B-155754, DEC. 30, 1964, 44 COMP. GEN. 368

B-155754, DEC. 30, 1964, 44 COMP. GEN. 368

AIRPORTS - FEDERAL AID - DEVELOPMENT PROJECTS - LEASEHOLD TERMINATION COSTS ALTHOUGH INCIDENT TO THE REMOVAL OF HANGARS OBSTRUCTING NAVIGATION AIDS AT A MUNICIPAL AIRPORT, THE FEDERAL AVIATION AGENCY MAY GRANT FUNDS TO COVER THE GOVERNMENT'S SHARE OF THE REASONABLE COST OF TERMINATING THE LEASEHOLD INTERESTS HELD BY FIRMS SERVICING AIRCRAFT UNDER LEASES WITH AN UNEXPIRED 5-YEAR TERM AND A RENEWAL OPTION FOR ANOTHER 5 YEARS AS A PROPER "LAND ACQUISITION" DEVELOPMENT PROJECT COST UNDER 49 U.S.C. 1101 (A) (3) TO THE EXTENT OF THE CITY'S LEGAL LIABILITY, PAYMENT BASED ON A FORMULA CONSIDERING THE 10 YEAR'S REMAINING LIFE OF THE LEASES AND THE 30 YEARS' PROJECTED LIFE OF A SUBSTITUTE HANGAR, PLUS ITS CONSTRUCTION COST ( 10/30 TIMES $-------), THE GOVERNMENT'S MAXIMUM PARTICIPATION OF 50 PERCENT MAY NOT BE CHARACTERIZED AS A GRANT TO EXTINGUISH A LEASEHOLD INTEREST, BUT WOULD CONSTITUTE A PAYMENT FOR THE CONSTRUCTION OF A HANGER THAT IS PROSCRIBED BY SECTION 1101 (A) (3), THE FORMULA OVERLOOKING THAT THE APPROPRIATION OF THE NEW HANGAR TO CURRENT LEASES IS TO BE COMPENSATED FOR BY THE PAYMENT OF RENT, THAT THE CITY COULD USE ITS POLICE POWERS TO REDUCE TERMINATION COSTS, AND THAT THE LEASES PROVIDE FOR CANCELLATION WITHOUT OBLIGATION.

TO THE ADMINISTRATOR, FEDERAL AVIATION AGENCY, DECEMBER 30, 1964:

THIS IS IN RESPONSE TO LETTER OF DECEMBER 10, 1964, FROM THE DEPUTY ADMINISTRATOR IN THE MATTER OF REMOVING CERTAIN HAZARDS TO AIR NAVIGATION AT THE DES MOINES, IOWA, AIRPORT. FROM INFORMATION IN THE DEPUTY ADMINISTRATOR'S LETTER, THE FACTS INVOLVED MAY BE BRIEFLY SUMMARIZED AS FOLLOWS:

NEW FEDERAL AVIATION AGENCY NAVIGATION AIDS HAVE BEEN INSTALLED AT THE DES MOINES AIRPORT, AND IT HAS BEEN FOUND THAT SEVERAL HANGARS LIE WITHIN A "CLEAR ZONE" AREA SO AS TO CONSTITUTE OBSTRUCTIONS TO THE AERIAL APPROACH OR LIE WITHIN THE CLEAR ZONE FOR THE INSTRUMENT RUNWAY IN SUCH MANNER AS TO PREVENT MAXIMUM UTILIZATION OF THESE NAVIGATION AIDS. THE FAA ACCORDINGLY DETERMINED THE HANGARS TO BE OBSTRUCTIONS OR HAZARDS TO AIR NAVIGATION AND HAS REQUESTED THE CITY OF DES MOINES AS THE AIRPORT OWNER AND OWNER OF THE HANGARS TO REMOVE THEM. HOWEVER, THE HANGARS ARE CURRENTLY OCCUPIED BY SEVERAL FIRMS ENGAGED IN THE BUSINESS OF SERVICING AIRCRAFT AT THE AIRPORT UNDER LEASES WHICH HAVE A REMAINING TERM OF APPROXIMATELY FIVE YEARS EACH WITH FIVE YEAR RENEWAL OPTIONS.

