an introduction to the valuation of aircraft abstract ... · consumption, and operations. an...

FEATURES

AbSTRAcTThis article provides an

overview of the general

considerations for the

valuation and analysis

of aircraft hangars.

Hangars are a special-

use type of prop-

erty with specific and

unique considerations.

The article is presented

in two parts. This, part

two, discusses the mar-

ket 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 character-

istics are briefly sum-

marized and a valuation

case study illustrates

the concepts. Part

one, published in the

Winter 2008 issue of

The Appraisal Journal,

discussed hangar

characteristics, valu-

ation 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, high-est 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 Adminis-tration (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

An Introduction to the Valuation of Aircraft Hangars—Part 2by Timothy J. Lindsey, MAI

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.

The Appraisal Journal, Spring 2008 AnIntroductiontotheValuationofAircraftHangars-Part2132

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 sec-tor of the air transportation industry. The U.S. air car-rier 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 traf-fic 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 designator.

The third classification of air traffic, general avia-tion, does not provide scheduled public transportation. As shown in Tables 1 and 2, the majority of general

12,000

10,000

8,000

6,000

4,000

2,000

1995

1997

1999

2001

2003

2005

0Jet

5,724

6,464

7,270

8,294

9,235

9,880

Turboprop

3,444

3,207

3,740

3,752

3,281

2,994

Piston

6,992

6,167

5,757

4,970

4,269

3,745

Rotary Wing

2,110

2,152

2,378

2,429

2,571

2,620

Source: FAA Administrator’s Fact Books, 1998–2006

Figure 1 U.S Air carrier Aircraft by Type

aviation aircraft is for personal use and is predomi-nantly piston aircraft.

Market Analysis of AirportsAirport classificationsAppraisers may want to consider an airport’s posi-tion 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 NPIAS classifications include international airports, domestic air carrier airports, commuter airports, reliever airports, and general aviation air-ports. The FAA classifies these airports by the size of the traffic hub as measured by the Standard Metro-politan Statistical Area (SMSA). Domestic air carrier

5. Federal Aviation Administration, Report to Congress National Plan of Integrated Airport Systems (NPIAS) (2007–2011), 1.

6. Ibid.

AnIntroductiontotheValuationofAircraftHangars-Part2 The Appraisal Journal, Spring 2008 133133

airports, which include international airports as a special subcategory, serve the largest cities. Com-muter 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, certifi-cated 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 expe-rience, fire safety, security, and airport design stan-dards. The United States had 599 certificated airports in 2004, of which 57 were used by the military.

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., helicopter) 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%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.

Source: FAA Administrator’s Fact Book, December 2006.

Airports vary widely, so when developing a mar-ket analysis, an airport’s infrastructure and services should be evaluated against competing airports. An airport’s competitive market capture is against air-ports 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 pub-lishes the AOPA’s Airport Directory biannually, which is an excellent summary of all pertinent airport infra-structure, 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 hour-ly capacity—see the Federal Aviation Administration’s circular, “Airport Capacity and Delay.”8

Table 1 U.S. General Aviation and Air Taxi Activity, Type of Flying, 2005

Type of Flying Estimated Active Aircraft Estimated Hours Flown (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.

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.


Figure 2 Total U.S. Airports, 2003

Figure 3 National Plan of Integrated Airport Systems (NPIAS) Airports

19,847Total U.S. Airports26% Public Owned74% Private Owned

5,261Open to Public

14,586Closed to Public

4,169Public Owned

1,092Private Owned

3,431NPIAS Airports

(of the 5,261 existing public use airports, 65% are NPIAS

3,364 Existing3,251 Public Owned113 Private Owned

67 Proposed

382Primary

2Primary

135Commercial

Service

6Commercial

Service

274Reliever

4Reliever

2,573General Aviation

55General Aviation


Table 3 Airport Infrastructure and Services checklist

Infrastructureo Aircraft rescue and fire fighting (ARFF) facility o Air traffic control systems, navigational aids Automatic Terminal Information Service (ATIS) Distance Measuring Equipment (DME) Instrument Landing System (ILS) Microwave landing system Non-Directional Beacon (NDB) Runway lighting Visual Approach Slope Indicator (VASI) Very High Frequency Omnidirectional Range (VOR) Precision Approach Radar (PAR) o Air traffic control towers o Aprons for parked planes o Baggage handling o Behind the gate warehouses and facilities o Concourses o Fueling storage facilities: Avgas fuel for propeller or turboprop planes JetA fuel for jets Automobile fuel Self-serve; trucks; hydrants o Ground handling o Heliporto Holding area for aircraft near runway o Holding bays for aircraft along taxiways o Parking lots/structures o Perimeter fences o Pilot’s lounge o Ramps (tarmacs) for unloading o Restaurants/retail o Runways (Number, width, length, orientation, quality, annual or hourly capacity) o Taxiways (Quality, capacity, width, turn-radius, holding bays) o Terminals o Utilities (sewer, water)

