UNITED STATES DEPARTMENT OF TRANSPORTATION
NOTICE OF INVESTIGATION
Notice is hereby given to the City of Venice, Florida (City), the operator of the Venice Municipal Airport (Airport), that the Federal Aviation Administration (FAA) has this date initiated an investigation, pursuant to 14 CFR Part 16(1) to ascertain the City's compliance with its Federal sponsor obligations. This investigation will examine various leases between the City and a non-aeronautical leaseholder, including lease history, lease terms and rental payments for non-aeronautical use on the Airport.
In accordance with Part 16, the FAA requests the City to file a response to this Notice within 30 days from the date of service and invites good faith efforts to resolve the matter. If this investigation establishes violations of Federal law and/or the City's grant assurances, then the FAA may issue a determination that the City is in noncompliance with its Federal sponsor obligations in its operation of the Airport. The City could be found ineligible to receive FAA grants, and ineligible to receive payments under existing FAA grants until this matter is resolved. Further sanctions, including a judicial order of enforcement, are also possible.
The Venice Municipal Airport was originally conveyed to the City of Venice from the United States government, acting by and through the War Assets Administration, via a quitclaim deed dated June 10, 1947 under the authority of the Surplus Property Act of 1944, as amended. Subsequent quitclaim deeds conveyed smaller adjacent parcels, facilities and equipment. By accepting the quitclaim deed, the City assumed certain restrictions that are imposed on the land indefinitely. Those restrictions require that the airport shall be used for public airport purposes, on reasonable terms, without unjust discrimination, and without granting any exclusive right on aeronautical services.
The City has accepted seven grants under the Airport Improvement Program (AIP) through the Airport and Airway Improvement Act of 1982, as amended, which was recodified by the FAA Reauthorization Act of 1994 into what is known today as Title 49 United States Code (USC) Subtitle VII, "Aviation Programs," Chapter 471, "Airport Development." The FAA issued these grants to the City of Venice under AIP for a total amount of $930,871.
Prior Lease Agreements
On March 4, 1958, the City entered into a lease with the Venice Golf Association, Inc., (VGA) for a term of 20 years with one 20-year option to renew based on performance at an annual rental rate of $1.00. For consideration of these terms, the lease required that VGA construct an 18-hole public golf course (including incidental structures and installations) and maintain all grass areas of the Airport. The City was responsible to pay all city taxes and assessments, if any, levied or assessed against the premises during the leasehold period. [1958 Lease, pares 13] Also the City was responsible to build and maintain access roads to the golf course. The lease required a minimum investment for improvements by VGA in the amount of $135,000.00. The lease stated, "Title to all improvements erected or constructed on the leased premises shall pass to the Landlord upon termination of this lease." [1958 Lease, para. 5]
On December 22, 1969, the City renegotiated the lease with VGA for a term of 25 years adding acreage for an expanded golf course. This lease declared, "All prior Lease Agreements, and any and all amendments thereto, between the CITY and the TENANT are superseded by this agreement and are therefore null and void." [December 1969 Lease, para. 1 ] This lease included a 25-year Tenant's option to "re-lease" subject to Tenant's full and faithful performance of the terms and conditions of the lease, and dictated an escalating rental rate of from 4% to 7% of the gross revenues derived from all operations of the golf course with the exception of the pro shop and dining facilities. The minimum rent was not to be less than $5,000.00 per year through 1975 and increased incrementally to $10,000.00 per year in 1994. This lease requires VGA. to "maintain the existing eighteen-hole golf course and maintain or replace in manner satisfactory to the [City] all other incidental structures and installations in good order and condition," build another 18-hole golf course and build a new clubhouse. The lease required a minimum investment for improvements by VGA in the amount of $225,000.00. Unlike the 1958 Lease, this lease stated that the VGA is responsible for. payment of all taxes levied on the premises. [December 1969 Lease, para. 15] According to the lease, the City renegotiated with VGA because the City completed a Master Development Plan for the airport and recognized that the 18-hole golf course required per the terms of the 1958 Lease was inadequate to serve the public.
