Sign up

An introduction to the valuation of aircraft Hangars-Part 2.
Subject:
Aircraft industry (Buildings and facilities)
Hangars (Valuation)
Real property (Valuation)
Real property (Methods)
Author:
Lindsey, Timothy J.
Pub Date:
03/22/2008
Publication:
Name: Appraisal Journal Publisher: The Appraisal Institute Audience: Trade Format: Magazine/Journal Subject: Business; Real estate industry Copyright: COPYRIGHT 2008 The Appraisal Institute ISSN: 0003-7087
Issue:
Date: Spring, 2008 Source Volume: 76 Source Issue: 2
Topic:
Event Code: 440 Facilities & equipment; 800 Capital funds & cash flow
Product:
Product Code: 4595180 Aircraft Storage NAICS Code: 488119 Other Airport Operations SIC Code: 3721 Aircraft; 4581 Airports, flying fields, & services
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States

Accession Number:
179535026
Full Text:
ABSTRACT

This article provides an overview of the general considerations for the valuation and analysis of aircraft hangars. Hangars are a special-use type of property with specific and unique considerations. The article is presented in two parts. This, part two, discusses the market analysis of airport characteristics; highest and best use; the impact of ground leases on value; and the cost, sales comparison, and income approaches to value. Aviation industry trends and characteristics are briefly summarized and a valuation case study illustrates the concepts. Part one, published in the Winter 2008 issue of The Appraisal Journal, discussed hangar characteristics, valuation considerations and property rights, the impact of fuel sales, and site considerations.

**********

This article is the second in a two-part series addressing the valuation of aircraft hangars. It focuses on the market analysis of airport characteristics, highest and best use, the impact of ground leases on value, and the three approaches to value. Part one of this article, which was published in the Winter 2008 issue of The Appraisal Journal, discusses hangar characteristics, valuation considerations and property rights, the impact of fuel sales, and site considerations.

Market Analysis of the Aviation Industry

Nationwide, the aviation industry is mature, with growth in various segments but decline in other segments. Since 9/11, prices, gross domestic product, and traffic volume have restabilized and grown. (1) The impact of 9/11 on the aviation industry, although pertinent, is beyond the purview of this article.

Short-term aviation industry trends are difficult to gauge, as industry statistics may be several years old before published. However, we do know that in 2000, air transportation generated $53.4 billion, or 0.5% of the U.S. gross domestic product. (2) In 2005, there were 609,325 pilots, a decrease from 733,000 pilots in 1970. (3) Over the years, the stock of aircraft and airports has consistently grown.

Traffic volume is measured by number of passenger enplanements, fuel consumption, and operations. An operation is aviation terminology for aircraft takeoffs and landings. (4) Air traffic is classified by the Federal Aviation Administration (FAA) into four categories: (1) air carrier, which accounted for 28.7% of FAA control tower operations in 2005; (2) air taxi, 23.3% of FAA control tower operations in 2005; (3) general aviation, 44.3% of FAA control tower operations in 2005; and (4) military, 3.7% of FAA control tower operations in 2005.

Certified air carriers are the most prominent sector of the air transportation industry. The U.S. air carrier fleet consisted of 19,239 aircraft in 2005. During the past 30 years, the air carrier airline industry has consolidated while serving an increasingly larger volume of passengers and freight. The number of domestic and international enplanements increased to 747 million enplanements in 2005, up 10% since 2000, recovering from an 8% downward spike in 2001. Also, air carriers have been shifting away from piston aircraft to jet aircraft as shown in Figure 1.

Air taxis in 2005 constituted 60% of the air traffic fleet. Air taxi commuter operations are aircraft capable of seating less than 60 passengers that are used for nonscheduled passenger service, air freight service, medical evacuation, etc., or that use a three-letter company designator.

The third classification of air traffic, general aviation, does not provide scheduled public transportation. As shown in Tables 1 and 2, the majority of general aviation aircraft is for personal use and is predominantly piston aircraft.

Market Analysis of Airports Airport Classifications

Appraisers may want to consider an airport's position within the matrix of competing airports in the regional and neighborhood analysis. On the supply side, the United States had 19,847 airports as of 2003, up 75% since 1970 (Figure 2). (5)

Of the airports open to the public, 65% belong to the National Plan of Integrated Airport Systems (NPIAS). (6) This plan is used to administer public funds at the largest airports. About 92% of all based aircraft are at NPIAS airports. NPIAS airports are further divided into subcategories as shown in Figure 3.

The N PIAS classifications include international airports, domestic air carrier airports, commuter airports, reliever airports, and general aviation airports. The FAA classifies these airports by the size of the traffic hub as measured by the Standard Metropolitan Statistical Area (SMSA). Domestic air carrier airports, which include international airports as a special subcategory, serve the largest cities. Commuter airports handle low traffic volumes of 2,500 to 5,000 passengers. Reliever airports are a special category of general aviation airport located in an SMSA of at least 500,000 and are capable of reducing congestion at air carrier airports. General aviation airports are private use or public use airports.

As a separate element of classification, certificated airports (also known as Part 139 airports) serve scheduled air carrier operations with aircraft that seat more than 9 passengers and unscheduled operations with aircraft that seat more than 30 passengers. These airports must meet the more stringent FAA regulatory standards of 14 CFR part 139, in terms of pilot experience, fire safety, security, and airport design standards. The United States had 599 certificated airports in 2004, of which 57 were used by the military.

Airports vary widely, so when developing a market analysis, an airport's infrastructure and services should be evaluated against competing airports. An airport's competitive market capture is against airports with similar NPIAS airport designations; size and capacity characteristics; levels of infrastructure and services; and runway approach type (visual, nonprecision instrument, and precision instrument). An airport's financial situation is important too: Is it well funded or is it running deficits?

The Aircraft Owners and Pilots Association publishes the AOPA's Airport Directory biannually, which is an excellent summary of all pertinent airport infrastructure, services, and neighborhood characteristics. (7) Airport infrastructure may be cataloged as shown in Table 3. For more information about runways--number, width, length, orientations, quality, and annual or hourly capacity--see the Federal Aviation Administration's circular, "Airport Capacity and Delay." (8)

[FIGURE 2 OMITTED]

[FIGURE 3 OMITTED]

Airport Capacity

Many airports are assigned an Airport Reference Code (ARC). The ARC establishes the largest aircraft that can utilize an airport. First, an airplane's landing speed and characteristics are measured and classified from A to D, lowest to highest, respectively. Second, the airplane's size attribute, referred to as airplane design group (ADG), is grouped by a roman numeral. (9) Table 4 shows the ADG classification parameters.

For example, the smallest planes, like a Cessna 150, can fly into an A-I airport, or larger. A Gulfstream corporate jet with a wingspan of 77 feet can only land at a medium-sized airport (ARC of C-II) or larger. (10) The mammoth Boeing 747 requires a D-V airport. The ARC and ADG numbers are delimiting parameters for the market feasibility analysis. (11)

Large commercial aircraft are confined to airports with sufficient runway strength. Highly technical engineering rating systems, known as Pavement Classification Numbers in the United States, calculate how many runway operations can support the aircraft's weight across the ramps, runways, and at touchdown spots. The types and frequency of airplane usage constrains the demand for hangar space and other services. A medium-sized airport's runway design may be able to land large aircraft, but the runway will deteriorate more quickly.

The airport's capacity also determines the types and sizes of aircraft and hence the associated demand for hangar square footage. Airport capacity is a specialized discipline with numerous variables and an extensive literature.

Capacity may determine the competitive airports used in the appraisal analysis. Capacity can be measured by operations per year, per day, per hour; passenger or cargo enplanements; runway or taxiway capacity; terminal area; parking lot; and apron, gate, and interairport airspace capacity.

An airport's operating statistics, planning documents, and staff can delineate the mix of aircraft based at the airport and suggest future supply and demand trends. Factors that influence an airport's capacity include runway length and runway touchdown thickness, radio frequencies, approach type (ILS, VOR, etc.), lights, security screening services, custom services, emergency services, control tower hours of operation, and elevation.

Lastly, appraisers may want to consider neighborhood demographics and economic development such as hotels, restaurants, highway infrastructure, mass transit, and nearby office and industrial parks, which create demand for commuter, regional, and general air transportation.

Highest and Best Use

The Dictionary of Real Estate Appraisal, 4th edition, defines highest and best use as,

The four criteria--legal permissibility, physical possibility, financial feasibility, and maximum productivity--are used in analyzing highest and best use for aircraft hangars.

Legal Permissibility

In terms of legal permissibility, use of airports and surrounding parcels are affected by rules and regulations promulgated by the airport authority and the FAA. For new construction at public airports, FAA height and hazard regulations create a complex three-dimensional airspace around airports and runways called imaginary surfaces, which must be free of obstructions. (13) The following lists a number of imaginary surfaces that limit the placement of landside buildings or structures.

* The horizontal surface limits structure heights to 150 feet.

* The primary surface extends 200 feet from both ends of a hard-surface runway. Also no obstacles are allowed across a runway's primary surface width; the minimum width requirements are specified in Table 5.

* The approach surface slopes extend from the runway's end at various shallow ratios for extensive distances.

* The transitional surface slopes up from the edge of the primary surface and approach surface slopes at a 14% slope (7 horizontal feet per vertical foot).

* Other imaginary surfaces extend farther away from the airport into its airspace.