Serviceso Aerial photography providers o Aircraft rental o Aircraft interior refurbishment o Aircraft painting o Aircraft washing o Airframe repair (major or minor) o Avionics shop o Car rental o Deicing o Engine overhaul and repair o Flight instruction o Ground school o Hours of operation of airport o In-flight catering o Instrument shop o Interior cleaning o Through-the-fence services (offsite mechanics) o Propeller shop o Security o Snow Removal o U.S. Customs

135


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 engi-neering rating systems, known as Pavement Classifica-tion 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 spe-cialized discipline with numerous variables and an extensive literature.

Capacity may determine the competitive air-ports 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 docu-ments, 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 thick-

Table 4 Airplane Design Group classifications

Group Tail Height (feet) Wingspan (feet)I <20 <49II 20 - <30 49 - <79III 30 - <45 79 - <118IV 45 - <60 118 - <171V 60 - <66 171 - <214VI 66 - <80 214 - <262

ness, 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 neighbor-hood 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 reasonably probable and legal use of vacant land or an improved property, which is physically possible, ap-propriately supported, financially feasible, and that results in the highest value.12

The four criteria—legal permissibility, physical pos-sibility, financial feasibility, and maximum produc-tivity—are used in analyzing highest and best use for aircraft hangars.

Legal PermissibilityIn terms of legal permissibility, use of airports and sur-rounding 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 fol-lowing lists a number of imaginary surfaces that limit the placement of landside buildings or structures.

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,” §77.25.


Table 5 Legally Permissible Runway Widths

Approach Type Width RequirementVisual approach runway

Nonprecision instrument approach runway(with only horizontal or area approach navigation systems)

Precision instrument approach runway(with ILS or PAR air navigation system)

Utility runway (for propeller aircraft of 12,500 or less gross weight)

Larger than utility runway

Utility runway

Larger than utility, visibility minimumgreater than 3/4 mile Larger than utility, visibility minimumas low as 3/4 mile

n.a.

250 feet (i.e., 125 feet +/- runway’s center line)

500 feet

500 feet

500 feet

1,000 feet

1,000 feet

• 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 ex-tensive 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 verti-cal 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 au-thority, 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; to-pography; 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 neces-sary 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:

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 main-tenance organization completes a service check. . . [maintenance] hangar utilization, or bay occupancy, is a measure of how fully a company employs its han-gar facilities. A three-shift-per-day, seven-day-a-week schedule makes full use of a hangar.14

The hangar is a cost center, and the goal is to make the aircraft available to fly as soon as possible. The pro-rated 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 mainte-

14. Gail F. Butler and Martin R. Keller, ed., Handbook of Airline Operations (New York: Aviation Week, 2000), 483–492.


nance 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 mainte-nance 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:

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 opera-tional demands on airport facilities like runways, light-ing 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

An airport’s historical operations data and mas-ter 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 correlat-ed 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. Airport

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, §7.2.4.

18. Richard de Neufville and Amedeo R. Odoni, Airport Systems: Planning, Design, and Management (New York: McGraw-Hill, 2003), 59.

Systems: Planning, Design, and Management recom-mends the analysis of different scenarios:

The forecast is “always wrong.” Modern planners and managers must face this reality in the era of deregula-tion 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

Airports have financial, operating, and politi-cal 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 case study will be presented next to illustrate vari-ous 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 ap-proach, and the income capitalization approach—are derived from at-market interests. Fee simple (FS) equivalent property interests are premised on per-petual 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 rever-sionary value.


Table 6 case Study Market Area

Market Area• Surrounded by strong office and light-industrial district• Prosperous, growing, suburb of medium-sized metropolitan area• Highway access

Airport• 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

Partitioned InterestsThe property’s market income stream is partitioned into the residual cash flows as follows:

IO = IB + IL

where: IO = Income overall (NOI) IB = Income to building (hangar) IL = Income to land

The land component is partitioned as follows:

Figure 4 case Study Subject Improvements

• 44,645-square-foot (SFL) parcel on ground lease

• 16,000-square-foot (SFB) storage hangar, class S, good

quality, + 5,000 SFB office area, masonry construction

Fits 4 small planes, or 2 medium planes with small planes tucked in

2-ton bridge crane • Four bi-sliding panel doors, motorized 120 foot (width) × 26 foot (height) • 1995-1996 year of construction• Appraisal’s effective date: 2002