On October 24, 1978, the City renegotiated the lease with VGA for a term of 25 years with one 5-year option to renew based on performance with the lease. The 1978 Lease is a "net lease" requiring the City to receive all rent free from any taxes, charges, assessments, impositions, expenses or deductions of any kind. [1978 Lease, para. 1] The rental rate was established at $41,250.00 per year with no escalation clause. The lease included language that stated that all permanent improvements shall revert to the City at the expiration of the lease. [1978 Lease, para. 6] This lease requires VGA to operate a 27-hole golf course,(2) operation of a pro shop, restaurant and rental of golf carts and equipment, [1978 Lease, para. 2] According to the lease, the City renegotiated with VGA to eliminate the ambiguities of the previous lease due to disagreements. over interpretation. [1979 Lease, p. 1 ] This lease also committed the City to construct and maintain the irrigation system for the golf course to use reclaimed water from the wastewater plant required by a "201 Plan." [1978 Lease, para. 28] Paragraph 28 states:
Lessor intends to utilize a portion of the Venice Airport property of which the demised premises are a part for the land spreading of effluent from Lessor's waste water treatment facility located nearby. Lessee shall make available unused open areas on the demised premises for storage of effluent and for holding ponds. To this end Lessor agrees at its expense to redesign and install a golf course irrigation system to specifications approved by Lessor's 201 Plan Consulting Engineers who will consult with Lessee to insure proper installation and coverage of Lessee's golf course which will accept the demised premises' pro rata portion of up to three million gallons per day of effluent from such waste water treatment facility at such time as said 201 Plan is implemented, and without cost to the Lessee for effluent consumption. Lessor shall pay the cost of delivering the effluent to the demised premises and thereafter Lessee shall bear all costs of maintenance and necessary repair. [1978 Lease, para. 28]
In 1984, the City of Venice received its first Federal Airport Improvement Program Grant for a master plan study, runway light rehabilitation, installation of apron lighting, installation of NAVAIDS and installation of runway visual guidance systems. These grants totaled $119,307 of Federal assistance from the Airport and Airways Trust Fund. [Grant History]
On September 29, 1988, the City renegotiated the lease with VGA for a term of 10 years with two 5-year options to renew based on performance with the lease. The net lease rental rate was established at $70,250.00 per year with an annual Consumer Price Index (CPI) adjustment The rental rate for the renewal option term was established at 12% of FMV. This lease required VGA to make certain improvements to the golf course including renovation and updating the clubhouse within the first year of the lease, stating:
... the Lessee shall complete the following improvements pursuant to the specifications agreed to between the Lessor and the Lessee:
a. Pave cart paths and rebuild bridges.
b. New public shelters on course.
c. New hole information signs.
d. Upgrade and remodel clubhouse and internal facilities.
e. Re-condition electric carts.
f. Re-condition pull carts.
g. Rebuild driving range tee. New markers. [1988 Lease, para. 5]
In addition,.... The Lessee shall immediately retain the services of a qualified golf course architect... [T]he architect shall give a written report with recommendations of improvements to:
a. Relocate No. 14 green and No. 15 tee to within lease area and eliminate conflict with airport clear zone.
b. Minimize impact of airport fence.
c. Improve drainage for low area on No. 17.
d. Improve the layout and playing condition of the course, particularly the third nine holes.
The Lessee shall make the improvements recommended by the architect... [1988 Lease, pares 6]
The 1988 Lease maintains the reversion of leasehold improvements to the City at the expiration of the term in 2008 or upon VGA's default. [1988 Lease, para. 15] The 1988 Lease also provided a right of first refusal, stating, "In the event the Lessor prior to the expiration of the current lease, receives a bona fide offer from a third party to lease the premises to commence at the conclusion of the current lease, or any extensions thereof, and the offer shall be satisfactory to Lessor, then provided the Lessee shall not be in default of the lease, the Lessor shall give Lessee the option to lease the premises on the same terms and conditions as the offer so made." [1988 Lease, para. 34] The 1988 Lease states:
It is understood that the leased premises are a municipal golf course. To this end the Lessee shall use its best efforts to provide a full range of public golfing activities including tournaments and instruction. (Use of powered golf carts shall not be mandatory.) Members of the public using the facility shall be treated fairly and courteously at all times. The Lessee shall provide a full-time qualified golf instructor for golf instruction to members of the public at rates not in excess of other area courses. [1988 Lease, para. 9)
Regarding the use of Airport property for a `municipal' golf course, the 1988 Lease further states that "The initial schedule of greens fees and other charges is attached hereto as Exhibit "D." Increases in such fees and charges shall not exceed seven percent (7%) per year unless the Lessee can demonstrate to the Lessor that further increases are necessary in order to receive a fair return on capital invested." [1988 Lease, para. 12]
In December 1992, the City and the VGA entered into an agreement to further govern their relationship regarding the irrigation of the airport property with effluent from municipal sources. This "Reclaimed Water Irrigation Agreement" stated, "The Lessee shall be entitled to an equitable adjustment in rent due the City if the City requires the golf course to use a volume of reclaimed water in excess of 0.40 mgd and such excess usage causes any one hole to be unplayable by reasonable standards for an excess of three (3) consecutive days." [1992 Irrigation Agreement, para. 12]
Office of Inspector General Audit
1. Develop and implement property management procedures consistent with FAA airport revenue accountability requirements.
2. Establish by independent appraisal the fair rental value of all airport property used for non-aviation purposes and either adjust rental amounts to fair rental value where possible or sell such land and deposit the proceeds into the airport fund.
