Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

CC:               Charles Soules, Director of Public Works

                   Diane Stoddard, Assistant City Manager

FROM:          Roger Zalneraitis, Economic Development Coordinator/Planner

DATE:           February 7, 2011

RE:               T-Hangar Revenues and Costs

On January 11^th, Staff presented an analysis to the City Commission of the costs and benefits of building 20 new T-Hangars at Lawrence Municipal Airport.  The Airport Advisory Board recommended that the new hangars be marketed at $255 per month. 

The Commission requested a more in-depth analysis.  Specifically, the Commission wished to see the inclusion of additional revenue sources that may result from the T-Hangars being built.  These include fuel flowage fees, sales tax on fuel sales, and new property taxes from additional aircraft.  Staff also reviewed bond costs on the existing T-Hangars as well as maintenance costs.  Each revision is discussed in detail in this memo.

This memo does not address whether the airport would be more likely to receive federal funds with additional aircraft.  Nor does it consider indirect benefits or costs that may arise as the result of additional air activity at the airport.  The discussion only looks at revenues and costs directly associated with the new and existing T-Hangars.

The Original T-Hangar Model

The original model was based on a financial analysis prepared for the T-Hangars added to the airport in 2003.  The model was modified for new interest rates, additional costs associated with the 2010 proposal, and potential subsidies from the existing T-Hangars to help pay off the bonds. 

The original model did not include at least three other sources of City revenue associated with new aircraft at the airport.  These are the fuel flowage fees, sales tax on fuel sales, and property taxes.  The impact of these three revenue sources, as well as a review of the subsidies available from the other T-Hangars, is discussed below.

Fuel Flowage Fees and Sales Taxes

The City collects 5 cents for each gallon of aviation gas sold at the airport.  This is the fuel flowage fee.  In order to analyze the increase in the annual flowage fee, staff received the average hourly fuel consumption of several different aircraft.  The aircraft were selected because they were the correct size to fit in the new T-Hangars and are commonly flown by private pilots.  These included the Cessna 172, Cessna 310, Beech Bonanza, Piper Cherokee, and Mooney M20.  On average, these aircraft consume between 11 and 13 gallons of gasoline per hour.  Assuming that 19 of the T-Hangars were occupied, and that each airplane flew for 100 hours per year, this would translate into about 22,000 gallons of gasoline use per year.

However, it is very easy for a pilot to fuel up at any number of regional airports.  For this reason, staff assumed that only about half of the fuel purchases would occur in Lawrence.  Furthermore, staff assumed that the fuel flowage fee would not increase, and that fuel purchases by pilots would not increase in the future, either.  As a result, the fuel flowage fee collected by the City ranges between $500 and $600 per year over the 30 years analyzed in the model.  This means that over the next 30 years, the City may expect to receive about $16,500 of fuel flowage fees as a result of new aircraft being located at the airport.

The Fixed Base Operator (FBO) also collects sales taxes on fuel sales.  The FBO estimates that about 75% of all fuel sales are taxable.  Therefore, the analysis assumed that 75% of all new gas sales would pay sales taxes.  The analysis also assumed that gas prices at the airport would be about $5 per gallon and rise slowly over the 30 year period.  This results in additional sales taxes of about $750 per year for Lawrence, or a total of $23,000 over a 30 year period.

Property Taxes

Property tax information was provided by the County Appraiser’s office and Lawrence’s Department of Public Works.  The Appraiser’s office believes that the majority of aircraft in Kansas are not subject to property tax.  This is because the airplanes are either over 25 years old, or classified primarily for business use.  In both cases, the aircraft owner would be exempt from paying property taxes. 

At the Lawrence Municipal Airport, only 8 of the 28 airplanes currently housed in the existing T-Hangars have property tax assessed on them.  This is 29 percent of the aircraft.  For the purposes of this analysis, staff assumed that a similar ratio of aircraft would have property tax assessed against them.  This is about 5 airplanes.

Staff requested from the Appraiser’s office the average appraised value on several aircraft.  These were the same aircraft used for the fuel estimates, but various ages were submitted to get a sense for the appraised value of both older and newer airplanes.  On average, the airplanes housed in the new T-Hangar were estimated to be valued at about $159,000.  Airplanes are assessed at 30%.  Using the City mill levy of 26.697 mills, Staff estimated that each of the 5 airplanes that had property tax assessed against them would owe about $1,300 each year.  Therefore, there would be about $6,400 per year of City property tax collected on airplanes in the new T-Hangars.

Over time, the model projects a slight increase in property taxes.  This is consistent with all other costs and revenues in the model, except for fuel flowage fees, which the model shows as not increasing.  As a result, over 30 years a total of $220,000 would be collected in property taxes by the City on aircraft in the new T-Hangars.

