, raw materials, taxes,
exchange rates) that are passed on to consumers." Appraisal
Institute, The Dictionary of Real Estate Appraisal, 68.(22.) Appraisal Institute, The Appraisal of Real Estate, 354.(23.) Mike Fenske, "What's Your NLA? How Will New Large
Aircraft Affect Your Airport Facilities?" (Burns & McDonnell,
2001), http//www.burnsmcd.com; and Austin Company.(24.) Lufthansa Airlines, "Maintenance in Germany's
Largest Industrial Hall,"
http://a380.lufthansa.com/en/html/technik/wartungshalle/index.php.(25.) George Campbell, 1974 Supplement to Airport Management and
Operations (Louisiana: Claitor's Publishing Division, 1974).
Campbell states that hangars have an estimated life span of 30 years.
Other related airport structures have the following estimated life
spans: terminal buildings (new), 40 years; terminals (frame and stucco),
15 years; air freight terminals (steel and metal siding), 20 years;
service buildings and shops, 30 years; runways, taxiways, aprons, and
roads, 20 years.(26.) Aerospace Industries Association, Aerospace Facts &
Figures, 2004/2005 edition. Updated annually, this pamphlet provides
airline and airline employment data taken from the U.S. Bureau of Labor.
For example, the average hourly wage for aircraft workers in 2003 was
$25.40/hour plus a substantial overhead of about 70%.(27.) Alexander T. Wells and Seth B. Young, Airport Planning and
Management, 5th ed. (New York: McGraw-Hill, 2000), 214.(28.) Aircraft Owners and Pilots Association, Aircraft Hangar
Development Guide (2005), http://www.aopa.org/asn.(29.) Wells and Young, 366.by Timothy J. Lindsey, MAITimothy J. Lindsey, MAI, is a commercial appraiser in Denver,
Colorado, with Safiya: Land + Building Appraisal Studios. He recently
earned his MAI designation from the Appraisal Institute. Contact:
tim@saflya.usThe reasonably probable and legal use of vacant land or
an improved property, which is physically possible, appropriately
supported, financially feasible, and that results
in the highest value. (12)An airline's maintenance base (hangar) is the factory
where the airline produces its product (flight hours).
For instance, flight hours are produced when a maintenance
organization completes a service check ...
[maintenance] hangar utilization, or bay occupancy,
is a measure of how fully a company employs its hangar
facilities. A three-shift-per-day, seven-day-a-week
schedule makes full use of a hangar. (14)The number of based aircraft at general aviation airports
is a big factor in planning for future facility needs. The
number of based aircraft not only correlates to operational
demands on airport facilities like runways, lighting
and Navaids [navigation aids], they directly relate
to ground facilities needed at individual airports, like
hangar storage, fueling facilities, and aircraft service
and repair needs. (16)The forecast is "always wrong." Modern planners and
managers must face this reality in the era of deregulation
and competition. Airlines form alliances, merge, and
change their routes and services; passengers and shippers
reorient their patterns. These variations make forecasts of
levels and types of traffic unreliable. Airport professionals
must assume that the future reality will easily be different
from what seems most likely at present. (18)Probability of yes renewal:   P(r) = r %
Probability of no renewal:    P([logical not]r) = 1 - r%
Total probability:            100%The cost approach is also used to develop an opinion
of market value ... of special-purpose or specialty
properties, and other properties that are not frequently
exchanged in the market. Buyers of these properties
often measure the price they will pay for an existing
building against the cost to build minus depreciation
or the cost to purchase an existing structure and make
any necessary modifications. (22)Rentals are usually based on a rate per square foot and
cover investments in associated aircraft apron space and
hangar-related employee parking. Hangar office space
is charged on a similar basis and covers office-related
employee parking. (27)Determine the level of commitment from those on the
list-do they intend to occupy a hangar once one is built?
