Airports remain relatively underdeveloped because of several reasons that hamper real-estate investment. Julie Boatman
It’s a question that aircraft owners and airport-based businesses have been asking for decades—why are there inevitably long waiting lists for hangar rental at just about every GA airport in the country?
And it’s a question that Flying’s owner and CEO Craig Fuller posed in a recent post—with the suggestion that the situation was ripe for an innovative entrepreneur or tech disruptor to address in a creative way.
That story triggered a substantial response, and among those chiming in from the community was Paul Breckner, an owner of multiple businesses—and aircraft—who has recently built a new hangar, at Flying Cloud Airport (KFCM), in Minneapolis, Minnesota. He’d love to invest in the airport, but has run up against a vicious cycle that defies an easy solution.
And it illuminates why investment in and around airports is so challenging.
How We Got Here
As in most metropolitan areas, the Metropolitan Airport Commission (MAC), owns the land around all 7 county airports in the Minneapolis-St. Paul region.
Under the current system, the MAC leases the land to all users, and no other entity can own the land outright. Those leases run for 10 years, with five-year extensions.
Typically, most of the leases are renewed, but the MAC could refuse to extend a land lease if it felt it needed the land for other purposes.
It happens occasionally, but that’s not the big issue.
“There are several hangars that are too close to the taxiway, and MAC is only extending [those leases] one year at a time, and so they have very little to no value,” Breckner says. “Also, MAC will not consider any person or corporate entity to be a lessee, unless that person or entity has U.S.-registered airplane. Period.
“So, that restricts many potential investors immediately.”
The MAC leases define the structures that are built on MAC-owned land as “Personal Property,” not “Real Property.” So, when Breckner started down the road to build a hangar, he assumed that with the new tax code (in 2017), he could take 100 percent accelerated depreciation since MAC considers the building “Personal Property,” not “Real Property.”
“Well, after about four different tax consultants, and several interpretations of the 1988 McManus lawsuit against the IRS,” said Breckner, “the asset [the hangar] is considered ‘Real Property’ by the IRS, for tax purposes, even though it is defined in a government lease [under MAC] as ‘Personal Property’ and is subject to leases of only five to 10 years at a time.
“The IRS has also removed the 15-year depreciation [schedule]—it is now 39-year depreciation, as it is for all real estate…So, it’s worse than ever before,” Breckner concluded.
The Real Obstacles
The ramifications that create roadblocks to real estate investment? Breckner outlines the following points.
- The letter of the law is 39-year depreciation, and defined as Real Property per 1988 precedence; Cost Segmentation is challenging to impossible since the unique items that make up a hangar, are defined as part of the building—items such as the hangar door are big expenses and unique and should have reduced depreciation schedules.
- Land leases of 10 years or less; most are 5 years or less.
- Banks are very reluctant to borrow money on a “temporary” structure on leased land.
- Limited use (supposedly only aviation-related, but poorly monitored, and that scares away investors).
- City zoning laws, (not those governed by MAC’s codes) that require sometimes-crazy codes like Foam Fire retardant (in structures more than 10,000 sq ft), but “grandfathered” hangars don’t need to comply.
- ADA-accessible buildings, and bathrooms and parking on all new construction, even if for private use.
“There are other issues at hand, but from an investor’s standpoint, these are very challenging projects with the tax structure and restrictions,” Breckner said. “No investor would put a large portfolio at risk with that kind of depreciation schedule, combined with relatively short land leases.”
That is why many hangars, even in metro areas, remain corrugated steel, post-war structures.
What Can Be Done?
Could this law be challenged? Well, Breckner says that to pursue a challenge would be “barking up the wrong tree—without a change in legislation.
“In my opinion, if we can have the 1988 McManus (ITC) decision amended, we would see a boom in hangar construction,” Breckner said.
Could that happen? Breckner believes it’s possible—with enough muscle and enough people involved.
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