IL = IL, SLH + IL, SW + IL, LF

where: IL = Income to land at a market level, equivalent to fee simple rent IL, SLH = Subleasehold’s income to land = IL, FS market – IL, LH (hangar user) IL, SW = Sandwich leasehold’s income to land = ILH – ILF (FBO) IL, LF = Leased fee’s income to land (airport authority)

139


The leasehold interest can be positive when the market rent is greater than the contract rent or nega-tive 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 be-cause 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:

However, as the leasehold gets closer to expiration, the capitalized leasehold building and land values diminish in comparison to the Vperpetual 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 of leasehold 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 = Vleasehold

To demonstrate the algebraic linkage, the percent of leasehold recaptured can alternatively be loaded into the capitalization rate.

Table 8 demonstrates the percent of leasehold re-captured for the case study subject.

Vperpetual life

1/Rperpetual life

= 1/Radjusted

=1 - 1Sn

I Vperpetual life

= Rperpetual life

Radjusted =% of leasehold recaptured

Rperpetual life

Table 7 case Study Ground Lease, Net Operating Income PartitionedFour 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

L, or

$12,054 (= $0.27/SFL × 44,645 SF

L).

As a surrogate benchmark, and as a check of reason-ability, 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

L =

VL × R

L). $8,996 to $9,688 = $3.25/SF

L to $3.50/SF

L ×

44,645 SFL × 6.2%. As might be anticipated it is near or

somewhat below the airport’s market ground rent.

IL, LH

and IL, LF are contract rents. The subject’s net oper-

ating income is partitioned:

Io

= $165,885

IB

IL

= $153,831

= $12,054

IL, LF

= $2,230

IL, SLH

= IL (FS market)

− IL, LH

IL, SW

= IL, LH

− IL, LF

$8,054 = $12,054 − $4,000

$1,770 = $4,000 − $2,230

Both the FBO’s sandwich position and the hangar tenant’s subleasehold are positive leasehold interests.

= an

1/Rperpetual life


Figure 5 case Study Nonperpetual Income Stream Partitioned

10 20 30 37 40 50 60 70

lO

lB

IL

IL, SLH

Time (years)

Income Stream, Partitioned(before discounting to present value)

Ireversion (B & L)

Case S

tudy’sExpiration

IL, SW

IL, LF

100%

90%

30%

40%

50%

60%

70%

80%

20%

10%

0%

This curve illustrates a 9.3% discount rate.Based on the assumption that the yield rateY and capitalization R are equivalent.

At the case study’s 9.3% yield, the graph demonstrates that a ground lease term should be no less than 40 years if the developer is to have a reasonable chance to recapture the intial replacement cost new.

Time Remaining on Leasehold (years)

0 10 20 30 40 50 60 70

Figure 6 Leasehold’s Value Versus Value of Perpetual Income


The Inwood Premise. The Inwood premise is R = Y – ∆×1/Sn.

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 = Rperpetual life, and if the hangar reverts to the landlord at the termination of the lease (n), ∆ = -100% then the adjusted model is as follows:

Radjusted = Rperpetual life – (-100%) ×1/Sn

Radjusted = Rperpetual life + 1/Sn

In the case study this is computed as

9.65977% = 9.3% + 0.35977%

The model can be expanded to reflect increases in the land and building income and value as follows:

Rperpetual life = Yperpetual life –Aperpetual life

where A is the future change in income or value.20 By substitution into the previous Inwood premise,

Radjusted = Y -A + 1/Sn , or = Y - A +

where the future value component, Sn = (1 +Y)n, is discounted at the yield (Y -A). The percent of lease-hold 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 (RO) 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:

RO = (L ×RL ) + (B ×RB )

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 capitaliza-tion rate, and building capitalization rates are gener-ally higher than the overall capitalization rate:

RL < RO < RB

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 entrepreneurial incentive, requiring a higher capitalization rate in order to recapture the building investment. Likewise, leased fee rates are lower than leasehold rates:

RLF < RSW < RSLH

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 inter-est. These calculations will be carried forward into other sections of the case study. For the land component, at 6.2% (see Table 9, Rate Extraction from Residual Techniques for more rate develop-ment) over 37 years, the percent of leasehold recapture is developed using the formula:

0.89201 =

14.3872 = 14.3872

, or = 1 - 1

= 1 - 1

1/6.2% 16.1290 (1.062)37 9.2599

The building component is similarly developed at 9.3%:

0.962756 = 10.35222

, or = 1 - 1

10.75269 26.8501 The percent of building leasehold recaptured is loaded into the perpetual building capitalization rate to determine the adjusted building capitalization rate:

