HomeMy WebLinkAbout11-27-2007TO: Members of the Sebasti Councir
FROM: Al Minner, City Manag r`'
RE: AIRPORT HANGER E RMAIECONOMIC DEVELOPMENT ACTION
DATE: Tuesday, November 7, 7
BACKGROUND — WE HAVE TWO FDOT BUILDING FACILITY GRANTS
At the October 24, 2007 meeting of the City Council, a $640,000 Joint Project Agreement (JPA)
was approved between the City and the Florida Department of Transportation (FDOT). This grant
was an 80/20 grant whereby the City must provide 20% of the funding ($160,000), making the
total project $800,000.
Please be advised that the City also has earmarked, by the FDOT, another 80/20 building facility
grant totaling $625,000. That JPA was approved by Council in 2005 and is structured as a
public/private partnership.
In preparing for the FY 08 Budget, staff advised Council (and Council approved) on a plan
whereby FDOT monies could fund a second hanger project. This action is noted on page 138 of
the FY 08 Budget in the Capital Funds Program Chart, where the transaction is depicted as a
grant and private contribution. If I recall correctly, some discussion took place at budget time to
inform Council of the hanger project and to note that the Airport Fund, at that time, was not
planning a capital contribution to the project; but rather, a private contributor would bring the
required cash match. Further, this proposal was roughly outlined as a transaction that would be
similar to the Sheltair/City Agreement approved on September 13, 2002. In that agreement,
Sheltair used FDOT grant funds by paying the City an "Annual Investment Fee" in an amount
equal to 7% for the grant funds and provided the 20% cash match. The term of this deal is for 30
years. In addition, Sheltair also pays the City a lease for the property where the T-hangers are
now located. This transaction has proved lucrative for the Airport in that this deal alone
comprises 15.5% of total Airport Revenue (approximately $84,183 per year - $58,809 for
Investment Fee and $25,374 Land Rent). On the negative side, the City does loose control over
rental rates and receives periodic complaints on rent.
With -that information in mind and because of a directive from Council, this report has been
prepared. Its main purpose will provide (1) a financial evaluation for T-hanger construction, (2)
alternative options for spending FDOT grant funds; and, (3) a recommended action going
forward.
HANGER COST ANALYSIS
A major goal at the airport is to continue to support general aviation and diversify airport
revenues. As mentioned above, one success story at the airport is the Sheltair "T-hanger"
agreement, where storage facilities for general aviation aircraft have been constructed. This deal
has provided 40 hangers and is a nice revenue stream for the airport. To date, the Sheltair T-
hangers are at 88% capacity, with 35 of 40 hangers under lease. By all accounts, the Sebastian
area market can still support additional T-hangers. In that effort, the FDOT has agreed to
additional facility grant JPAs.
At the October 24, 2007 Regular Meeting, a JPA was provided. As directed by Council, before
beginning another private/public hanger partnership, a financial analysis has been conducted.
The analysis focuses on the following issues: (1) market place products; (2) cost/benefits; (3)
assumption of market risks; and, (4) potential errors and assumptions in the analysis.
9. Market Place Products
In the general aviation market, generally, three types of structures exist for aircraft storage; those
being "T"-hangers, box hangers and shade hangers. T-hangers are generally a large structure
divided into "T" shaped units. Sizes of T-hangers vary, but they are generally large enough to
store one aircraft and are approximately 1,000 square feet. Box hangers have more variance in
size. Their purpose is to not only store an aircraft, but also provide additional space for storage,
aircraft maintenance, aircraft fabrication or conducting other aviation type activity within the
hanger. There are several box hangers now in existence at the Airport which range in size from
3,000 to 6,000 square feet. For the purpose of Sebastian Airport, there also seems to be a
market for box hangers. Staff is of the opinion that a marketable box hanger should be
approximately 1,500 square feet and leased for around $600 per month. A third market place
product is shade hangers. Shade hangers are very minimum storage facilities that protect aircraft
from the physical elements. In short, this product is a pole structure that provides "shade" and a
roof over "tie -down" space. Lastly, a fourth product, which was not examined, is a condominium
hanger. This is one large hanger that parks several aircraft in one large storage area. This
option was not reviewed because additional staff and equipment would be required to facilitate
parking and un-parking of aircraft for potential renters when they require use of their airplane.
Also, there is some question in staffs opinion as to whether this is a quality product.