Bond Analysis

There are two sets of existing T-Hangars at the airport.  The first set of 10 T-Hangars was constructed in 1995, at a cost of about $191,000.  Including interest charges, these T-Hangars have paid off their bonds.  The second set of T-Hangars consists of 20 units, and was constructed in 2003.  The total cost these T-Hangars was about $900,000.  This includes issuance fees, engineering, design, and support infrastructure for the hangars.  The cost to build the T-Hangars was about $600,000 (including the T-Hangars share of issuance costs, engineering, etc).  An agreement was made in 2003 that the T-Hangars would only need to reimburse the City for the portion of the bonds directly associated with the hangars (see attached memo).  This left about $300,000 of infrastructure costs paid for by the City. 

The second set of T-Hangars will finish paying off their portion of the bonds in 2019.  In the original analysis, staff assumed that these T-Hangars would not finish paying off their share of the bonds until 2023.  As a result, once maintenance costs have been accounted for, there is an additional $150,000 of revenue available from the existing T-Hangars to help pay for costs associated with the new T-Hangars.

Results

The results are presented in two parts.  The first part evaluates the new T-Hangars’ ability to pay off its bonds, as well to cover the additional costs associated with the new hangars.  The second part looks at the value of all of the T-Hangars assessed together.  The results are numerically presented in the attached spreadsheet.

Revenues and Costs for the New T-Hangars

The interest rates on the bonds have risen since the calculations were originally presented to the City Commission.  The interest rate on a 12 year bond is now likely to be closer to 4.21%.  In the original analysis, the interest rate was about 4.0%.  This results in an increase in interest charges on the 12 year bonds of about $24,000.  Including principal, the total cost of 12 year bonds for the new T-Hangars is now estimated to be $1,835,000. 

Revenues from the new T-Hangars total $2,250,000 over 30 years.  This includes rent payments, as well as fuel flowage fees, sales taxes on fuel sales, and property taxes on aircraft in the hangars.  These latter revenue sources contribute $260,000 to the project.  The new T-Hangars and the aircraft in them will generate $1,835,000- or enough to pay back the bonds in their entirety- by the end of 2037.  This is approximately 25 years after construction is complete.

Over the first 12 years, the new T-Hangars would need a subsidy of about $64,000 per year.  This is money that would be paid from the General Fund to help cover the principal and interest payments during this time, as the revenues available from the other T-Hangars would not be sufficient to cover these payments. 

Finally, the total costs estimated for the new T-Hangars including maintenance, utilities, and insurance are about $2,315,000 over 30 years.  The rental revenue from the new T-Hangars will cover these additional costs on an annual basis, once the bonds have been paid back.  Until the bonds are fully paid back, a portion of the maintenance, utilities, and insurance on the new hangars will have to be paid for by revenues from the existing T-Hangars.

Revenues and Costs for All T-Hangars

Total revenues from all three sets of T-Hangars increased from the previous analysis to $5,220,000 over the 30 year period.  The total costs are about $3,600,000 if 12 year bonds are issued for the new project.  Assuming that 12 year bonds are issued for the new project, the net revenues for all the T-Hangars is between $140,000 and $265,000 in current dollars, depending on the discount rate.

It should be noted that while maintenance costs for the existing T-Hangars was included, insurance and utilities were not.  However, the model does not measure fuel flowage fees, sales taxes on fuel sales, and property taxes on aircraft in the existing T-Hangars, either.  It is likely that these additional revenues would offset and possibly exceed the costs that were not included in the model.

An additional important caveat is that the new T-Hangars will be paying back all debt service for their construction.  The previous T-Hangars built in 2003 only had to pay back a portion of the debt.  If the 2003 construction had to pay off the total cost of the project, those T-Hangars would not have completed payments until 2025 or 2026.  That is about 23 years after construction was complete.  That is comparable to the 25 years it will take for the new T-Hangars to pay back their bonds.   Similarly, if the new T-Hangars only had to pay the portion of costs associated with the actual hangars, they would complete the repayment on the bonds in about 16 years instead of 25 years.

Conclusion

The new T-Hangars would yield enough revenue to pay off the entirety of the 12 year bonds by the end of 2037.  This is 25 years after the hangars begin operation.  The T-Hangars built in 2003 would have needed a comparable amount of time to pay off their bonds if the full project costs had been paid by the project.  Revenues include rent, fuel flowage fees, sales taxes on fuel sales, and property taxes on aircraft housed in the new T-Hangars.  The new T-Hangars would require an upfront subsidy of about $64,000 per year by the General Fund.  Finally, while the new T-Hangars will be able to cover their operating costs, some revenue from the existing T-Hangars will be needed to pay for these costs until the bonds are fully repaid to the General Fund.