R

adjusted, B =

0.093 = 9.65977% 0.962756

19. Sinking fund factor: 1/Sn = Y , where Sn = (1 + Y)n.

20. Appraisal Institute, The Appraisal of Real Estate, 12th ed. (Chicago: Appraisal Institute, 2001), 561. Sn – 1

(Y -A ), or

Sn-1

=(Y – A)

1 – 1Sn


IL, SLH

RL, SLH

=$8,054 ×89.201% 6.2%

L= ≈10%

Table 9 case Study Rate Extraction from Residual Techniques

The building capitalization rate (RB) is extracted using a

residual technique where RO and R

L were derived from

traditional development techniques.

RO = (L ×R

L) + (B × R

B)

9.0% ≈ (10% × 6.2%) + (90% × 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 ap-proach of $1,748,202 and the capitalization of the land value, $12,054 ÷ 6.2%.

$194,419

$1,748,202 + $194,419

VL =

VO

Table 10 case Study Value of Subleasehold InterestThe 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.

VL, SLH

= ×% of land leasehold recaptured

=$129,903 ×89.201%

(To maintain simplicity in the case study, the leasehold rate stratum is assumed to be equal: R

L, LF = R

L, SW

= RL, SLH

)

Reversionary ValueThe probability of lease renewal might add rever-sionary 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 expi-ration 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 re-version. The possibility of future renewal is bounded between the 0% probability of renewal and the 100% probability of renewal.

Probability of yes renewal: P(r) = r %Probability of no renewal: P(¬r) =1 – r %Total probability: 100%

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 (VO reversion, SLH ) discounted to a present value:

E (VO reversion ) =(P(r) ×VO reversion, SLH ) + (P (¬ r) × $0)

where VO reversion, SLH equals the VB reversion, SLH plus the VL reversion, SLH.

The reversionary value of the building (VB reversion,

SLH ) equals the value of the depreciated building at the lease’s renewal plus the value added from the

(1 + Y )n

VL, SLH = RL, SLH

×%of leasehold recaptured

IL, SLH

VB +L, SLH =IB, SLH + IL, SLH

Radjusted, O, SLH

Radjusted,B,SLH

=IB,SLH

Radjusted, L, SLH

+IL, SLH

RL ×(1 +YL)n Radjusted

or = IL, LF + IL reversion, LF +IB reversion, LF

RB ×(1 +YB )n

VL, SW =IL, SW

R adjusted, SW

The subleasehold income is capitalized into the sub-leasehold value as shown in the following equation and in Table 10.

In conclusion, three interests constitute the total value of the aircraft hangar property. The hangar (sublessee) receives the present value of IB, SLH and IL,

SLH (see shaded area of Figure 5) until the sublease’s expiration:

The FBO (lessee) receives the present value of IL, SW until expiration:

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:

RB ×(1 +YB )n

VB + L, LF = IL, LF + IB reversion, LF RL, LF

143

= $115,875=$116,000 (Rounded)


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 deprecia-tion. These net capital repairs may or may not create value. At the time of construction, capital repairs (adjusted for future inflation) may include compli-ance with new building and fire codes.

The third factor, cost-push inflation, may appre-ciate 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 Ap-pendix 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.

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

Table 11 case Study Valuation of the Expected Value of the ReversionThe 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.

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.

cure of physical depreciation minus the cost to cure (i.e., a capital expenditure) minus the functional obsolescence from any deficiency requiring mod-ernization, 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 down-time during a renovation. This net capital repair can have a positive, negative, or breakeven effect on the

reversionary value.

Lease Renewal. The probability of lease renewal requires careful judgment. When the renewal deci-sion 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 prob-ability 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 honor-able 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-suf-ficient, if airport/runway expansions upset the citi-zens, or if various authorities are inclined toward cronyism, then non–airport governmental authori-ties 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 re-versionary value, the contractual ground rents are likely to increase. Additionally, three forces affect the future value of the building.

(1 +YL, SLH )n

E (Vreversion ) =P(r) ×[ VB reversion, SLH + VL reversion, SLH ] +$0(1 +YB, SLH )

n


or the cost to purchase an existing structure and make any necessary modifications.22

Because cost information is available directly from the market, it is significant that someone actu-ally 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 infor-mation improves reliability. Because of the special-ized 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 length-ens and the square footage increases, stronger and thicker trusses or girders are required.23 Higher ceil-ing 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 simi-lar to other general commercial property types, although exact rates will differ and the presence of external obsolescence may nullify any entrepre-neurial incentive. To determine depreciation, all typical appraisal techniques are applicable, includ-ing 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 proper-ties 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 speci-fications 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 ware-house 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 ob-solescence 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 applica-tion presumes a perpetual-life fee simple interest, the value of the building must be adjusted, if necessary, to reflect a nonperpetual leasehold interest. The

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 employ-ment 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%.


percent of leasehold adjustment derived from the income approach can be multiplied against the stabi-lized building value. The nonperpetual subleasehold land value, if any, is added (VL, SLH). The probability of a weighted reversion value (E(Vreversion)) is added. Combined, these equal the subleasehold value of the building and land to the tenant (VB+L, SLH).

