Ground-Lease Reversion Risk: Why a Hangar Can Be Worth Less Than It Cost to Build

Abstract

1. Introduction

Few hangars sit on land the operator owns. The standard structure is a ground lease: the airport sponsor holds the land, the tenant builds and owns the hangar for a term of years, and at the end of that term the improvements vest in the sponsor. In the leases filed with the Securities and Exchange Commission by the only publicly traded hangar developer, that transfer occurs "without compensation to Lessee" (Metropolitan Washington Airports Authority and IAD Hangars LLC 2024, art. 7.C) and "at no cost" (City of Phoenix and DVT Hangars LLC 2022, sec. 18.5). The Airport Cooperative Research Program found reversion clauses in every airport ground lease it examined, and reported that the clause providing reversion at termination without compensation is the form most often used (National Academies of Sciences, Engineering, and Medicine 2024, 44).

That contract term, and not the steel, is the variable that decides what the building is worth to the party that paid for it. A hangar completed at a cost of ten million dollars on a lease with fifteen years to run is not a ten million dollar asset in the tenant's hands, and no amount of physical condition analysis will close the gap. The gap is not depreciation. It is the reversion.

Two things make this harder than it should be. The first is that the cost approach, which is the method practitioners reach for when a special-purpose building has thin market evidence, produces the value of the improvement as though the improvement were owned outright. Nothing in the standard sequence of reproduction cost less physical, functional and external obsolescence deducts for the fact that the interest being valued expires. The second is that the appraisal doctrine on leasehold value was written for a different problem. It holds that a leasehold position has value where contract rent sits below market rent, so that the tenant captures a rent differential. A tenant who built the building holds value in it whether the ground rent is favorable, at market, or above market, and the rent differential rule has no mechanism for saying so.

The result is a class of assets on which cost and value diverge systematically, in one direction, for a reason that is written into the lease and is knowable at the outset. This paper sets out that reason and quantifies it.

Section 2 describes the instrument and the three forms the reversion clause takes, with the operative language from four leases on the public record. Section 3 sets out the federal guidance on lease term and the useful life the same agency assumes for a building, and shows that the two do not meet. Section 4 derives the finite-horizon factor and reports where the value curve bends. Section 5 addresses the appraisal doctrine and where it stops. Section 6 assembles three independent bodies of practice that already price the decay, and reports what the published relativity graphs embed. Section 7 addresses federal cost recovery, which moves against the taxpayer rather than with the economics. Section 8 addresses renewal, which is an assumption rather than a fact. Section 9 reports the statutory limits on term. Section 10 sets out what a reversion analysis requires. The theory of why a sponsor is positioned to price a renewal at the top of the bargaining range is developed separately in Carter (2026a); this paper takes the contract as written and asks what it is worth.

2. The Instrument and the Clause

2.1 What the tenant owns

A ground lease divides the fee into a present possessory interest for a term of years and a future interest in the reversion. The Airport Cooperative Research Program states the common law position directly: "When an owner of a property enters into a lease, the Lessor's fee estate separates into two parts, the Lessee receives a present interest in the premises for the term of the lease (the leasehold estate) and the Lessor retains a future interest in the fee estate with a right of possession at the termination of the lease (the reversion). ... At common law, when the leased estate reverted to the Lessor, it carried along with it all of the leasehold improvements made by the Lessee" (National Academies of Sciences, Engineering, and Medicine 2024, 44).

Modern airport leases do not leave that to the common law. They allocate ownership of the improvements to the tenant during the term, which preserves the tenant's depreciation deductions and its ability to grant a leasehold mortgage, and then transfer title at expiration. The digest reports that the clauses "generally provide that all improvements made under the lease remain the property of the Lessee for the lease term so that the Lessee may take full advantage of all of the available tax benefits," and that "at the conclusion of the lease the improvements become the Lessor's property" (National Academies of Sciences, Engineering, and Medicine 2024, 45).

The tenant therefore owns a building it cannot move, cannot repurpose off the airport, and cannot keep. Ground lease terms at airports run typically from 15 to 50 years (National Academies of Sciences, Engineering, and Medicine 2024, 33).

2.2 The three reversion clauses

The digest's taxonomy is useful because the three forms are not economically equivalent. It identifies "three kinds of reversion clauses used by airports: (1) a simple and straightforward reversion at termination without compensation; (2) a reversion at termination with compensation; and (3) a more complex clause that allows the airport to accept or reject the reversion at termination and, if rejected, to require removal of any structures or improvements and the restoration of the premises. The first type of reversion clause is the most common" (National Academies of Sciences, Engineering, and Medicine 2024, 45).

Type one sets the tenant's terminal value at zero. Type two sets it at whatever the compensation formula produces. Type three sets it at zero or below zero, because a landlord election to require removal converts the terminal position into a cash cost. Those are three different assets, and an analysis that does not read which one is in front of it has not started.

The digest also records how tenants experience the clause. A lessee objecting to reversion argues that its investment "will have no value (or a negative value if restoration of the premises is required) at the end of the term unless the Lessee is able to enter into a new lease in competition with other bidders," a position one fixed base operator described as "being forced to buy back its own business" (National Academies of Sciences, Engineering, and Medicine 2024, 45 n.). The takings framing that sometimes accompanies the objection does not survive contact with the authorities, since the clause is a negotiated term of a contract with a government entity acting in its proprietary rather than its sovereign capacity (National Academies of Sciences, Engineering, and Medicine 2024, 45 n.).

One behavioral detail in the digest deserves attention from anyone valuing these assets. Its negotiation checklist asks whether the lease contains "a separate signature line or initials box for the Lessee to acknowledge the presence of the reversion provision," and notes that one large airport places the reversion clause at the beginning of its commercial leases (National Academies of Sciences, Engineering, and Medicine 2024, 45). A drafting recommendation of that kind is written because practitioners observe tenants signing without pricing the clause. Where that happens, the correction arrives later, from a lender or a buyer, and it arrives as a discount.

2.3 What the filed leases say

Four airport ground leases are on the public record as exhibits to filings by Sky Harbour Group Corporation, which develops and operates home-basing hangar campuses. They are useful because they are executed instruments at four airports in four states, negotiated by a counterparty with institutional capital and counsel.

