Minch v. Cottonwood Municipal Airport
FAA Docket No:
16-17-05
Author:
Kevin C. Willis, Director Airport Compliance and Management Analysis
Complainant(s):
Lawrence J. Minch; Janice K. ThompsonRespondent(s):
City of Cottonwood, ArizonaAirport(s):
Cottonwood Municipal Airport (P52)
Holding:
Complaint dismissed.Abstract:
Respondent began leasing vacant airport property in 1995 pursuant to a lease that allowed tenants to construct hangars or other improvements on land that had no previous facilities. (p. 2.) Lawrence J. Minch and Janice Kay Thompson jointly filed a complaint centered on the allegation that Complainants’ separate leases both contained a “hard end date” lease term that allegedly violated Cottonwood’s federal obligations. (p. 6.)
In January 2002, Respondent executed a lease with Cortez Diversified, LLC, signed by Donald C. Thompson for land for a term of 25 years. (p. 2.) Upon his death, Complainant Thompson became the designated assignee of the lease.
In 2004, Respondent executed a lease for land with LAK, L.L.C. for a term of 25 years. LAK was unable to continue maintenance on the property, however and requested that the City approve assignment of the lease to Minch, who became the assignee of such lease in July 2005. (p. 2.)
In August 2007, Minch petitioned Cottonwood to amend the July 5, 2005, lease to include the same 15-year renewal option that was offered and executed in the leases to other tenants. (p. 3.) Cottonwood voted to grant the same 15-year renewal option to extend Minch’s lease, which was formally amended and executed with Minch’s signature in 2008. (p. 3.)
Eight years later, Complainant Thompson requested to extend her lease by 15 years. (p. 3.) Cottonwood required Ms. Thompson to obtain an appraisal of fair market value to ascertain an appropriate lease rate, but it later determined the appraisal requirement was made in error as Thompson was simply requesting the same 15-year extension option as Minch and others. (p.3.) Upon clarification, Cottonwood reimbursed the cost of the appraisal of the hangar and offered to amend Thompson’s lease to include the same 15-year extension option. (p. 3.) Thompson had not accepted Cottonwood’s offer and the original 25-year lease term remained in place, however. (p. 3.)
On June 23, 2016, the FAA Western Pacific Region Airports Office issued an informal determination to an informal complaint filed by Minch under 14 C.F.R. Part 13, Investigative and Enforcement Procedures. (p.3.) The FAA Western Pacific Region Airports Office, Regional Airport Compliance Program Manager concluded that the differences in lease terms were “miniscule” and “essentially the same,” and that it appears “that Mr. Minch already has reasonable access, on reasonable terms, without unjust discrimination, and without the grant of an exclusive right under the current lease agreement.” (p.3.) Minch argued that the finding was in error, and filed a formal complaint.
As an initial matter, the Director dismissed Thompson’s claims based upon the lack of evidence supporting her claims or an explanation of how her refusal to sign the 15-year renewal option was the result of a violation of the Grant Assurances. (p. 7.) The record showed that the Thompson lease included a direct 25-year term, not a hard end date as alleged, and was without an additional 15-year renewal option. (p. 6.) In comparison, the Minch lease consisted of a 25-year lease term (23 years, 10 months remaining upon signing) with a specific expiration date of May 29, 2029, and had an additional 15-year renewal option. (p. 6-7.) These differences were substantial, according to the Director. (p.6.) The Minch and Thompson leases did not share lease term similarities. (p. 7.) The absence of the 15-year renewal option in Thompson’s lease was due to her unexplained failure to accept Cottonwood’s good faith offer to amend her lease with the 15-year extension. (p. 7.) Thompson’s refusal to accept the 15-year option appeared to be personal or financial in nature and remained a personal/business decision. (p. 7.) There was no evidence her refusal to sign was due to Cottonwood’s conduct or its alleged violation of Grant Assurance 22, Economic Nondiscrimination or Grant Assurance 23, Exclusive Rights or any other Grant Assurances. (p. 7.)
With respect to Minch’s complaint, the Director first evaluated whether the lease term language in his lease was unjustly discriminatory in violation of Grant Assurance 22, Economic Nondiscrimination. The core of the Minch Complaint was a dispute over lease language pertaining to the length of the term of the Minch lease compared to other leaseholders who had also leased land and constructed hangars on airport property. (p. 7.) Minch alleged that Cottonwood had violated Grant Assurance 22 by allowing “only a 25 year lease term before taking over ownership of their improvements (hangars) while the City allowed a total term of 40 years for three other similarly situated hangars owners before taking over ownership of those hangars thus creating a discrimination.” (p. 7.) Minch argued that other similarly situated tenants were allowed to “keep their hangars for 15 years longer before City confiscation.” (p. 7.) Minch argued that he “should be allowed to have the exact same wording” as other similarly situated land/hangar lessees, which were offered a 25-year lease term with a 15-year renewal extension option. (p. 7.)