Table 12 illustrates application of the cost ap-proach 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-list-ing 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 han-gar 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 ad-justments. 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 incor-porates the market’s anticipated use of the property.

To make a comprehensive property rights com-parison, 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 infla-tion, 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 oc-cupancy, 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 oc-cur 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 com-parison approach in the case study.

Table 12 case Study cost Approach

Building hard costs $1,570,000Utility tap fees, jurisdictional, miscellaneous $50,000Construction Financing $73,600 Base Replacement Cost: $1,693,600Other Soft Costs 2% $33,872Base Replacement + Soft Cost $1,727,472Entrpreneurial Incentive 15% $259,121Replacement Cost New: $1,986,593Less Depreciation: Physical 12.0% $238,391 Functional 0.0% $0 External 0.0% $0Depreciated Value of the Building $1,748,202Leasehold Adjustment: × 0.962756V

B, SLH $1,683,092V

L, SLH $116,000

Vreversion $0

Value of Subleasehold (VB + L, SLH

): $1,799,092Round $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.

comparable Sales

# Airport Year built Sale Date Sale Price $/SF

B

1 Subject 2000 4/00 $215,800 $59.202 Similar 1991 12/97 $825,000 $68.863 Subject 2000 6/00 $259,000 $61.674 Similar 2001 1/02 $430,000 $69.35

Elements of comparison

Property Rights Conveyed 1. All of the hangars are of the realty elements only. 2. Very little ground sublease information is available. (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

L, SLH) benefit is likely to be similar.

(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 Immediately after Purchase

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 and rental rates.Building Construction Quality The general quality of the majority of the comparable sales are inferior to the subject. An adjustment based on differentials in hard costs, provided by Marshall Cost Service, 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 economic life.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.

building Square Feet

3,64511,9804,2006,200

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 profes-sional 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 opera-tor reported that hangar rent rates are particularly difficult to determine even for people in the business. According to Airport Planning & Management,


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

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 posi-tions. 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 han-gars 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 capitaliza-tion 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

Table 13 case Study Sales comparison Approach (continued)

Adjustments comparable Sales #1 #2 #3 #4$/SF

B $59.20 $68.86 $61.67 $69.35

Property Rights Conveyed – – – –Adjusted $/SF

B $59.20 $68.86 $61.67 $69.35

Financing Terms – – – –Adjusted $/SF

B $59.20 $68.86 $61.67 $69.35

Conditions of Sale – – – –Adjusted $/SF

B $59.20 $68.86 $61.67 $69.35

Expenditures Made – – – –Immediately After Purchase

Adjusted $/SFB $59.20 $68.86 $61.67 $69.35

Years Prior to Appraisal 1.8 4.1 1.6 0.0Market Conditions +10% +24% +9% +0%

Adjusted $/SFB $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/SFB

Median $82.98/SFB

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 SFB × $82.00/SF

B = $1,722,000

Rounded = $1,720,000

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.

that are of similar size, along with larger hangars that can accommodate multiple planes. Demand for han-gars 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:

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

Expenses can be handled on a triple-net basis, modified-gross basis, or gross basis in the same mar-ket 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 char-acteristics. 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 capi-talization approach to the case study property.

ConclusionEach market area differs substantially as to the avail-ability 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 con-structed 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 prop-erty. 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 contrib-uting to value.

In addition to the cost approach, the sales com-parison and income capitalization approaches to value are needed. The three approaches to value are

Timothy J. Lindsey, MAI, is a commercial appraiser in Denver, Colorado, with Safiya: Land + Building Ap-praisal Studios. He recently earned his MAI designa-

tion from the Appraisal Institute. contact: [email protected]

150 The Appraisal Journal, Spring 2008 AnIntroductiontotheValuationofAircraftHangars-Part2150

a reflection of market conditions and the market par-ticipants’ 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

Table 14 case Study Income capitalization ApproachComparable 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.