The airport authority's master plan, development policies, airport community, and architectural design standards impact the use of the property, effectively limiting the highest and best use to an aviation use. Conventional local zoning codes may not be as important an element of comparison because the airport authority as a governmental or quasi-governmental entity may function independently of local planning and zoning authorities. On the local level, political relationships between the airport authority, the local government, fixed base operators (FBO), owner-operators, and developers are critical considerations. A small circle of players impact the who, what, when, and where of hangar-developed and ground lease conveyance. The ground lease has long-term stipulations on the hangar's use.

Physical Possibility

Physically possible uses are constrained by the airport's layout and boundaries; surplus or excess land; proximity to roadways; taxiways, runways; topography; utility infrastructure; and environmental and safety concerns. Economic utility is derived from the mission of the likely users. To a pilot of small aircraft, a hangar is a house to protect his or her investment and equipment. The plane may occupy the hangar for extended periods.

To a commercial operator, a hangar is a necessary overhead expense or cost center associated with an airplane's downtime. The hangar protects a major corporate asset and provides a safe, dry environment for crews and for frequent light maintenance, known as A and B checks. Dedicated maintenance hangars serve an important function:

The hangar is a cost center, and the goal is to make the aircraft available to fly as soon as possible. The prorated cost of the hangar plus the maintenance labor and material costs divided by the flight hours between service checks equals the cost per flight hour. Slow turnaround in maintenance work can push maintenance to outdoor ramps or at the gate. (15) Changing user needs, like higher maintenance standards and techniques, evolve rather than remain consistent.

Maintenance hangar demand comes from a proportion of an aircraft fleet or based aircraft. Maintenance hangars are used for C-level checks (every 12 to 18 months) and major overhaul D-level checks (every 4 to 5 years), but more frequent, less intensive A and B checks may not require maintenance hangars. The number of maintenance hangar or dock spaces needed ranges from 15% to 30% of the based or fleet aircraft.

Financial Feasibility

Financial feasibility for aircraft hangars is driven by the market, which extends to local and regional operations, itinerate traffic (an exogenous demand factor), and endogenous hangar demand created to support the based and itinerate aircraft. Busy airports generate internal hangar demand. As the number of aircraft increase, there is greater demand for mechanical and repair service hangar space. The Washington State Department of Transportation Aviation System Plan illustrates this point:

An airport's historical operations data and master plan suggest trends. Fundamental analysis also takes into consideration the stock of based aircraft, trends (e.g., shift from smaller propeller planes to business jets, or possible emergence of very light jets), market area growth, and office and government space growth.

Supply and demand for hangar space is correlated with the ARC ratings that affect the size of aircraft most likely to use the airport in the present and into the future. Supply and demand can be segmented into small, medium, and large bays. (17) Forecasts can be segmented by each type of aircraft user. Airport

Systems: Planning, Design, and Management recommends the analysis of different scenarios:

Airports have financial, operating, and political pressures, both local and national, which may stymie or propel future development or expansion. Each market varies. On the supply side, if an FBO has a master ground lease on vacant land, there may be pressure to convert this into paying subleases, increasing hangar supply.

Case Study

A ease study will be presented next to illustrate various concepts in the valuation of aircraft hangars. The improvements of the subject aircraft hangar are as shown in Figure 4 and the subject's market area is described in Table 6.

Leasehold Valuation with a Ground Lease

In the valuation process the three approaches to value--the cost approach, the sales comparison approach, and the income capitalization approach--are derived from at-market interests. Fee simple (FS) equivalent property interests are premised on perpetual and unpartitioned rights and cash flows. With aircraft hangars, however, land and building are rented and utilized as a single entity. Consequently, an aircraft hangar ground lease violates the implicit assumptions of the three approaches to value. The leasehold (LH) analysis of an aircraft hangar, then, has three critical considerations:

1. The income stream is partitioned into different interests.

2. The leasehold and its income stream are not perpetual.

3. The probability of lease renewal may add reversionary value.

[FIGURE 4 OMITTED]

Partitioned Interests

The property's market income stream is partitioned into the residual cash flows as follows:

[I.sub.O] = [I.sub.B] + [I.sub.L]

where:

[I.sub.O] = Income overall (NOD [I.sub.B] = Income to building (hangar) [I.sub.L] = Income to land

The land component is partitioned as follows:

[I.sub.L] = [I.sub.L, SLII] + [I.sub.L, SW] + [I.sub.L, LF]

where:

[I.sub.L] = Income to land at a market level, equivalent to fee simple rent

[I.sub.L, SLII] = Subleasehold's income to land

= [I.sub.L, FS market] - [I.sub.L, LH] (hangar user)

[I.sub.L, SW] = Sandwich leasehold's income to land

= [I.sub.LH] - [I.sub.LF] (FBO)

[I.sub.L, LF] = Leased fee's income to land (airport authority)

The leasehold interest can be positive when the market rent is greater than the contract rent or negative when the market rent is less than the contract rent. The residual interests can be valued by direct capitalization or by a discounted cash flow analysis. In this article, direct capitalization is discussed because it demonstrates the interaction of rates, yields, values, and time.

Table 7 shows the subject's net operating income as partitioned.

Nonperpetual Terms

Figure 5 shows the nonperpetual income stream as partitioned over time. Time is significant to a leasehold value. When the leasehold is very long (40+ years), the reversionary value approaches zero. When value is premised upon a stable perpetual income stream, direct capitalization is appropriate and simple, and it can be capitalized as follows:

[V.sub.perpetual life] = I / [R.sub.perpetual life]

However, as the leasehold gets closer to expiration, the capitalized leasehold building and land values diminish in comparison to the [V.sub.perpetual life]. A longer lease generates more income, but the increase in value diminishes exponentially with each additional year (Figure 6).This requires an adjusted or loaded capitalization rate, or the use of a discounted cash flow analysis.

The capitalization rate can be adjusted through two types of interrelated techniques: the percent of leasehold recaptured and the Inwood premise.

Percent of Leasehold Recaptured. The percent of

leasehold recaptured can be multiplied against the perpetual value to reflect the value of the remaining leasehold. It is calculated by dividing the present value of an annuity (i.e., the Inwood coefficient) by a present value of a perpetual annuity, as shown in the following equation.

% of leasehold recaptured = [V.sub.leasehold] / [V.sub.perpetual life]

= 1/[R.sub.adjusted] / 1/[R.sub.perpetual life]

= [a.sub.n] [??] / 1/[R.sub.perpetual life]

= 1 - 1 / [S.sub.n]

To demonstrate the algebraic linkage, the percent of leasehold recaptured can alternatively be loaded into the capitalization rate.

[R.sub.adjusted] = [R.sub.perpetual life] / % of leasehold recaptured

Table 8 demonstrates the percent of leasehold recaptured for the case study subject.

[FIGURE 5 OMITTED]

[FIGURE 6 OMITTED]

The Inwood Premise. The Inwood premise is R = Y - [DELTA] x 1/[S.sub.n{??]]. (19) The Inwood premise is adjusted to reflect a capitalization rate loaded for the reversion of the property at the end of the leasehold. If income is level, Y= [R.sub.perpertual life], and if the hangar reverts to the landlord at the termination of the lease (n), [DELTA] = -100% then the adjusted model is as follows:

[R.sub.adjusted] = [R.sub.perpetual life] - (-100%) x 1/[S.sub.n{??]]

[R.sub.adjusted] = [R.sub.perpetual life] + 1/[Sub.n][??]

In the case study this is computed as

9.65977% = 9.3% + 0.35977%

The model can be expanded to reflect increases in the land and building income and value as follows:

[R.sub.perpetual life] = [Y.sub.perpetual life] - [A.sub.perpetual life]

where A is the future change in income or value. (20) By substitution into the previous Inwood premise,

[R.sub.adjusted] = Y - a + 1/[S.sub.n[??]], or = Y - a + (Y - A) / [S.sub.n] - 1, or

= (Y - A) / 1 - 1/[S.sub.n]

where the future value component, [S.sup.n] = [(1 + Y).sup.n], is discounted at the yield (Y - A). The percent of leasehold adjustment is calculated in the same manner, using (Y- A) as the discount rate.

Having determined the capitalization rate to the building's subleasehold, the income (if any) to the land's subleasehold position is valued. This land capitalization rate can be adjusted by a nonperpetual value. (The case study will simply multiply the value by the percent of leasehold recaptured factor.)

Overall capitalization rates ([R.sub.O]) are relatively easy to determine in the marketplace from a number of different approaches. The relationship between the overall capitalization rate, the land capitalization rate, and the building capitalization rate is defined by the following equation:

[R.sub.O], = (L x [R.sub.L]) + (B x [R.sub.B])

where L and B are the land and building values, as a percentage of total value. Table 9 illustrates rate extraction for the case study using this formula.

In general appraisal theory, land capitalization rates are generally lower than the overall capitalization rate, and building capitalization rates are generally higher than the overall capitalization rate:

[R.sub.L] < [R.sub.O] < [R.sub.B]

This relationship occurs because land is stable and less risky than a building. A building, in contrast, has a limited economic life, greater economic risk, and includes an entreprenenrial incentive, requiring a higher capitalization rate in order to recapture the building investment. Likewise, leased fee rates are lower than leasehold rates:

[R.sub.LF] < [R.sub.SW] < [R.sub.SLH]

The subleasehold income is capitalized into the subleasehold value as shown in the following equation and in Table 10.