At Washington Dulles International Airport, the surrender article provides that "all Improvements, including any alterations, additions and fixtures thereto, on the Premises at the expiration of the Term or sooner termination of this Lease shall, without compensation to Lessee, become Lessor's property," and adds that the lessor "at Lessor's sole option and election ... may require that Lessee remove some or all Improvements installed or constructed upon the Premises and return the Premises, in whole or in part, to the condition that existed on the Lease Commencement Date, at Lessee's sole cost and expense" (Metropolitan Washington Airports Authority and IAD Hangars LLC 2024, art. 7.C). That is the digest's type three: no compensation, plus a unilateral election that can make the terminal position negative. The term ends 31 March 2074, with one renewal option of ten years at the greater of contract rent or fair market rent determined by appraisal.

At Phoenix Deer Valley Airport the lease runs forty years and states that it "does not contain an option to renew or extend the Term" (City of Phoenix and DVT Hangars LLC 2022, sec. 4.1). Title to the tenant improvements "shall be automatically transferred and conveyed to Landlord at no cost, unless Landlord refuses to accept title," and must pass "free and clear of all claims, liens, encumbrances, and security interests and at no cost to Landlord" (sec. 18.5).

The Deer Valley lease shows what reversion is worth more directly than the others, because the same document prices the improvements in one circumstance and not in the other. If the landlord terminates early for airport safety, efficiency or master plan development, it "shall reimburse Tenant for its unamortized, actual investment in the Tenant Improvements as of the termination date," capped at $15,300,000 for the first phase, with the unamortized amount "calculated in accordance with a thirty (30)-year straight-line depreciation schedule" (sec. 5.2). Taken back early for the landlord's convenience, the hangar is worth its unamortized book cost. Handed back at the natural expiry of a forty year term, the same hangar is worth nothing to the tenant. The compensation formula also amortizes over thirty years against a forty year term, so even the priced case retires the tenant's investment ten years before the lease ends.

At Chicago Executive Airport the lease runs fifty years and provides that the lessee owns the improvements "until the end of this Lease, at which time title to the Improvements shall automatically vest in the Lessor," with the lessor able to direct removal of all or any portion of them instead (Chicago Executive Airport and PWK Hangars LLC 2024, sec. 9). At Centennial Airport the improvements "shall become the absolute property of Sublessor on the expiration or termination of this Sublease," excepting trade fixtures and personal property (Sunborne XVI, Ltd. and APA Hangars LLC 2020, sec. 5.6).

Four leases, four states, four sponsors, and in each case the building passes to the landlord at the end of the term for nothing.

3. The Regulator's Own Arithmetic

3.1 Thirty to thirty-five years

Federal guidance on lease term at obligated airports sits in one paragraph of the Airport Compliance Manual. Reviewing the adequacy of an aeronautical lease, the order asks: "Does the term exceed a period of years that is reasonably necessary to amortize a tenant's investment? Does the lease provide for multiple options to the term with no increased compensation to the airport sponsor? Most tenant ground leases of 30 to 35 years are sufficient to retire a tenant's initial financing and provide a reasonable return for the tenant's development of major facilities. Leases that exceed 50 years may be considered a disposal of the property because it likely exceeds the useful life of the structures erected on the property. ... The Region or ADO should not consent to proposed lease terms that exceed 50 years" (Federal Aviation Administration 2026a, para. 12.3.b(3)).

Three features of that paragraph matter. It is written from the sponsor's side, prompting the reviewer to notice renewal options that carry no additional compensation to the sponsor. It is advisory rather than mandatory, using "should not consent" and directed at agency field offices rather than at sponsors, and the same chapter records that the agency "does not approve leases, nor does it endorse or become a party to the lease agreements" (Federal Aviation Administration 2026a, para. 12.4). And the 50 year figure is a disposal trigger rather than a term limit as such, resting on the premise that a term of that length exceeds the life of the building.

The research literature the agency itself relies on states the trade-off the term is meant to resolve: "Best practices for leasing and developing airport property include reversion of improvements back to the airport sponsor at the termination of the lease. Therefore, the lease must be long enough for the developer to be able to amortize the investment the company makes in improvements, but not so long as to unnecessarily restrict the options available to the sponsor to develop and improve the airport in the future" (Transportation Research Board 2011, 72 to 73, quoted in Feliciano and Yellow Hangar LLC v. Puerto Rico Ports Authority 2025, 14 n.8). Amortizing the investment and compensating the tenant for the residual are different objectives, and the guidance pursues only the first.

Administrative decisions have read the 30 to 35 year language narrowly. Denying a complaint by hangar tenants who argued that a 20 year initial term was too short to amortize their investment, the agency held that the figure "is a best practice recommendation left to the discretion of the airport sponsor," established "to give airport sponsors latitude to attract long term tenants to the airport while also retaining required rights and powers over airport property," and that "[l]ease terms less than 30-35 years are not a violation of Grant Assurance 38" (Hankins and Plyler v. North Texas Regional Airport 2020). A more recent determination reached the same conclusion: the assurance "does not define a specific timeframe for a long-term lease or how long it is required for a reasonable return on a tenant's investment," and the manual's language "does not suggest that a 30-to-35-year lease is necessary for compliance" (Feliciano and Yellow Hangar LLC v. Puerto Rico Ports Authority 2025, 15 to 16).

Grant Assurance 38 itself is thin. Where a sponsor and an aircraft owner agree that a hangar will be built at the owner's expense, the sponsor "will grant to the aircraft owner for the hangar a long term lease that is subject to such terms and conditions on the hangar as the airport owner or operator may impose" (49 U.S.C. 47107(a)(21)). It sets no duration, no amortization standard and no compensation requirement, and it does not define "long term" at all.

3.2 A forty-year building

The same agency publishes the useful life it assumes for a building. The Airport Improvement Program Handbook sets minimum useful lives for grant funded work, and assigns buildings a life of 40 years against 20 years for construction projects generally and an unlimited life for land (Federal Aviation Administration 2019, table 3-7). The compliance manual cross-references that table for the meaning of useful life (Federal Aviation Administration 2026a, para. 4.4).

Put the two provisions next to each other and the gap is arithmetic rather than interpretive.

Source: Federal Aviation Administration (2019, 2026a); National Academies of Sciences, Engineering, and Medicine (2024, table 1), reporting a sponsor leasing policy.