Income capitalizationPotential gross income: $10.50/SF ×21,000 SF = $220,500Vacancy/collection loss: 3% -$6,615Effective gross income: $213,885Operating expenses: Insurance $7,000 Janitorial $5,000 Maintenance $5,000 Management and misc. $11,000 Utilities $20,000 Total: - $48,000Net Operating Income (I

O ): $165,885

- Income to land (at market): (IL): $12,054

= Income to building (IB ): $153,831

÷ Building capitalization rate (RB ): 9.3%

Capitalization of Building Income into Perpetuity: $1,654,097% of Building Leasehold Recaptured: 0.962756Value of Building (V

B): $1,592,492

+ Value of Land’s Subleasehold (VL, SLH

): $116,000 + V

reversion $0

Value of Subleasehold (VB+L,

SLH

): $1,708,492Round: $1,710,000

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 en-planed 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 Reversion

The 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.

Replacement Cost New n = 0 $1,986,593×Inflation (3%, 37 years, compounded yearly) 2.9852= Relacement Cost New n = 37 $5,930,377

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.

IB n = 1 $153,831

÷ % Good = (100% – 12% depreciation) 88%Imputed Feasibility New I

B n = 1 $174,808

The income, as if new, is inflated at 3% to the year of reversion, 2040.Imputed Feasibility New I

B n = 1 $174,808

×Inflation (3%, 37 years) 2.9852Feasible RCN I

B, cost-push inflation n = 38 $521,837

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.

IB, cost-push inflation n = 38 $521,837

RB, reversion n = -1 9.3%

RCN, reversion n = 37 $5,611,151

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.

Value New at Reversion n = 37 $5,700,000Depreciation (=43 year age ÷50 year life) - 86% $(4,902,000)V

B, reversion n = 37 $798,000

This reversionary value is discounted back to present value as of the effective date of the appraisal (n = 0). Again, for simplicity the R

B is assumed to be the same as the Y

B, where inflation is offsetting appreciation. At a

building yield rate of 9.3%, the present value factor over 37 years is 3.7244%.

The present value of VB, 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.

Time (years) 0 10 20 30 37 40 50 60 70

$ PresentValue

= VB, reversion

(1 + YB )n

Ireversion, building

IL


App

end

ix I

I-C C

ase

Stu

dy B

uil

ding

Co

st B

reak

dow

n

Sub

ject

Par

amet

ers

Sou

rces

Offi

ce (

1st

floo

r)

2,5

00

squ

are

feet

R

SM

eans

Squ

are

Foot

Cos

ts, 2

00

2O

ffice

(2

nd fl

oor)

2

,50

0 s

quar

e fe

et

RSM

eans

Ass

embl

ies

Cos

t D

ata,

20

02

Han

gar

16

,00

0 s

quar

e fe

et

For

pre-

engi

neer

ed r

igid

fra

me

Tota

l 2

1,0

00

squ

are

feet

R

SM

eans

Bui

ldin

g Con

stru

ctio

n Cos

t D

ata

Han

gar

Wid

th

10

0 ×

16

0 fee

t N

atio

nal B

uild

ing

Cos

t M

anua

l, 2

00

2, e

d. D

ave

Oge

rsho

k (C

raft

sman

Boo

k C

o.)

Offi

ce W

idth

1

00

× 2

5 fee

t M

arsh

all C

ost

Ser

vice

Pe

rimet

er

57

0 li

near

fee

tEa

ve H

eigh

t 2

4 fee

t

Roo

f H

eigh

t 3

2 fee

t

cos

t pe

r A

. S

ubst

ruct

ure

Tabl

e #

S

ecti

on

Des

crip

tion

U

nit

Uni

t Ty

pe

Uni

t c

ost

cos

t b

uild

ing

SF

%

10

10

Fo

unda

tions

Po

ured

con

cret

e; s

trip

and

spr

ead

foot

ings

570

LF

$16.6

5

$9,4

91

$0.4

5

0.6

%

10

30

S

lab

on g

rade

3”

rein

forc

ed c

oncr

ete

slab

on

grad

e flo

or

2,5

00

SF

of foo

t pr

int

$3.0

7

$7,6

75

$0.3

7

0.5

%

(o

ffice

)

10

30

S

lab

on g

rade

8”

rein

forc

ed c

oncr

ete

slab

on

grad

e flo

or

16,0

00

SF

of foo

t pr

int

$5.4

7

$87,5

20

$4.1

7

5.3

%

(h

anga

r)

b.