[V.sub.L, SLH] = [I.sub.L, SLH]/[R.sub.L, SLH] x % of leasehold recaptured

In conclusion, three interests constitute the total value of the aircraft hangar property. The hangar (sublessee) receives the present value of [I.sub.B, SLH]. and [I.sub.L, SLH] (see shaded area of Figure 5) until the sublease's expiration:

[V.sub.B+L, SLH] = [I.sub.B, SLH] + [I.sub.L, SLH]/[R.sub.adjusted, O, SLH] = [I.sub.B,SLH]/[R.sub.adjusted,B,SLH] + [I.sub.L, SLH]/[R.sub.adjusted, L, SLH]

The FBO (lessee) receives the present value of [I.sub.L. SW]-until expiration:

[V.sub.L, SH] = [I.sub.L, SW]/[R.sub.adjusted, SW]

The airport authority (landlord) receives the present value of the income during the leasehold and the reversionary value, if the lease is not renewed. The reversionary value would be discounted by a present value factor from time n to the appraisal's effective date at time 0:

[V.sub.B + L, LJ] = [I.sub.I, LF]/ [R.sub.L, LF] + [I.sub.B reversion, LJ]/[R.sub.B] x [(1 + [Y.sub.B]).sup.n]

or = [I.sub.L, LF]/{R.sub.adjusted] + [I.sub.L reversion, LF]/[R.sub.L] x [(1 + [Y.sub.L]).sup.n] + [I.sub.B reversion, LF]/[R.sub.B] x [(1 + [Y.sub.B]).sup.n]

Reversionary Value

The probability of lease renewal might add reversionary value to the hangar sublessee. As the end of the sublease approaches, both tenant and landlord have an incentive to write a new lease. A new lease can occur well prior to the expiration of the old one. If the new lease is modeled to occur before the expiration of the first lease, appraisers should make sure not to double count income streams or values.

The binomial options pricing model can value the probability of the future lease renewal in the reversion. The possibility of future renewal is bounded between the 0% probability of renewal and the 100% probability of renewal.

The reversion occurs after the lease expiration year (n) plus any anticipated lag times for vacancy. The expected value, E(V), is the probability-weighted overall reversionary value ([V.sub.O reversion, SLH]) discounted to a present value:

E ([V.sub.O reversion, SLH]) = (P(r) x [V[V.sub.O reversion, SLH]) + (P ([logical not] r) x $0)/[(1 + Y).sup.n]

where [V.sub.O reversion, SLH] equals the [V.sub.B reversion, SLH] plus the [V.sub.L reversion, SLH].

The reversionary value of the building ([V.sub.B reversion, SLH]) equals the value of the depreciated building at the lease's renewal plus the value added from the cure of physical depreciation minus the cost to cure (i.e., a capital expenditure) minus the functional obsolescence from any deficiency requiring modernization, minus the loss in remaining contributory value of demolished/removed components from the original structure, and minus holding costs and the time value of money arising from delays or downtime during a renovation. This net capital repair can have a positive, negative, or breakeven effect on the reversionary value.

E ([V.sub.reversion]) = P(r) x [[V.sub.B reversion, SLH]/[(1 + [Y.sub.B, SLH]).sup.n] + [V.sub.L reversion, SLH]/([1 + [Y.sub.L, SLH]).sup.n]] + $)

Lease Renewal. The probability of lease renewal requires careful judgment. When the renewal decision is far in the future, the impact of receiving or not receiving a lease renewal is small. As the decision nears, the impact becomes significant.

Past behaviors and suggested future intentions are the best quantitative predictors for judging the probability of lease renewal. First and foremost, aviation is the mission, revenue source, and the passion of the airport administrators, FBOs, and tenants. To them, the hangars are ancillary attributes of business (if not outright banal attributes) until they need hangars.

The local political mood affects the likelihood of lease renewal. Some airport authorities desire long-term relations with stable tenants. If the FBO has been a responsible operator, renewal of the master lease is more likely. If the hangar tenant is an honorable member of the airport community, renewal of the sublease is more likely. Some airport authorities with hangar waiting lists and political pressures may eschew the appearance of favoritism and may desire the reversion of the hangar.

If noise or emissions complaints rankle the neighbors, if the airport is not financially self-sufficient, if airport/runway expansions upset the citizens, or if various authorities are inclined toward cronyism, then non-airport governmental authorities are likely to intervene in the airport's operation. Lease and sublease renewals in such situations become more closely scrutinized.

Future Value of Buildings. In considering the reversionary value, the contractual ground rents are likely to increase. Additionally, three forces affect the future value of the building.

The first factor that affects the future value of the building is depreciation, or the deterioration of the building's components that eventually decay the structure to the point of demolition.

The second factor affecting future value of the building is repairs. One condition for the sublease's renewal may be the refurbishment or replacement of the hangar's exterior walls to offset its depreciation. These net capital repairs may or may not create value. At the time of construction, capital repairs (adjusted for future inflation) may include compliance with new building and fire codes.

The third factor, cost-push inflation, may appreciate the existing hangar structure's value, based on the principle of substitution, as a new structure will increasingly become more expensive to build new. (21) Eventually, the force of the cost-push inflation may be substantially offset by the physical depreciation rendering the reversion value in the present value near zero.

The expected reversionary value in the case study is described in Table 11 and computed in Appendix II-B.

Three Approaches to Value

Cost Approach

Due to the relatively small aircraft hangar market, the cost approach becomes an important indicator of value. As described in The Appraisal of Real Estate, 12th edition, sometimes the only market evidence is represented through the cost approach.

Because cost information is available directly from the market, it is significant that someone actually paid money to construct the improvements, or intended to do so, upon a particular site. As applied to aircraft hangars, the cost approach is applied in a typical manner with the usual considerations.

The utilization of the cost approach must rely on the appraiser's judgment. A unit-in-place or quantity survey is more likely to be reliable than summary cost statistics. Some cost manuals survey vendors rather than collect empirical data from actual construction projects. Consequently, costs may be incorrect for special-purpose properties. Rapid increases in steel prices, for example, over the last several years may be poorly reflected in the data. Where numerous light steel-frame construction companies compete in regional markets, more than one source of cost information improves reliability. Because of the specialized nature of hangar doors, these costs may have to be researched from private construction companies, not from the popular cost estimation manuals.

As structure size increases, cost per square foot can increase exponentially. As the free span lengthens and the square footage increases, stronger and thicker trusses or girders are required. (23) Higher ceiling clearances result in greater structural loads and more exterior wall and cladding area. As heating, ventilation, and air conditioning (HVAC) and utility service requirements increase, the building carries heavier gauge piping. Larger structures can have higher quality materials, because the aircraft and personnel are more expensive. Floors must support heavier aircraft (live load). Larger structures tend to have more amenities. All of these factors increase the dead load. As the dead load mass increases, cost increases. As an extreme example, Lufthansa's maintenance facility with rail link designed for four Airbus A380 bays is 527,000 square feet, and cost between $340 and $370 per square foot. (24)

Entrepreneurial incentive appears to be similar to other general commercial property types, although exact rates will differ and the presence of external obsolescence may nullify any entrepreneurial incentive. To determine depreciation, all typical appraisal techniques are applicable, including market extraction, age-life method, cost manual tables, matched-pair analysis, or multiple regression analysis of comparable sales or rents. (25) As a caveat, to extract building residuals and to compare properties with leasehold interests, much greater analytical care is required.

Functional obsolescence is impairment in a property's utility. Because of experimentation in architectural design and because of unique specifications by owner-developers, obsolescence can occur in a variety of forms. For example, suppose a tandem laid-out hangar necessitated backing out the front plane to retrieve the plane in the rear. This obsolescence could possibly be measured by the capitalized cost in personnel time and equipment to retrieve the plane and reinsert the plane in the front. (26) This obsolescence would be a subtraction or adjustment in the three approaches to value.

However, suppose the rear hangar space was rented at the same rental rate as the bay fronting the apron to a moving company who used it as a warehouse because of its street access and loading dock. Functioning as a mixed-use property, this ostensibly nullifies some or all functional obsolescence.

As another example, an overly-large hangar in a small airport may be indicative of several possible scenarios: no obsolescence if multiple small aircraft can functionally occupy the space, or functional obsolescence for pockets of square (or cubic) footage underutilized by housing a smaller plane, or external obsolescence because of acute vacancy.

Whereas the cost approach in its normal application presumes a perpetual-life fee simple interest, the value of the building must be adjusted, if necessary, to reflect a nonperpetual leasehold interest. The percent of leasehold adjustment derived from the income approach can be multiplied against the stabilized building value. The nonperpetual subleasehold land value, if any, is added ([V.sub.L, SLH]). The probability of a weighted reversion value (E([V.sub.reversion])) is added. Combined, these equal the subleasehold value of the building and land to the tenant ([V.sub.B+L, SLH]).

Table 12 illustrates application of the cost approach for the case study subject, and Appendix II-C provides a detailed analysis of the building hard costs for the case study.

Sales Comparison Approach

Comparable sales data can be obtained from a variety of sources, including national and local multiple-listing sales databases, local brokers specializing in this product type, assessors, and recorders offices. Since aircraft hangars are a special-purpose property, these data sources may not adequately monitor aircraft hangar sales. Additional field research may be necessary to correct for sloppy data collection. Airport bulletin boards, aviation magazines, and aviation Internet chat forums and Web pages can uncover additional data.

Ultimately, airport authorities, FBOs, and other people onsite are generally most knowledgeable about the activities in their own market. These people seem to be receptive to impromptu conversations in the field. Unlike time-stressed property managers and brokers of general-purpose properties, onsite people are not paid on commission and are not bombarded by telephone calls and e-mail requests for appraisal data. Appraisers should treat information from onsite people confidentially, though, for the airport is a small community of long-term acquaintances, hobbyists, and professionals. Before wandering the airport, an appraiser should check in with the airport authority and FBO because of security concerns.