A hangar handed back at the end of a 30 year lease still has a quarter of its federally assumed life in front of it. The sponsor receives that residual for nothing. A hangar handed back at the end of a 35 year lease still has an eighth. The recommended term and the assumed life do not meet, and the difference is the sponsor's.

The guidance also runs in the other direction where federal money is involved. Where a sponsor seeks a grant for work on leased land, "the lease term generally must exceed the useful life of the anticipated project," and good title may be established by "a lease with a term that is at least as long as the useful life of the project" (Federal Aviation Administration 2026a, ch. 6). The agency requires term to outrun useful life when it is protecting a federal investment, and recommends term inside useful life when the investment is the tenant's.

3.3 What the guidance does not contain

The federal apparatus on this subject is smaller than its reputation. Neither of the advisory circulars practitioners reach for addresses the question at all: the minimum standards circular contains no lease term guidance and no reference to amortization, reversion or useful life (Federal Aviation Administration 2023), and the exclusive rights circular contains none either (Federal Aviation Administration 2007). A state aviation guide restates the federal position and then adds a formula, advising that a reasonable ground lease term is "the number of years required to amortize the investment plus 10 years to provide a reasonable rate of return" (Georgia Department of Transportation 2024, 13). The guide attributes that formula to the Federal Aviation Administration. It does not appear in the compliance order, in the grant handbook, or anywhere else in the federal guidance located for this paper.

That is worth more than a footnote, because it is how an unwritten rule acquires the appearance of a written one. A state agency publishes a plain, sensible, quotable formula and attributes it upward; sponsors and tenants across the state then negotiate against what they believe is a federal standard. The formula may be good practice. It is not federal guidance, and anyone relying on it as such is relying on a misattribution.

So the entire federal treatment of lease term and reversion rests on one paragraph of an internal compliance order and one row of a grant handbook table. That is worth stating plainly, because it explains why practice varies so widely and why the analysis has to be done lease by lease.

4. Why Cost Is Not Value

4.1 The missing deduction

The cost approach estimates the value of an improvement as the cost to reproduce or replace it, less accrued depreciation from physical deterioration, functional obsolescence and external obsolescence. It is the approach most often applied to hangars, because hangars are special purpose buildings with thin sale evidence, a difficulty the appraisal literature on the property type has identified since it was first treated at length (Lindsey 2008a, 2008b), and one visible in the dispersion of reported per square foot figures (Carter 2026b).

The sequence produces the value of the improvement considered as property. It does not produce the value of a terminable interest in that improvement. Nothing in physical deterioration, functional obsolescence or external obsolescence captures the fact that the holder's interest ends on a date certain and that nothing is received on that date. A hangar in excellent condition, ideally configured for the aircraft based at the field, at an airport with a waiting list, can be subject to a lease with eleven years to run. Every conventional deduction is small. The interest is still worth a fraction of the number the approach produced.

The deduction that is missing is not a form of obsolescence. It is a discounting problem, and it has a closed form.

4.2 The finite-horizon factor

Let the improvement generate net income I in the first year, growing at rate g, and let r be the rate at which a buyer of the interest discounts that income. An interest of unlimited duration is worth I divided by (r minus g). An interest that ends after N years with no terminal payment is worth that same quantity multiplied by a factor that depends only on N and on the net discount rate:

factor = 1 minus [(1 + g) / (1 + r)]^N

The factor is the share of perpetual value that survives the finite horizon. It is the same quantity the English enfranchisement market calls relativity, computed rather than observed. Table 2 reports it across the range of terms encountered in hangar work, under three combinations of discount rate and rent growth that bracket ordinary real estate assumptions.

Source: Author's computation from the finite-horizon factor stated above.

Three results follow, and none of them depends on any assumption beyond the discount rate and the growth rate.

First, at long terms the reversion costs little. A claim with 40 years to run retains roughly 85 to 94 percent of perpetual value. This is why long-dated leasehold hangars trade close to comparable fee assets and why practitioners who work only at that end of the market can go years without meeting the problem.

Second, the decay is convex. The curve is nearly flat from 50 years to 35 and then steepens without interruption. The percentage of remaining value given up over a five year period rises from 3.8 percent at 40 years to 10.5 percent at 25, 15.6 percent at 20 and 24.5 percent at 15. An owner holding a hangar on a lease with 15 years left is surrendering about a quarter of the asset's value every five years simply by holding it, before any consideration of physical condition or market rent.

Third, a higher discount rate flattens the curve rather than steepening it. This is the result that most often surprises, and it matters because it is the reason the published English relativity graphs cannot be borrowed for hangar work. Section 6.4 returns to it.

One caution about what the factor is. It is a floor on the shape rather than a complete account of it. A second source of curvature exists in the option to redevelop, which a finite lease truncates and which is worth more the longer the term (Capozza and Sick 1991; Dale-Johnson 2001). A ground-leased hangar carries less of that option than an urban site does, because the use is fixed by the lease and by the airport's own land use controls, but it is not zero where the parcel could support a larger or better configured building. An analyst who computes the factor and stops has measured the arithmetic of the horizon and not the value of what the horizon forecloses.

4.3 Cost against value

Apply the factor to a cost estimate and the title of this paper becomes arithmetic. Take a hangar whose depreciated replacement cost is ten million dollars, generating income that supports that figure at a discount rate of 9 percent and rent growth of 3 percent. Table 2 gives the value of the tenant's interest at each remaining term.

With 40 years remaining, the interest is worth approximately $8.96 million. With 30 years, $8.17 million. With 20 years, $6.78 million. With 15 years, $5.72 million. With 10 years, $4.32 million. The hangar is physically identical in every case.

A building completed this year on a thirty year lease is therefore worth about 82 percent of its depreciated cost on the day the certificate of occupancy issues, before any consideration of whether it was built efficiently, whether the rent is at market, or whether the developer earned a profit. A developer can still make money, because development margin comes from the spread between cost and stabilized value in the market, not from the factor. But an owner carrying the asset at cost is carrying it above value, and the discrepancy widens every year.