UNDER SECTIONS 4 AND 10 OF THE FEDERAL AIRPORT ACT, AS AMENDED, 40 U.S.C. 1103 AND 1109, YOU ARE AUTHORIZED TO MAKE GRANTS OF FUNDS TO SPONSORS FOR THE PURPOSE OF PARTICIPATING IN THE COST OF APPROVED "AIRPORT DEVELOPMENT" PROJECTS. "AIRPORT DEVELOPMENT" IS DEFINED IN SUBSECTION 2 (A) (3) OF THE ACT, 49 U.S.C. 1101 (A) (3), AS INCLUDING:

* * * ANY ACQUISITION OF LAND OR OF ANY INTEREST THEREIN * * * WHICH IS NECESSARY TO * * * REMOVE OR MITIGATE * * * AIRPORT HAZARDS; BUT SUCH TERM DOES NOT INCLUDE THE CONSTRUCTION, ALTERATION, OR REPAIR OF AIRPORT HANGERS.

"AIRPORT HAZARD" IS IN TURN DEFINED IN SUBSECTION (A) (4) OF THE SAME SECTION AS:

* * * ANY STRUCTURE * * * LOCATED ON OR IN THE VICINITY OF A PUBLIC AIRPORT, * * * WHICH OBSTRUCTS THE AIRSPACE REQUIRED FOR THE FLIGHT OF AIRCRAFT IN LANDING OR TAKING OFF AT SUCH AIRPORT OR IS OTHERWISE HAZARDOUS TO SUCH LANDING OR TAKING OFF OF AIRCRAFT.

PURSUANT TO THE QUOTED PROVISIONS, FAA HAS CONCLUDED THAT A GRANT TO THE CITY OF DES MOINES COULD PROPERLY BE MADE FOR AN APPROPRIATE SHARE OF THE REASONABLE COST OF TERMINATING THE LEASEHOLD INTERESTS NOW HELD ON THE HANGARS INVOLVED. SEE 14 CFR 151.39 (B) (13) (III). WE AGREE THAT TO THE EXTENT THERE WOULD BE ANY LEGAL LIABILITY ON THE PART OF THE CITY TO ITS LESSEES IN THE EVENT OF LEASE TERMINATIONS FOR THE PURPOSE UNDER CONSIDERATION, THE COST DISCHARGING SUCH LIABILITY WOULD CONSTITUTE A PROPER PROJECT COST. FROM THIS CONCLUSION, THE DEPUTY ADMINISTRATOR SUGGESTS THAT THE FOLLOWING DESCRIBED PLAN NEED NOT BE QUESTIONED, PARTICULARLY IN LIGHT OF THE RELATED CIRCUMSTANCES LEADING TO ITS PROPOSED ADOPTION.

THE DEPUTY ADMINISTRATOR STATES THAT THE COST TO TERMINATE THE LEASES WOULD BE HIGH; THAT THE CITY IS RELUCTANT TO UNDERTAKE SUCH COST; AND THAT THE CITY HAS, THEREFORE, PROPOSED TO CONSTRUCT A NEW HANGAR AND, AS CONSIDERATION FOR TERMINATING THE LEASEHOLD INTERESTS INVOLVED, THE CITY WOULD SUBSTITUTE THE NEW HANGAR FOR THE PREMISES CURRENTLY UNDER LEASE. THE CITY FURTHER PROPOSES THAT THE REASONABLE COST OF THUS "ACQUIRING THE EXISTING LEASEHOLDS" BE DETERMINED UNDER A FORMULA WHICH TAKES ACCOUNT OF THE COST OF THE NEW HANGAR AND THE NECESSITY FOR DEVOTING PART OF ITS USEFUL LIFE TO SATISFY THE OBLIGATIONS TO THE LESSEES AS FOLLOWS:

REMAINING LIFE OF

EXISTING LEASES (10 YRS) TIMES COST OF NEW HANGAR ($575,000)

PROJECTED LIFE OF NEW

HANGAR (30 YRS)

ALL OF THE FIGURES USED IN THE FORMULA ARE STATED TO BE TENTATIVE AND SUBJECT TO VERIFICATION. BUT USING THE ESTIMATES GIVEN, THE COST OF "ACQUIRING" THE LEASEHOLDS WOULD BE 10/30 TIMES $575,000, APPROXIMATELY $192,000, IN WHICH THE MAXIMUM PARTICIPATION OF 50 PERCENT BY FAA WOULD BE ABOUT $96,000.

