Some lessees of Kenai’s airport reserve properties believe their leases were unfairly evaluated in a 2015 appraisal that determines the rent they pay to the city, resulting in a dramatic increase of rates.
“I really feel that for the Kenai airport to have a bright future, businesses and investors need to see stability and consistency,” Dick Page, director of SOAR International Ministries, said to the Kenai City Council at an Aug. 19 meeting. “When we have unpredictable, sky-rocketing lease rates with no limits, that’s not very attractive to businesses coming to the Kenai airport.”
SOAR, a non-profit religious organization that flies missionaries to northern Russia from a hangar on the Kenai Municipal airport, holds 3 of the airport’s 57 lease properties. Although the city negotiates each airport lease individually, the market value of the leased land is determined by an appraisal made every five years.
The recent appraisal, completed in April 2015 by Anchorage-based real estate appraisers MacSwain Associates, divides the airport reserve properties into 7 zones based on factors that increase the land’s value, such as access to roads and runway, and assigns a value to a square foot of land within each zone. According to the report, the market value of a square foot of Kenai airport land ranged from 50 cents per square foot for property on Coral Street, which has access to two gravel roads, to $5 per square foot for Kenai Spur properties, with access to both the Kenai Spur Highway and Main Street Loop.
The rate paid by the lessee is a percent of the property’s square-foot market value. The percentages are different in individual leases.
Based on the appraisal process and the rate given in his lease, Page said the amount that SOAR pays for its three leases has grown from $15,120 per year in 2005 to $32,943 in 2015. Four other airport lessees who attended the council meeting said they had lease concerns similar to Page. One of these was Jim Bielefeld of Kenai Aviation, who said in a later interview that his lease rate had more than doubled with the most recent assessment. Kenai Fabric Center co-owner Wendy McGahan said her business’s lease payments had nearly doubled.
In an Aug. 18 letter to Kenai City Manager Rick Koch, Page wrote that the 2015 appraisal established a market value for the leases by comparing them to properties that were not in fact comparable, and that one of his properties was placed in a zone based on inaccurate information.
Two of Page’s leases lie in the Inner City zone and one in the Granite Point Zone. These zones were established by the appraisal within the airport reserve, and are unrelated to the city’s normal zoning. To determine the market value of the properties, MacSwain compared the zones collectively to the prices of other properties sold in Kenai. According to the 2015 report, the seven comparables for the Inner City zone included a commercial property with a “retail/warehouse building” on the Kenai Spur Highway which sold in 2013, the property occupied by the Alaska USA Federal Credit Union, which sold in 2006, and a Marathon Road property containing a Lowe’s retail warehouse which sold in 2007.
According to the Fannie Mae Real Estate Selling Guide, property appraisals should be based on “comparable sales that have closed within the last 12 months.” One of the Inner City comparables, an unimproved lot on Bridge Access Road, had sold in 2015, and the next most-recent sale was in 2013. The three Granite Point comparables were sold in 2013, 2009, and 2006.
Real estate appraiser Dave Derry, of Soldotna-based Derry Associates, was not involved in the Kenai airport appraisal but commented as a licensed appraiser. Derry listed the most important factors in determining comparables.
“You’d look for something that has the most similar characteristics, the most recent sale date, and the starting point is that you’d want to have a parcel that has a similar highest and best use,” Derry said. Highest and best use is a concept that compares what is physically possible, legally permissible, and economically feasible in developing the properties to their highest value.
When asked what was the most important factor in determining valid comparables, Derry said, “Probably number one, time. And number two, physical characteristics.”
Page said that MacSwain’s zone-based appraisal, in which a collectively-grouped set of properties were compared to the sales values of properties in disparate locations sold in differing times with different legal conditions attached to their use, was “illogical” and “at the discretion of the appraiser.”
MacSwain Associates declined to comment on the appraisal.
Derry said that zone-based valuation is an acceptable practice, provided zones accurately group similar properties.
“One of the key issues is that each of the parcels within that zone, you’d have to look at the physical characteristics of each of them,” Derry said. “You’d have to make sure you’re talking about the same size range, access, road frontage, those characteristics. All of those physical characteristics of the property would need to be the same. Classifying the properties by zone could be an acceptable method, but you can’t just throw everything in a pot, stir it up, and say everthing’s in zone A, and therefore it’s all worth X.”
With some exceptions, such as Kenai Fabric and Ron’s Rent-it Center, land in the airport reserve — such as Page’s three leases — is legally restricted to uses directly related to the airport. Page said that because of this restriction, the value of the land is different than a property open to non-airport-related retail use. He said that because there had been few recent transactions of land in the airport reserve, there were few truly comparable comparisons available.