Two qualifications belong with the arithmetic. The factor applies to the income the improvement generates, so it is a like-for-like comparison against the value of the same income stream held without a horizon, not against the value of a fee position that also includes land. And the factor assumes the terminal payment is zero, which is what a type one reversion clause provides. Where a lease provides compensation, the terminal payment enters the calculation at its contractual amount and the factor rises accordingly. Where a lease reserves a landlord election to require removal, the terminal payment is negative and the factor falls below the table.

5. The Doctrine That Does Not Reach the Case

5.1 The rent differential rule

The orthodox treatment of leasehold value in appraisal practice holds that the leasehold position carries value where contract rent is below market rent, so that the tenant holds the right to occupy at a discount, and that the value of the position is the present worth of that differential over the remaining term. The rule is usually stated with conditions attached: the lease must be assignable or sublettable, the remaining term must be long enough for the differential to be worth something, and the tenant must be able to relocate. A corollary is that where contract rent exceeds market rent the leasehold position carries a penalty rather than a value. The rule and the definitions it rests on are set out in the profession's standard texts (Appraisal Institute 2026a, 2026b).

The rule is sound for the case it was written for, which is a tenant occupying space in a building someone else owns. It produces the right answer for an office tenant with eight years left on a below-market lease. Recent appraisal literature restates it in the same terms, holding that the value of a leasehold interest is developed by capitalizing or discounting the tenant's profit, and that rates for a leasehold interest should be derived from leasehold transactions (Tellatin et al. 2023).

5.2 Tenant-owned improvements break it

A tenant who built the building is not in that position. Its value in the asset does not arise from a favorable rent. It arises from having paid for a structure it is entitled to use and to receive income from for a term of years. If ground rent were struck at exactly market on the day of valuation, the rent differential would be zero and the rule would return a leasehold value of zero, while the tenant holds a ten million dollar hangar and a stream of tenant rents for as long as the lease runs. The rule does not merely understate the value. It is silent on it.

The practitioner literature that addresses ground leases directly recognizes the gap. One treatment measures the income to leasehold improvements as the net operating income attributable to the improvements less the ground rent, notes that at expiry "any leasehold improvements will revert to the underlying land owner," and instructs that the analysis consider the remaining term of the ground lease, the economics of the lease, the quality of the improvements, marketability and financing concerns, and "the lack of any reversionary benefits" (Richard 2018). Another notes that the surrender clause, "whether improvements revert, are removed, or must be demolished, can significantly shift value" (Colorito 2026). Both are trade publications rather than standards.

At the standards level there is a gap. The Appraisal Institute publishes Guide Notes addressing a range of assignment types; none of the current Guide Notes addresses leasehold interests, ground leases, partial interests or tenant-owned improvements (Appraisal Institute 2025). The relevant obligation under the Uniform Standards of Professional Appraisal Practice is the general one to identify the real property interest and the rights to be appraised, which tells an appraiser to state the problem correctly without telling anyone how to solve this one (Appraisal Standards Board 2024, Standards Rule 1-2(e)). A paper on the problem of ground leases in the profession's own journal addresses rent reset disputes rather than reversion (Whalen 2023).

That absence is itself the finding. The property interest at issue here is common enough to have generated a settled federal policy on lease term, a published legal digest, and a class of institutional assets, and it has no treatment at the level of professional guidance.

One body of law does have a mechanism, and the contrast is instructive rather than comforting. In a federal taking the rules do not leave a tenant-built improvement unvalued. The uniform relocation regulations provide that a tenant-owned improvement is valued at the greater of its contribution to the value of the whole property or its salvage value where the tenant has the right or obligation to remove it (49 C.F.R. 24.105). The federal appraisal standards direct that the whole property be valued as though unencumbered and the award then apportioned among the interests, and that the apportionment follows the lease (Interagency Land Acquisition Conference 2016, secs. 1.2.7.3.2 and 4.2.2.1). So the undivided fee rule does not extinguish the tenant's claim; it defers it to a second step.

The second step is where the hangar tenant loses, and it loses for the same reason it loses at expiry. Apportionment follows the contract. A lease under which improvements vest in the sponsor without compensation, and under which the tenant has no right to remove, hands the condemnation award to the sponsor through the same clause that hands it the building at the end of the term. The Supreme Court settled the general principle long ago: a tenant's compensation in a taking is measured by what the lease gives it, and where the lease provides that improvements pass to the landlord the tenant takes nothing for them (United States v. Petty Motor Co. 1946).

The distinction matters for how this paper's claim should be read. It is not that the law has overlooked tenant-built improvements. Both the appraisal doctrine and the condemnation rules have a place for them. It is that the lease term does the work in both settings, and a valuation that reads the lease for the rent and not for the surrender clause will be wrong in the same direction whether the interest is sold, refinanced or taken.

5.3 A title insurance form gets it right

A national statement that a tenant's improvements are a value component separate from and additional to any rent differential does exist, and it comes from the title industry. The ALTA leasehold endorsements define the insured's loss as "the value for the Remaining Lease Term of the Leasehold Estate and any Tenant Leasehold Improvements existing on the date of the Eviction," and provide that the insured "shall have the right to have the Leasehold Estate and the Tenant Leasehold Improvements valued either as a whole or separately," with the determination taking "into account rent no longer required to be paid for the Remaining Lease Term" (American Land Title Association 2012a, 2012b, sec. 2).

The forms define tenant leasehold improvements as "[t]hose improvements, including landscaping, required or permitted to be built on the Land by the Lease that have been built at the Insured's expense or in which the Insured has an interest greater than the right to possession during the Lease Term," and define lease term to include a renewal or extension only where a valid option is contained in the lease (American Land Title Association 2012a, sec. 1).

Three elements of the appraisal problem are settled in that language. The improvements are a separate component of value. The rent differential is an adjustment to the computation rather than the whole of it. And the measurement period is the remaining lease term, with options counted only where the tenant holds them. A standard form drafted to pay claims has the structure that the valuation doctrine lacks.

6. Three Independent Confirmations

The finite-horizon result is not a position one has to take on faith. Three bodies of practice, developed for unrelated purposes, already treat a tenant-built improvement on leased land as an asset whose life ends with the lease.