The sales comparison approach with regard to aircraft hangars should apply the typical elements of comparison following the usual sequence of adjustments. The real property rights conveyed should adjust for nonrealty components like business income and leasehold interests arising from the comparable's ground lease. Whereas sales are frequently of the leasehold value of the improvement, the value incorporates the market's anticipated use of the property.

To make a comprehensive property rights comparison, the comparable's component interests may require a reverse-engineered discounted cash flow analysis. As discussed previously in this article, this includes market appreciation from cost-push inflation, changes in sublease rates, term lengths, building depreciation, the likelihood of having anything of value to sell to a subsequent user at the end of the occupancy, and the possibility of reversionary value.

For example, near the end of the long-term lease, a hangar improvement may be sold at a substantial discount because there is a finite term remaining until the hangar must be vacated. This might occur if the seller does not have sufficient political connections or motivation to get the ground lease renewed. The purchasing sublessee, though, may be able to obtain a new sublease, thereby extending the subleasehold interest, increasing the building's subleasehold value.

If there is a dearth of data, the trade area and the timeframe might have to be dramatically increased. Great care must be made in comparing one type or size of hangar to a different type or size of hangar as this may result in a very misleading conclusion. Sometimes, the only support for adjustments may be differentials indicated by cost tables. In making adjustments, office space may be a large amenity or included in the unit of comparison.

Table 13 illustrates application of the sales comparison approach in the case study.

Income Capitalization Approach

Landlords may be investors specializing in aircraft hangars, the airport authority, a local firm that has surplus hangar space available, the FBO, or professional commercial aviation operators. To the last two entities, the rental of a hangar may be as much of a business asset as a real estate asset.

The nature of the rental market for hangar space may be highly subjective as there may be a limited marketplace. An experienced developer and operator reported that hangar rent rates are particularly difficult to determine even for people in the business. According to Airport Planning & Management,

Square footage can be a unit of comparison; however, in larger hangars, a position is a unit of comparison. A position is a nonquantified area that varies with the type and size of aircraft. A hangar, therefore, can accommodate a flexible range of positions. In a large hangar, the landlord may lease an agreed on number of positions to several tenants. Because a tenant's fleet may consist of a variety of aircraft, as the fleet arrives and departs, the aircraft actually stored will change daily or weekly.

Another method for generating income is the tuck. The tuck is where aircraft with different wing heights overlap. Each aircraft owner pays the same rate as if the planes exclusively occupied the hangar space. Aircraft leases provide the hangar owner with flexibility to generate additional income above the contract rent. When the tenant's aircraft is out of the hangar, the hangars may be rented overnight to visiting aircraft at a premium.

To obtain rental data, the airport's terminal or central office may have a bulletin board with hangars available for rent and the airport authority may have a waiting list for hangars owned by the aviation authority. The FBOs are particularly knowledgeable about local activities.

Fuel sales and aviation services represent a significant source of potential business income to a hangar complex. Other aviation services include towing or on-demand, twenty-four-hour availability of an airplane, such as an airplane fitted as a medical ambulance. In developing the income capitalization approach, potential income from fuel sales and aviation services should not be included because it represents business value, and, accordingly, the management, labor, and overhead expenses for fuel and service is excluded.

Vacancy rates are developed by inferred analysis and fundamental analysis. Inferred analysis takes into consideration current vacancy rates of hangars that are of similar size, along with larger hangars that can accommodate multiple planes. Demand for hangars of other sizes can provide a helpful indication of supply and demand. Absorption rates of new hangar product and waiting lists are insightful. The Aircraft Hangar Development Guide advises as follows:

Expenses can be handled on a triple-net basis, modified-gross basis, or gross basis in the same market area and may be passed through a community or homeowners association. Expenses can be itemized or an expense ratio can be applied.

Janitorial and management expenses may not be applicable to a very small hangar, if they are considered part of the owner's general use.

Determining the management and maintenance costs may be particularly difficult and subjective as this may be done as general overhead associated with other business services by the hangar operator. Business-related expenses, like management, should be partitioned from the real estate component, which would commonly occur in a commercial operator or FBO-owned hangar.

Ad valorem taxation may or may not pertain to the building sublease; local authorities may vary even within the same state. Other expenses to consider include improvements to the land, and landscaping and maintenance of employee parking or access roadways, if applicable. (29)

The ground lease is a liability or cash outflow diminishing its value. A ground lease expense is not an operating expense and occurs below the net operating income line.

Capitalization rates are especially difficult to extract because of the scarcity of comparable sales and the subjective nature of the business and real property income streams. The mortgage-equity band of investment approach is an appropriate approach for deriving a capitalization rate. As a proxy, while admittedly very subjective, capitalization rates from metal industrial buildings may provide a starting point, because of the similarity in physical characteristics. In concluding a capitalization rate, the remaining economic life of the improvement and the remaining term of the lease should be considered. Where these are shortening, and the lease renewal is unlikely, the capitalization rate may be higher due to the depreciating nature of the physical and financial investment in line with the Inwood premise.

Table 14 shows application of the income capitalization approach to the case study property.

Conclusion

Each market area differs substantially as to the availability and reliability of data. All three approaches to value are recommended to achieve the greatest level of confidence. Because aircraft hangars are special-purpose properties, weak data requires additional fieldwork and verbal confirmation to determine the market participant's thinking.

In general, the cost approach is particularly insightful and reliable for recently or newly constructed hangars, provided the market is in balance. As a special-purpose property, the cost approach may have to be relied upon to value older hangars, if only as a check of reasonability.

The cost approach model can misvalue a property. Cost can be difficult to determine, for material and labor prices occur across a broad spectrum and special components are difficult to price. In a data-poor environment, depreciation, entrepreneurial incentives, functional obsolescence, and external obsolescence are difficult to derive. Because of the risk that the cost approach model implies a priori feasibility, it is difficult to determine whether the market sees all cost components as equally contributing to value.

In addition to the cost approach, the sales comparison and income capitalization approaches to value are needed. The three approaches to value are a reflection of market conditions and the market participants' current and future experiences and needs. Some markets have extensive rental and comparable sale information, others do not. For some markets, the income capitalization approach is the primary approach to value. In other markets, the income capitalization approach is unreliable, but if applied properly it may provide a check of reasonability against the other two approaches or provide a basis for rating a property and determining adjustments. The reconciliation and conclusion of value, then, is similar to any property, type.

Appendix II-A Selected Aviation Terms and References

Air Carrier: An entity that undertakes directly, by lease, or other arrangement to engage in air transportation. More specifically, the commercial system of air transportation comprising large certificated air carriers, small certificated air carriers, commuter air carriers, on-demand air taxis, supplemental air carriers, and air travel clubs. [Note: Each of these carrier designations has specific definitions.]

Airport and Airway Trust Fund: Fund established by Congress to pay for improvements to the nation's airports and air traffic control system. Money in the fund comes solely from users of the system, principally via taxation of domestic airline tickets.

Commercial Service Airport: Airport receiving scheduled passenger service and having 2,500 or more enplaned passengers per year.

En Route Center: Formally known as an Air Route Traffic Control Center (ARTCC), it houses the air traffic controllers and equipment needed to identify and direct aircraft, primarily during the en route portion of their flights.

Essential Air Service (EAS): Government-subsidized airline service to rural areas of the United States, which continued after the Airline Deregulation Act of 1978.

General Aviation: All facets of civil aviation, except facets of those air carriers that hold a Certificate of Public Convenience and Necessity. All civil aviation operations other than scheduled air services and nonscheduled air transport operations for taxis, commuter air carriers, and air travel clubs that do not hold Certificates of Public Convenience and Necessity.

Nonscheduled Service: Revenue flights not operated as regular scheduled service, such as charter flights, and all non-revenue flights incident to such flight.

Revenue Passenger Enplanement: A revenue passenger boarding an aircraft in scheduled service, including origination, stopover, and any connections. Generally corresponds to a flight coupon. Does not include through passengers.

Turbojet: The original designation for a "pure" jet engine whose power is solely the result of its jet exhaust.

Turboprop: A type of engine that uses a jet engine to turn a propeller. Turboprops are often used on regional and business aircraft because of their relative efficiency at speeds slower than, and altitudes lower than, those of a typical jet.

Widebody Aircraft: Generally considered to be any airliner with more than one aisle in the passenger cabin. Examples of widebody aircraft include the Boeing 747,767, and 777; the Lockheed L-1011; the McDonnell Douglas DC-10, and the Airbus A300 and A310. Technically, any aircraft with a fuselage diameter in excess of 200 inches may be considered a widebody.

Source: The Airport Transport Association of America http://www.airlines.org (Reprinted with permission.)

Appendix II-B Valuation of the Expected Value of the Reversion

The hangar's reversionary value is estimated by forecasting the replacement cost new of the hangar. Both the cost and the income capitalization approaches are forecasted. The replacement cost new, from the year 2002 (time n = 0) cost approach, is projected for 37 years of inflation (n = 37), one year after the ground sublease expires.

The building income residual, which has an effective age of 6 years and life of 50 years, is de-depreciated to estimate the building income as if new.

The income, as if new, is inflated at 3% to the year of reversion, 2040.

