For the record: Ground control

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.

Email [email protected]

The AOPA Legal Services Plan is offered as part of AOPA’s Pilot Protection Services (www.aopa.org/pps).