6.1 Lease accounting

Generally accepted accounting principles resolved this question years ago. Leasehold improvements "shall be amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term," unless ownership transfers to the lessee or the lessee is reasonably certain to exercise a purchase option (Financial Accounting Standards Board 2016, ASC 842-20-35-12). A subsequent amendment modified the treatment for leases between entities under common control, requiring amortization over the useful life to the common control group (Financial Accounting Standards Board 2023). Where the expected lease term shortens, the change is treated as a change in accounting estimate applied prospectively, which accelerates the annual charge as expiry approaches (ASC 250-10-45-17).

Accounting therefore does two things the cost approach does not. It caps the asset's life at the lease term, and it steepens the charge as the term runs down, which is the accounting analogue of the convexity in Table 2.

The practice is visible in the filings of the operator whose leases are quoted in Section 2.3. Its stated policy is to depreciate a completed campus "on a straight-line basis over the lesser of the life of the asset or the remaining term of the related ground lease, including expected renewal terms" (Sky Harbour Group 2026a). An asset depreciated to zero over the lease term is an asset the preparer expects to be worth nothing at the end of it.

What the same filings do not do is name the risk. The words "revert" and "reversion" appear nowhere in the annual report for 2025 or the quarterly report for the period ended 30 June 2026, although the leases filed as exhibits to those same filings provide for reversion in terms. The narrative risk factors describe the adjacent facts without the word: airport authorities "may choose not to renew a lease at all or to only renew the lease on terms that are unfavorable to us"; "[a]t the conclusion of a lease, airport authorities may require us to participate in a bidding process to renew a lease"; ground leases "may be subject to competitive bidding at the end of their term"; and because the sites are not owned, the company "may not be able to sell underlying real estate assets in order to meet liquidity requirements" (Sky Harbour Group 2026a). An allocator reading the narrative disclosure alone would not learn that the buildings pass to the landlord for nothing, and would have to read the lease exhibits to find it.

There is a fourth confirmation, and it is the only one written from the sponsor's side of the transaction. GASB Statement 94 governs public-private and public-public partnership arrangements, which is what a ground lease under which a private party builds and operates a facility on public land is. Under it the sponsor recognises the underlying asset the operator builds as its own capital asset, measured at acquisition value, and recognises a corresponding deferred inflow of resources that it then recognises as revenue over the term of the arrangement.

Read against Section 4, that is the same transaction seen from the other end. The tenant's finite-horizon factor is the share of perpetual value that survives its own reversion. The sponsor's deferred inflow is the mirror image: a balance that starts at the acquisition value of the building on the day it opens and is earned into income over exactly the years the tenant is amortising it toward zero. Two sets of accounts, prepared under different standards for different parties, describe the same transfer in opposite directions.

What makes this the strongest of the four confirmations is that the sponsor books the asset at the outset rather than at expiry. The building is on the sponsor's balance sheet, at value, from the day it is completed. Nothing in the tenant's own accounts, and nothing in a cost-approach appraisal of the tenant's interest, records the corresponding claim.

6.2 Credit standards

Lenders price the horizon explicitly, and have done so long enough for the requirements to be written into published guides. There is no single industry rule. There are several, and they differ by an order of magnitude depending on the channel and the structure.

Source: Fannie Mae (2026); Freddie Mac (2026); Stein (2024).

Two features of the multifamily standard transfer directly to airport work. The requirement scales with the lender's exposure at maturity, which is why a fully amortizing loan needs ten years of cushion and a loan with a balloon needs twenty or thirty. And renewal options do not count unless the borrower controls them: "[r]enewal options that are at the sole discretion of the landlord under the ground lease ... even if the Ground Lessor is controlled by or under common control with the Borrower, may not be considered part of the ground lease term for purposes of satisfying the ground lease term requirements" (Freddie Mac 2026, ch. 30).

The consequence for hangar finance is a threshold effect rather than a gradual tightening. As remaining term falls toward the sum of a lender's maximum loan term and its required cushion, the pool of lenders thins, then the pool of buyers thins with it, because a buyer who cannot finance must pay cash. The financing question is treated at length in Carter (2026c). For valuation purposes the point is narrower: at some remaining term the discount rate applicable to the interest rises, which lowers the factor in Table 2 further, and the two effects compound.

Airport practice has not kept up with this. The legal digest reports that some lenders prefer debt on an airport ground lease to be retired at least five years before the end of the lease, and then records that "none of the airport leases reviewed for this digest contained such a provision" (National Academies of Sciences, Engineering, and Medicine 2024, 10).

6.3 The leasehold discount literature

The third confirmation is empirical, and it comes from housing markets where leasehold and freehold titles trade side by side. Using the universe of residential transactions in England, Wales and Singapore, Giglio, Maggiori and Stroebel (2015) find that "100-year leaseholds are valued 10-15% less than otherwise identical freeholds," that leases of 125 to 150 years trade 5 to 8 percent below freehold, and that the discount vanishes beyond about 700 years. Their benchmark calculation is the one that matters for hangar work: under a conventional constant discount rate, "even with a conservative rate of return of 6.5% and optimistic rent growth of 2% the price discount of 100-year leaseholds relative to freeholds should be at most 1%," against 10 to 15 percent in the data.

Bracke, Pinchbeck and Wyatt (2018) estimate the same relationship on English transactions from 1987 to 1992, chosen to predate the statutory right to extend, and find implied discount rates "around 5-6%" on very short leases falling to "close to 3%" near 100 years. They also state the gap between the empirics and professional practice directly. In the working paper version the authors write that "[t]ribunals assume a 1% price difference between a long leasehold and a freehold whereas our historical results imply much greater differences" (Bracke, Pinchbeck, and Wyatt 2016), and the published article records that "the shape of the curve we fit diverges substantially from the curves in common use by practitioners."

Two further studies establish the magnitude in institutional settings closer to an airport ground lease. Gautier and van Vuuren (2019) examine Amsterdam, where privately owned land coexists with municipal ground leases, and find properties on owned land command a premium of 11 to 13 percent over equivalent properties on leases with payments still running, with each year free of ground lease payment worth about 0.2 percent of price and an implied discount rate near 4 percent. That is the closest institutional analogue in the literature to an airport ground lease: a public ground lessor, periodic rent resets, and privately financed improvements on public land. Fesselmeyer, Liu and Salvo (2022) find in Singapore that "a freehold property typically sells for 15 to 20 per cent more than a 99 year leasehold property," with discount rates of 2.5 to 4 percent over the first century falling to 0.5 to 1.5 percent by the fourth.

