Niche properties

Flying High

Creative Planning Helps Air Cargo Facility Take Flight.

By Gary G. Tharp, CCIM |

Editor's note: Air cargo facility development is a growing niche in the commercial real estate industry. This case study examines one CCIM's journey from initial site selection to successful completion of an air cargo facility for Emery, a worldwide air cargo integrator, in Broward County, Fla.

"Why would I want to change careers?” I asked.

“It's not a change at all,” my colleague said. “It's real estate!”

I was on the phone with a fellow CCIM in October 1995, committing to a weekend seminar in Austin, Texas, with a company called the Lynxs Group, a small collection of national developers specializing in build-to-suit and multitenant facilities inside the airport operations area or AOA fence. A major asset of the Lynxs Group is its stable of tenants. It had developed sites for major passenger airlines' cargo, such as Delta, Northwest, and American Airlines; integrators, including Emery, UPS, and FedEx; and other small cargo airlines and freight forwarders.

The seminar proved to be my introduction to the air cargo facilities business: After three days of intense discussion on the difficulties, dangers, and rewards of the industry, I became the company's Florida partner.

A few months later, Emery expressed an interest in expanding its presence in Broward County, Fla., and asked Lynxs to propose a new 50,000-square-foot facility at the Fort Lauderdale Hollywood International Airport. It was my job to select an AOA site, so the project could commence.

If Only They'd Known I met with the head of the business department of the Broward County Aviation Division and his assistant, who were openly wary about my chances for success. In recent months, three other developers and a real estate specialist from CNF, Emery's parent company, had approached the division about a new Emery cargo development. However, the only AOA site that could be altered to meet Emery's criteria was encumbered by an abandoned 66,000-sf concrete furniture warehouse. According to the previous developers, the site was too expensive to raze and incapable of being renovated to meet Emery's specifications. I toured the facility anyway and later learned that I was the first non-aviation-trained expert to do so.

Upon inspection, it was clear that my predecessors' conclusions were accurate. Indeed, the old warehouse was too expensive to tear down — more than $500,000 — and it couldn't be renovated for Emery, since air cargo sorters need ample clear space and this warehouse had columns spaced 20 feet by 40 feet apart.

However, I was lucky enough to envision a solution. By removing the roof, knocking down the walls and columns, and constructing a new steel building on the old foundation, enough money could be saved in site and foundation work to pay for the reduced renovation. In fact, these cost-savings measures possibly could grant the client a lower-than-expected rental rate. Though the execution turned out to be much more complex, the original brainstorm became reality nearly three years later.

First, the Design A developer's role is similar to that of a movie producer. The producer chooses a book or screenplay, hires a director and writers, helps select the cast, raises money for the project, and coordinates most activities until the movie is released.

Likewise, a developer articulates a vision for a project, finds a tenant, designers, and contractors, raises debt and equity, works with the appropriate local boards and commissions, and coordinates the efforts of all participants until the product is finished and the tenant can occupy and pay rent.

A developer's first step is to create an effective design. After Emery was in-formed of our plan to convert the furniture factory, a small Orlando-based design company provided a conceptual site plan and footprint, along with a sketch of the proposed building.

On the strength of the pictures and a rough specification, Emery offered a non-binding letter of intent for the project. The Lynxs Group's headquarters agreed that the project had gained enough momentum and provided seed money to hire the architect and a civil engineer to prepare plans sufficient enough to negotiate leases and obtain financing.

The Great Race Most air cargo facilities projects are intricate balancing acts. First, airport authorities must grant a ground lease, since AOA land isn't available for purchase. At the same time, a tenant lease, including a ground sublease, must be executed. Many of the airport clauses will be anathema to the tenant, and vice versa. In addition, all documents are subject to the lender's review, which may introduce more deal-breaker clauses.

For this project, I obtained a sample lease from the airport that was used for a different kind of tenant. In addition, I received a copy of a tenant lease that previously was used with Emery in Sacramento. Making the two documents conform proved to be a long, complex process.

A West Palm Beach attorney was hired to assist in negotiating the leases. The Lynxs Group partners voiced concerns about hiring a local attorney, architects, and engineers for the project, but they soon realized that these local entities were a necessity. After more than a year of negotiations, the lease documents were complete.

The Long Road to Permit Airport developments fall under the jurisdiction of all levels of government — the Federal Aviation Administration, state commissions, such as water districts, and local regulatory bodies. In all, the Emery project required permission and clearance from 26 different agencies for its site plan and nearly as many for the building permit.