She

ll

B

10

Sup

erst

ruct

ure

10

10

W

all c

onst

ruct

ion

Pre-

engi

neer

ed r

igid

fra

me

(1:1

2 r

oof ra

tio):

16,0

00

SF

of f

oot

prin

t $12.6

8

$202,8

80

$9.6

6

12.3

%

st

eel c

olum

ns +

gird

ers

+ pu

rloin

s, 1

60’

cl

ear

span

1

01

0

Floo

r co

nstr

uctio

n S

teel

col

umns

, joi

sts,

bea

ms,

dec

king

, 5,0

00

SF

$10.3

3

$51,6

50

$2.4

6

3.1

%

(offi

ce)

conc

rete

(of

fice)

1

02

0

Roo

f co

nstr

uctio

n (in

corp

orat

ed a

s pa

rt o

f rig

id fra

me

supe

rstr

uctu

re)

B

20

Ext

erio

r En

clos

ure

20

10

Ex

terio

r W

alls

En

amel

ized

ste

el s

idin

g (7

5%

of ha

ngar

and

13,6

80

SF

of w

all

$7.0

2

$96,0

34

$4.5

7

5.8

%

of

fice)

with

vin

yl-fa

ced-

insu

latio

n (a

djus

tmen

t

to u

pgra

de). E

xclu

des

the

hang

ar d

oor

surf

ace

area

.

20

20

Ex

terio

r W

indo

ws

Ther

mop

ane

win

dow

s, p

ictu

re fra

me

styl

e

17

Each

$530

$9,0

10

$0.4

3

0.5

%

(o

ffice

)

20

20

Ex

terio

r W

indo

ws

Poly

carb

onat

e tr

ansl

ucen

t pa

nes

(han

gar)

1,0

00

SF

of w

all

$13.0

0

$13,0

00

$0.6

2

0.8

%

20

30

Ex

terio

r D

oors

M

etal

ped

estr

ian

door

s 3

Each

$1,2

70

$3,8

10

$0.1

8

0.2

%

20

30

Ex

terio

r D

oors

S

teel

ove

rhea

d ro

lling

aut

omob

ile d

rive-

in d

oor

1

Each

$2,1

75

$2,1

75

$0.1

0

0.1

%B

30

Roo

fing

30

10

R

oof C

over

ings

En

amel

ized

ste

el s

idin

g w

ith v

inyl

-face

d-

18,5

00

SF

$7.0

2

$129,8

70

$6.1

8

7.9

%

in

sula

tion

(adj

ustm

ent

to u

pgra

de)

3

02

0

Roo

f O

peni

ngs

Non

e

c.

Inte

rior

s

10

10

O

ffice

Wal

l (o

ffice

) 5,0

00

Per

surf

ace

SF

$4.0

0

$20,0

00

$0.9

5

1.2

%

Part

ition

s

10

20

In

terio

r D

oors

(o

ffice

) 1

Lum

p su

m

$3,0

00

$3,0

00

$0.1

4

0.2

%

10

30

Fi

ttin

gs

Toile

t pa

rtiti

ons

4

Lum

p su

m

$500

$2,0

00

$0.1

0

0.1

%

20

10

S

tair

Con

stru

ctio

n (o

ffice

) 2

Each

$2,9

35

$5,8

70

$0.2

8

0.4

%

30

10

W

all fi

nish

es

(offi

ce)

5,0

00

Per

SF

$10.0

0

$50,0

00

$2.3

8

3.0

%

30

20

Fl

oor

Fini

shes

Ep

oxy

coat

ing

(han

gar)

, tw

o co

ats

16,0

00

SF

$2.0

0

$32,0

00

$1.5

2

1.9

%

30

20

Fl

oor

Fini

shes

C

arpe

t (o

ffice

) 5,0

00

SF

$2.0

0

$10,0

00

$0.4

8

0.6

%

30

30

C

eilin

g Fi

nish

es

Acou

stic

tile

(of

fice)

5,0

00

SF

$8.6

5

$43,2

50

$2.0

6

2.6

%


cas

e Stu

dy b

uild

ing

cos

t b

reak

dow

n (c

onti

nued

)

cos

t pe

r D

. S

ervi

ces

Tabl

e #

S

ecti

on

Des

crip

tion

U

nit

Uni

t Ty

pe

Uni

t c

ost

cos

t b

uild

ing

SF

%D

10

Con

veyi

ng

10

10

El

evat

ors

& L

ifts

Non

e

1

02

0

Esca

lato

rs &

N

one

Mov

ing

Wal

ksD

20

Plu

mbi

ng

20

10

Pl

umbi

ng

Toile

ts, h

ot w

ater

2

Each

$3,0

00

$6,0

00

$0.2

9

0.4

%D

30

HVA

C

30

10

En

ergy

Sup

ply

3

02

0

Hea

t G

ener

atin

g S

uspe

nded

gas

-fire

d he

ater

s (h

anga

r)