A Swedish study frequently cited in this context requires care. Caesar, Donner and Kopsch (2019) find that "apartment prices are found to increase with 0.22% for each additional year that remains until renegotiation of the lease contract," and report a leasehold discount of 2.3 percent overall with 4.2 percent depreciation at renegotiation. The Swedish tomtratt is a perpetual lease with a periodic ground rent reset, so what is being priced is proximity to a rent reset, not proximity to reversion. It is evidence on reset risk, which airport leases also carry, and not evidence on terminal value.

The common finding across this literature is that markets price finite horizons more steeply than conventional valuation practice assumes. One table in that literature deserves to be reported rather than cited, because it is the cleanest measurement of the decay available anywhere. Bracke, Pinchbeck, and Wyatt (2018, tbl. 4, 1837) set their own Prime Central London estimates beside the England and Wales coefficients on 1.37 million transactions: leaseholds with 80 to 99 years remaining trade 17.6 percent below freehold in the national sample and 10.5 percent below in the London sample, falling to 11.0 and 8.0 percent at 100 to 124 years, 8.9 and 4.3 percent at 125 to 149, and 3.3 and 3.7 percent at 150 to 300. A newer hedonic study of about five million Land Registry transactions between 2000 and 2025 reports a baseline leasehold discount of 17.33 percent, widening after 2016 (Gugnani 2026); that figure is a tenure indicator rather than a term structure and part of it reflects building-safety risk that has no hangar analogue, so it is reported here as corroboration of direction rather than of magnitude.

The common limitation is that all of it is residential and all of it concerns dwellings the leaseholder did not construct as a separate capital asset. Section 6.5 takes up the one commercial estimate.

6.4 What the relativity graphs embed

English enfranchisement valuation uses published graphs that state the value of a leasehold with a given unexpired term as a percentage of freehold value. Two are in general use. Their figures are set out in Table 4, together with the net discount rate that reproduces each figure through the factor in Section 4.2.

Source: Clark (2020) for the Gerald Eve graph and Savills (2016) for both Savills columns; implied rates are the author's computation from the enfranchiseable figures.

The third column of Savills figures is the one closest to the hangar case and it is the one practitioners rarely quote. It is the curve for a leasehold with no statutory right to extend or enfranchise. A hangar tenant has no such right either: there is no aviation analogue to the English extension statutes, and the sponsor is under no obligation to renew. On that curve a 20-year unexpired term is worth 39.2 percent of the unencumbered value rather than 49.0, and a 30-year term 51.5 percent rather than 61.4. The gap between the two Savills columns is the price the English market puts on a statutory right the hangar tenant does not have.

One structural caution goes with all three columns. The fitted curves do not reach zero. Savills' unenfranchiseable curve still shows roughly a tenth of freehold value at nil unexpired term, because an English leaseholder at expiry retains rights a hangar tenant does not. The instrument this paper is about goes to a contractual zero. No relativity graph in use describes that, which is a reason to compute the factor rather than to read it off a chart.

The implied rates are informative in two ways. They are close to flat across the term structure, in the range of 2.3 to 3.4 percent, which is to say the practitioner graphs used in the English market are approximately consistent with the low long-run discount rates the academic literature estimates from transaction data. Practitioners and econometricians who have disagreed publicly about method are, on this measure, not far apart on magnitude.

They are also nowhere near a hangar. A required return of 2.3 to 3.4 percent net of growth is a residential owner-occupier's implicit rate on a dwelling. An investor in a special purpose commercial building with a single possible counterparty and no established sale market prices at a spread of several hundred basis points above that. Reading Table 4 against Table 2 shows what follows: at 20 years unexpired, the English graphs give 36 to 49 percent of freehold value, while the hangar arithmetic gives 61 to 76 percent of an equivalent perpetual claim. The graphs are not a conservative version of the same answer. They are a different answer to a different question, and importing them into hangar work would overstate the discount by a wide margin at every term.

Several further limitations attach to the graphs. They are residential and confined to prime central London. They assume nominal ground rents, where an airport ground lease carries a real and escalating rent. They embed the English statutory framework, including marriage value below 80 years unexpired, which has no American analogue. The Upper Tribunal declined to endorse either graph, holding that "there is reason to believe that the relativities shown by these two graphs are higher than appropriate for the market which existed at the valuation dates," and rejected the competing regression model advanced in that case as unworkable (Trustees of the Sloane Stanley Estate v. Mundy 2016, para. 153; aff'd Mundy v. Trustees of the Sloane Stanley Estate 2018). The Royal Institution of Chartered Surveyors has withdrawn its 2015 guidance on the subject. They support two narrow propositions and no others: that a mature leasehold market has settled on a convex decay, and that the rates implied by its settled figures are residential rates.

6.5 The commercial estimate, and what it does and does not show

One study prices lease term in commercial property directly. Anderson, Sirmans, Sirmans and Smersh (2025) analyze 8,293 United States single-tenant transactions from 2000 to 2019 and report that capitalization rates "compress steeply with term initially but flatten substantially beyond 20 years," a convexity they attribute to competing insurance and encumbrance effects: a longer term insures the landlord against near-term rollover, while a very long term encumbers the asset with uncertainty about distant states.

The shape is the same shape. A capitalization rate that falls steeply as term lengthens and then flattens is the reciprocal of a value factor that rises steeply and then flattens, which is what Table 2 reports. The location of the bend agrees as well. Their flattening begins around twenty years; Table 2 shows the five-year surrender of value passing fifteen percent at twenty years remaining and a quarter at fifteen; and the credit standards in Section 6.2 begin to bind over the same interval. Three methods, an arithmetic identity, a hedonic regression on transactions and a set of published lending rules, locate the same region of the term structure.

The mechanism is not the same mechanism, and the magnitudes do not transfer. A single-tenant net lease is a leased fee position. The landlord owns the building throughout and what expires is the tenant's obligation to pay, so the risk priced is rollover: re-letting at an unknown rent, with the asset retained. A ground-leased hangar tenant does not retain the asset. Its encumbrance is total and arrives on a known date. Their coefficients therefore describe a different contract, and this paper cites the study for the existence and shape of a term structure in commercial property rather than for any number in it.

