Kenai airport struggles to perfect land agreements

The Kenai Municipal Airport earned a fifth of its revenue recorded in the city’s present budget from payments made by businesses that lease the hundreds of acres of city-owned land dedicated to its support. Airport revenues recorded in fiscal years 2014 and 2015 show similar percentages of income from lease payments.

Many lease-payers, such as Kenai Aviation and Soar International Ministries, do business at the airport. But others include Olga’s Jewelry, the Main Street Tap and Grill, the Kenai Court House, Big Dipper Car Wash, Summit Cleaners dry cleaning, and — until it went out of business in 2015 — the AlaskaLanes Bowling Alley.

Managing these properties and other city-owned land was a major issue to occupy the Kenai City Council’s time in 2016. Of the 18 closed-door executive sessions the council held during their 21 regular meetings this past year, 14 were to discuss buying or selling land. These discussions, held behind closed doors because of the bargaining advantage they may give to prospective land buyers if held publicly, resulted in two land sales in 2016, the first since Kenai sold the property of Bargain Basement thrift store to private owners in 2011.

Kenai’s large municipal land-holding is in part a result of its history: much of the land now occupied by the city was a military airfield in the 1940’s and 1950’s.

“The federal government in 1940 knew that there was going to be war,” said Henry Knackstedt, a Kenai city council member and former chair of the airport commission. “And nobody owned property in Alaska — it was not a state. There was very little privately owned property. The federal government hacked out what we see as the airport property in anticipation that the military would need that.”

After the airfield was decommissioned, the Federal Aviation Administration gave approximately 2,000 acres of it to Kenai’s government after the city’s chartering in 1963. The initial airport property included much of Old Town Kenai and what is now the downtown commercial district nearby. Over the years most of these lots were sold to local business people, creating the patchwork of private and municipal land that exists south of the present airport.

“It seems like it’s far-flung from the airport, but that was established back in the 1940s,” Knackstedt said of the city-owned land in this area.

This history has left Kenai with 461.07 acres that it leases out to local businesses, according to calculations based on a 2015 count of lease properties, the proceeds of which are legally dedicated to financing the airport. About half the city land offered for lease — 259.13 acres — remains unleased and undeveloped. The following information is based on a June 2014 map of unleased lands, the most recent one available.

Of the unleased and available property, 80.54 acres are offered in the plotted but undeveloped Kenai Airport Industrial Park, which occupies presently-wooded land on Marathon Road, zoned light industrial. Others sit among greater development in the center of town. As of 2014, undeveloped city-owned commercial land (zoned mixed-use) included 31.13 acres in 11 parcels, having between them approximately 2,295 feet of street frontage on the Kenai Spur Highway and Bridge Access Road as they pass through central Kenai.

Real estate agent and Kenai Airport Commissioner Glenda Feeken said the city-owned land doesn’t compete with the private land markets for commercial and industrial space or influence lease rates in those markets.

“We’re not out competing to sell this land with the private individual,” Feeken said. “Occasionally someone wants to buy, and it goes out to bid. But it doesn’t compete with individuals selling their land or setting value on it.”

Airport reserve

On Sept. 6, 2006, the Kenai city council voted to designate the land immediately surrounding the airport as the airport reserve — giving it a legal requirement to be used for airport-related business and allowing it to be leased but never sold.

Consulting firm DOWL Engineering recommended creating the reserve after Kenai hired the firm in 2005 to create a plan for managing the airport lands and lease practices. A November 2005 Clarion article quotes DOWL project manager Tom Middendorf speaking on the subject at a Kenai Chamber of Commerce luncheon talk.

“You have a lot of land, but a lot of it is being, you might say, gobbled up by community development,” Middendorf said.

Knackstedt chaired the airport commission at the time. He said the reserve was meant to prevent the airport from being surrounded by development that would interfere with its function — a fate he said had been met by other municipal airports such as Anchorage’s Merill Field.

“The airport started out in kind of the back 40, a long ways away from all the other development,” Knackstedt said. “Development moved in and around the airport, and the airport essentially lost control. Even residential development near the airport, and the noise complaints began and whatnot. The airport started getting pushed out of the way. The reserve is a way to protect the airport from incompatible development near the airport.”

DOWL’s consulting work led to the ordinance passed in September 2006, which created the airport reserve and established a system for determining the value of the lots businesses leased on airport land both inside and outside the reserve: appraisals done every five years, with annual payments set at a negotiated percentage of the land’s appraised value. The ordinance passed, with council member Mike Boyle voting against it.

Though the reserve was created to hold exclusively airport-dedicated businesses, some pre-existing non-airport businesses found themselves within it: the Kenai Fabric Center and Ron’s Rent-it Center on the airport’s eastern edge, and Bargain Basement, Big Dipper Car Wash and Summit Cleaners on the airport’s southern edge where the reserve boundary came to the Kenai Spur Highway.

In January 2011 Bargain Basement’s parent company, Ma & Pa Alaskan Treasures, offered to buy the thrift store’s property from the city. In April the Kenai council approved the sale, citing an exception to the airport reserve sales prohibition for lessees whose agreements preceded the airport reserve and gave them purchase rights for the property.