In some cases, people have their names on multiple lists
at neighboring airports, or they do not currently own
an aircraft. In other cases, the waiting lists are not well
managed, are out of date, or do not reflect the realistic
demand for hangars. (28)Replacement Cost New  [down arrow] n = 0   $1,986,593
x Inflation (3%, 37
years, compounded
yearly)                                      2.9852
= Relacement Cost New              n 37    $5,930,377[I.sub.B]                              n = 1   $153,831
/ % Good = (100% - 12% depreciation)                88%
Imputed Feasibility New [I.sub.B]      n = 1   $174,808Imputed Feasibility New [I.sub.B]   [down arrow] n = 1   $174,808
x Inflation (3%, 37 years)                                 2.9852
Feasible RCN [I.sub.B], cost-push
inflation                                      n = 38  $521,837[I.sub.B], cost-push inflation   [down arrow] n = 38     $521,837
[R.sub.B], reversion                          n= -1          9.3%
RCN, reversion                                n = 37   $5,611,151Value New at Reversion                        n = 37    $5,700,000
Depreciation (= 43 year age + 50 year life)   - 86%    $(4,902,000)
[V.sub.B, reversion]                          n = 37       $798,000Appendix 11-C Case Study Building Cost Breakdown
Subject Parameters                        Sources
Office (1st floor)   2,500 square feet    RSMeans Square Foot
Costs, 2002
Office (2nd floor)   2,500 square feet    RSMeans Assemblies Cost
Hangar               16.000 square feet   For pre-engineered
Total                21,000 square feet   RSMeans Building
Hangar Width           100 x 160 feet     National Building Cost
Manual, 2002, ed. Dave
Ogershok (Craftsman
Office Width           100 x 25 feet      Marshall Cost Service
Perimeter             570 linear feet
Eave Height               24 feet
Roof Height               32 feet
A. Substructure         Table #   Section
1010    Foundations
1030    Slab on grade
B10 Superstructure        1010    Wall construction
1010    Floor construction
1020    Roof construction
B20 Exterior              2010    Exterior Walls
2020    Exterior Windows
2030    Exterior Doors
B30 Roofing               3010    Roof Coverings
3020    Roof Openings
1010    Office Wall
1020    Interior Doors
1030    Fittings
2010    Stair Construction
3010    Wall finishes
3020    Floor Finishes
3030    Ceiling Finishes
D10 Conveying             1010    Elevators & Lifts
1020    Escalators &
D20 Plumbing              2010    Plumbing
D30 HVAC                  3010    Energy Supply
3020    Heat Generating
3030    Cooling Generating
3050    Terminal & Package
3090    Other HVAC
D40 Fire Protection       4010    Sprinklers
4020    Standpipes
Other   Draft Curtains
D50 Electrical            5010    Electrical Service/
5010    Electrical Service/
5020    Lighting & Branch
5030    Communications
5030    Telephone System
E. Equipment and
1020    Integrated
1040    Special Facilities
Requirements (10%),
Overhead (5%), and
A. Substructure         Table #   Description
1010    Poured concrete; strip and
1030    3" reinforced concrete slab
on grade floor (office)
1030    8" reinforced concrete slab
on grade floor (hangar)
B10 Superstructure        1010    Pre-engineered rigid frame
(1:12 roof ratio): steel
columns + girders + purloins,
160' clear span
1010    Steel columns, joists, beams,
decking, concrete (office)
1020      (incorporated as part of
rigid frame superstructure)
B20 Exterior              2010    Enamelized steel siding (75%
Enclosure                           of hangar and office) with
vinyl-faced-insulation
(adjustment to upgrade).