2. Cost/Benefit
Market place product is important to examine because there is some question as to whether the
City replicating the same product on airport property (T-hangers) would create a situation that
jeopardizes a successful private/public partnership with Sheltair. It is staffs opinion that the City
should not complete with Sheltair. However, competition is good and Sheltair monopolizing
aircraft storage could artificially increase monthly hanger costs. Therefore, a financial or
cost/benefit analysis was conducted to examine whether (1) the City could profit from entering
into the aircraft storage business or if (2) the City should venture into another public/private
partnership that would create fair competition at the airport.
It was determined that the City could not profit from construction and leasing its own hanger
facilities. This determination applies to all market products to include box, "Ts" and shade
hangers. The analysis also includes using both, or portions of, the FDOT grant money to
subsidize the construction of said hangers. Below are three charts that depict revenues and
expenses for box, "T" and shade hangers. These figures were calculated, based on borrowing
the FDOT grant match with varying terms of 15, 20 and 30 years at 5.5% annual interest rates. In
addition, construction costs of $55 per square foot were used for "T" and box hangers, while a
cost of $25 per square foot was used for shade hangers. Also note that a 10% contingency was
added to construction costs (Attached hereto are the detailed spread sheets which show other
assumptions for building size, hanger rental, revenues at 80% capacity, etc.)
For the City to "break even" on T-hanger rental, a monthly lease rate of $435.68 would be
required. Currently, Sheltair provides this amenity for $375.00 per month plus an additional
payment for the share of insurance and tax, which totals an estimated monthly expense of
$50.00. (Total estimated Sheltair T-Hanger rent - $425.00/Month). As you can see, the City best
the City can do is match this rate. If the term of debt is extended to 20 and 30 years, the monthly
rental price can be reduced however, these charts assume an immediate 80% capacity and no
plan can be created where a price of $300 a month can be offered.
15 YEAR COMPETITIVE
15 YEARS BREAK EVEN
20 YEARS BREAK EVEN
30 YEARS BREAK EVEN
'Debt 90,000
2.?�0
_.._.__ 24850
_..__....__-.,_._19000-
_U➢Bes' 3 000
_ 3 000
_ 3 000
3 000
StormwWer Fee _ 2 500
2 500
2 500
2,600
Tex 26 000
26 000
28 000
26 000 i
Insurenoe _ _ _ 5,000
5,000
51900
5 000
7150
_. ... _a_._- .
6 4.0
._. -_ _t _ .-.....
_.___ 6615
-....^ .-. Bi050
'TOTAL ANNUAL OPERATWO 83,650
a 81340
, 77765
71550
80%Oaupan
Subtotal Monthly Revenue 4i800
._ 6971
6460
59831
LTotal AnnWW 57 600
- 83 651
77 766
71 551
1j
In an effort to provide a different product, a box hanger analysis was completed. In this scenario,
the City set as benchmarks a competitive rate of $600 per month. As the analysis shows, box
hangers could be leased for $584.90. At $600 per month, only a small margin of $1,450 annually
would be created. Again, the data assumes immediate 80% capacity.
15 YEAR COMPETITIVE 15 YEARS BREAK EVEN 20 YEARS BREAK EVEN 30 YEARS BREAK EVEN
�.�SD-D
.......... ..... _._.._
3,000
3 000
3,000
3,D00
7,500
7 500
7,500
7,500
z soo
zsOD
s96
z 500
16,000
_ 16,000
1600) _......
16000r
�_.
5,000.
5,000
5,000
_ 5,000,�
4 650
4,650
4 340
4,000
TOTAL ANNUAL OPERATING
56,150
56,150
52,740
49 000
�rVMnth{gRerrY3l Re value
$600.00
$StRf.90.
ss49.3U
'180% Occupancy
6
8
8
8
`Subtotal Monthly Revenue
_- 4,800
4,679
4.395 _
4,083
�TO W Annual
57 600
56,150
52,740
49 000
jRevanue-Expenses
1 450
0
0
0
Interestingly enough, when construction costs were greatly reduced, we could not even meet a
competitive bench mark for shade hangers. The break even point for this product was found at
$234.22 vs. the target rate of $150 per month.