Income, anticipated to be received at the end of the year, is capitalized back to the reversionary value at the time of lease's expiration (n = 37). This assumes that the building's reversion capitalization rate remains stable and it is not loaded for any risk or depreciation factors.

The two forecasted reversionary replacement costs are both reasonable and are reconciled to $5,700,000.

Assuming that the hangar will not require new skin, i.e., replacement of exterior walls, depreciation is subtracted from the replacement cost new to determine the reversionary value of the building.

This reversionary value is discounted back to present value as of the effective date of the appraisal (n = 0). Again, for simplicity the [R.sub.B] is assumed to be the same as the [Y.sub.B], where inflation is offsetting appreciation. At a building yield rate of 9.3%, the present value factor over 37 years is 3.7244%.

[GRAPHIC OMITTED]

The present value of [V.sub.B, reversion] equals $29,721 at the effective date of the appraisal (n = 0).

The chance that the lease will be renewed without the replacement of the exterior skin is estimated to be 25%, resulting in an expected value of $7,430. Due to the number of assumptions and the sensitivity of variables to far-forward projections, it is not unreasonable to round this to a zero expected value.

It is likely that the exterior skin (walls and roofing) will need to be replaced as part of the lease renewal terms, increasing the probability of the renewal variable. These capital repairs may cure physical depreciation adding to the reversionary value, yet at the same time the capital repair cost maybe less than, greater than, or equal to the expenditure. If the exterior walls still have some economic life, premature demolition will result in a form of functional depreciation taking into consideration demolition costs and salvage value. This model can be refined to reflect the different economic age and economic life of the short- and long-lived components.

(1.) Bureau of Transportation Statistics, http://www.bts.gov.

(2.) United States Bureau of Economic Analysis Survey of Current Business, "Other NIPA and NIPA-Related Tables" (March 2006): D-46.

(3.) United States Department of Transportation Federal Aviation Administration, Administrator's Fact Book (December 2006).

(4.) See Appendix II-A for definitions of additional aviation terms.

(5.) Federal Aviation Administration, Report to Congress National Plan of Integrated Airport Systems (NPIAS) (2007-2011), 1.

(6.) Ibid.

(7.) See http://www.aopa.org or http://www.sportys.com for information on purchasing this book.

(8.) Federal Aviation Administration, "Airport Capacity and Delay," http://www.faa.gov/airports_airtraffic/airports/resources/ advisory-circulars/media/150-5060-5/150_5060_5.pdf.

(9.) Federal Aviation Administration, "Airport Design," http://www.faa.gov/airports_airtraffic/airports/resources/ advisory_circulars/media/150-5300-13/150_5300_13_chg7.pdf.

(10.) Ibid. The FAA Aircraft Characteristics Database at http://www.faa.gov/airports_airtraffic/airports/construction/ aircraft_char_databasealso provides these codes.

(11.) Aircraft sizes are also classified by operating weight empty.

(12.) Appraisal Institute, The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002), 135.

(13.) Code of Federal Regulations, "Objects Affecting Navigable Airspace," Title 14, Chapter 1, Part 77 (2004). See also Federal Aviation Regulations Part 77, "Objects Affecting Navigable Airspace," [section] 77.25.

(14.) Gall E Butler and Martin R. Keller, ed., Handbook of Airline Operations (New York: Aviation Week, 2000), 483-492.

(15.) Austin Company, "Hangar Design--The Door to Profitability," MRO Management (July 1999).

(16.) Washington State Department of Transportation Aviation, Aviation Division, http://www.wsdot.wa.gov/aviation/wsasp/ExecSummary.htm.

(17.) Air Force Handbook (AFH) 32-1084, [section] 7.2.4.

(18.) Richard de Neufville and Amedeo R. Odoni, Airport Systems: Planning, Design, and Management (New York: McGraw-Hill, 2003), 59.

(19.) Sinking fund factor: 1/[S.sub.n[??]] = Y / [S.sup.n] - 1, where [S.sup.n] = [(1 + Y).sup.n].

(20.) Appraisal Institute, The Appraisal of Real Estate, 12th ed. (Chicago: Appraisal Institute, 2001), 561.

(21.) Cost-push inflation is described as, "Rising prices caused by increasing costs of production (labor, raw materials, taxes, exchange rates) that are passed on to consumers." Appraisal Institute, The Dictionary of Real Estate Appraisal, 68.

(22.) Appraisal Institute, The Appraisal of Real Estate, 354.

(23.) Mike Fenske, "What's Your NLA? How Will New Large Aircraft Affect Your Airport Facilities?" (Burns & McDonnell, 2001), http//www.burnsmcd.com; and Austin Company.

(24.) Lufthansa Airlines, "Maintenance in Germany's Largest Industrial Hall," http://a380.lufthansa.com/en/html/technik/wartungshalle/index.php.

(25.) George Campbell, 1974 Supplement to Airport Management and Operations (Louisiana: Claitor's Publishing Division, 1974). Campbell states that hangars have an estimated life span of 30 years. Other related airport structures have the following estimated life spans: terminal buildings (new), 40 years; terminals (frame and stucco), 15 years; air freight terminals (steel and metal siding), 20 years; service buildings and shops, 30 years; runways, taxiways, aprons, and roads, 20 years.

(26.) Aerospace Industries Association, Aerospace Facts & Figures, 2004/2005 edition. Updated annually, this pamphlet provides airline and airline employment data taken from the U.S. Bureau of Labor. For example, the average hourly wage for aircraft workers in 2003 was $25.40/hour plus a substantial overhead of about 70%.

(27.) Alexander T. Wells and Seth B. Young, Airport Planning and Management, 5th ed. (New York: McGraw-Hill, 2000), 214.

(28.) Aircraft Owners and Pilots Association, Aircraft Hangar Development Guide (2005), http://www.aopa.org/asn.

(29.) Wells and Young, 366.

by Timothy J. Lindsey, MAI

Timothy J. Lindsey, MAI, is a commercial appraiser in Denver, Colorado, with Safiya: Land + Building Appraisal Studios. He recently earned his MAI designation from the Appraisal Institute. Contact: tim@saflya.us
The reasonably probable and legal use of vacant land or
   an improved property, which is physically possible, appropriately
   supported, financially feasible, and that results
   in the highest value. (12)


An airline's maintenance base (hangar) is the factory
   where the airline produces its product (flight hours).
   For instance, flight hours are produced when a maintenance
   organization completes a service check ...
   [maintenance] hangar utilization, or bay occupancy,
   is a measure of how fully a company employs its hangar
   facilities. A three-shift-per-day, seven-day-a-week
   schedule makes full use of a hangar. (14)


The number of based aircraft at general aviation airports
   is a big factor in planning for future facility needs. The
   number of based aircraft not only correlates to operational
   demands on airport facilities like runways, lighting
   and Navaids [navigation aids], they directly relate
   to ground facilities needed at individual airports, like
   hangar storage, fueling facilities, and aircraft service
   and repair needs. (16)


The forecast is "always wrong." Modern planners and
   managers must face this reality in the era of deregulation
   and competition. Airlines form alliances, merge, and
   change their routes and services; passengers and shippers
   reorient their patterns. These variations make forecasts of
   levels and types of traffic unreliable. Airport professionals
   must assume that the future reality will easily be different
   from what seems most likely at present. (18)


Probability of yes renewal:   P(r) = r %
Probability of no renewal:    P([logical not]r) = 1 - r%
Total probability:            100%


The cost approach is also used to develop an opinion
   of market value ... of special-purpose or specialty
   properties, and other properties that are not frequently
   exchanged in the market. Buyers of these properties
   often measure the price they will pay for an existing
   building against the cost to build minus depreciation
   or the cost to purchase an existing structure and make
   any necessary modifications. (22)


Rentals are usually based on a rate per square foot and
   cover investments in associated aircraft apron space and
   hangar-related employee parking. Hangar office space
   is charged on a similar basis and covers office-related
   employee parking. (27)


Determine the level of commitment from those on the
   list-do they intend to occupy a hangar once one is built?
   In some cases, people have their names on multiple lists
   at neighboring airports, or they do not currently own
   an aircraft. In other cases, the waiting lists are not well
   managed, are out of date, or do not reflect the realistic
   demand for hangars. (28)


Replacement Cost New  [down arrow] n = 0   $1,986,593
x Inflation (3%, 37
  years, compounded
  yearly)                                      2.9852
= Relacement Cost New              n 37    $5,930,377


[I.sub.B]                              n = 1   $153,831
/ % Good = (100% - 12% depreciation)                88%
Imputed Feasibility New [I.sub.B]      n = 1   $174,808


Imputed Feasibility New [I.sub.B]   [down arrow] n = 1   $174,808
x Inflation (3%, 37 years)                                 2.9852
Feasible RCN [I.sub.B], cost-push
  inflation                                      n = 38  $521,837


[I.sub.B], cost-push inflation   [down arrow] n = 38     $521,837
[R.sub.B], reversion                          n= -1          9.3%
RCN, reversion                                n = 37   $5,611,151


Value New at Reversion                        n = 37    $5,700,000
Depreciation (= 43 year age + 50 year life)   - 86%    $(4,902,000)
[V.sub.B, reversion]                          n = 37       $798,000