IN THE CONCLUDING PARAGRAPHS OF THE DEPUTY ADMINISTRATOR'S LETTER HE STATES THE BASIS FOR HIS INQUIRY AS FOLLOWS:

UNDER SECTION 13 (A) (3) OF THE ACT. 49 U.S.C. 112 (A) (3), A PROJECT COST IS ALLOWABLE IF, AMONG OTHER, IT IS REASONABLE IN THE OPINION OF THE ADMINISTRATOR. IF, THEREFORE, THE ADMINISTRATOR OR HIS DELEGATEE CAN PROPERLY DETERMINE THAT THE COST ARRIVED AT BY APPLICATION OF THE FORMULA IS NOT MORE THAN A REASONABLE COST FOR THE "LAND ACQUISITION" INVOLVED IN ABATING THE EXISTING LEASEHOLD INTEREST, THEN SUCH COST CAN BE CONSIDERED TO BE AN ALLOWABLE PROJECT COST. IN DETERMINING WHETHER SUCH COST IS REASONABLE, THE VALUE OF THE LEASEHOLD AND THE REASONABLE COST OF EXTINGUISHING IT BY DIRECT PAYMENT TO THE LESSEE MAY PROPERLY BE TAKEN INTO ACCOUNT AS FIXING THE OUTSIDE LIMITS OF REASONABLENESS. WITHIN SUCH LIMITATIONS THE OBJECT IS TO BASE THE GRANT ON THE ACTUAL REASONABLE COST TO THE SPONSOR, AND IN THIS CASE WE BELIEVE SUCH COST MAY PROPERLY BE MEASURED BY THE EXPENDITURE WHICH THE SPONSOR IS REQUIRED TO MAKE TO SATISFY THE POTENTIAL DEMANDS OF THE LESSEES. MOREOVER, WE BELIEVE THAT THE GOVERNMENT PARTICIPATION MUST PROPERLY BE CHARACTERIZED AS A GRANT FOR THE EXTINGUISHMENT OF THE LEASEHOLD INTEREST AND NOT AS A PROHIBITED GRANT FOR "THE CONSTRUCTION, ALTERATION, OR REPAIR OF AIRPORT HANGARS," EVEN THOUGH THAT MAY BE AN INCIDENTAL RESULT.

ACCORDINGLY, WE HAVE CONCLUDED THAT IN MAKING THE EXPENDITURES REQUIRED TO CARRY OUT THE PROPOSED PLAN THE AIRPORT OWNER WOULD BE INCURRING COSTS OF ACQUIRING AN INTEREST IN LAND (ABATING THE EXISTING LEASEHOLDS) NECESSARY FOR THE REMOVAL OF AN AIRPORT HAZARD, WHICH COULD BE CONSIDERED AN ELIGIBLE ITEM OF PROJECT COST UNDER THE FEDERAL AIRPORT ACT, AND THAT THE SUGGESTED FORMULA WOULD FORM AN ACCEPTABLE BASE FOR DETERMINING THE REASONABLE COST OF ABATING SUCH LEASEHOLD INTERESTS. OUR INQUIRY IS WHETHER YOU WOULD BE REQUIRED TO OBJECT IF A GRANT AGREEMENT WERE EXECUTED ON THE BASIS OF THIS CONCLUSION AND GRANT PAYMENTS MADE PURSUANT TO SUCH A GRANT AGREEMENT.