Although an architect and civil engineer already had been hired, a specialist to facilitate the permit process also was retained because the regulations in Broward County are so daunting. Hiring this seasoned civil engineer who had worked on various airport projects for more than 25 years was a fortuitous decision. Having someone familiar with the labyrinth of Broward Country regulatory agencies was paramont to the project's success.

Due to the number of agencies involved, many decisions were juxtaposed between one agency that required something and another that prohibited it. For example, the agency that had jurisdiction over the sewer permit required an 8-inch gravity line, whereas another agency dictated a 6-inch gravity line. Neither agency would budge without a letter from an independent engineer testifying that the 6-inch line would meet the required code as well as both of their own regulations. This “letter for the file” technique was used several times to resolve interagency wrangles.

Never Trust a Cheap Contractor A developer selects a general contractor with as much care as a movie producer hires a director. In both cases, the two must share good chemistry, confidence, and respect for one another to weather potential storms in the course ahead.

We obtained several different preliminary bids, but once the hard costs were calculated negotiations ensued with a single contractor. We wanted a guaranteed maximum contract with savings provisions for the Emery project, which would shift some of the risk of execution to the contractor while offering bonuses for so-called value engineering savings. A central Florida-based company with major projects in the state was awarded the contract.

Although the contractor had never built on an airport, it had substantial experience in building demanding projects in Broward County and had crews, subcontractors, vendors, and managers ready to go.

In addition, the contractor proved to be a “no surprises” outfit. On several occasions, the nature of the work — such as marrying an old foundation to a new building — created unforeseen problems. Each time, the contractor attempted to solve the problem before requesting a change order. After exhausting all possibilities, the contactor approached the Lynxs Group with a range of options that minimized costs and delays.

Blow Me Down! Unlike most of the country, in southern Florida you can build year-round; however, building during the first five or six months of the year is preferable. The reason: hurricanes.

The loan closed and the project began to incur hard costs on June 1, 1999 — the first day of hurricane season, which lasts through December. The first hurricane to hit was Floyd on September 14, which closed the airport. Hurricane Harvey followed on September 22 and rained out construction for four days. Then, on October 16, Irene poured 8 inches of rain on the facility's fresh concrete apron and halted construction for nearly a week.

Florida is flat and merely a few feet above sea level in most areas, making storm water drainage issues paramount. In fact, these concerns had cost us several delays in the permit process while the site was being re-engineered. The planning delays, along with a contractor experienced in Florida weather, helped the project survive the effects of three hurricanes. The entire job was completed with only 13 days lost to inclement weather.

Tenant Relations Regular progress meetings with Emery were initiated early in the design phase and continued through to substantial completion. Most meetings included design, construction, and ownership representatives, as well as local and regional tenant management representatives.

The rapport built with Emery in the early stages paid off for all parties as the project moved forward. Compromises avoided standoffs, delays, and costly changes. Because we accommodated certain upgrades, Emery allowed work-around solutions to some production problems. In the end, occupancy was delivered nine days later than contracted, which was a trivial problem for the tenant in terms of moving machinery, personnel, furniture, and aircraft.

Certificate of Occupancy On the Emery project, the certificate of occupancy had to be signed by the same 26 agencies that had endorsed the original building permit. About one month prior to the project delivery date, inspectors' signatures were collected as they reviewed the work. Finally, two days before the tenant's expected occupancy date only one inspection remained — the water inspection.

What ensued was an arm wrestling match with one of the environmental agencies for a certificate on the potable water line. Without the certificate, a water meter couldn't be installed. Without a water meter, the certificate of occupancy couldn't be issued. Several water purity test results were submitted (and resubmitted) before approval was granted, yet it took another week for the paperwork to clear the bureaucracy.

Future Outlook Entry into the air cargo facilities business has never been easy. Long lead times, the need for substantial seed money, intense regulatory issues, and the land lease vs. fee issue all contribute to the challenges encountered.

The events of Sept. 11, 2001, also changed the way commercial real estate professionals in this segment of the industry do business. Airport security, which always has been a concern, now is heightened. There are fewer access points in the AOA fence through which cargo can move. Facilities providers also will have to build additional personnel control features and airside monitoring devices.

Economics also have changed the business in recent months. Third-party developers should be more welcome on airports due to the reallocation of most airport capital improvement funds pending long-term strategies for building more secure terminals and fence lines. Insurance costs now are higher, and carriers are inserting war and terrorism exclusion clauses that may make many lenders slow to underwrite on-airport facilities.

For the future, however, I am as sanguine as my CCIM colleague was on the phone six years ago during our discussion about my introduction to the air cargo facility business: “It's not a change at all. It's real estate!”