Appendix 11-C Case Study Building Cost Breakdown

Subject Parameters                        Sources

Office (1st floor)   2,500 square feet    RSMeans Square Foot
                                            Costs, 2002
Office (2nd floor)   2,500 square feet    RSMeans Assemblies Cost
                                            Data, 2002
Hangar               16.000 square feet   For pre-engineered
                                            rigid frame
Total                21,000 square feet   RSMeans Building
                                            Construction Cost Data
Hangar Width           100 x 160 feet     National Building Cost
                                            Manual, 2002, ed. Dave
                                            Ogershok (Craftsman
                                            Book Co.)
Office Width           100 x 25 feet      Marshall Cost Service
Perimeter             570 linear feet
Eave Height               24 feet
Roof Height               32 feet

A. Substructure         Table #   Section

                          1010    Foundations
                          1030    Slab on grade

                          1030    Slab on grade

B. Shell
B10 Superstructure        1010    Wall construction
                          1010    Floor construction
                                    (office)
                          1020    Roof construction
B20 Exterior              2010    Exterior Walls
Enclosure
                          2020    Exterior Windows
                          2020    Exterior Windows
                          2030    Exterior Doors
                          2030    Exterior Doors
B30 Roofing               3010    Roof Coverings
                          3020    Roof Openings

C. Interiors
                          1010    Office Wall
                                    Partitions
                          1020    Interior Doors
                          1030    Fittings
                          2010    Stair Construction
                          3010    Wall finishes
                          3020    Floor Finishes
                          3020    Floor Finishes
                          3030    Ceiling Finishes

D. Services
D10 Conveying             1010    Elevators & Lifts
                          1020    Escalators &
                                    Moving Walks
D20 Plumbing              2010    Plumbing
D30 HVAC                  3010    Energy Supply
                          3020    Heat Generating
                                    Systems
                          3020    Heat Generating
                                    Systems
                          3030    Cooling Generating
                                    Systems
                          3050    Terminal & Package
                                    Units
                          3090    Other HVAC
                                    System &
                                    Equipment
D40 Fire Protection       4010    Sprinklers
                          4020    Standpipes
                          Other   Draft Curtains
D50 Electrical            5010    Electrical Service/
                                    Distribution
                          5010    Electrical Service/
                                    Distribution
                          5020    Lighting & Branch
                                    Wiring
                          5020    Lighting & Branch
                                    Wiring
                          5030    Communications
                                    & Security
                          5030    Telephone System

E. Equipment and
   Furnishings

F. Special
   Construction
                          1020    Integrated
                                    Construction
                          1040    Special Facilities
                          1040    Special Facilities
                          1040    Special Facilities
                          1040    Special Facilities
                          1040    Special Facilities

G. Building
   Sitework

Subtotal
Contractor's General
  Requirements (10%),
  Overhead (5%), and
  Profit (10%)
Subtotal
Architect Fees
Total
Locality Adjustment
Total Direct Cost
Round

A. Substructure         Table #   Description

                          1010    Poured concrete; strip and
                                    spread footings
                          1030    3" reinforced concrete slab
                                    on grade floor (office)
                          1030    8" reinforced concrete slab
                                    on grade floor (hangar)

B. Shell
B10 Superstructure        1010    Pre-engineered rigid frame
                                    (1:12 roof ratio): steel
                                    columns + girders + purloins,
                                    160' clear span
                          1010    Steel columns, joists, beams,
                                    decking, concrete (office)
                          1020      (incorporated as part of
                                    rigid frame superstructure)
B20 Exterior              2010    Enamelized steel siding (75%
Enclosure                           of hangar and office) with
                                    vinyl-faced-insulation
                                    (adjustment to upgrade).
                                    Excludes the hangar door
                                    surface area.
                          2020    Thermopane windows, picture
                                    frame style (office)
                          2020    Polycarbonate translucent
                                    panes (hangar)
                          2030    Metal pedestrian doors
                          2030    Steel overhead rolling
                                    automobile drive-in door
B30 Roofing               3010    Enamelized steel siding with
                                    vinyl-faced-insulation
                                    (adjustment to upgrade)
                          3020    None

C. Interiors              1010    (office)
                          1020    (office)
                          1030    Toilet partitions
                          2010    (office)
                          3010    (office)
                          3020    Epoxy coating (hangar),
                                    two coats
                          3020    Carpet (office)
                          3030    Acoustic tile (office)

D. Services
D10 Conveying             1010    None
                          1020    None
D20 Plumbing              2010    Toilets, hot water
D30 HVAC                  3010
                          3020    Suspended gas-fired heaters
                                    (hangar)
                          3020    Central heat/AC system
                                    (office)
                          3030
                          3050
                          3090    Rooftop cooling
D40 Fire Protection       4010    None
                          4020    None
                          Other   None
                          5010    Feeds
D50 Electrical            5010    Branch Wiring (hangar and
                                    office)
                          5020    Outlets and florescent
                                    lights (office)
                          5020    High bay lamps (hangar)
                          5030    Fire alarm security system,
                                    12 detectors
                          5030

E. Equipment and
   Furnishings                    None

F. Special
   Construction
                          1020
                          1040    Motorized sliding hangar
                                    door system (26' x 120')
                          1040    Hangar door, installation
                          1040    Hangar door, exterior wall
                                    ("skin")
                          1040    Eye wash pedestal
                          1040    2-ton bridge crane (crane,
                                    single rail, installation) 1

G. Building
   Sitework
                                  19 car parking spaces
                                  Hangar apron, concrete
Subtotal
Contractor's General
  Requirements (10%),
  Overhead (5%), and
  Profit (10%)
Subtotal
Architect Fees
Total
Locality Adjustment
Total Direct Cost
Round

A. Substructure         Table #    Unit        Unit Type

                          1010       570   LF
                          1030     2,500   SF of foot print
                          1030    16,000   SF of foot print

B. Shell
B10 Superstructure        1010    16,000   SF of foot print
                          1010     5,000   SF
                          1020
B20 Exterior
Enclosure                 2010    13,680   SF of wall
                          2020        17   Each
                          2020     1,000   SF of wall
                          2030         3   Each
                          2030         1   Each
B30 Roofing               3010    18,500   SF
                          3020

C. Interiors
                          1010     5,000   Per surface SF
                          1020         1   Lump sum
                          1030         4   Lump sum
                          2010         2   Each
                          3010     5,000   Per SF
                          3020    16,000   SF
                          3020     5,000   SF
                          3030     5,000   SF

D. Services
D10 Conveying             1010
                          1020
D20 Plumbing              2010         2   Each
D30 HVAC                  3010
                          3020         4   Each
                          3020     5,000   Per SF
                          3030
                          3050
                          3090     5,000   Per SF
D40 Fire Protection       4010
                          4020
                          Other
D50 Electrical            5010         1   Each
                          5010        25   Per LF
                          5020     5,000   Per SF
                          5020    16,000   Per SF
                          5030         1   Lump sum
                          5030     5,000   Per SF

E. Equipment and
   Furnishings

F. Special
   Construction
                          1020     None
                          1040     3,120   Per SF
                          1040         1   Each
                          1040     3,120   Per SF
                          1040         1   Each
                          1040             Each

G. Building
   Sitework
                                   6,080   Per SF
                                  14,800   Per SF
Subtotal
Contractor's General
  Requirements (10%),
  Overhead (5%), and
  Profit (10%)
Subtotal
Architect Fees
Total
Locality Adjustment
Total Direct Cost
Round

A. Substructure         Table #   Unit Cost      Cost

                          1010      $16.65        $9,491
                          1030       $3.07        $7,675
                          1030       $5.47       $87,520

B. Shell
B10 Superstructure        1010      $12.68      $202,880
                          1010      $10.33       $51,650
                          1020
B20 Exterior
Enclosure                 2010       $7.02       $96,034
                          2020        $530        $9,010
                          2020      $13,00       $13,000
                          2030      $1,270        $3,810
                          2030      $2,175        $2,175
B30 Roofing               3010       $7.02      $129,870
                          3020

C. Interiors
                          1010       $4.00       $20,000
                          1020      $3,000        $3,000
                          1030        $500        $2,000
                          2010      $2,935        $5,870
                          3010      $10.00       $50,000
                          3020       $2.00       $32,000
                          3020       $2.00       $10,000
                          3030       $8.65       $43,250

D. Services
D10 Conveying             1010
                          1020

D20 Plumbing              2010      $3,000        $6,000
D30 HVAC                  3010
                          3020      $1,800        $7,200
                          3020       $8.21       $41,050
                          3030
                          3050
                          3090       $6.97       $34,850
D40 Fire Protection       4010
                          4020
                          Other
D50 Electrical            5010      $4,750        $4,750
                          5010      $57.50        $1,438
                          5020       $9.06       $45,300
                          5020       $4.11       $65,760
                          5030      $6,700        $6,700
                          5030       $1.56        $7,800

E. Equipment and
   Furnishings

F. Special
   Construction           1020

                          1040         $20       $62,400
                          1040     $50,000       $50,000
                          1040       $7.02       $21,902
                          1040         $80           $80
                          1040     $20,000       $20,000

G. Building
   Sitework
                                     $1.75       $10,640
                                     $4.50       $66,600
Subtotal                                      $1,231,705
Contractor's General
  Requirements (10%),
  Overhead (5%), and
  Profit (10%)                         25%      $307.926
Subtotal                                      $1,539,631
Architect Fees                          7%      $107.774
Total                                         $1,647,405
Locality Adjustment                                95.3%
Total Direct Cost                             $1,569,977
Round                                         $1,570,000

A. Substructure         Table #   Building SF     %

                          1010       $0.45       0.6%
                          1030       $0.37       0.5%
                          1030       $4.17       5.3%

