Much of what is now central Kenai was a military airfield during the 1940s and ‘50s. One of its legacies is a large holding of city land dedicated to an airport fund, with a complicated policy for that land’s use that has frustrated some of Kenai’s commercial property users and would-be developers.
Soon after Kenai was chartered in May 1963, the Federal Aviation Authority (FAA) granted it about 2,000 acres of the old airfield land in December of that year. The property extended from the present airport’s northern boundary south to the Cook Inlet bluffs, including land that is now the Kenai Senior Center, the Lawton Field of Flowers, Kenai City Hall, and most of old town Kenai. One condition of the FAA deed was that a portion of this land — the airport reserve — remains dedicated to aviation use. The rest is legally required to benefit the airport in other ways.
“The FAA recognized in 1963 that a purpose of having property was to draw in revenue for support of the airport,” said Kenai City Manager Rick Koch, speaking to a joint work session of the airport commission and city council on Feb. 23. “A piece of property doesn’t have to be aviation-related to have an airport purpose. This airport needs to generate income to support its operations.”
Airport land outside the reserve has been sold or leased to private owners to create airport revenue, either with the one-time earnings of a sale or the annual payment of a lease. Although much of the original airport land has entered private hands through sales, the city in recent years has preferred leases.
Koch said revenue from leases and sales is an increasingly important airport funding source.
“It’s probably more important today than it was 20 years ago, because we’re not seeing discretionary funding coming out of the FAA,” Koch said. “10 years ago we’d get $7 or $8 million routinely from the FAA to support projects outside of our entitlement funding. Now it’s about $1.2 million. Without those monies, it’s going to be incumbent on the airport to generate money for capital improvements.”
Today Kenai leases 47 parcels of airport-dedicated land to a diverse array of businesses and other interests. In addition to aviation companies located near the airport itself, these include the Kenai Fabric Center, the old bowling alley, Kenai’s state courthouse, the Federal Aviation Authority, the Alaska State Forestry division, Hilcorp Alaska oil and gas company, and Weaver Brothers Trucking. The city also leases 3 parcels to itself, paying rent into the airport fund for the properties of the Kenai animal shelter, the city water tower, and the city shop yard.
Each lease payment is a percentage of the property’s market value, determined by an appraisal every five years. The percentage is negotiated differently with each individual lease — the standard rate is 8 percent, but existing lease rates range between 6 percent and 10 percent. Most lease terms are 55 years, though some are as long as 99 years or as short as 35.
In total, the leased airport land is valued at $6.9 million in market value, from which Kenai will collect $627,826.53 annually.
Kenai’s August 2015 lease appraisal, which determined the current market value of leased land, caused some airport lease holders to experience large increases in their payments. Although 4 lease rates went down in the appraisal — one lessee losing 27 percent of the annual payment — others rose by 50 percent or more. Lessee Dan Pitts had the highest raises — 127 percent on one of his properties, and 174 percent on the other, which jumped from $3,720 per year to $10,181.
At the Feb. 23 Airport-Council work session, Koch said the cost jumps were a result of unusual lease provisions that caused the lease rate to fall far below the land’s market value before being brought dramatically back to market value in 2015. One provision was intended to synchronize the five-year appraising schedule for the various leases by skipping some appraisals.
“Beginning in 2006, our goal was to get all our leaseholders’ reappraisals to fall on years ending in zero or five,” Koch said. “... For some of those leases, it was nine years between appraisals that affected the lease rate.”
Another cause was an expiring cost protection.
“There also were a number of provisions... that were a protection in the lease, that the lease can’t increase more than 50 percent,” Koch said. “That was good for either a 30- or a 35-year period.”
He gave the hypothetical example of a lease that began under this protection in 1985.
“Over the subsequent years, until 2015, this lease was never within 50 to 60 percent of what the appraisal was ... 2015 comes along, this lease goes up 200 percent. It wasn’t because the land value had gone up. It was because the protection went away.”
Koch said the delayed appraisals and lease protections were all finished, and without them future appraisals will be different — despite some increases of over 100 percent, the average rate increase in the 2015 appraisal was 17.5 percent, Koch said. Of the leases unaffected by the expiring 50 percent rate cap, the highest increase was 76 percent.
“Those anomalies that made 2015 such a weird year, a weird and almost combative process at times, are in the rear-view mirror,” Koch said.
Pitts is one of the Kenai residents advocating for the sale, rather than lease, of airport property.
Others include realtor Fred Braun, Ronald Smith, and Duane Bannock representing airport-located business Schilling Rentals. Smith and Braun both made offers for a currently unoccupied lot at the intersection of Main Street Loop and the Kenai Spur Highway, east of Bargain Basement. Braun’s was turned down last year, and on March 16 the city council voted against waiving a code requirement that would have allowed Smith to begin negotiating his purchase.
Koch said in the past, city sales of airport land were more common. Much of Kenai’s downtown commercial area once belonged to the airport.
“At one time it was fairly easy for our lease holders to come in and turn (a lease) into a purchase,” Koch said.
Koch recommended the sale to Smith to the Kenai City Council. At the Feb. 23 worksession, he presented estimates of the value to the city of a hypothetical airport property — with standard 50-year lease and 8 percent lease rate — under four scenarios: the city selling the land, leasing the land, holding the land while failing to find a lessee, or owning a vacant lease after a lessee defaults.
Scenarios similar to those analyzed have occurred in reality. Kenai’s Alaskalanes Bowling Alley, a building on airport land, was vacated after lessee Ken Liedes closed the business and became unable to make annual payments. The currently vacant lease at the corner of the Kenai Spur Highway and Main Street Loop road that Smith and Braun made offers on has a similar history.
“Over the last 10 years we had a smoke shop in there that failed, that owes us money we’ll probably never collect,” Koch said. “We had a portion of the lot under a special use permit for a temporary restaurant that was in there.”
Prior to 2013, the lot was leased to Golden Eagle Tobacco, whose owner Sun Sims owed Kenai $5,959 when her business failed. Sims subleased part of the lot to Davis and Sons Pit Barbecue restaurant.
Koch’s analysis assumed the income from a sale or lease would be invested and would grow at an annual rate of 5 percent.
If the property is successfully leased for 50 years, the larger one-time sale earnings outvalues the accumulated lease earnings for the first 15 years of the lease, after which the accumulated value of the annual lease payments becomes increasingly larger than the invested sale earnings. At the end of 50 years, the lease outvalues the sale by $1.8 million.
Koch compared this scenario to those in which the property remains unleased for 10 years and for twenty. In the 10 year vacancy scenario the lease outvalues the sale after 37 years, and is worth $455,828 more at the end of 50 years. The 20 year vacancy scenario, the sale earning win with a final value greater by $613,296.
The Kenai City council voted 3-2 (with one absence) against selling to Smith at their March 16 meeting. At the council’s next meeting on April 6, members will vote on whether to re-examine the possibility of a sale.
At the Feb. 23 Airport Commission-Council work session, airport commissioner James Bielefeld — himself an airport leaseholder who had a large rate increase in the 2015 appraisal — advocated reforming the lease rules, saying “the airport will make more money by having more customers, rather than taking more from the existing customers.”
“We all recognize that the Kenai Airport is a jewel,” Bielefeld said. “... We have no problems operating there. The approach facilities are the best on the Peninsula, everything’s up to date. What we need here are more customers, more people leasing land on the airport. We’ve touched on uncertainties here. I would propose fixing this whole lease situation not with bandaids, but with a whole new program for the city.”
Reach Ben Boettger at email@example.com.