4

Each

$1,8

00

$7,2

00

$0.3

4

0.4

%

Sys

tem

s

30

20

H

eat

Gen

erat

ing

Cen

tral

hea

t/AC

sys

tem

(of

fice)

5,0

00

Per

SF

$8.2

1

$41,0

50

$1.9

5

2.5

%

Sys

tem

s

30

30

C

oolin

g G

ener

atin

g

Sys

tem

s

30

50

Te

rmin

al &

Pac

kage

U

nits

3

09

0

Oth

er H

VAC

R

ooft

op c

oolin

g

5,0

00

Per

SF

$6.9

7

$34,8

50

$1.6

6

2.1

%

Sys

tem

&

Equi

pmen

tD

40

Fire

Pro

tect

ion

40

10

S

prin

kler

s N

one

40

20

S

tand

pipe

s N

one

Oth

er

Dra

ft C

urta

ins

Non

e

D

50

Ele

ctrica

l 5

01

0

Elec

tric

al S

ervi

ce/

Feed

s 1

Each

$4,7

50

$4,7

50

$0.2

3

0.3

%

Dis

trib

utio

n

50

10

El

ectr

ical

Ser

vice

/ B

ranc

h W

iring

(ha

ngar

and

offi

ce)

25

Per

LF

$57.5

0

$1,4

38

$0.0

7

0.1

%

Dis

trib

utio

n

50

20

Li

ghtin

g &

Bra

nch

Out

lets

and

flor

esce

nt li

ghts

(of

fice)

5,0

00

Per

SF

$9.0

6

$45,3

00

$2.1

6

2.7

%

Wiri

ng

50

20

Li

ghtin

g &

Bra

nch

Hig

h ba

y la

mps

(ha

ngar

) 16,0

00

Per

SF

$4.1

1

$65,7

60

$3.1

3

4.0

%

Wiri

ng

50

30

C

omm

unic

atio

ns

Fire

ala

rm s

ecur

ity s

yste

m, 1

2 d

etec

tors

1

Lum

p su

m

$6,7

00

$6,7

00

$0.3

2

0.4

%

& S

ecur

ity

50

30

Te

leph

one

Sys

tem

5,0

00

Per

SF

$1.5

6

$7,8

00

$0.3

7

0.5

%E.

Equ

ipm

ent

and

Furn

ishi

ngs

Non

e

F. S

peci

al c

onst

ruct

ion

1

02

0

Inte

grat

ed C

onst

ruct

ion

Non

e

1

04

0

Spe

cial

Fac

ilitie

s M

otor

ized

slid

ing

hang

ar d

oor

syst

em

3,1

20

Per

SF

$20

$62,4

00

$2.9

7

3.8

%

(2

6’

× 120’)

1

04

0

Spe

cial

Fac

ilitie

s H

anga

r do

or, i

nsta

llatio

n 1

Each

$50,0

00

$50,0

00

$2.3

8

3.0

%

10

40

S

peci

al F

acili

ties

Han

gar

door

, ext

erio

r w

all (

“ski

n”)

3,1

20

Per

SF

$7.0

2

$21,9

02

$1.0

4

1.3

%

10

40

S

peci

al F

acili

ties

Eye

was

h pe

dest

al

1

Each

$80

$80

—

0.0

%

10

40

S

peci

al F

acili

ties

2-to

n br

idge

cra

ne (cr

ane,

sin

gle

rail,

inst

alla

tion)

1

Each

$20,0

00

$20,0

00

$0.9

5

1.2

%G

. b

uild

ing

Sit

ewor

k

19 c

ar p

arki

ng s

pace

s 6,0

80

Per

SF

$1.7

5

$10,6

40

$0.5

1

0.6

%

Han

gar

apro

n, c

oncr

ete

14,8

00

Per

SF

$4.5

0

$66,6

00

$3.1

7

4.0

%

Sub

tota

l

$1,2

31,7

05

$58.6

4

74.8

%

Con

trac

tor’s

Gen

eral

Req

uire

men

ts (

10

%),

Ove

rhea

d (5

%),

and

Pro

fit (

10

%)

25%

$307,9

26

$14.6

6

18.7

%

Sub

tota

l

$1,5

39,6

31

$73.3

0

93.5

%

A

rchi

tect

Fee

s

7%

$107,7

74

$5.1

3

6.5

%

To

tal

$1,6

47,4

05

$78.4

3

100%

Loca

lity

Adj

ustm

ent

95.3

%

To

tal D

irec

t Cos

t

$1,5

69,9

77

$74.7

6

Rou

nd

$1,5

70,0

00

an introduction to the valuation of aircraft abstract ... · consumption, and operations. an...

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