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City auditors find airport leases may not reflect fair market value

Tuesday, November 22, 2022 by Chad Swiatecki

An analysis of the leasing activities and other operations at Austin-Bergstrom International Airport has found the city is potentially undercharging for dozens of lease agreements that haven’t been evaluated in years to determine if they’re in line with fair market value. Those practices, if left unchanged, could negatively impact the airport’s ability to be self-sustaining as the city moves forward with an ambitious expansion plan over the next 20 years.

At Monday’s meeting of City Council’s Audit and Finance Committee, the city auditor presented the findings of a special request report made by Council to look at leasing practices, and determine the community benefit activities in place with airlines using AUS compared to other U.S. airports.

The report, which differs from a standard audit because of the questions Council wanted answered, found that in 2021 and 2022 there were 40 lease agreements in place for property outside the main passenger terminal. Those leases to car rental companies, cargo and logistics operators, and concessions companies covered 13.7 million square feet of the airport’s 4,242 acres and generated $574,000 per month in cumulative rent.

All but two of the leases fell within the airport’s minimum standards, with the primary exception coming from a hangar lease holder that was given an exemption to install a 12,000-gallon aviation fuel tank.

The report noted some uncertainty in how rates for some of the existing leases were established, and fair market value was considered.

It reads, in part: “Current staff indicated that they are not aware of how the Aviation Department management at the time established the rent charges. They noted that the airport currently establishes land lease rates based on the historical rates. Because AUS has not done a ground rental market study, we were unable to determine if the current lease rates charged are in line with the land’s fair-market value rates. This does not constitute non-compliance with FAA airport leasing requirements. However, if the city charges low rent, it may impact the airport’s goal to be self-sustaining.”

The two most notably low leases are $1/year agreements with the state of Texas and Texas National Guard, both of which provide in-kind services to the airport that may not meet the suggested per-square-foot threshold recommended by FAA.

Staff noted in the report that they are in the early stages of conducting a fair-market study to determine if the airport is undercharging on many of its current lease agreements.

Council Member Vanessa Fuentes, whose district includes the airport, said the report showed a clear need to improve policies and practices around how much commercial tenants are charged.

“It’s important knowing that many of our land leases are not at market at this point and that they’re using historical rates. There’s a lot of work to do on that end and that’s something I will continue to press for to ensure that as the airport expands, we are doing right by our community and our constituents,” she said. “The airport is going through a massive expansion program and certainly Southeast Austin is seeing tremendous growth with a lot of people moving to Southeast Austin. I want to make sure we’re balancing the needs of both.”

The analysis of community benefit agreements at other airports showed that the most substantial benefit agreements are struck between airlines and the airport that acts as their hub, which is not the case for any airline flying out of Austin currently.

Council Member Leslie Pool said the growth planned for the airport could make it a potential hub in the future, creating the need to further study those agreements in preparation for negotiations.

“If we were to investigate having Austin potentially be a hub for an airline, we would need to find out what are the financial trade-offs and if there is sufficient community benefit coming to the city to make up for whatever tax waivers, fee waivers or subsidies, or other financial support would be given by the city to the airline to create the hub,” Pool said.

Photo made available through a Creative Commons license.

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