3. Justify the need for federally donated airport land deeded to an inland waterway district for a dredging spoil area or revert the land to the City.
The FAA concurred with OIG's recommendations and sent letters dated July 28, 1993 and August 16,1993 to the City with our recommendations. Since then, numerous communications were transmitted between the FAA Orlando Airports District Office and the City of Venice regarding the progress and satisfaction of the audit recommendations.
The Bass Appraisal, dated July 22, 1998, concluded that the underlying land value of the VGA property was $1,000,000 and that the true net annual land rent was $80,000.
The Hettema Appraisal, dated August 7, 1998, stated, "the total fee simple market value of the subject property, as of August 1, 1998, was $2,300,000. According to a strict interpretation of the [1988 Lease], the rent would be 12% of this figure, or $276,000 per year." The appraiser concludes that this is an "excessively high rent." After making adjustments for undocumented lessee improvements and reducing the rental rate to 10%, the appraiser concludes, "This would create my estimate of the appropriate market rent for the subject property, as of October 1, 1998, the renewal date, of Two Hundred Thousand Dollars per year." [Hettema Appraisal, cover letter]
The FAA is concerned about the adequacy of support for either of the appraisals. The Bass Appraisal's conclusion of the net $80,000 annual rent is premised on a based land value, which deducts all improvements, including the golf holes. The Hettema Appraisal's conclusion of a $200,000 annual market rent does not appear to consider the circumstances of a lease extension beyond the time frame of the extant 1988 Lease or the apparent elimination of the 1988 Lease's right of first refusal provisions.(5)
Current Lease Agreement
Since the issuance of the Office of Inspector General (OIG) "Report on Audit of Airport Revenue Accountability" for the City (Report Number R4-FA-3-74) dated July 22, 1993, the FAA did not consider funding any projects at the Venice Municipal Airport until the City satisfied the recommendations of the audit. In 1999, the FAA was satisfied with the progress that the City was making in addressing the recommendations of the OIG audit, and thus issued an AIP grant in 1999. The FAA did not consider funding airport improvements in 2000 and 2001 under AIP at the Venice Municipal Airport since the City did not attain FMV rental on the renegotiated golf course lease, which was submitted to the FAA on October 7, 1999.
The FAA has worked with the City to come to informal resolution of these issues in order to ensure that the City operates the Airport according to its Federal obligations and consistent with the Federal taxpayers' interest in civil aviation. This has included several meetings and guidance as well as requests, for additional information regarding improvements to the golf course property made by the leaseholder that could be considered leasehold interest.
This Notice of Investigation is being issued because the FAA realizes that further informal efforts to resolve these issues are not likely to be successful.
Applicable Law and FAA Policy
The Federal role in developing civil aviation has been augmented by various legislative actions, which authorize programs for providing funds and other assistance to local communities for the development of airport facilities. In each such program, the airport sponsor assumes certain obligations, either by contract or by restrictive covenants in property deeds and conveyance instruments, to maintain and operate its airport facilities safely and efficiently and in accordance with specified conditions. Commitments assumed by airport sponsors in property conveyance or grant agreements are important factors in ensuring the traveling public reasonable access to the airport.
The City has entered into grant agreements with the FAA under the Airport Improvement Program (AIP) authorized by 49 USC § 47101 et seq. In applying for and accepting AIP grants, the City agreed to numerous conditions, in the form of grant assurances, relating to the operation of the Airport. The City has also accepted Federal land for the operation of the Airport. Thus the City assumed certain obligations to maintain and operate its Airport safely and efficiently and in accordance with the specified conditions.
The FAA has a statutory mandate, under 49 USC § 47122, to ensure that airport owners comply with these sponsor assurances. FAA's efforts to maintain airport sponsor compliance are designed to ensure the availability of a national system of safe and properly maintained public-use airports operated in a manner consistent with the airport owners' Federal obligations and the public's investment in civil aviation. The FAA does not control or direct the operation of airports; rather, it monitors the Administration of the valuable rights pledged by airport sponsors to the people of the United States in exchange for monetary grants and donations of Federal property to ensure that the public interest is being served.