Excludes the hangar door
2020    Thermopane windows, picture
frame style (office)
2020    Polycarbonate translucent
panes (hangar)
2030    Metal pedestrian doors
2030    Steel overhead rolling
automobile drive-in door
B30 Roofing               3010    Enamelized steel siding with
(adjustment to upgrade)
3020    None
C. Interiors              1010    (office)
1020    (office)
1030    Toilet partitions
2010    (office)
3010    (office)
3020    Epoxy coating (hangar),
3020    Carpet (office)
3030    Acoustic tile (office)
D10 Conveying             1010    None
1020    None
D20 Plumbing              2010    Toilets, hot water
D30 HVAC                  3010
3020    Suspended gas-fired heaters
3020    Central heat/AC system
3090    Rooftop cooling
D40 Fire Protection       4010    None
4020    None
Other   None
5010    Feeds
D50 Electrical            5010    Branch Wiring (hangar and
5020    Outlets and florescent
lights (office)
5020    High bay lamps (hangar)
5030    Fire alarm security system,
Furnishings                    None
1040    Motorized sliding hangar
door system (26' x 120')
1040    Hangar door, installation
1040    Hangar door, exterior wall
1040    Eye wash pedestal
1040    2-ton bridge crane (crane,
single rail, installation) 1
Hangar apron, concrete
A. Substructure         Table #    Unit        Unit Type
1010       570   LF
1030     2,500   SF of foot print
1030    16,000   SF of foot print
B10 Superstructure        1010    16,000   SF of foot print
1010     5,000   SF
B20 Exterior
Enclosure                 2010    13,680   SF of wall
2020        17   Each
2020     1,000   SF of wall
2030         3   Each
2030         1   Each
B30 Roofing               3010    18,500   SF
1010     5,000   Per surface SF
1020         1   Lump sum
1030         4   Lump sum
2010         2   Each
3010     5,000   Per SF
3020    16,000   SF
3020     5,000   SF
3030     5,000   SF
D10 Conveying             1010
D20 Plumbing              2010         2   Each
3020         4   Each
3020     5,000   Per SF
3090     5,000   Per SF
D40 Fire Protection       4010
D50 Electrical            5010         1   Each
5010        25   Per LF
5020     5,000   Per SF
5020    16,000   Per SF
5030         1   Lump sum
5030     5,000   Per SF
1020     None
1040     3,120   Per SF
1040         1   Each
1040             Each
6,080   Per SF
14,800   Per SF
A. Substructure         Table #   Unit Cost      Cost
1010      $16.65        $9,491
1030       $3.07        $7,675
1030       $5.47       $87,520
B10 Superstructure        1010      $12.68      $202,880
1010      $10.33       $51,650
Enclosure                 2010       $7.02       $96,034
2020        $530        $9,010
2020      $13,00       $13,000
2030      $1,270        $3,810
2030      $2,175        $2,175
B30 Roofing               3010       $7.02      $129,870
1010       $4.00       $20,000
1020      $3,000        $3,000
1030        $500        $2,000
2010      $2,935        $5,870
3010      $10.00       $50,000
3020       $2.00       $32,000
3020       $2.00       $10,000
3030       $8.65       $43,250
D20 Plumbing              2010      $3,000        $6,000
3020      $1,800        $7,200
3020       $8.21       $41,050
3090       $6.97       $34,850
D50 Electrical            5010      $4,750        $4,750
5010      $57.50        $1,438
5020       $9.06       $45,300
5020       $4.11       $65,760
5030      $6,700        $6,700
5030       $1.56        $7,800
Construction           1020
1040         $20       $62,400
1040     $50,000       $50,000
1040       $7.02       $21,902
1040         $80           $80
1040     $20,000       $20,000
$1.75       $10,640
$4.50       $66,600
Subtotal                                      $1,231,705
Profit (10%)                         25%      $307.926
Subtotal                                      $1,539,631
Architect Fees                          7%      $107.774
Total                                         $1,647,405
Locality Adjustment                                95.3%
Total Direct Cost                             $1,569,977
Round                                         $1,570,000
A. Substructure         Table #   Building SF     %
1010       $0.45       0.6%
1030       $0.37       0.5%
1030       $4.17       5.3%
B10 Superstructure        1010       $9.66      12.3%
1010       $2.46       3.1%