B. Shell
B10 Superstructure        1010       $9.66      12.3%
                          1010       $2.46       3.1%
                          1020
B20 Exterior
Enclosure                 2010       $4.57       5.8%
                          2020       $0.43       0.5%
                          2020       $0.62       0.8%
                          2030       $0.18       0.2%
                          2030       $0.10       0.1%
B30 Roofing               3010       $6.18       7.9%
                          3020

C. Interiors
                          1010       $0.95       1.2%
                          1020       $0.14       0.2%
                          1030       $0.10       0.1%
                          2010       $0.28       0.4%
                          3010       $2.38       3.0%
                          3020       $1.52       1.9%
                          3020       $0.48       0.6%
                          3030       $2.06       2.6%

D. Services
D10 Conveying             1010
                          1020
D20 Plumbing              2010       $0.29       0.4%
D30 HVAC                  3010
                          3020       $0.34       0.4%
                          3020       $1.95       2.5%
                          3030
                          3050
                          3090       $1.66       2.1%
D40 Fire Protection       4010
                          4020
                          Other
D50 Electrical            5010       $0.23       0.3%
                          5010       $0.07       0.1%
                          5020       $2.16       2.7%
                          5020       $3.13       4.0%
                          5030       $0.32       0.4%
                          5030       $0.37       0.5%

E. Equipment and
   Furnishings

F. Special
   Construction
                          1020
                          1040       $2.97       3.8%
                          1040       $2.38       3.0%
                          1040       $1.04       1.3%
                          1040          --       0.0%
                          1040       $0.95       1.2%

G. Building
   Sitework
                                     $0.51       0.6%
                                     $3.17       4.0%
Subtotal                            $58.64      74.8%
Contractor's General
  Requirements (10%),
  Overhead (5%), and
  Profit (10%)                      $14.66      18.7%
Subtotal                            $73.30      93.5%
Architect Fees                       $5.13       6.5%
Total                               $78.43       100%
Locality Adjustment
Total Direct Cost                   $74.76
Round


Table 1 U.S. General Aviation and Air Taxi Activity, Type
of Flying, 2005

Type of Flying         Estimated Active    Estimated Hours Flown
                            Aircraft            (millions)

Corporate               10,600     4.8%        3.1    11.9%
Business                25,500    11.5%        3.2    12.3%
Personal               151,400    68.3%        9.3    35.6%
Instructional           13,400     6.0%        3.6    13.8%
Aerial Application       3,500     1.6%        1.0     3.8%
Aerial Observation       4,700     2.1%        1.3     5.0%
Aerial Other               800     0.4%        0.1     0.4%
External Load              200     0.1%        0.1     0.4%
Other Work               1,700     0.8%        0.2     0.8%
Sightseeing                900     0.4%        0.2     0.8%
Air Tours                  600     0.3%        0.4     1.5%
Air Taxi                 6,900     3.1%        2.9    11.1%
Air Medical Services     1.400     0.6%        0.7     2.7%
Total                  221,600   100.0%       26.1   100.0%

Source: FAA Administrator's Fact Book, December 2006.

Table 2 U.S. General Aviation and Air Taxi Activity, Type
of Aircraft, 2005

Type of Aircraft     Estimated Active Aircraft   Estimated Hours
                                                 Flown (millions)

Piston                    167,600    74.7%        16.4    60.7%
Turboprop                   7,900     3.5%         2.1     7.8%
Jet                         9,800     4.4%         3.8    14.1%
Rotary Wing (i.e.,          8,700     3.9%         3.1    11.5%
  helicopter)
Experimental               23,600    10.5%         1.3     4.8%
Light Sport                   200     0.1%         0.0     0.0%
Other                       6.500     2.9%         0.3     1.1%
Total                   224,400 *   100.0%        27.0   100.0%

* Minor rounding error. FAA total statistics do not match
Aircraft by Type totals.

Source: FAA Administrator's Fact Book, December 2006.

Table 3 Airport Infrastructure
and Services Checklist

Infrastructure

* Aircraft rescue and fire fighting (ARFF) facility

* Air traffic control systems, navigational aids

      Automatic Terminal Information Service (ATIS)
      Distance Measuring Equipment (DME)
      Instrument Landing System (ILS)
      Microwave landing system
      Non-Directional Beacon (NDB)
      Runway lighting
      Visual Approach Slope Indicator (VASI)
      Very High Frequency Omnidirectional Range (VOR)
      Precision Approach Radar (PAR)

* Air traffic control towers

* Aprons for parked planes

* Baggage handling

* Behind the gate warehouses and facilities

* Concourses

* Fueling storage facilities:
      Avgas fuel for propeller or turboprop planes
      JetA fuel for jets
      Automobile fuel
      Self-serve; trucks; hydrants

* Ground handling

* Heliport

* Holding area for aircraft near runway

* Holding bays for aircraft along taxiways

* Parking lots/structures

* Perimeter fences

* Pilot's lounge

* Ramps (tarmacs) for unloading

* Restaurants/retail

* Runways
(Number, width, length, orientation, quality, annual or
hourly capacity)

* Taxiways
(Quality, capacity, width, turn-radius, holding bays)

* Terminals
* Utilities (sewer, water)

Services

* Aerial photography providers

* Aircraft rental

* Aircraft interior refurbishment

* Aircraft painting

* Aircraft washing

* Airframe repair (major or minor)

* Avionics shop

* Car rental

* Deicing

* Engine overhaul and repair

* Flight instruction

* Ground school

* Hours of operation of airport

* In-flight catering

* Instrument shop

* Interior cleaning

* Through-the-fence services (offsite mechanics)

* Propeller shop

* Security

* Snow Removal

* U.S. Customs

Table 4 Airline Design Group Classifications

Group   Tail Height (feet)   Wingspan (feet)

I                      <20               <49
II                20 - <30          49 - <79
III               30 - <45         79 - <118
IV                45 - <60        118 - <171
V                 60 - <66        171 - <214
VI                66 - <80        214 - <262

Table 5 Legally Permissible Runway Widths

Approach Type                                      Width Requirement

Visual approach runway    Utility runway (for     250 feet (i.e., 125
                          propeller aircraft      feet +/- runway's
                          of 12,500 or less       center line)
                          gross weight)

                          Larger than utility          500 feet
                          runway

Nonprecision instrument   Utility runway               500 feet
approach runway
(with only horizontal     Larger than utility,         500 feet
or area approach          visibility minimum
navigation systems)       greater than 3/4 mile

                          Larger than utility,        1,000 feet
                          visibility minimum
                          as low as 3/4 mile

Precision instrument      n.a.                        1,000 feet
approach runway
(with ILS or PAR air
navigation system)

Table 6 Case Study Market Area

Market Area

* Surrounded by strong office and light-industrial district

* Prosperous, growing, suburb of medium-sized metropolitan area

* Highway access

Airport

* Extremely busy general aviation (reliever) airport

* Permitting class I, II, III size of aircraft

* Numerous corporate aircraft users and training pilots

* Precision approach runway with most navigational aids

* Multiple fixed base operators
* Most infrastructure and services available

Imaginary Surface--Check of Subject's Location

* The precision approach runway requires a 1,000-foot primary surface
width, i.e., 500 feet, plus or minus, from the center

* The subject is 1,250 feet from the nearest runway center line

* At the subject's position, the transitional surface prohibits
structures above 107 vertical feet (1,250 horizontal feet minus 500
horizontal feet) / (7 horizontal feet to 1 vertical foot)

* Conclusion: The subject is less than the imaginary surface boundary
and is acceptable

Table 7 Case Study Ground Lease, Net Operating Income Partitioned

Four comparable airport ground leases--augmented by
an airport management study--indicate that land rent
ranges between $0.18 and $0.30 per square foot. After
adjusting for airport location and market conditions,
the subject's land rent is estimated at $0.27/[SF.sub.L], or
$12,054 (= $0.27/[SF.sub.L] x 44,645 [SF.sub.L]).

As a surrogate benchmark, and as a check of reasonability,
the market fee simple land rent is derived from a
study of adjacent industrial land sales. Industrial land
sells for $3.25 to $3.50 per square foot. An extracted
land capitalization rate is concluded to be 6.2%. The land
value is converted into a land rent by capitalization ([I.sub.L] =
[V.sub.L] x [R.sub.L]). $8,996 to $9,688 = $3.25/[SF.sub.L] to
$3.50/[SF.sub.L] x 44,645 [SF.sub.L] x 6.2%. As might be anticipated
it is near or somewhat below the airport's market ground rent.
[I.sub.L, LH] and [I.sub.L, LF] are contract rents. The subject's net
operating income is partitioned:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Both the FBO's sandwich position and the hangar
tenant's subleasehold are positive leasehold interests.

Table 8 Case Study Percent of Leasehold Recaptured

The percent of leasehold recaptured is determined for the land
leasehold interest and for the building leasehold interest.
These calculations will be carried forward into other sections of
the case study.

For the land component, at 6.2% (see Table 9, Rate Extraction from
Residual Techniques for more rate development) over 37 years, the
percent of leasehold recapture is developed using the formula:

0.89201 = 14.3872 / 1/6.2% = 14.3872 / 16.1290, or = 1 - 1 /
[(1.062).sup.37] = 1 - 1 / 9.2599

The building component is similarly developed at 9.3%:

0.962756 = 10.35222 / 10.75269, or = 1 - 1 / 26.8501

The percent of building leasehold recaptured is loaded into the
perpetual building capitalization rate to determine the adjusted
building capitalization rate:

[R.sub.adjusted, B] = 0.093 / 0.962756 = 9.65977%

Table 9 Case Study Rate Extraction from
Residual Techniques

The building capitalization rate ([R.sub.B]) is extracted using a
residual technique where [R.sub.O] and [R.sub.L] were derived from
traditional development techniques.