Bielefeld also said he believed that comparisons to non-aviation properties were inappropriate.
“We’re an aviation business, we need a bit more space,” Bielefeld said. “An airplane is 36 feet — bigger than a truck.”
Derry said that because exchanges of airport-restricted lands are relatively uncommon, commercial properties can be acceptable comparisons to airport land, provided other factors are similar.
“Again you want to look at the physical characteristics,” Derry said. “If you’ve got an airport parcel that has, for example, only taxi-way access, or … (a building set-back restriction), then there’s some impact then in terms of the utility or usability of that parcel. … That needs to be taken into consideration, and you can’t just carte-blanche take a parcel that sold for retail purposes or commercial office purposes without considering all of those differences.”
In addition to criticizing the appraisal’s methodology, Page also told the city council that inaccurate information in the appraisal resulted in some of his leases being priced higher because of a street that doesn’t exist.
“Two of our lots were placed in the mid-priced Granite Point zone in 2007,” Page said. “Then in 2010, a proposed new street — giving them better access — moved them into a higher-priced Inner City zone.”
The two lots Page referred to are accessible from the airport taxiway and from a gravel lot which contains a right-of-way for the never-built FBO Street. Because of the access that was supposed to have been provided by that street, Page’s property was moved from the $3-per-square foot Granite Point zone to the $3.50-per-square foot Inner City zone. In 2010 Page successfully appealed to the city to have the property returned to the Granite Point zone. However, the 2015 appraisal identifies the two lots as belonging to the Inner City zone and values them accordingly.
“In 2015, there’s still no street,” Page said. “These lots only have access to a taxi-way and to a right-of-way coming across a gravel parking lot, and they’re priced the same as a lot that’s on Willow Street.”
Page is currently appealing one of his leases signed in 1977, which does not specify a return percentage, under a section of city code that he claims sets a 6 percent return for leases made prior to 2006. Other airport lessees are also contesting their rates. Kenai City Manager Rick Koch said that many airport leases contain a clause for conflict resolution by a third-party appraiser.
At least one of the upset lessees, Dan Pitts, is using the conflict resolution process and is now negotiating with the city to choose the third-party appraiser, Koch said. As of print time on Saturday afternoon, Pitts had not returned a call for comment.
Responding to lessee complaints at the Aug. 19 Kenai City Council meeting, Koch said the dramatic rise in some lease rates could be due to the expiration of a provision in some leases that previously kept the rates at an artificial low.
Some leases set a maximum limit on how much the rate can increase in an appraisal period. Pitts and Page both have leases with a clause preventing the rate from rising more than 50 percent for the first 30 years of the lease. For one of Page’s leases, which has existed since 1985 and contained the protection clause, the expiring protection means the rate of increase is no longer limited.
“This year, because the protection that was provided them under the lease expired, the lease rates went from a very, very depressed lease rate to market (value),” Koch said. He said that the unaccounted-for change in market prices over 30 years could create a large and sudden rate increase when protection expires, and that he believed this effect was responsible for the rise in rates experienced by Page and Pitts.
Regardless of the reason, users of airport land say that without a way to plan for the growth of potentially unlimited airport lease rates, business decisions will become increasingly difficult. Scott Bremer owns Peninsula Aero Tech, an avionic services company based in a hangar he sub-leases from Page. Bremer said that the rising airport leases were complicating his plan to build a hangar of his own.
“With the cost of construction, the price to recreate what we’ve got out here (the 8,000-square-foot hangar he currently uses) is probably going to be about a million bucks,” Bremer said.
The lease of the lot he is considering building on would be about $14,000 per year.
“It adds up to a fairly sizable sum,” Bremer said. “Our concern is, if we go ahead and build the building, if the lease is $14,000 per year, what about next year? And five years later? And fifteen years down the road if I want to retire and sell the building, how am I going to sell it if the lease is $20,000 a year? Because there is no cap on it at this point, and there is no limit to what they can actually do, it’s a big uncertainty to invest that kind of money into the airport.”
Bielefeld said that because Kenai Aviation gets most of its business from oilfield crew transfers and freight transport, the high lease rate increase contributed to an already difficult business climate caused by low oil prices. He said that although Kenai owns the land that his two buildings sit on, he owns the buildings himself — making the possibility of relocating very undesirable.
“The city is being a very poor landlord,” Bielefeld said. “They know they’ve got me. We own the building, we own a hangar. … We can’t just say goodbye, like a renter leaving an apartment.”
Reach Ben Boettger at email@example.com.