Enclosure                 2010       $4.57       5.8%
2020       $0.43       0.5%
2020       $0.62       0.8%
2030       $0.18       0.2%
2030       $0.10       0.1%
B30 Roofing               3010       $6.18       7.9%
1010       $0.95       1.2%
1020       $0.14       0.2%
1030       $0.10       0.1%
2010       $0.28       0.4%
3010       $2.38       3.0%
3020       $1.52       1.9%
3020       $0.48       0.6%
3030       $2.06       2.6%
D20 Plumbing              2010       $0.29       0.4%
3020       $0.34       0.4%
3020       $1.95       2.5%
3090       $1.66       2.1%
D50 Electrical            5010       $0.23       0.3%
5010       $0.07       0.1%
5020       $2.16       2.7%
5020       $3.13       4.0%
5030       $0.32       0.4%
5030       $0.37       0.5%
1040       $2.97       3.8%
1040       $2.38       3.0%
1040       $1.04       1.3%
1040          --       0.0%
1040       $0.95       1.2%
$0.51       0.6%
$3.17       4.0%
Subtotal                            $58.64      74.8%
Profit (10%)                      $14.66      18.7%
Subtotal                            $73.30      93.5%
Architect Fees                       $5.13       6.5%
Total                               $78.43       100%
Total Direct Cost                   $74.76
RoundTable 1 U.S. General Aviation and Air Taxi Activity, Type
of Flying, 2005
Type of Flying         Estimated Active    Estimated Hours Flown
Aircraft            (millions)
Corporate               10,600     4.8%        3.1    11.9%
Business                25,500    11.5%        3.2    12.3%
Personal               151,400    68.3%        9.3    35.6%
Instructional           13,400     6.0%        3.6    13.8%
Aerial Application       3,500     1.6%        1.0     3.8%
Aerial Observation       4,700     2.1%        1.3     5.0%
Aerial Other               800     0.4%        0.1     0.4%
External Load              200     0.1%        0.1     0.4%
Other Work               1,700     0.8%        0.2     0.8%
Sightseeing                900     0.4%        0.2     0.8%
Air Tours                  600     0.3%        0.4     1.5%
Air Taxi                 6,900     3.1%        2.9    11.1%
Air Medical Services     1.400     0.6%        0.7     2.7%
Total                  221,600   100.0%       26.1   100.0%
Source: FAA Administrator's Fact Book, December 2006.
Table 2 U.S. General Aviation and Air Taxi Activity, Type
of Aircraft, 2005
Type of Aircraft     Estimated Active Aircraft   Estimated Hours
Flown (millions)
Piston                    167,600    74.7%        16.4    60.7%
Turboprop                   7,900     3.5%         2.1     7.8%
Jet                         9,800     4.4%         3.8    14.1%
Rotary Wing (i.e.,          8,700     3.9%         3.1    11.5%
Experimental               23,600    10.5%         1.3     4.8%
Light Sport                   200     0.1%         0.0     0.0%
Other                       6.500     2.9%         0.3     1.1%
Total                   224,400 *   100.0%        27.0   100.0%
* Minor rounding error. FAA total statistics do not match
Aircraft by Type totals.
Table 3 Airport Infrastructure
and Services Checklist
* Aircraft rescue and fire fighting (ARFF) facility
* Air traffic control systems, navigational aids
* Air traffic control towers
* Aprons for parked planes
* Behind the gate warehouses and facilities
* Concourses
* Fueling storage facilities:
Avgas fuel for propeller or turboprop planes
JetA fuel for jets
Self-serve; trucks; hydrants
* Holding area for aircraft near runway
* Holding bays for aircraft along taxiways
* Parking lots/structures
* Perimeter fences
* Ramps (tarmacs) for unloading
* Restaurants/retail
(Number, width, length, orientation, quality, annual or
hourly capacity)
* Taxiways
(Quality, capacity, width, turn-radius, holding bays)
* Utilities (sewer, water)
* Aerial photography providers
* Aircraft interior refurbishment
* Aircraft painting
* Aircraft washing
* Airframe repair (major or minor)
* Avionics shop
* Deicing
* Engine overhaul and repair
* Hours of operation of airport
* Through-the-fence services (offsite mechanics)
* Propeller shop
Table 4 Airline Design Group Classifications
Group   Tail Height (feet)   Wingspan (feet)
I                      <20               <49
II                20 - <30          49 - <79
III               30 - <45         79 - <118