_---- ----- .-.--- . - __ .._-. _.. ....-..� _
15 YEAR COMPETITIVE 15 YEARS BREAK EVEN 20 YEARS BREAK EVEN 30 YEARS BREAK EVEN
5,000 5 000 S,OOp
.................._......... .... ..-.__5a "'-'-,..._.-.....-- ............ ...-......_......_._.._S,DDQ
llnsurence 3�500 3500 3,50(L 31500
C�oniingengy 3,770 3770 3,540 3,290
2,400 3,748 3,537
28,800 44,970 42,440
1�6178) -.T-- 0
3. Assumptions of Market/Financial Risks
In short, even with grant assistance, it does not appear that the City can be any more competitive
in providing hanger service than the current rate offered by Sheltair. Box hangers may be an
alternative, but the data shows that getting into the hanger business is a break even proposition
at best. Perhaps the best argument for not going "solo" into this business is the huge risk of
capital that is required for the grant match. This begs the question, "Why should the City put up
its own money to get into the hanger business to break even, when the data shows that better
prices and the private market is willing to take the financial risk? "
Another market factor question to consider concerns, "is there truly a market for more hangers at
the Sebastian Airport?" Staff has conducted no scientific study on this question. Rather, staff
has relied on conversation with private business that seems willing and ready to bring private
capital to leverage state dollars. Also consider as the chart below shows, that leveraging the
private and state dollars creates more revenue for the airport.
FRANCHISE THE $800.000 FOOT GRANT (80/20)
ITEM
AMOUNT 4�.._....._
Grant Franchise Fee
640,000
__..._RATES
4%
25,600
Land lease (2.5 Acres) _ _
_ 106,450
$0.15
15,___-_- 868
_..___.....
E
j
Annual Earnings
�
41,568 ;
1
E
YEAR
LEASE
FRANCHISE
i
F
TOTAL
1
15,968
25,600
41,568
2
16,447_...._.._.._._.._.__.._-._..._.._._...__25,600
4
3
16,940
25,600
42,540 �
4 _..._.._...._.....__..___.____..._..._....._....-17,448
_.._.. _._._..._ . 251600 _._._........_._
_....__.....-..___ _....... 431048
5
17,972
25,600
43,572
TOTAL 5 YEAR
$2129774
The numbers reveal that the better deal is a public/private partnership. Please note that based
on conversations with interested companies, an updated private/ public partnership would yield
lease revenue of $0.15 per square foot and an investment franchise of potentially 4%. This plan
would potentially yield new revenue of $41,568 annual versus the "break even" "T"-hanger
synopsis. Over five years, with a 3% escalator on the lease rate, $212,774 could be earned.
Remember this is guaranteed revenue, whether hangers are filled or not.
4. Errors and Assumptions
Please take time to visit the attached spreadsheets. They are self-explanatory and depict the
financial picture better than I can write. Having said that, the data does make one huge
assumption and that is based costs.
When the current T-hangers were built by Holland Construction (the parent company of Sheltair),
the square foot cost was reported at $23.82 per foot in 2004. This may be pause for question
when the enclosed construction estimates have more than doubled in a little over four years.
However consider the following:
1. The maintenance hanger currently under construction cost $57.29 per square foot;
2. Reports from other construction firms confirm a double in costs since 2004;
3. Residential construction is generally in the range of $80-$100 per square foot; and,
4. Commercial construction is generally in the range of $250 per square foot.
Briefly mentioned above is market need. Other airports, complaints of lease price and length of
hanger waiting lists should not be the scientific indicators that lead the Sebastian Airport into the
hanger business alone. Simply stated, if the private market is willing to take the risk and provide
gameted revenue to the City, then that is a good deal and should be explored by submitting an
RFP into the market place. However, it is unwise to recommend entering the hanger business
alone without completing more studies because of the public capital that would be at risk.
OPTIONS
Having explored costs and alternatives for the Airport and the current FDOT JPAs, there seems
to be three alternatives. One alternative however, is not one that would be recommended by
staff. That option is for the City to proceed into the "Hanger" business to compete with the
existing market at the airport.
The second option is for the City to conduct a request for proposal (RFP) process, whereby
private companies leverage FDOT grant monies, providing the City with additional revenue. This
option actually provides two alternatives — use both grants totaling a $1.425 million public/private
partnership or one grant for an $800,000 agreement. This avenue has worked in the past. While
there are still details to be ironed out, if Council approves this option, the City is ready to move
forward on an RFP process.
FRANCHISE THE 1800,000 FOOT GRANT (80/20)
ITEM
.............. ..............,..........._._._........................._._
..-.__-RATES j
�AMOUNT
......... _-...... __...-.._.
Grant Franchise Fee
640000 4%
25,600
Land Lease (2.5 Acres)
i 106:450 $0.15
1
15,968
Annual Earnings
41,568
FRANCHISE BOTH FOOT GRANTS - $1.426.000 (80/201
ITEM!
