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Consider approving the form of the proposed Airport Ground Lease Agreement for private hangars to be executed with 20 separate tenants, covering 35 existing hangars at the Nut Tree Airport, with a 10-year initial term commencing January 1, 2026, one successive 10-year extension option, and an initial rent of $1.02 per square foot per year with 3% annual increases; Authorize the Airport Manager, with concurrence of the County Administrator and County Counsel, to finalize lease negotiations with the tenants, including revisions deemed necessary and appropriate by County Counsel; Authorize the Airport Manager to execute all Ground Lease Agreements and any subsequent modifications or amendments, with County Counsel concurrence; and Authorize the Airport Manager to take all actions necessary to administer and implement the lease agreements
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Published Notice Required? Yes ____ No _X _
Public Hearing Required? Yes ____ No _X _
DEPARTMENTAL RECOMMENDATION:
The Department of General Services recommends that the Board of Supervisors:
1. Consider approving the form of the proposed Airport Ground Lease Agreement for private hangars to be executed with 20 separate tenants, covering 35 existing hangars at the Nut Tree Airport, with a 10-year initial term commencing January 1, 2026, one successive 10-year extension option, and an initial rent of $1.02 per square foot per year with 3% annual increases; and
2. Authorize the Airport Manager, with concurrence of the County Administrator and County Counsel, to finalize lease negotiations with the tenants, including revisions deemed necessary and appropriate by County Counsel; and
3. Authorize the Airport Manager to execute all Ground Lease Agreements and any subsequent modifications or amendments, with County Counsel concurrence; and
4. Authorize the Airport Manager to take all actions necessary to administer and implement the lease agreements.
SUMMARY:
The 25 existing Hangar Site Lease Agreements (Attachment A), covering 35 private hangars, were originally executed effective January 1996 and will expire on December 31, 2025, upon reaching their maximum 30-year term. After engaging the services of Aviation Management Consulting Group (“AMCG”), an aviation industry renowned firm, to conduct an appraisal of the current hangars to determine the fair market rental rate, Airport staff have drafted a new Airport Ground Lease Agreement template (Attachment B) offering the tenants an initial 10-year term with a 10-year extension at an initial rent of $1.02 per square foot annually with 3% annual increases. At the conclusion of the 20-year term, these hangars, all of which would be at least 50 years old and some constructed 60 years ago, would then revert to County ownership. Adoption of the leases ensures continuity for existing tenants, consistent revenue, and compliance with FAA Grant Assurance requirements.
FINANCIAL IMPACT:
Annual lease revenue is projected at $68,844 in the first year, with 3% increase each year thereafter, and is anticipated in the department’s budget. Based on hangar size, typical first-year rent calculations at $1.02 per square foot as follows:
• $2,040 2,000 sf hangar
• $2,133 2,091 sf hangar
• $3,060 3,000 sf hangar
• $7,855 7,701 sf (6 hangars)
The costs associated with preparing this agenda item are nominal and absorbed by the department’s FY2025/26 Working Budget.
DISCUSSION:
Thirty-five private hangars were constructed by tenants on County-owned land at the Nut Tree Airport (Attachment C) under leases that took effect on January 1, 1996. These leases included non-commercial use restrictions, maintenance obligations, CPI-based rent adjustments, and a maximum 30-year term. As a result, all 25 leases will expire on December 31, 2025, and new leases must be executed by January 1, 2026.
Each of the expiring leases includes the following clause: “by mutual agreement, a new contract may be negotiated, or the County may purchase each owner’s hangar at fair market value.” The Nut Tree Airport’s consultant, AMCG, has estimated the fair market value of the 35 hangars to be approximately $4.15 million. Because the Nut Tree Airport operates as an Enterprise Fund and is not entitled to General Fund support, it does not have sufficient funds to purchase the hangars.
As a recipient of FAA funding, the County is obligated to maintain control of the Nut Tree Airport property to remain eligible for vital FAA Airport Improvement Program (AIP) funding. One way to ensure such eligibility is to reevaluate the highest and best use of the airport property at reasonable opportunities. The expiration of these 25 leases (for 35 hangars) provides such an opportunity.
Consistent with FAA guidance, the County may enter long-term leases of sufficient duration to allow tenants to recover their investment in hangars, but not so long that the airport loses operational flexibility or fails to meet its federal obligation to remain self-sustaining. The FAA generally considers lease terms of 25 to 40 years reasonable for hangar improvements, depending on their useful life. The FAA discourages lease terms that extend significantly beyond the economic life of the improvement or restrict the airport from adjusting rents to fair market value in the future. The FAA has also provided guidance that leases terms should not exceed 50 years without significant tenant reinvestment in the improvements.
Because most of these hangars are 30 years old, and several are 40 years old, these hangars are at or near the end of their useful life. Nevertheless, staff recommends offering these tenants new leases with an initial 10-year term and a 10-year option, equating to a full 50-year term before the improvements revert to County ownership.
As noted above, many of the existing hangars are approaching or have reached the end of their useful life. It is important to recognize that California Senate Bill 654 (2023) amended Government Code section 50478 to allow counties, as airport sponsors, to enter into ground leases exceeding 50 years. According to the bill’s sponsors, SB 654 was enacted to remove the FAA-interpreted rigidity of a 50-year cap for public-use airports, not to require longer terms.
Although SB 654 authorizes counties to approve airport ground leases exceeding 50 years, the statute is wholly permissive. The statute imposes no obligation on the County to offer lease terms beyond the traditional 50-year limit, nor does it suggest that longer terms are preferable in every circumstance. The County retains full discretion to set lease durations that align with airport needs, federal funding requirements, and the remaining useful life of the existing hangars.
Because most of the existing hangars are already 30 years old (and some are even 40 years old), they are at or nearing the end of their useful life. Offering additional lease terms beyond 50 years would commit the County to a lease term that far exceeds the remaining functional and economic lifespan of these hangars. Limiting the total term to 50 years ensures that the County preserves its long-term planning authority, ensures the ability to adjust rents to market conditions, and maintains responsible stewardship of public airport assets. Accordingly, while SB 654 offers the possibility of longer lease terms, it does not provide any operational, financial or policy basis for doing so in this case.
For these reasons, staff is recommending the Board approve the attached form of a new Airport Ground Lease for private hangars and authorize the Airport Manager to execute these leases with the 20 existing tenants.
Should the Board approve staff’s recommendation and a tenant chooses not to execute the new ground lease by January 1, 2026, that tenant retains the right to remove their improvements, at their sole cost, and return the ground to its original condition before the existing lease expires. However, once the existing 1996 leases expire, any tenant who has not executed a new lease no longer has any legal right to occupy County-owned airport property. In that circumstance, the tenant’s continued possession of the hangar site would constitute an unauthorized holdover, requiring the County to initiate unlawful detainer proceedings to recover possession of the premises. Initiating this action would be necessary to maintain the County’s compliance with FAA Grant Assurances, preserve the County’s authority to manage airport property in the public interest, and prevent unauthorized or uncompensated use of airport land. While staff will make every effort to assist tenants in meeting the signing deadline, the County must be prepared to enforce its property rights and ensure orderly transition to the new lease structure.
ALTERNATIVES:
The Board could choose not to approve the draft template and could direct staff to revise the terms of the proposed leases; however, that is not recommended since the proposed terms are consistent with FAA guidance and represent best practices for airport management.
OTHER AGENCY INVOLVEMENT:
The proposed Airport Ground Lease Agreement template was drafted by County Counsel with input from AMCG.
CAO RECOMMENDATION:
APPROVE DEPARTMENTAL RECOMMENDATION