As a general-rule, we note that the FAA Compliance Program is designed to achieve voluntary compliance with Federal. obligations. In addressing allegations of non-compliance, the FAA will make a determination as to whether an airport sponsor is currently in compliance with the applicable Federal obligations. FAA has to make a judgment of whether the sponsor is reasonably meeting the Federal obligations.(6) FAA can also take into consideration any action or program the sponsor has taken or implemented or proposed action or program the sponsor intends to take, which in FAA's judgment, is adequate to reasonably carry out the obligations under the grant assurances.(7)
Thus, FAA can take into consideration reasonable corrective actions by the sponsor as measures to resolve alleged or potential violations of applicable Federal obligations, and as measures that could prevent reoccurrence of non-compliance and ensure sponsor compliance in the future.
The Airport Sponsor Assurances
Assurance #24: Airport Fee and Rental Structure
Assurance 24, "Fee and Rental Structure," of the prescribed sponsor assurances satisfies the requirements of § 47107(a)(13). It provides, in pertinent part, that the sponsor of a Federally obligated airport agrees that it will maintain a fee and rental structure for the facilities and services being provided to airport users which will make the airport as self-sustaining as possible under the circumstances existing at the particular airport, taking into account such factors as the volume of traffic and economy of collection.
The Order states that the sponsor's obligation to make an airport available for public use does not preclude the owner from recovering the cost of providing the facility through fair and reasonable fees, rentals or other user charges which will make the airport as self-sustaining as possible under the circumstances existing at the particular airport.(8)
Assurance #25: Airport Revenues
Assurance 25, "Airport Revenues," of the standard prescribed sponsor assurances implements the provisions of the ARIA regarding the use of airport revenue, 49 USC §§ 47107(b) and 47133, and, in pertinent part, requires the sponsor of a federally obligated airport to ensure that:
all revenues generated by the airport and any local taxes on aviation fuel established after December 30, 1987, will be expended by it for the capital or operating costs of the airport; the local airport system; or other local facilities which are owned or operated by the owner or operator of the airport and directly and substantially related to the actual air transportation of passengers or property; or for noise mitigation purposes on or off the airport.
In response to 49 USC § 47107(1), the FAA issued the Policy and Procedures Concerning the Use of Airport Revenues [64 Fed. Reg., 7696, (Feb. 16, 1999)], which provides the Federal Aviation Administration's policy on the use of airport revenues:
Unlawful revenue diversion is the use of airport revenue for purposes other than the capital and operating costs of the airport, the local airport system, or other local facilities owned and operated by the airport owner or operator and directly and substantially related to the air transportation of passengers or property. [Section II (C)]
Issues for Investigation
Considering the above-stated circumstances and facts, the FAA identifies the following issues for investigation and/or resolution:
Opportunity to Respond
David L. Bennett
Date: NOV 6 2002
(1) FAA Rules of Practice for Federally-Assisted Airport Enforcement Proceedings, 14 L1FR § 16.1 et seq., 61 FR 53998, October 16,1996. See 14 CFR § 16.101.
(2) Per the terms of the previous leases, VGA was required to construct two 18-hole golf courses on the leased airport premises. The renegotiated lease changed VGA's obligation from being required to construct two 18-hole golf courses to being required to operate the presently constructed 27-hole golf course.
(3) Office of Inspector General (OIG) "Report on Audit of Airport Revenue Accountability" for the City (Report Number R4-FA-3-74) dated July 22, 1993.
(4) The Bass Appraisal is designated a "Limited Summary Appraisal." [Bass Appraisal, cover letter]
(5) As discussed above, according to the terms of the 1988 Lease, the golf-course improvements would revert to the Airport in 2008 and the City would consider bona-fide offers from third parties for leasing the property in 2008. [1988 Lease, paras. 15 and 34]
(6) FAA Order 5190.6A, Airport Compliance Requirements, issued October 2, 1989, provides the policies and procedures to be followed by the FAA in carrying out its legislatively mandated functions related to federally obligated airports' compliance with their sponsor assurances. See FAA Order 5190.6, Sec. 5-6.
(7) See FAA Order 5190.6, Sec.5-6
(8) See Order, §4-14(a),
(9) A golf course may benefit the aeronautical users of the Airport and the public's interest in civil aviation by producing revenue to offset operational costs to aeronautical users and capital costs to the Federal taxpayer. In this case, the potential benefit is inadequate under the City's current lease agreement with the VGA.
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on November 6, 2002, I caused to be placed in the United States mail (first class mail, postage paid) a true copy of the foregoing document addressed to:
FAA Part 16 Airport Proceedings Docket