AMOUNT RATES
�
Grant Franchise Fee
_E
E 940,000 j 4% I
37,600
Land Lease (2.5 Acres)
I 106,450 $0.15 j
15,968
(Annual Earnings
53,568
A third option concerning the use of the FDOT JPAs is a hybrid approach. This option places
emphasis on creating immediate revenue and also using FDOT grants to promote an economic
development incentive. In this option, the use of the larger $800,000 grant can be used for
hanger storage in a public/private partnership, while the second $625,000 grant can be retained
by the City. In retaining the smaller grant, staff would suggest that this money be used to
construct one large 10,000 square foot facility ($62.50 per square foot construction cost) to be
used as an industrial speculative building. This option allows the City to use some grant funds for
the hangering of aircraft venture which should provide new revenue, while applying additional
grant money toward an economic development incentive program that would offer below market
rate rental as a business incentives for new job creation in Sebastian. The capital needed for the
20% grant match is justifiable as an economic development investment.
Each of the three options has positives and negatives, below is a chart which briefly illustrates the
pros and cons of each option:
OPTION #1— CITY OPERATED HANGER BUSINESS
PRO CON
• Control Pricing • Inability to Provide Competitive Rental Rates
• Direct Contact w/ Tenants • Compete w/ Existing Private/Public Agreement
• Ability to Provide Different Product • Face Market and Financial Risk
OPTION #2 — HANGER FACILITY AGREEMENT; "FRANCHISE THE GRANT"
PRO CON
• Guarantee of New Revenue • Smaller Franchise Fee than Sheltair Deal
• Differ Market/Financial Risk To Private Sector • Loss Control of Pricing/Product
• Less Ability to Manager Hanger Operations
OPTION #3 — ECONOMIC DEVELOPMENT BY LEVERAGING ONE FDOT GRANT
PRO CON
• Some New Revenue — Smaller Hanger Deal 0 Require a Small Loan for "Eco Dev. Hanger"
• Promote Business Expansion/Development • Loss Some Franchise Revenue
• Use Existing Facility/Capital to Market Airport 0 Gamble on Whether Market Accepts
• Requires FDOT Approval
RECOMMENDATION
At this time, staff recommendation is to move forward with the Economic Development "Hybrid"
Approach. Staff also recommends that more research be conducted into whether the second
$625,000 FDOT grant can be used for economic development purpose before moving forward
with the hanger RFP. Further, more work need to be completed to ensure that potential exists to
immediately fill an industrial speculative hanger facility.
At the Wednesday, December 12, 2007 meeting, this option will be introduced to Council.
Obviously more research, approval and information is needed; however, this report has been
provided to update and guide a decision making process that will be made in the near future.
T-HANGERS
T-HANGERS
20
Square Feet Required
24,000
Cost Per Square Foot
$55
Contingency
10%
TOTAL EST PROJECT
$1,452,000
,BOX. HANGERS
Square Feet Required
15,000
Cost Per Square Foot
$55
Contingency
10%
TOTAL EST PROJECT
$907,500
YEAR
1
15
YEAR
1
20
YEAR
1
30
PRINCIPAL
20,800
20,800
$312,000
PRINCIPAL
15,600
15,600
$312,000
PRINCIPAL
10,400
10.400
$312,000
SHADE HANGERS
_ 2Qh
Square Feet
25,000
Cost Per Square Foot
$25
Contingency
10%
TOTAL EST PROJECT
$687,600
Project Cost
$1,452,000
`t-DOT Grant
$1.140.000
City Share
$312,000
Interest Rate
5.50%
15 AMORTIZATION
INTEREST
TOTAL PAYMENT
BALANCE
17,160
37,960
291,200
1,144
21,944
0
$137,280