Two further qualifications. The study is a working paper rather than a peer-reviewed publication. And its sample is single-tenant net lease, a segment in which credit quality and term are negotiated together, so part of the estimated term effect may carry tenant credit with it. What survives both qualifications is the finding that commercial markets price remaining term, that they price it convexly, and that they treat twenty years as a region where the pricing changes character. Practitioners applying lease-term adjustments to hangar capitalization rates across a range of roughly 25 to 300 basis points (Lindsey 2008a, 2008b) were reading the same structure without a dataset to support it.

7. The Tax Mismatch

Federal cost recovery does not follow the economics; it runs against them. Where a lessee erects a building on leased land, the depreciation deduction is "determined under the provisions of this section," meaning the ordinary recovery rules (26 U.S.C. 168(i)(8)(A)), and the regulation is explicit that recovery proceeds "without regard to the period of the lease" (26 C.F.R. 1.167(a)-4). A hangar is a building, section 1250 property, neither residential rental property nor property with a class life under 27.5 years, so it is nonresidential real property recovered straight line over 39 years (26 U.S.C. 168(c), 168(e)(2)(B)). The treatment of hangar components and the limited circumstances in which shorter lives apply are addressed in Carter (2026d).

The consequence on a reverting hangar is a persistent divergence between the two sets of books.

Source: Author's computation from Financial Accounting Standards Board (2016), 26 U.S.C. 168 and 26 C.F.R. 1.167(a)-4. The straight-line figures are rounded to the nearest full year of charge; the mid-month convention at 26 U.S.C. 168(d)(2)(A) shifts the unrecovered balance to approximately half of cost rather than to an exact fraction.

For the same building, on the same twenty year horizon, the book charge is roughly twice the tax deduction, and at the reversion date the taxpayer holds nearly half its basis in an asset it no longer owns. The characterization of that remaining basis on surrender is a separate question that depends on the facts of the termination and is not addressed here.

What matters for valuation is the direction of the error. An owner who reasons from tax depreciation will conclude that the hangar is about half consumed at year 20 of a 20 year lease. Accounting says it is entirely consumed. The arithmetic in Section 4 says the interest was worth 67.8 percent of a perpetual equivalent when the lease had 20 years to run and is worth nothing when it has none. Book and economics agree. Tax is the outlier, and it is the set of numbers most often in front of an owner.

8. Renewal Is an Assumption

8.1 What the sponsor is obliged to do

Owners facing a short remaining term commonly answer that the sponsor will extend. Sometimes it will. The question for a valuation is whether that expectation is an entitlement, a probability, or a hope, and the authorities are unhelpful to the owner on all three.

Grant Assurance 38 requires a long term lease where an owner builds a hangar at its own expense, subject to whatever terms the sponsor imposes, and administrative decisions have declined to read any duration or return guarantee into it (Feliciano and Yellow Hangar LLC v. Puerto Rico Ports Authority 2025; Hankins and Plyler v. North Texas Regional Airport 2020). Grant Assurance 22 requires reasonable terms without unjust discrimination (Federal Aviation Administration 2026b), which disciplines differences between tenants rather than the level at which terms are set; a sponsor that moves every tenant to the same renewal rent has not discriminated against any of them. The agency has also declined to police the reversion itself, holding that a sponsor's leases "are contracts," that it "has no jurisdiction in enforcing a contract where FAA is not a party," and that disputes about them are "generally a matter of state law and not covered under the Part 16 process" (Clarke v. City of Alamogordo 2006).

The complaint record on the other side is thin and unsuccessful. In the most recent determination on point, a hangar tenant whose successive leases ran three, eight, eight and nine years contested both the reversion and the renewal terms, and the agency found no violation, while noting that the sponsor's own confusion about when the hangar had reverted was "troubling" and that best practice requires clarity on "the timing of, and what events will trigger, the reversion clause," with the timing taking "into account the level of investment in the hangar, useful life of the facility, and the residual value to the sponsor upon reversion" (Feliciano and Yellow Hangar LLC v. Puerto Rico Ports Authority 2025, 13). That determination is on appeal.

8.2 Options that are not options

Where a lease contains a renewal right, its analytical weight depends entirely on who holds it and on what terms. Three structures are common and only one of them extends the valuation horizon.

A tenant option exercisable at the tenant's sole discretion at a rent fixed or formula-determined in the lease extends the horizon, because the tenant controls both the decision and the price. A tenant option at a rent to be determined at market extends the horizon for occupancy but not for value, because the renewal rent will be reset to capture whatever the market supports and the tenant's differential goes to zero at the reset. The Dulles lease is of this kind, providing one ten year renewal at the greater of contract rent or fair market rent determined by appraisal (Metropolitan Washington Airports Authority and IAD Hangars LLC 2024, art. 2.B). A right that depends on the landlord's consent, or that is subject to competitive bidding, does not extend the horizon at all. The mortgage standards say so in terms, excluding renewal options exercisable at the sole discretion of the ground lessor (Freddie Mac 2026, ch. 30), and so, in effect, does the operator that must live with them, disclosing that at the conclusion of a lease airport authorities "may require us to participate in a bidding process to renew a lease" and that ground leases "may be subject to competitive bidding at the end of their term" (Sky Harbour Group 2026a).

The federal guidance is alert to the middle case from the sponsor's side. The compliance manual prompts reviewers to ask whether a lease provides "multiple options to the term with no increased compensation to the airport sponsor," and, under the heading of title, whether "any lease extension or option provisions provide for added facility rent once the title of facilities vests in the airport sponsor" (Federal Aviation Administration 2026a, paras. 12.3.b(3), 12.3.b(5)). The second question contemplates a sponsor charging rent on a building the tenant paid for, after title has passed, during an extension. An analyst valuing an extension period should establish whether that provision is present, because it changes the income the extension produces.

A lease reported without qualification as running fifty years may therefore be a twenty year lease with two landlord-consent extensions, and it should be valued as twenty. Disclosed aggregate terms tend to assume exercise. The operator discussed above reports ground lease terms "ranging between 18 to 71 years, including options for the Company to extend," and weighted average remaining terms of 51.5 years on leases unimproved at commencement and 29.5 years on leases with existing improvements as at 30 June 2026, on the stated basis that management considers exercise reasonably certain (Sky Harbour Group 2026b). The figures are correct on their stated basis. They are not the horizon a third party would use without reading the options.