Minch acknowledged signing a lease amendment in 2008 that “does have a 15 year option to renew,” but claimed the “[t]erm will have already ended on May 20, 2029” giving Cottonwood the ability to “takeover” the hangar by the May 20, 2029 date. (p. 7.) Minch further alleged that the presence of the “hard end” date lease term was discriminatory because other similarly situated land/hangar lessees did not have a specific lease expiration date. (p. 7.) Minch believed the terms of the lease “allows a 15 year extension at rates that include leasing [the] building back from the City in addition to the ground pad.” (p. 7.) Minch argued that Cottonwood should be compelled to “make the wording (one sentence) in [the] leases to be written identical (verbatim) to that one sentence of others who” Minch believed “allows the improvements to remain in possession of the hangar owner until the end of the [40 year] term of the lease.” (p. 7.)
Cottonwood denied unjust discrimination against the Complainants, arguing instead that the Complainants “misrepresent or misunderstand the lease terms.” (p. 8.) Cottonwood asserted that on May 20, 2004, a 25-year lease was executed with LAK, L.L.C., and that approximately a year into the lease, LAK, L.L.C. cited hardship and formally requested Cottonwood approve assignment of the lease to Minch, who had demonstrated interest. (p. 8.) In July 2005, the lease was reassigned and executed by Minch and Cottonwood. (p. 8.) Cottonwood confirmed that in 2007, Minch “petitioned the City to adjust the term of his lease to be the same as the GRL lease.” (p. 8.) Cottonwood alleged that “the City subsequently approved the lease amendments for Minch, as well [as] another hangar owner, which added exactly the same fifteen year renewal option as present in the GRL lease.” (p. 8.) Cottonwood further argued that the “Minch Lease does not allow the City to ‘confiscate’ any improvements on the property until the expiration of the term, which may be 40 years from the effective date of the lease if Minch chooses to exercise the 15 year renewal option and the parties can agree on a fair rental rate for the renewal term.” (p. 8.). Cottonwood also disputed “that the six hangars identified by the Complainants are similarly situated . . . because of proximity,” arguing that the hangars are “significantly” different in size. (p. 8.) Lastly, Cottonwood argued that “all of the leases with renewal options provided that the exercise of the option was contingent upon the parties negotiating in good faith the rate of lease at renewal.” (p. 8.) Cottonwood’s argument was centered on its belief that the “City had granted Minch reasonable airport access without unjust discrimination and had not granted any exclusive right.” (p. 8.)
Minch contended the terms of his lease provided for “confiscation” of the hangar upon initial lease expiration on May 20, 2029. (p. 8.) A secondary issue was the allegation that Minch would be deprived of 15-years of ownership, and thus 15 fewer years of additional return on its hangar investment. (p. 8.) The Director’s analysis of these allegations was based on a review of the specific language contained in Minch’s lease and other similarly situated tenants. (p. 8.)
Issue 1 – Lease Language Unjustly Discriminatory
In addressing this issue, the Director noted the FAA’s consistency in concluding that Grant Assurance 22 did not require a sponsor to offer lease rates and terms that are identical to other leases negotiated at different points in time. (p. 12.) Likewise, while FAA policy in Order 5190.6B, Airport Compliance Manual, Chapter 12, states that while 30-35 year lease terms may be appropriate to amortize a tenant’s investment in hangar improvements, lease terms and amortization requirements are highly dependent on the circumstances of each prospective tenant and each individual airport. (p. 12.) According to the Director, the 30-35 year term outlined in Order 5190.6B is a best practice recommendation left to the discretion of the airport sponsor, not an FAA requirement. (p. 12.)