IV                45 - <60        118 - <171
V                 60 - <66        171 - <214
VI                66 - <80        214 - <262
Table 5 Legally Permissible Runway Widths
Approach Type                                      Width Requirement
Visual approach runway    Utility runway (for     250 feet (i.e., 125
propeller aircraft      feet +/- runway's
of 12,500 or less       center line)
Larger than utility          500 feet
Nonprecision instrument   Utility runway               500 feet
approach runway
(with only horizontal     Larger than utility,         500 feet
or area approach          visibility minimum
navigation systems)       greater than 3/4 mile
Larger than utility,        1,000 feet
as low as 3/4 mile
Precision instrument      n.a.                        1,000 feet
(with ILS or PAR air
Table 6 Case Study Market Area
* Surrounded by strong office and light-industrial district
* Prosperous, growing, suburb of medium-sized metropolitan area
* Extremely busy general aviation (reliever) airport
* Permitting class I, II, III size of aircraft
* Numerous corporate aircraft users and training pilots
* Precision approach runway with most navigational aids
* Multiple fixed base operators
* Most infrastructure and services available
Imaginary Surface--Check of Subject's Location
* The precision approach runway requires a 1,000-foot primary surface
width, i.e., 500 feet, plus or minus, from the center
* The subject is 1,250 feet from the nearest runway center line
* At the subject's position, the transitional surface prohibits
structures above 107 vertical feet (1,250 horizontal feet minus 500
horizontal feet) / (7 horizontal feet to 1 vertical foot)
* Conclusion: The subject is less than the imaginary surface boundary
and is acceptable
Table 7 Case Study Ground Lease, Net Operating Income Partitioned
Four comparable airport ground leases--augmented by
an airport management study--indicate that land rent
ranges between $0.18 and $0.30 per square foot. After
adjusting for airport location and market conditions,
the subject's land rent is estimated at $0.27/[SF.sub.L], or
$12,054 (= $0.27/[SF.sub.L] x 44,645 [SF.sub.L]).
As a surrogate benchmark, and as a check of reasonability,
the market fee simple land rent is derived from a
study of adjacent industrial land sales. Industrial land
sells for $3.25 to $3.50 per square foot. An extracted
land capitalization rate is concluded to be 6.2%. The land
value is converted into a land rent by capitalization ([I.sub.L] =
[V.sub.L] x [R.sub.L]). $8,996 to $9,688 = $3.25/[SF.sub.L] to
$3.50/[SF.sub.L] x 44,645 [SF.sub.L] x 6.2%. As might be anticipated
it is near or somewhat below the airport's market ground rent.
[I.sub.L, LH] and [I.sub.L, LF] are contract rents. The subject's net
operating income is partitioned:
Both the FBO's sandwich position and the hangar
tenant's subleasehold are positive leasehold interests.
Table 8 Case Study Percent of Leasehold Recaptured
The percent of leasehold recaptured is determined for the land
leasehold interest and for the building leasehold interest.
These calculations will be carried forward into other sections of
For the land component, at 6.2% (see Table 9, Rate Extraction from
Residual Techniques for more rate development) over 37 years, the
percent of leasehold recapture is developed using the formula:
0.89201 = 14.3872 / 1/6.2% = 14.3872 / 16.1290, or = 1 - 1 /
[(1.062).sup.37] = 1 - 1 / 9.2599
The building component is similarly developed at 9.3%:
0.962756 = 10.35222 / 10.75269, or = 1 - 1 / 26.8501
The percent of building leasehold recaptured is loaded into the
perpetual building capitalization rate to determine the adjusted
building capitalization rate:
[R.sub.adjusted, B] = 0.093 / 0.962756 = 9.65977%
Table 9 Case Study Rate Extraction from
The building capitalization rate ([R.sub.B]) is extracted using a
residual technique where [R.sub.O] and [R.sub.L] were derived from
traditional development techniques.
[R.sub.O] = (L x [R.sub.L]) + (B x [R.sub.B])
9.0% = (10% x 6.2%) + (90% x 9.3%)
The land-to-value ratio (L) is the land value divided by
overall value. B = 100% - L. L and B are derived from
the market, and for the case study it is compared
against the depreciated building value from the cost approach
of $1,748,202 and the capitalization of the land
value, $12,054 / 6.2%.
