Part 2 of 2
In our previous Post we looked into the “Real Estate “Angle” of the New Commercial Terminal Being Built at Paine Field Everett – Seattle Washington” from the Commercial Aviation and Airport perspective. We discussed:
- How was this real estate deal made?
- Why did the airport choose to go this direction, a private partnership?
In this Part 2 let’s look at it from the perspective of the private developer and the FBO owner and user:
- How did the private developer financially structure the 50 year lease, and what’s their return?
- Does this have any application to FBO owners at their airport for their private facilities?
As we mentioned in our previous post, FBO Advisors, LLC background is heavily real estate (40+ years) and we have combined that knowledge and experience in applying it to our FBO and airport consulting activities over the years. We believe this is one of the factors why our consulting business, FBO Advisors, LLC has been so successful over these 40 years. We understand the real estate component of an FBO operation and sale transaction. So when this news that a private entity was building a new commercial terminal at Paine Field in Everett (north of Seattle) Washington, it piqued our interest.
In attempting to answer these questions (the two questions shown above, in this Part 2) please understand few businesses care to share the intimate financial details of how they make transactions such as this work financially. While we have requested public documents from the airport so that we can be more fully informed, we are forced to make generalizations and hypothesize how this transaction came to be and makes sense for the parties involved.
We do have personal knowledge, historically, of Paine Field having been engaged to conduct consulting work for the FBO years ago. And while our experience is dated we still understand the basics of that market. Paine Field is mostly a general aviation airport together with the famous Boeing aircraft factory where a large number of Boeing jets are successfully produced, tested, and sold from. It has a rich, rich history. And Paine Field’s past history, a military field, with long commercial 9,000 foot runways made it an excellent candidate for Alaska Airlines and Southwest Airlines to consider new service from this nearby Seattle suburb.
So who is the private developer Brett Smith?
According to a recent local AP news story:
“Smith is the founder and chief executive officer of Propeller Investments LLC., which secured a 50-year agreement with Snohomish County three years ago through a local subsidiary to build and operate the terminal in Everett, Washington. Operations are due to start in the fall, with announcements already made from Alaska Airlines, Southwest Airlines and United Airlines for up to 24 flights per day.”
“Brett Smith’s company is investing about $40 million to build the terminal. In the process, he wants to increase U.S. acceptance of a global trend: Putting commercial airport terminals in the hands of private companies instead of the government.”
“The deal stands out for U.S. airports because it’s structured as a public-private partnership, a model that divides the responsibilities of owning and operating public assets between governments and the private sector. It’s also notable because Propeller has no experience in building or operating airport terminals.”
It’s also notable because Propeller has no experience in building or operating airport terminals.
So how did Smith, the private developer financially structure the 50 year lease and what’s his likely return?
According to published reports, “Propeller sold $50 million of bonds in February to finance the project, paying investors about double the interest rate they would earn on similar U.S. Treasury’s, according to data compiled by The Associated Press. The company doesn’t have a credit rating.”
The quote from these public sources, “ . . . Paying investors about double the interest rate they would earn on similar US treasuries” is not surprising or unexpected. To explain the difference in the interest rate, the “double the interest rate” is the pricing by the bond purchaser/investor marketplace for the risk involved over the perceived “low risk” afforded by investing in safer U.S. Treasury’s.
Today that U.S. Treasury bond rate is approximately 3.0% so if Propeller Investments LLC borrowed at twice the bond rate that would be approximately 6.0% or above. Still not a bad
interest rate to start from when financing a $40 million project in which you are borrowing $50 million for.
Propeller Investments LLC pro forma is not available to us but we can reasonably assume that the $10 million “spread” between the project cost of $40 million and the $50 million of bond financing covers a well earned developers fee, assumption of risk, interest carry, and interest reserve, etc..
To successfully sell the $50 million in bond financing to the marketplace Propeller Investments LLC must have shown eventual positive cash flow and commitments from the major airlines who will be operating out of the new Commercial Terminal, Southwest Airlines, Alaska Airlines, and others. Those of us in the industry know however that the commitments made by the airlines contain short “out clauses” which allow them to terminate their leases should the airlines revenue expectations fall short. The future of Paine Field providing commercial aviation to the general public as an alternative for the population living north of Seattle, and up until this project, having no other option but commuting to SeaTac Airport, seems like a reasonable bet for success. Apparently the bond market agreed as Propeller Investments LLC successfully sold $50 million in bonds.
While nothing would be more pleasing than being able to disclose an investment rate of return that Propeller Investments is projecting we can only assume that it must be positive and of reasonable risk. (We will continue to research to see if we can further likely narrow down the % return to the private investor Propeller Investments LLC.)
The last question, “Does this have any application to FBO owners at their airport for their private facilities?” is equally intriguing.
It’s hard to contemplate that private developers would be interested in, or even be able to finance private FBO facilities for FBO owners.
Those in the know understand that FBO businesses are unique, complex businesses with no guarantees of long term of income. One can argue that the FBO income is more at risk than the income Propeller Investments LLC is banking on to make their bond payments from the commercial terminal. Propeller Investments LLC is also able to “show” the financial statements of its new tenants, Southwest Airlines and Alaska Airlines for example, and somewhat rely on those and their credit worthiness to convince bond investors to hand over their money. To sell that to the same bond investors, the underlying credit worthiness of the airport tenant which in this case would be your FBO, (unless you are Signature Flight Support, Atlantic Aviation, a heavy public company “hitter” with substantial assets and cash flow,) would be a difficult sale.
That we believe is why we haven’t seen many, if any similar private partnership investments from the airport side, a private investor as sub-landlord, into FBO leaseholds and businesses.
We don’t see anything in the horizon that would change this for FBO’s.
So for the present and the foreseeable future, FBO’s need to have their own money and won’t be able to depend upon the private sector, in this case the example of Propeller Investments LLC at Paine Field to provide them funding for expansions, acquisitions let alone operations.
Thus the translation, “Business as usual for FBO’s !”
FBO Advisors, LLC
Serving the FBO industry for more than 40 years
Please feel free to direct comments to us on our views and opinions cited . . .