$29,952';�
20 AMORTIZATION
INTEREST
TOTAL PAYMENT BALANCE
17,160
32,760 296,400
858
16,458 0
$180,180 -"
$24,609:-1
30 AMORTIZATION
INTEREST TOTAL PAYMENT BALANCE
17,160 27,560 294,840
200 10,600 (6,760)
$255,198I
15 YEAR COMPETITIVE
15 YEARS BREAK EVEN
20 YEARS BREAK EVEN
30 YEARS BREAK EVEN
Debt
30,000
27,900
24,650
19,000
Utilities
3,000
3.000
3,000
3,000
Operation/Maintenance
10,000
10.000
10,000
10,000
Stormwater Fee
2,500
2,500
2,500
2,500
Tax
26,000
26,000
26.000
26.000
Insurance
5,000
5,000
5,000
5,000
Contingency
7,150
6,940
6,615
6,050
TOTAL ANNUAL OPERATING
fyp 11
83,650
81,340
{ 77,765
71,550
It
W®
80%Occupancy16
16
f
16
16
Subtotal Monthly Revenue
4,800
6,971
6,480
5,963
Total Annual
57,600
83,651
77.766
71,551
Revenue -Expenses
(26,050)
1
1
1
BOX HANGERS
makikkw
Square Feet Required
24,000
Cost Per Square Foot
$55
Contingency
10%
TOTAL EST PROJECT
$1,452,000
Square Feet Required 15,000
Cost Per Square Foot $55
Contingency 10%
TOTAL EST PROJECT $907,500
SHADE HANGERS
20.:
Square Feet
25,000
Cost Per Square Foot
$25
Contingency
10%
EST PROJECT
$687,500
7TOTAL
1- _ ._ _ BOX HANGERS
Project Cost
S907,500
=DOT Grant
$726,000
Pity Share
$181,500
Interest Rate
5.50%
15 AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
12.100
9.983
22.083
169,400
15
12.100
666
12,766
p
$181,500
$79,860
$174s
�ru
20 AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
9,075
9,983
19,058
172,425
20
9.075
499
9,574
0
$181,600
$104,816
$14,316 �
30 AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
6,050
9,983
16,033
171,518
30
6,050
116
6,166
(3,933)
$181,500
$148,456
15 YEAR COMPETITIVE
15 YEARS BREAK EVEN
20 YEARS BREAK EVEN
30 YEARS BREAK EVEN
Debt
17,500
17,500
14,400
11,000
Utilities
3,000
3,000
3,000
3,000
Operation/Maintenance
7,500
7,500
7.500
7,500
Stormwater Fee
2,500
2.500
2,500
2.500
Tax
16,000
16,000
16,000
16,000
Insurance
5,000
5.000
5,000
5,000
Contingency
4,650
4,650
4,340
4,000
TOTAL ANNUAL OPERATI�-
56,150
56ii11 5�0
I52,740
49,000
80% Occupancy
8
8
�
8
8
Subtotal Monthly Revenue
4,800
4,679
4,395
4,083
Total Annual
57,600
56,150
52.740
49,000
Revenue -Expenses
1,450
0
0
0
SHADE HANGERS
T-HANGERS
20
-
Square Feet Required
24,000
SHADE HANGERS
20
Cost Per Square Foot
$55
Square Feet
25,000
Contingency
Cost Per Square Foot
$25
TOTAL EST PROJECT
10%
$1,452,000
Contingency
10%
TOTAL EST PROJECT
$687,500
,BOX HANGERS
Square Feet Required
15,000
SHADE HANGERS
Cost Per Square Foot
$55
Project Cost
$687,500
Contingency
g
JFDOTGrant
$550,000
TOTAL EST PROJECT
10%
$907,500
City Share
$137.500
Interest Rate
a
5.50 /a
16AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
15
9,167
7,563
16,729
128,333
9,167
504
0
$137,600
$60,500 I
3,200
$1,00
20 AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
20
6,875
7,563
14,438
130,625
6,875
376
7,253
0
$137,500
$79,406 I
$10,845
30 AMORTIZATION
YEAR
PRINCIPAL
INTEREST
TOTAL PAYMENT
BALANCE
1
30
4,583
7,563
12,146
129,938
4,583
88
4,672
(2,979)
$137,500
$112,467
fit`
1$ YEAR COMPETITIVE
15 YEARS BREAK EVEN I
20 YEARS BREAK EVEN
30 YEARS BREAK EVEN
Debt
13,200
13,200 -
10,900
8,400
Utilities
5,000
5,000
5,000
5,000
Operation/Maintenance
5,000
5,000
5,000
Storrnwater Fee
2,500
2,500
5,000
Tax
12,000
12,000
2,500
1,00
2,500
12,00
Insurance
3,500
3,500
3,500
3,500
Contingency
3,770
3,770
3,540
3,290
TOTAL ANNUAL OPERATING
44,970
44,970
42,440
39,690
80% Occupancy
16
16
Subtotal Monthly Revenue
2,400
3,748
16
16
Total Annual
28,800
44,970
3,537
42,440
3,308
Revenue -Expenses
(16,170)
0
39,690
(0)
0