Latest posts by Dustin Dunham (see all)
- Making the Case for REIT Ownership of Airports: - December 4, 2018
- Passive Investors are Causing Concern in REIT Markets - November 11, 2018
- 36TH ANNUAL CORNELL REAL ESTATE CONFERENCE – PANEL WRAP UP – WALL STREET AND THE CAPITAL MARKETS - November 6, 2018
America’s once world-class infrastructure is in desperate need of repair. In recent years, bridge collapses and other engineering failures have sparked political debate about how the country’s aging public infrastructure should be addressed. Airports are often overlooked in this debate and viewed as less critical infrastructure, despite the fact that 1.7 million Americans get on a plane every day and over $44 billion is spent on air freight transportation domestically every year. In fact, at just over 15,000 airports, the US has about 1/3 of all of the world’s airports (U.S. Travel Association, 2017). As such a critical component of the country’s public infrastructure, why is there no REIT activity involved with airport infrastructure? Could REITs be a potential solution to this problem?
Infrastructure repair discussions typically revolve around funding, and currently a massive funding gap exists in relation to what is needed to upgrade existing assets. State and federal agencies often administer funds and grants to repair and develop public airports. These sources of public funding often come with regulatory limits on how much and at what rate airports can earn from collecting fees from operations like landing taxes and sales taxes. Often these constraints leave airports hamstrung in their ability to make large property improvements. Often, state and city governments must focus on investing in their own airports, raising funds in conjunction with the private sector. Unlike governmental entities which typically get funding through debt instruments like municipal bonds and state or federal sources, an airport REIT could also access the equity markets.
State and local authorities situated in or near airports benefit greatly from the tax revenues generated by airports, thus the idea of turning them into privatized entities is not always in these authorities’ best interest. Although not always politically popular, the low cost of issuing municipal debt and the ability to levy new taxes to fund projects is a power tool that makes public entities logical developers of airports (Shine, 2018). Despite this advantage, public entities might not be the best operators and generators of cash flow for airports. To draw an analogy, the prison system has experienced a massive boom in REIT investments. Prisons are highly regulated and expensive facilities to run, yet the lives of inmates are entrusted to REIT managers and their ability to work with regulators. Airport REITs would require a similar level of public and private cooperation in order to succeed. The institutional quality of airport assets, consistent income generation, and the ability to capture multiple revenue streams from operations make airports entities that could benefit from active management. Currently, some countries are attempting to convert airports into REITs. An example of this is the main airport in Kuala Lumpur, Malaysia, which is currently undergoing the conversion process (Bernama, 2018).
Moreover, REITs are tax free and tax efficient vehicles, similar to many public-sector investment products. Creating an airport REIT using a ground lease structure from the government might not look that dissimilar from what is currently in place from a returns perspective, although the investor base is comprised of larger institutional investors instead of cities looking to collect tax revenues. Cities would still collect sales taxes and normal business taxes, but the upside potential of regular dividends and increased access to global capital markets makes an airport REIT structure more compelling to governments.
In an era marked by a willingness to enable the private sector to solve public sector problems, the stage could be set in the United States to undergo this type of change. One proposal recommended by President Donald Trump would provide $137 billion in federal tax credits to companies that finance transportation projects (Nash, 2016). These tax advantages, on top of the existing benefits of REIT structures, would be a perfect enticement for a REIT to step in and upgrade current airport infrastructure.
The main issue prospective airport REIT managers might face is understanding how to efficiently run and operate what has been nearly exclusively a public-sector enterprise. Security, compliance, and maintenance associated with the operations of an airport present a large learning curve and might include a public entity element. Again, like prison REITs, compliance with quasi-governmental entities would be paramount. The TSA screening and security checkpoints to ensure that safety is being upheld to high standards is not a foreign concept to some REITs, but if an oversight or mistake occurred, the public backlash would be severe.
Politically, converting a cash flowing public asset like an airport into a privatized operator would have be hard to envision, but with sweeping tax reform and other legislative changes, it is not unimaginable that in the near future the private sector could eliminate what some see as inefficient and bureaucratic airport systems.
Americans are often dissatisfied with their airport experience, including the hassle of checking in and giving up what seem like basic rights just to get on a plane. If REIT operators began competing to obtain higher yields for their shareholders, it is interesting to contemplate how privatized entities might be able to transform the experience of an airport and improve airport infrastructure and operational efficiency. Government will always have a role to play in transportation, but applying a REIT structure toward airport assets could provide needed infrastructure investment and the private sector expertise to enhance how we travel.
U.S. Travel Association. (2017). U.S. Travel Answer Sheet. Retrieved from U.S. Travel Association: https://www.ustravel.org/answersheet
Shine, C. (2018, 11 28). Dallas News. Retrieved from Dallas Morning News: https://www.dallasnews.com/business/dfw-airport/2018/11/30/gates-again-dfw-airport-plans-billions-bond-sales-airfield-terminal-improvements
Nash, G. (2016, 11 16). Five things to know about Trump’s infrastructure plan. Retrieved from The HIll: https://thehill.com/policy/transportation/306847-five-things-to-know-about-trumps-infrastructure-plan
Bernama. (2018, 11 02). Budget 2019: Malaysia set to have the world’s first airport REIT. Retrieved from Edge Prop: https://www.edgeprop.my/content/1441059/budget-2019-malaysia-set-have-worlds-first-airport-reit