In this context, Cottonwood offered up to 40 years to amortize tenant hangar investments. (p. 12.) But, the FAA does not normally intervene in the business decisions of the airport sponsors where grant assurance violations are not at issue, the Director noted. (p. 12.) Regarding ownership of the hangar facilities at lease expiration, the Director found that the lease language in this case was unambiguous. (p. 12.) Minch’s amended lease contained a 15-year extension option, for a total potential lease term of 38 years and 10 months. (p. 12.) The Director found no evidence in the original or amended leases dictating the “confiscation” of Minch’s hangar on May 20, 2029, and then leasing the land and hangar back to him, as alleged. (p. 12.) Additionally, a “hard end date” versus a directly stated term in number of years was immaterial to the actual expiration of an executed lease. (p. 12.) The outcome was effectively the same, a 23-year, 10-month (effective) initial term versus a 25-year initial term (such as GRL’s), each with a 15-year extension option. (p. 12.) Minch was not treated dissimilarly to other similarly situated tenants, therefore, according to the Director. (p. 12.)
Additionally, the record included partial reference to an appraisal prepared in conformance with Uniform Standards of Professional Appraisal Practice (USP AP) indicating that a “Class S Maintenance Hangar” (metal frame and walls like the Minch hangar) had a useful life expectancy of 40 years. (p. 12.) The appraisal further indicated that a leasehold of less than 40 years would create a negative leasehold interest for the owner, according to the Director. (p. 12.) Cottonwood granted an amended lease that reflects Minch’s ability to recoup his original investment for the useful life of his hangar, subject to the terms of the renegotiation. (p. 12.)
The Director also noted that it was entirely conceivable that the ownership of Minch’s hangar could revert to Cottonwood’s ownership after May 20, 2029, if the parties could not successfully negotiate terms of the 15-year extension, and Minch does not remove the hangar. (p. 12.) The language of the executed lease allowed for that contingency. (p. 12.) The same held true for another tenant’s lease at the expiration of its initial lease term. (p. 12.) The Director concluded, therefore, that Minch failed to substantiate that he would have been deprived of 15 additional years of hangar ownership when in fact the lease itself made the 15-year extension a contractual right contingent on additional negotiation. (p. 12.) Indeed, Minch agreed to those terms by his signature on January 17, 2008. (p. 12.)
In consideration of the totality of the record, the Director found Cottonwood had met its grant assurance obligations as an airport sponsor by, in part, voluntarily agreeing to amend Minch’s lease to add the 15-year extension option. (p. 13.) Such actions were demonstrative of an airport sponsor taking care to avoid unjust discrimination, not that of a sponsor seeking to unjustly discriminate against airport tenants. (p. 13.) The Director concluded, moreover, that Cottonwood was not in violation of the requirements Grant Assurance 22, Economic Nondiscrimination, to provide reasonable and not unjustly discriminatory access to the airport. (p. 13.)
Issue 2 – Grant Assurance 23, Exclusive Right
Next, the Director considered whether the lease term language in the Complainant’s lease resulted in a prohibited exclusive right in violation of Grant Assurance 23, Exclusive Rights. Framing the issue as such, the Director then noted that Grant Assurance 23, Exclusive Rights requires the owner or sponsor of a federally obligated airport not, either directly or indirectly, grant or permit any person, firm, or corporation, the exclusive right at the airport to conduct any aeronautical activities. (p. 13.)
Minch alleged that a prohibited exclusive right existed via the alleged unjustly discriminatory terms in his lease. (p. 13.) Specifically, Minch alleged that similarly situated airport tenants were granted access to the airport for a 40-year term that was otherwise denied to him. (p. 13.) The terms in the various leases were functionally identical, the Director reasoned. (p.13.) Minch failed to substantiate that he would be deprived of 15 additional years of hangar ownership when in fact the lease itself made the 15-year extension a contractual right contingent on additional negotiation. (p. 13.) If Minch successfully negotiated lease terms for a 15-year extension, then he would have kept possession of his hangar on the airport for the totality of 38 years and 10 months (unless sooner terminated). (p. 13.) The terms for the additional 15-year renewal were the same as provided for in another airport lease. (p. 13.) Therefore, Minch could not credibly argue that Cottonwood granted an exclusive right to lease airport property to others on favorable terms otherwise denied to him, according to the Director. (p. 13.) For these reasons, the Director found that in the absence of evidence of granting a prohibited exclusive right to similarly situated airport tenants, Cottonwood is not in violation in Grant Assurance 23, Exclusive Rights. (p. 13.)