WE CANNOT AGREE THAT PAYMENT BASED ON THE PROPOSED FORMULA MAY "PROPERLY BE CHARACTERIZED AS A GRANT FOR THE EXTINGUISHMENT OF A LEASEHOLD INTEREST AND NOT AS A PROHIBITED GRANT FOR THE CONSTRUCTION, ALTERATION, OR REPAIR OF AIRPORT HANGARS.' RATHER, WE BELIEVE THAT ANY PAYMENT UNDER THE FORMULA MUST BE CHARACTERIZED AS ONE TOWARD THE CONSTRUCTION OF A HANGAR WHICH IS PROSCRIBED BY SUBSECTION 2 (A) (3) QUOTED ABOVE. IF THE EXISTING HANGAR WERE TO BE REMOVED WITHOUT CONSTRUCTION OF A NEW HANGAR, ANY REQUIRED PAYMENT TO THE LEASEHOLDERS WOULD BE A COST FOR THE ACQUISITION OF AN INTEREST IN LAND IN WHICH FAA COULD PARTICIPATE. IN SUCH EVENT, HOWEVER, THE TOTAL COST TO THE OWNER WOULD BE THE AMOUNT OF THE PAYMENT PLUS LOSS OF THE EXISTING STRUCTURE, IN WHICH LOSS FAA COULD NOT PARTICIPATE. THE PLAN AND FORMULA PROPOSED BY THE CITY ASSUME THAT APPROPRIATION OF THE NEW HANGAR TO FULFILLMENT OF THE UNEXPIRED TERMS OF THE CURRENT LEASES CONSTITUTES A COST TO THE CITY RELATED TO THE LEASES, APPARENTLY ON THE BASIS THAT THE OTHERWISE FULL AND UNENCUMBERED USE OF THE NEW STRUCTURE WHICH THE CITY WOULD HAVE IS LOST TO IT FOR THIS LEASE PERIOD. BUT THIS OVERLOOKS THE FACT THAT APPROPRIATION OF THE NEW HANGAR TO THE CURRENT LESSEES IS TO BE COMPENSATED FOR BY THE PAYMENT OF RENT. THE REAL COST TO THE CITY RELATED TO THE CURRENT LEASES WOULD, THEREFORE, IN ANY EVENT BE ONLY THE DIFFERENCE BETWEEN THE RENTAL TO BE PAID BY THE LESSEES FOR THE UNEXPIRED TERMS OF THEIR LEASES AND ANY HIGHER RENTAL WHICH THE NEW HANGAR COULD REASONABLY BE EXPECTED TO COMMAND LESS WHAT THE CITY WOULD SAVE BY NOT HAVING TO OTHERWISE COMPENSATE THE LESSEES. AND IN THIS CONNECTION, WHILE THE PLAN ENVISAGES TRANSFERRING THE LESSEES TO THE NEW HANGAR AT NO INCREASE IN RENTAL, THERE IS NO EVIDENCE THAT THE LESSEES WOULD NOT BE WILLING TO NEGOTIATE A HIGHER RENTAL, IF THE NEW STRUCTURE SO WARRANTS, RATHER THAN HAVE THEIR LEASES TERMINATED OUTRIGHT INSTEAD OF TRANSFERRED. IN SHORT, TO THE EXTENT THAT THE CITY IS FAIRLY COMPENSATED BY WAY OF RENTAL OF THE NEW HANGAR THERE IS NO COST INVOLVED RELATED TO THE EXISTING LEASEHOLDS. INDEED THE CITY WILL HAVE SAVED THOSE MONEYS IT WOULD HAVE ORDINARILY BEEN REQUIRED TO PAY FOR TERMINATING THE LEASES. LOSS OF THE EXISTING STRUCTURE WOULD, OF COURSE, OCCUR WHETHER OR NOT A NEW HANGAR IS CONSTRUCTED AND SHOULD BE BORNE BY THE CITY.

IN ADDITION TO OBJECTION BASED UPON THE ABOVE, THERE ARE SEVERAL OTHER ASPECTS OF THE MATTER WHICH RAISE SERIOUS DOUBTS AS TO THE PREMISES UNDERLYING CONCEPTION OF THE PROPOSAL.

1. THE DEPUTY ADMINISTRATOR FOUNDS HIS UNDERSTANDING THAT THE COST OF OUTRIGHT TERMINATION OF THE LEASES WOULD BE HIGH BECAUSE (1) LOSS OF PROSPECTIVE PROFITS WOULD BE SUBSTANTIAL, (2) THERE IS LITTLE OR NO ALTERNATIVE USE FOR THE SPECIALIZED EXPENSIVE EQUIPMENT INSTALLED BY THE LESSEES, AND (3) THERE IS VIRTUALLY NO OTHER AVAILABLE LOCATION TO WHICH THE BUSINESSES COULD BE REMOVED. IT APPEARS THAT CONSIDERATION OF WHAT THE TERMINATION COST WOULD BE HAS BEEN IN TERMS OF A TERMINATION EFFECTED BY PRIVATE PARTIES. HOWEVER, WE BELIEVE THAT SUCH COST SHOULD BE EVALUATED IN TERMS OF WHAT THE CITY WOULD BE REQUIRED TO PAY UNDER A TERMINATION EXERCISED BY VIRTUE OF ITS POLICE POWERS.

SECTION 329.2 OF TITLE 13, IOWA CODE, ANNOTATED VOLUME 16, AUTHORIZES MUNICIPALITIES TO RAISE AND EXPEND FUNDS TO ACQUIRE INTERESTS IN LAND FOR THE PURPOSE OF ELIMINATING AIRPORT HAZARDS AS AN EXERCISE OF THE POLICE POWER. THE HAZARD UNDER CONSIDERATION MEETS ALL OF THE REQUIREMENTS OF THE IOWA STATUTES. THEREFORE, A BONA FIDE EXERCISE OF SUCH POLICE POWER IN THE INSTANT CASE WOULD APPEAR TO GIVE RISE TO MORE LIMITED COMPENSATION REQUIREMENTS FOR LEASE TERMINATION THAN INDICATED IN THE DEPUTY ADMINISTRATOR'S LETTER, NOTWITHSTANDING THAT THE CITY ITSELF IS THE OWNER OF THE PROPERTY INVOLVED. SEE ANNOTATION AT 3 ALR2D 286 FOR THE PROPOSITION THAT MARKET VALUE OF A LEASE IS THE PROPER BASIS FOR ESTABLISHING DAMAGES WHERE THE LEASEHOLD IS TAKEN UNDER EMINENT DOMAIN, PARTICULARLY SECTION 20 AT PAGE 321 STATING THE GENERAL RULE THAT LOSS OF PROFITS IS NOT COMPENSABLE. SEE ALSO 166 ALR 1211 ANNOTATING THE RULE THAT WHERE THERE ARE SEVERAL INTERESTS OR ESTATES IN A PARCEL OF REAL ESTATE TAKEN BY EMINENT DOMAIN, A PROPER METHOD OF FIXING THE VALUE OF EACH INTEREST OR ESTATE IS TO DETERMINE THE VALUE OF THE PROPERTY AS A WHOLE, AND THEN APPORTION THE SAME AMONG THE SEVERAL OWNERS ACCORDING TO THEIR RESPECTIVE INTERESTS OR ESTATES RATHER THAN TO TAKE EACH INTEREST OR ESTATE AS A UNIT AND FIX THE VALUE THEREOF SEPARATELY.