L = [V.sub.L]/[V.sub.O] = $194,419/$1,748,202 + $194,419
[approximately equal to] 10%
Table 10 Case Study Value of Subleasehold
The subleasehold land rent is capitalized into value,
and then it is adjusted by the percent of land leasehold
recaptured during the 37-year lease term. This value
benefits the hangar tenant.
[V.sub.L, SLH] =  [I.sub.L, SLH]/[R.sub.L, SLH] x % of land leasehold
= $8,054/6.2% x 89.201%
= $129,903 x 89.201%
= $115,875
= $116,000 (Rounded)
(To maintain simplicity in the case study, the leasehold
rate stratum is assumed to be equal:
[R.sub.L LF] = [R.sub.L, sw]  = [R.sub.L, SLH])
Table 11 Case Study Valuation of the Expected
Value of the Reversion
The subject's reversion is far into the future, 37 years,
resulting in a present value factor at 9.3%, assuming
increases in income are canceled out by increases in
inflation of approximately 3.7%.
The market does not suggest any reversionary value
given the political risk of nonrenewal of a lease and the
economic risks from the variability of far-off forecasts.
The expected value of the reversion is zero.
Table 12 Case Study Cost Approach
Building hard costs                                   $1,570,000
Utility tap fees, jurisdictional,
miscellaneous                                          $50,000
Construction Financing                                   $73,600
Base Replacement Cost:                                $1,693,600
Other Soft Costs                                 2%      $33,872
Base Replacement + Soft Cost                          $1,727,472
Entrpreneurial Incentive                        15%     $259,121
Replacement Cost New:                                 $1,986,593
Physical                                    12.0%     $238,391
Functional                                   0.0%           $0
External                                     0.0%           $0
Depreciated Value of the Building                     $1,748,202
Leasehold Adjustment:                                 x 0.962756
[V.sub.B, SLH]                                        $1,683,092
[V.sub.L, SLH                                         $1,160,000
[V.sub.reversion]                                             $0
Value of Subleasehold ([V.sub.B + L. SLH]):           $1,799,092
Round                                                 $1,800,000
Table 13 Case Study Sales Comparison Approach
Within the case study's region, very few comparable sales
occurred at general aviation airports. Smaller hangars are
included due to the lack of comparable sales data. The
hangars are somewhat comparable to the subject as they can
house similar planes in lieu of the subject structure,
although they are less likely to be purchased by the same
type of user or operator.
Square     Year    Sale     Sale
#   Airport     Feet     Built    Date    Price     $/[SF.sub.B]
1   Subject     3,645     2000    4/00   $215,800      $59.20
2   Similar    11,980     1991   12/97   $825,000      $68.86
3   Subject     4,200     2000    6/00   $259,000      $61.67
4   Similar     6,200     2001    1/02   $430,000      $69.35
Property Rights      1. All of the hangars are of the realty
Conveyed             elements only.
2. Very little ground sublease information
(a) All sales are on long-term ground
subleases beginning near the year of
construction and involve the sale of
hangar improvement. The two airports
historically structure their leases
in a consistent manner. The subleases
are assumed to be fairly similar to
the subject and have fairly similar
leasehold terms.
(b) The residual subleasehold value
([V.sub.L, SLH] benefit is likely
(c) The diminution to the building value
due to a relatively longer or shorter
reversion is likely to be relatively
similar to the subject.
Financing Terms      Cash equivalent transactions
Conditions of Sale   Arm's-length transactions
Expenditures Made    None
Market Conditions    The general commercial market has
appreciated. A representative at the
FBO reported that town hangars (having
separate doors but sharing an open hangar
with contiguous hangar units) generally
sold for $13,900 in 1982 and sold for
$45,000 in 2000. This indicates an
appreciation rate of 6.7%, compounded
annually. The region's market has begun
to slow, so a slightly lower appreciation
of 6.0% per year is applied.