[R.sub.O] = (L x [R.sub.L]) + (B x [R.sub.B])
9.0% = (10% x 6.2%) + (90% x 9.3%)

The land-to-value ratio (L) is the land value divided by
overall value. B = 100% - L. L and B are derived from
the market, and for the case study it is compared
against the depreciated building value from the cost approach
of $1,748,202 and the capitalization of the land
value, $12,054 / 6.2%.

L = [V.sub.L]/[V.sub.O] = $194,419/$1,748,202 + $194,419
[approximately equal to] 10%

Table 10 Case Study Value of Subleasehold
Interest

The subleasehold land rent is capitalized into value,
and then it is adjusted by the percent of land leasehold
recaptured during the 37-year lease term. This value
benefits the hangar tenant.

[V.sub.L, SLH] =  [I.sub.L, SLH]/[R.sub.L, SLH] x % of land leasehold
recaptured

= $8,054/6.2% x 89.201%

= $129,903 x 89.201%

= $115,875

= $116,000 (Rounded)

(To maintain simplicity in the case study, the leasehold
rate stratum is assumed to be equal:
[R.sub.L LF] = [R.sub.L, sw]  = [R.sub.L, SLH])

Table 11 Case Study Valuation of the Expected
Value of the Reversion

The subject's reversion is far into the future, 37 years,
resulting in a present value factor at 9.3%, assuming
increases in income are canceled out by increases in
inflation of approximately 3.7%.

The market does not suggest any reversionary value
given the political risk of nonrenewal of a lease and the
economic risks from the variability of far-off forecasts.
The expected value of the reversion is zero.

Table 12 Case Study Cost Approach

Building hard costs                                   $1,570,000
Utility tap fees, jurisdictional,
  miscellaneous                                          $50,000
Construction Financing                                   $73,600
Base Replacement Cost:                                $1,693,600
Other Soft Costs                                 2%      $33,872
Base Replacement + Soft Cost                          $1,727,472
Entrpreneurial Incentive                        15%     $259,121
Replacement Cost New:                                 $1,986,593

Less Depreciation:
  Physical                                    12.0%     $238,391
  Functional                                   0.0%           $0
  External                                     0.0%           $0
Depreciated Value of the Building                     $1,748,202
Leasehold Adjustment:                                 x 0.962756
[V.sub.B, SLH]                                        $1,683,092
[V.sub.L, SLH                                         $1,160,000
[V.sub.reversion]                                             $0
Value of Subleasehold ([V.sub.B + L. SLH]):           $1,799,092
Round                                                 $1,800,000

Table 13 Case Study Sales Comparison Approach

Within the case study's region, very few comparable sales
occurred at general aviation airports. Smaller hangars are
included due to the lack of comparable sales data. The
hangars are somewhat comparable to the subject as they can
house similar planes in lieu of the subject structure,
although they are less likely to be purchased by the same
type of user or operator.

Comparable Sales

              Building
               Square     Year    Sale     Sale
#   Airport     Feet     Built    Date    Price     $/[SF.sub.B]

1   Subject     3,645     2000    4/00   $215,800      $59.20
2   Similar    11,980     1991   12/97   $825,000      $68.86
3   Subject     4,200     2000    6/00   $259,000      $61.67
4   Similar     6,200     2001    1/02   $430,000      $69.35

Elements of
Comparison

Property Rights      1. All of the hangars are of the realty
Conveyed             elements only.

                     2. Very little ground sublease information
                     is available.

                     (a) All sales are on long-term ground
                         subleases beginning near the year of
                         construction and involve the sale of
                         hangar improvement. The two airports
                         historically structure their leases
                         in a consistent manner. The subleases
                         are assumed to be fairly similar to
                         the subject and have fairly similar
                         leasehold terms.

                     (b) The residual subleasehold value
                         ([V.sub.L, SLH] benefit is likely
                         to be similar.

                     (c) The diminution to the building value
                         due to a relatively longer or shorter
                         reversion is likely to be relatively
                         similar to the subject.

Financing Terms      Cash equivalent transactions

Conditions of Sale   Arm's-length transactions

Expenditures Made    None
  Immediately
  after Purchase

Market Conditions    The general commercial market has
                     appreciated. A representative at the
                     FBO reported that town hangars (having
                     separate doors but sharing an open hangar
                     with contiguous hangar units) generally
                     sold for $13,900 in 1982 and sold for
                     $45,000 in 2000. This indicates an
                     appreciation rate of 6.7%, compounded
                     annually. The region's market has begun
                     to slow, so a slightly lower appreciation
                     of 6.0% per year is applied.

Location             The two airports, and nearby office and
                     warehouse districts as a proxy, compete
                     against each other at similar land prices
                     and rental rates.

Building             The general quality of the majority of the
Construction         adjustment based on differentials in hard
Quality              costs, provided by Marshall Cost Service,
                     comparable sales are inferior to the subject.
                     An indicates a ratio of 45% higher between
                     excellent-and good-quality Class S storage
                     hangars. The comparables do not have cranes.

Age                  An age adjustment represents noncurable
                     physical depreciation using a fifty-year
                     economic life.

Size                 Downward adjustments are applied due to the
                     marginal higher price per square foot for
                     smaller hangars.

Office Space         In this case study, the office space is
                     treated as gross square footage rather
                     than as an amenity.

Adjustments                             Comparable Sales

                                #1         #2        #3       #4

$/[SF.sub.B]                   $59.20     $68.86   $61.67   $69.35
Property Rights Conveyed           --         --       --       --
  Adjusted $/[SF.sub.B]        $59.20     $68.86   $61.67   $69.35
Financing Terms                    --         --       --       --
  Adjusted $/[SF.sub.B]        $59.20     $68.86   $61.67   $69.35
Conditions of Sale                 --         --       --       --
  Adjusted $/[SF.sub.B]        $59.20     $68.86   $61.67   $69.35
Expenditures Made                  --         --       --       --
Immediately After Purchase
  Adjusted $/[SF.sub.B]        $59.20     $68.86   $61.67   $69.35
Years Prior to Appraisal          1.8        4.1      1.6      0.0
Market Conditions                +10%       +24%      +9%      +0%
  Adjusted $/[SF.sub.B]        $65.12     $85.39   $67.22   $69.35
Location                           0%         0%       0%       0%
Construction Quality              +45         0%     +45%     +45%
Age                               -8%       +10%      -8%     -10%
Size                             -17%        -5%     -16%     -13%
Net Adjustments                  +20         +5%     +21%     +22%
Final Adjusted                 $78.14     $89.66   $81.34   $84.61

Mean                           $83.44/
                             [SF.sub.B]
Median                         $82.98/
                             [SF.sub.B]

None of the comparables is truly representative of the
subject's size and class, but after considering the
adjustments, the comparable sales provide a general
indication. The market suggests $82.00 per square foot.

21,000 [SF.sub.B] x $82.00/[SF.sub.B] = $1,722,000
Rounded = $1,720,000

Table 14 Case Study Income Capitalization Approach

Comparable leases range from $7.84/SF to $13.18/SF The subject
generated $205,200 in effective gross income in 2001, which
does not include fuel and service sales. Based on this
limited array of rent data, the EGI is forecasted to increase
by about 4% in 2002. The implied rental rate of $10.50/SF is
supported by the market.

Vacancy is especially tight at this and at the next comparable
general aviation airport. There are long waiting lists for
t-hangars; two multi-unit hangar complexes, newly constructed
and condominiumized, sold out in several months. The subject
airport is surrounded by the second largest office district
in the state and suburban growth is continuing. This airport's
short- and long-term demand is high.

Income Capitalization

Potential gross income:               $10.50/SF x
                                      21,000 SF =     $220,500
Vacancy/collection loss:                       3%   -   $6,615
Effective gross income:                               $213,885

Operating expenses:
  Insurance                                $7,000
  Janitorial                               $5,000
  Maintenance                              $5,000
  Management and misc.                    $11,000
  Utilities                               $20,000
  Total:                                            -  $48,000
Net Operating Income ([I.sub.O]):                     $165,885
  - Income to land (at market):
    ([I.sub.L]):                                       $12,054
  = Income to building ([I.sub.B]):                   $153,831
  / Building capitalization rate
    ([R.sub.B.]):                                         9.3%
Capitalization of Building Income
  into Perpetuity:                                  $1,654,097
% of Building Leasehold Recaptured:                   0.962756
Value of Building ([V.sub.B]):                      $1,592,492
  + Value of Land's Subleasehold
    ([V.sub.L, SLH]):                                 $116,000
  + [V.sub.reversion]                                       $0
Value of Subleasehold ([V.sub.B+L,                  $1,708,492
  SLH):
Round:                                              $1,710,000

Figure 1 U.S Air Carrier Aircraft by Type

        Jet    Turboprop   Piston   Rotary Wing

1995   5,724     3,444     6,992       2,110

1997   6,464     3,207     6,167       2,152

1999   7,270     3,740     5,757       2,378

2001   8,294     3,752     4,970       2,429

2003   9,235     3,281     4,269       2,571

2005   9,880     2,994     3,745       2,620

Source: FAA Administrator's Fact Books, 1998-2006
Gale Copyright:
Copyright 2008 Gale, Cengage Learning. All rights reserved.