2. THE LEASES IN QUESTION CONTAIN THE FOLLOWING PROVISION:

* * * AND IT IS FURTHER AGREED THAT THIS LEASE SHALL BE SUBORDINATE TO THE PROVISIONS OF ANY EXISTING OR FUTURE AGREEMENT BETWEEN THE LESSOR AND THE UNITED STATES, RELATIVE TO THE OPERATION OR MAINTENANCE OF THE AIRPORT, THE EXECUTION OF WHICH HAS BEEN OR MAY BE REQUIRED AS A CONDITION PRECEDENT TO THE EXPENDITURE OF FEDERAL FUNDS FOR THE DEVELOPMENT OF THE AIRPORT, PROVIDED, HOWEVER, THAT IN THE EVENT THAT ANY OF THE RIGHTS * * * GRANTED TO THE LESSEE HEREIN ARE HEREBY INTERFERED WITH * * * THE LESSEE * * * MAY CANCEL THIS LEASE * * * AND * * * BE RELIEVED FROM ALL OBLIGATIONS

SECTION 11 (3) OF THE ACT, 49 U.S.C. 1110 (3) REQUIRES THAT AS A CONDITION PRECEDENT TO ANY AIRPORT DEVELOPMENT PROJECT UNDER THE ACT, THE SPONSOR MUST ASSURE THAT THE AERIAL APPROACHES TO THE AIRPORT WILL BE ADEQUATELY CLEARED BY REMOVING, IF NECESSARY, EXISTING AIRPORT HAZARDS AND BY PREVENTING THE ESTABLISHMENT OR CREATION OF FUTURE AIRPORT HAZARDS. WOULD ASSUME THAT SUCH ASSURANCES WERE PROVIDED WITH RESPECT TO DEVELOPMENT OF THE DES MOINES AIRPORT AND INSTALLATION OF NEW NAVIGATION EQUIPMENT. THE DEPUTY ADMINISTRATOR HAS EXPLAINED THAT THE QUOTED LEASE PROVISION WAS INSERTED AT THE REQUEST OF FAA TO APPLY TO MATTERS RELATING TO AIRPORT OPERATION AND MAINTENANCE POLICIES AND WAS NOT INTENDED TO COVER THE SITUATION HERE INVOLVED. HOWEVER,WITHOUT FURTHER EVIDENCE WE WOULD HAVE TO CONCLUDE THERE IS SERIOUS DOUBT, IN VIEW OF THE PLAIN TERMS OF THE LEASE PROVISION TOGETHER WITH THE ASSURANCES REGARDING AIRPORT HAZARDS WHICH WE ASSUME WERE GIVEN, THAT THE CITY WOULD LEGALLY BE OBLIGATED IN ANY WAY TO THE LESSEES FOR REMOVAL OF THE HANGARS AS HAZARDS PURSUANT TO FAA DETERMINATION AND REQUEST.

WHILE WE DO NOT DECIDE THE QUESTIONS RAISED AS TO WHETHER THE CITY WOULD BE LIABLE TO THE LESSEES AND, IF SO, WHAT THE PROPER MEASURE OF COMPENSATION WOULD BE, WE POINT THEM OUT FOR YOUR CONSIDERATION CONCERNING THE OUTSIDE LIMIT OF APPROPRIATE COST FOR FEDERAL PARTICIPATION WITHIN THE CONTEXT OF ANY NEW FORMULA WHICH MIGHT BE ARRIVED AT FOR DETERMINING THE AMOUNT WHICH YOUR AGENCY MAY CONTRIBUTE TOWARD REMOVAL OF THE HAZARDS.