Location             The two airports, and nearby office and
warehouse districts as a proxy, compete
against each other at similar land prices
Building             The general quality of the majority of the
Construction         adjustment based on differentials in hard
Quality              costs, provided by Marshall Cost Service,
comparable sales are inferior to the subject.
An indicates a ratio of 45% higher between
excellent-and good-quality Class S storage
hangars. The comparables do not have cranes.
Age                  An age adjustment represents noncurable
physical depreciation using a fifty-year
Size                 Downward adjustments are applied due to the
marginal higher price per square foot for
smaller hangars.
Office Space         In this case study, the office space is
treated as gross square footage rather
than as an amenity.
Adjustments                             Comparable Sales
#1         #2        #3       #4
$/[SF.sub.B]                   $59.20     $68.86   $61.67   $69.35
Property Rights Conveyed           --         --       --       --
Adjusted $/[SF.sub.B]        $59.20     $68.86   $61.67   $69.35
Financing Terms                    --         --       --       --
Conditions of Sale                 --         --       --       --
Expenditures Made                  --         --       --       --
Years Prior to Appraisal          1.8        4.1      1.6      0.0
Market Conditions                +10%       +24%      +9%      +0%
Adjusted $/[SF.sub.B]        $65.12     $85.39   $67.22   $69.35
Location                           0%         0%       0%       0%
Construction Quality              +45         0%     +45%     +45%
Age                               -8%       +10%      -8%     -10%
Size                             -17%        -5%     -16%     -13%
Net Adjustments                  +20         +5%     +21%     +22%
Final Adjusted                 $78.14     $89.66   $81.34   $84.61
Mean                           $83.44/
[SF.sub.B]
Median                         $82.98/
None of the comparables is truly representative of the
subject's size and class, but after considering the
adjustments, the comparable sales provide a general
indication. The market suggests $82.00 per square foot.
21,000 [SF.sub.B] x $82.00/[SF.sub.B] = $1,722,000
Rounded = $1,720,000
Table 14 Case Study Income Capitalization Approach
Comparable leases range from $7.84/SF to $13.18/SF The subject
generated $205,200 in effective gross income in 2001, which
does not include fuel and service sales. Based on this
limited array of rent data, the EGI is forecasted to increase
by about 4% in 2002. The implied rental rate of $10.50/SF is
supported by the market.
Vacancy is especially tight at this and at the next comparable
general aviation airport. There are long waiting lists for
t-hangars; two multi-unit hangar complexes, newly constructed
and condominiumized, sold out in several months. The subject
airport is surrounded by the second largest office district
in the state and suburban growth is continuing. This airport's
short- and long-term demand is high.
Potential gross income:               $10.50/SF x
21,000 SF =     $220,500
Vacancy/collection loss:                       3%   -   $6,615
Effective gross income:                               $213,885
Insurance                                $7,000
Janitorial                               $5,000
Maintenance                              $5,000
Management and misc.                    $11,000
Utilities                               $20,000
Total:                                            -  $48,000
Net Operating Income ([I.sub.O]):                     $165,885
- Income to land (at market):
([I.sub.L]):                                       $12,054
= Income to building ([I.sub.B]):                   $153,831
/ Building capitalization rate
([R.sub.B.]):                                         9.3%
Capitalization of Building Income
into Perpetuity:                                  $1,654,097
% of Building Leasehold Recaptured:                   0.962756
Value of Building ([V.sub.B]):                      $1,592,492
+ Value of Land's Subleasehold
([V.sub.L, SLH]):                                 $116,000
+ [V.sub.reversion]                                       $0
Value of Subleasehold ([V.sub.B+L,                  $1,708,492
SLH):
Round:                                              $1,710,000
Figure 1 U.S Air Carrier Aircraft by Type
Jet    Turboprop   Piston   Rotary Wing
1995   5,724     3,444     6,992       2,110
1997   6,464     3,207     6,167       2,152
1999   7,270     3,740     5,757       2,378
2001   8,294     3,752     4,970       2,429
2003   9,235     3,281     4,269       2,571
2005   9,880     2,994     3,745       2,620
Source: FAA Administrator's Fact Books, 1998-2006 Gale Copyright:
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