The text of the ordinance making the sale to Bargain Basement notes that although the property’s lease, originally entered in 1970, doesn’t include purchase rights, “City employees made representations to the shareholders of Ma & Pa Alaskan Treasures that it had a right of purchase in its lease, upon which representations it claims to have relied.” Under these circumstances, the prohibition against sales of airport reserve land was waived.

Rents and land value

By that time, uneven change in the appraised value of their land was causing consternation for some lessees. In the case of the AlaskaLanes Bowling Alley, after the five-year appraisals were instituted its lease payments rose from the annual $18,360 in its 2003 lease agreement to $24,600 in 2008, and to $27,000 in 2013. The bowling alley had defaulted on its lease by August 2015, but for other businesses the 2015 appraisal (the period was adjusted to put appraisals on years ending in 5 and 0) brought rent increases as high as 174 percent.

For the non-airport businesses inside the airport reserve, unable to buy their land, Knackstedt and then-council member, now Kenai Mayor, Brian Gabriel introduced an ordinance in September 2016 to move the airport reserve boundary back from the Kenai Spur Highway, making possible the sale of nine properties — four undeveloped, and others including Big Dipper, Summit Cleaners and the Paisley Boutique.

Since that time, none of the business owners who left the airport reserve have made offers to purchase the land under their buildings. Business owners approached for this story did not respond or declined requests for interviews.

Council member Tim Navarre, who in past council discussions has advocated for sales of airport property, said though the political will exists to put lease land into private hands, other considerations make it harder.

“The main obstacle is how you arrive at a price,” Navarre said. “You want everything to succeed. That doesn’t mean you give the property away.”

Knackstedt and Gabriel’s ordinance put the price of the subject properties at 125 percent of their appraised value. In a previous Clarion interview, Don Moffis, who is negotiating the sale of the Big Dipper Car Wash on behalf of its owners Patrick and Mary Doyle, said it should be sold for only its assessed value.

At the August 7 council meeting in which the sales were discussed, Navarre unsuccessfully moved to lower the price to 120 percent of the appraised value. His own family businesses, including the Kenai Arby’s franchise, are in the downtown commercial area that was once part of the airport, though he said those properties passed into private hands long before his family bought them. He isn’t surprised no offers were made on the newly salable properties.

“It was too high priced,” Navarre said. “You’re not comparable to the private market.”

Knackstedt said 125 percent is “essentially just a number.”

“It could have been 130 percent, which we looked at,” Knackstedt said. “It could have been 120 percent. We chose 125 percent. It wasn’t like a big mathematical formula that zeroed it in, honestly.”

He cited the sale earlier in 2016 to entrepreneur Ronald Smith, made for 119 percent of the property’s assessed value, as an influence on his and Gabriel’s price-setting.

“The purpose of it was, not that it was the right number for every case, but it made it consistent amongst all those nine properties,” Knackstedt said. “Some (of the business owners) whom I have heard from said that it’s fair.”

Lease conditions

Inside the airport reserve, lessees are looking at other problems.

As of 2014, four undeveloped light-industrial lease lots sat adjacent to the airport with access both to taxiways and to North Willow Street. Two others sat opposite the airport on North Willow. Feeken said she believes prospective airport reserve lessees are being deterred from using these lots by a set of conditions that would go into effect at the end of a lease’s negotiated term. After this time passes, the code created by the 2006 ordinance makes extended lease time conditional on the lessee spending $25,000 on the property per year of additional leasing. It includes a scale allowing extensions from 5 to 35 years for investments of $100,000 to over $500,000.

Feeken said she hadn’t joined the airport commission until about 2008, but was still familiar with the airport reserve plan passed in 2006. She said the decision to tie lease extensions to money spent on the property was based on a practice used at large urban airports, where she said “if a lease comes up, there might be 14 people vying for that lease” — making the conditions an effective incentive for private industry to build airport-based assets.

“That is not something that works well with our airport,” Feeken said. “It’s harming us growing, because nobody in their right mind is going to get into a lease and have to put a million dollars in to get X amount of years. It makes no sense because we might have one person who wants that lease and nobody else. Whereas in Dallas (for example) if they make that stipulation it’s not going to slow anybody down, because they want that piece of property. We just don’t have that market.”

At a Dec. 8 joint worksession with the Airport Commission and the Kenai City Council, the commissioners, council members and city administrators who spoke seemed to hold similar views. Kenai city manager Rick Koch presented the problems lease-holders encounter at the end of their terms.

If a lease-holder chooses not to extend their lease, their options are to transfer the lease to the city along with the construction they built on it, or sell it to a new lease-holder. Although leases outside the reserve have fewer restrictions than those inside, Koch said they have a similar problem.

“There is no exit strategy at the end of those leases,” Koch said. “There is nothing that provides a defined mechanism by which the lease holder is able to get some or all of the value of their leasehold improvements at the end of the lease. It’s just over.”

When negotiating with prospective lessees, Koch said Kenai administrators are usually forced to waive many of the conditions by bringing the agreement for the Kenai City Council’s passage as non-code ordinances.

“When people come in to look for opportunities at the airport, without non-code ordinances, I don’t know that we’d have any leases,” Koch said.

Possible solutions may start to come before the Kenai City Council soon.

“One of the problems is we don’t have a clear policy,” Navarre said. “It’d be better if we had policy in place and then it was clear — here’s the procedures. I think that’s what you’ll see the council address next year: a plan for how we sell land.”

 

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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