AOPA Pilot Magazine - March 2019 - 26

FOR THE RECORD

Ground control

BY JARED ALLEN

Understand your ground lease

JARED ALLEN is

AOPA's Legal
Services Plan senior
staff attorney and is
an instrument-rated
private pilot.

26 | AOPA PILOT March 2019

IF YOU'RE THINKING OF BUILDING or buying a hangar
at a public airport, carefully consider the terms of your
ground lease for the land beneath it. Aircraft owners
have spent tens, or even hundreds, of thousands of dollars for a hangar-only to later learn that their ground
lease was expiring and would not be renewed, and the
airport would assume ownership of the hangar at the
end of the lease. Reckoning with the legal and financial
implications of these clauses early on in your hangar
planning can help avoid a costly oversight.
Ground leases at public airports are subject to FAA
requirements, otherwise known as grant assurances.
Among other things, these prohibit an airport from
taking any action that may deprive it of its rights and
powers to direct and control airport development.
Grant Assurance 38, Hangar Construction, lays out
the FAA's expectation on the matter: "If the airport
owner or operator and a person who owns an aircraft
agree that a hangar is to be constructed at the airport
for the aircraft at the aircraft owner's expense, the airport owner or operator will grant to the aircraft owner
for the hangar a long-term lease that is subject to such
terms and conditions on the hangar as the airport owner
or operator may impose."
One such term routinely imposed is a reversion
clause. Typically, it provides that at the end of the lease,
the ownership of any "improvement" (e.g., a hangar)
on the land is automatically transferred to the landlord.
By assuming ownership through reversion, an airport can charge higher rent to future tenants, since
those leases will be for use of the hangar, not just the
land. From an airport's perspective, this approach helps
meet FAA grant assurances that require the airport to
"maintain a fee and rental structure for the facilities
and services at the airport, which will make the airport
as self-sustaining as possible under the circumstances
existing at the particular airport."
Are reversion clauses enforceable? In the vast
majority of the ground leases reviewed by the AOPA
Legal Services Plan, yes. Ground leases are contracts,
with the airport and hangar owner each a party to the
agreement. Assuming the ground lease is a valid contract according to applicable state laws, it's likely that
the reversion clause will be enforceable.
With this in mind, a pivotal issue for any aircraft
owner considering a new ground lease or the purchase
of hangar on an existing ground lease is whether the

lease term is adequate to provide an acceptable return of
capital investment in the hangar by the end of the lease.
In its Airport Compliance Manual, Order 5190.6B, the
FAA states that "most tenant ground leases of 30 to 35
years are sufficient to retire a tenant's initial financing
and provide a reasonable return for the tenant's development of major facilities." Ground leases reviewed by
the AOPA Legal Services Plan typically have a 20-year
initial term, with at least one 5-year renewal option.
While negotiating an increase in years is particularly
important if you'll be making a large capital investment
in the hangar, leases of more than 50 years raise issues
with grant assurances. The FAA states that in these
cases, "the term of the lease will likely exceed the useful life of the structures erected on the property." The
number and length of renewal options can help meet
the minimum number of years required for financing the
hangar. However, be aware of any conditions or notice
requirements that must be met to exercise these renewal
options. And above all, remember that if the lease does not
expressly provide a renewal option, then there isn't one-
and any renewal will be purely at the landlord's discretion.
Future expenses must also be estimated when
calculating your total investment, as ground leases
typically make the tenant responsible for property
taxes, building and liability insurance, and maintenance, in addition to paying ground rent and utilities.
Additionally, many leases allow the airport to periodically "adjust" the ground rent, based upon appraisals
or an annual percentage set in the lease.
It's worth noting that in some cases, the reversion clause may provide an option (or requirement)
for removal of the hangar at the end of the lease and
returning the land to its original condition-right down
to seeding new grass-all at the hangar owner's expense.
Ground leases can be a sound approach to securing
stable, long-term storage for your aircraft. However, a tenant's interest in a ground lease and related improvements
is essentially a diminishing asset that decreases in value as
the end of a lease term nears. The inherent complexity of
ground leases requires legal counsel. For Legal Services
Plan participants, review of a hangar ground lease agreement is included in your benefits.
AOPA
EMAIL jared.allen@aopa.org

The AOPA Legal Services Plan is offered as part of
AOPA's Pilot Protection Services (www.aopa.org/pps).
http://www.aopa.org/pps
AOPA Pilot Magazine - March 2019

Table of Contents for the Digital Edition of AOPA Pilot Magazine - March 2019