Issue 3 – Grant Assurance 38, Hangar Construction
Third, the Director evaluated whether the Complainant’s lease term resulted in a violation of Grant Assurance 38, Hangar Construction. (p. 13.) Grant Assurance 38, Hangar Construction, which is codified in 49 U.S.C. § 47107(a)(21), requires the airport sponsor to grant “a long term lease” to a person who owns an aircraft and seeks to build a hangar (at the aircraft owner’s expense) on the airport, subject to the terms and conditions imposed by the airport operator. (p. 13.) Minch argued that Cottonwood violated Grant Assurance 38 by “not granting such a lease when Complainant’s hangars were constructed, namely a minimum of 30 to 35 years as directed” by FAA Order 5190.6B, Airport Compliance Manual. (p. 13.)
Order 5190.6B states that 30-35 year lease terms may be appropriate to amortize a tenant’s investment in hangar improvements. (p. 14.) However, lease terms and amortization requirements were highly dependent on the circumstances of each prospective tenant and each individual airport, according to the Director. (p. 14.) The 30-35 year term outlined in Order 5190.6B is a best practice recommendation left to the discretion of the airport sponsor, not a minimum FAA requirement as asserted by Minch, the Director opined. (p. 13.) The FAA established this lease term guidance to give airport sponsors wide latitude to attract long-term tenants to the airport while also retaining required rights and powers over airport property. (p. 14.) Lease terms less than 30-35 years are not a violation of Grant Assurance 38 or FAA policy. (p. 14.)
Conversely, the FAA considers lease terms exceeding 50 years to be, effectively, a prohibited disposal of airport property and a violation of the sponsor’s federal obligations. (p. 14.) According to the Director, however, lease terms with option renewals of up to 40 years, similar to the terms provided to Minch, were not a violation of the grant assurances so long as the sponsor incorporated appropriate subordination and rental escalation clauses within the lease and the sponsor exercises rent escalators to account for the economic dynamics of the airport. (p. 14.)
In this case, the Director concluded, Cottonwood satisfactorily addressed the future rent escalation issue by making the 15-year renewal option contingent on rate negotiation. (p. 14.) Minch willfully entered into a 23 year, 10 month ground lease arrangement with Cottonwood on terms agreed to by both parties. (p. 14.) Later, upon request, Cottonwood amended Minch’s lease to add a 15-year renewal extension, contingent on rate negotiation, for a total of 38 years, 10 months. (p. 14.) Minch could not credibly argue that he was not granted a “long term lease” in which to build a hangar when he enjoys a privately financed hangar on the airport, and has the option to keep possession of the hangar for up to 38 years, 10 months (unless sooner terminated). (p. 14.) The Director concluded that Cottonwood is not in violation of Grant Assurance 38, Hangar Construction. (p. 14.)
Issue 4 – Grant Assurance 1, General Federal Requirements
Finally, the Director evaluated whether the Complainant’s lease term resulted in violation of Grant Assurance 1, General Federal Requirements. Minch’s alleged Grant Assurance l, General Federal Requirements, violation was premised on the assumption that Cottonwood violated “applicable Federal laws, regulations, executive orders, policies, guidelines, and requirements” pertaining to Grant Assurance 22, Economic Nondiscrimination, Grant Assurance 23, Exclusive Rights, and Grant Assurance 38, Hangar Construction. (p. 15.)
The Director concluded that Cottonwood was not in violation of the aforementioned grant assurances; therefore, Minch’s allegations of a Grant Assurance 1 violation was likewise without merit and dismissed accordingly. (p. 14.)
The Director found Cottonwood had adequately addressed its lease parity issues by voluntarily agreeing to amend Minch’s lease to add the 15-year extension option. (p. 15.) Further, the Director found no evidence in the original or amended leases dictating the “confiscation” of Minch’s hangar on May 20, 2029. (p. 15.) For these reasons, the Director concluded that Cottonwood was not in violation of Grant Assurance 22, Economic Nondiscrimination. (p. 15.) The Director also found the terms in Minch’s lease to be functionally identical to those with other tenants at the Airport. (p. 15.) Minch failed to substantiate that he would be deprived of 15 additional years of hangar ownership. (p. 15.) For these reasons, too, the Director concluded that Cottonwood is not in violation in Grant Assurance 23, Exclusive Rights. (p. 15.)
The Director also found that Minch could not credibly argue that the Complainant was not granted a “long term lease” in which to build a hangar, and for this reason, too, the Director concluded that Cottonwood was not in violation of Grant Assurance 38, Hangar Construction. (p. 15.) Moreover, insofar as the Director had found that Cottonwood was not in violation with Grant Assurance 22, Grant Assurance 23, or Grant Assurance 38, the Director concluded that Cottonwood was not in violation of Grant Assurance 1. (p. 15.)