AAAE Airport Finance & Administration Conference

Daytona Beach, FloridaMarch 4-7, 2012

Federal Controls on the Use ofAirport Revenue

Pablo O. Nüesch202-879-4000

pablo.nuesch@spiegelmcd.com

SPIEGEL &MCDIARMID LLP

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Goals for Presentation

• Review the basics.

• Focus on some nuances that may be applicable to your airport.

• Review a few of the most common problems identified by FAA and DOT/ OIG.

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Revenue Retention RequirementGrant Assurance 25

Airport revenue must be used for the capital or operating cost of --•the airport•the local airport system•other local facilities owned and operated by the sponsor that are directly and substantially related to the air transportation of passengers or property

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Revenue Retention RequirementSurplus Property Act

An airport sponsor that received surplus property may not use, lease, salvage or dispose of property for other than airport purposes unless FAA determines that the property can be used, leased, salvaged or disposed of without materially and adversely affecting the development, improvement, operation or maintenance of the airport.

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Self-Sustainability RequirementGrant Assurance 24

Airport sponsor must maintain a schedule of rates and charges for the use of the airport that will make the airport as self-sustaining as possible under the circumstances existing at the airport.

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Sources of Guidance

• DOT/FAA Revenue Use Policy

• Airport Compliance Manual, Chapter 15

• Part 16 Determinations

• DOT/OIG Audit Reports

• Written informal FAA guidance

• FAA Region/ADO

Airport Revenue

The Revenue Use Policy says it is money received by the airport sponsor for:•the right to occupy or conduct activities at the airport or at other sponsor-owned property used for airport-related purposes•the sale, transfer or disposition of airport property, or any interest thereof, not acquired with Federal assistance•the sale or lease of mineral, natural or agricultural products•activities conducted at the airport by the sponsor as the owner and operator of the airport

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Airport Revenue

Pablo says it is revenue generated from:

•airport-related activity on sponsor-owned property, or

•disposition of airport property (real, personal or natural resources) not acquired with Federal assistance

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Revenue Exempted from Restrictions

• lawful revenue diversion at grandfathered airports

• revenue from ad valorem property taxes imposed on a taxing district outside the footprint of the airport that is dedicated to support the airport

• revenue generated from sponsor’s exercise of its police powers

• revenue from nonaeronautical activity conducted by the sponsor on airport property not acquired with Federal assistance that is in excess of fair market rental value of the property

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Permitted Uses

• capital or operating cost of the airport, local airport system, and other facilities directly and substantially related to the airport

• sponsor expenses and costs properly allocated to the airport enterprise fund

• promotion of the airport and of competition at the airport, including some cooperative advertisement

• unreimbursed contributions if made within 6 years

• legal fees

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Prohibited Uses

• payments that exceed fair and reasonable value of services – “cost of providing services … [is] a reliable indicator of value”

• general economic development, marketing, and promotional activities unrelated to the airport

• PILOTs, assessments, or impact fees that exceed the value of services or are not based on reasonable and transparent cost allocation

• loans at less than prevailing interest rates

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Prohibited Uses Cont’d

• use of land by sponsor:

for nonaeronautical activities at less than FMV, except for certain public recreational and other community uses

for aeronautical purposes rent free or at nominal rent, except not for profit aviation organization

• direct subsidy of air carriers

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Enforcement and Sanctions

• voluntary compliance

• withholding of AIP grants

• withholding of PFC approval

• withholding of other transportation Federal funds

• treble civil penalties

• enforcement in U.S. District Court

• reversionary interest in surplus property

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Common Revenue Diversion Problems

• Free use of airport property by sponsor for non-airport purposes

• Transfer of airport property to sponsor at less than FMV

• Leases to other sponsor departments at less than FMV or, if long term, where rent is not properly indexed

• Payments that are not commensurate with services received from the sponsor

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Common Revenue Diversion Problems Cont’d

• Payments based on indirect allocations originally calculated based on estimates and never updated to actual

• Payment for services provided by sponsor based on “market price” instead of actual costs

• PILOTs not justified by property value and/or tax rates

• Revenue business agreements applicable to entire jurisdiction (city or county), including the airport, without proportionally allocating revenues to the airport.

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Common Revenue Diversion Problems Cont’d

• Sponsor activities performed outside the airport that cannot be properly traced to the airport

• Reimbursement for past contributions that are older than 6 years without proper documentation

• Impact fees paid in advance

• Promotional expenses unrelated to airport activity

Questions?

Pablo O. Nüesch202-879-4000

pablo.nuesch@spiegelmcd.com

SPIEGEL &MCDIARMID LLP