8.3 Compensation is rare, and two forms of it are on the record

The digest's second category, reversion with compensation, is rare in practice but it is not absent, and both published instances are worth setting out because they are different designs.

The first is a vesting schedule. Research for the digest "located only one airport that offered such a cash out provision": Monroe County Airport near Bloomington, Indiana, which offered an arrangement under which the airport's interest in a tenant's improvement vested at 2.5 percent a year, leaving a tenant on a thirty year lease with a 25 percent residual interest. The program "attracted some development," and the airport "has since discontinued the program in favor of standard termination and reversion provisions" (National Academies of Sciences, Engineering, and Medicine 2024, 44 n.).

The second is a purchase obligation, printed in the same digest, from Hastings, Michigan: a provision under which the sponsor buys the improvement at an agreed value or, failing agreement, at appraised value (ibid., 46 to 47). That is a different mechanism from vesting. Vesting gives the tenant a declining share of an asset it cannot sell; a purchase clause converts the terminal position into a receivable at a price a third party determines. For the valuation question this paper is about, the second is worth more than the first, because it is the only published form that gives the reversion a number the parties did not have to negotiate under time pressure.

Two of roughly a hundred airports is still rare, and the direction of travel in both cases was away from compensation. But "close to unheard of" overstates it, and a tenant negotiating a new lease has two drafted precedents to point at rather than none.

The same page of the digest carries a finding that runs against the argument of this paper, and it should be quoted rather than left out. "Based on interviews conducted for this digest, neither the presence nor the effect of airport reversion clauses seems to present significant issues at airports" (ibid., 44). Sponsors interviewed for it also made the case that the reversion is not a windfall but the consideration for land made available below its unencumbered value, and for the sponsor's own obligations over the term.

Both points deserve an answer rather than silence. On the first: an interview sample of airport sponsors is a sample of the party that receives the improvement, and a provision that transfers an asset at zero would not be expected to present significant issues at the receiving end. The tenants, lenders and appraisers who price the other side of it were not the ones interviewed. On the second: the consideration argument may well be right in many cases, and nothing in this paper says a reversion clause is improper or that sponsors should not have one. The claim is narrower and is about measurement. Whatever the clause is consideration for, a valuation that does not deduct for it is overstating the tenant's interest, and the size of the deduction is computable.

The economics literature identified both the problem and a remedy a generation ago. Dale-Johnson (2001) states the premise the appraisal literature has not absorbed, that "[g]round leased property trades at a discount relative to the fee interest," and then asks what contract terms would make both parties better off. Two answers emerge: sharing the value of the residual claim between the leased fee and the leasehold, and a lease extension clause triggered by redevelopment. Employing such terms, the paper concludes, "would lead to outcomes more consistent with the fee simple case."

The Monroe County program was residual-claim sharing, implemented at an American airport, on a vesting schedule. It is the design the literature recommends, it drew development, and it was abandoned in favor of the standard clause. That sequence is worth more attention than it has received. A sponsor gains the residual either way; what the sharing arrangement buys is a tenant willing to invest more, sooner, and to maintain the asset through the final years of the term rather than run it down. Where a sponsor has no difficulty attracting tenants on standard terms, it has no reason to pay for that behavior, which is the same market position that supports the renewal pricing described in Carter (2026a).

The Deer Valley asymmetry described in Section 2.3 is the more common pattern in a different guise. Compensation is available where the landlord takes the asset early for its own purposes, and unavailable where the asset arrives at the end of its contractual life. Both provisions are rational from the sponsor's side. Only one of them is a terminal value.

9. Statutory Limits on Term

State law caps how long a public airport sponsor may lease its land, and those caps bind before any federal guidance is reached. They are also the origin of the widely repeated belief in a fifty year federal limit, which does not exist in that form. Table 6 reports the provisions confirmed from statutory text.

Source: Statutory text as cited.

Two of these change the analysis rather than bounding it. Arizona conditions a sponsor's leasing authority on a lease that "[p]rovides that title to all buildings, structures and improvements added to the leased premises by the lessee vests in the department, city, town or county" (A.R.S. 28-8425(A)(1)). An Arizona sponsor does not choose whether to take a reversion; the statute requires it as a condition of the power to lease at all, which is why the Deer Valley clause reads as it does. Minnesota runs the other way, authorizing ninety-nine year ground leases for private construction of structures and naming hangars in the authorizing language, which permits a term long enough that the reversion factor is close to one.

Three practical points follow. A term that appears unusual for the region may be the statutory maximum rather than a negotiated outcome. A renewal structure may exist because the cap forbids a longer initial term, in which case the renewal is more likely to be honored than one granted freely, though that is a matter of judgment rather than entitlement. And where a lease term approaches a statutory ceiling, no extension can be assumed at all without a change in the statute.

10. Analyzing a Reverting Hangar

The analysis that follows from all of the above is short, and most of it is document work rather than modeling.

Establish the horizon before anything else. Read the term, then read every extension provision and classify each as tenant-controlled at a determinable rent, tenant-controlled at market, or landlord-controlled. Count only the first without qualification, treat the second as extending occupancy rather than differential value, and exclude the third. Check the term against the state cap in Table 6, since a lease at the ceiling cannot be extended by agreement.

Read the surrender clause, not the summary of it. Determine which of the three forms is present and whether the landlord holds an election to require removal. A removal election converts the terminal value from zero to a negative number and its estimated cost belongs in the analysis.

Value the income over the term and set the reversion at its contractual amount. That amount is zero in the common case, and the analysis should say so rather than leaving a residual to be computed at market. Where a compensation formula exists, apply the formula in the lease, including the depreciation schedule the lease specifies, which may differ from both the lease term and the tax life.

Test the sensitivity to term and to a reset. Table 2 gives the shape. Run the value at the contractual term, at the term less five years to reflect the possibility that a renewal is not available, and with the ground rent reset to market at the next reset date rather than held at contract. In the range below twenty-five years remaining, those three tests will usually move the answer more than any adjustment to the rent roll.

Establish what a lender will do at the subject's remaining term. Where the remaining term no longer supports institutional debt, the applicable discount rate is not the rate observed on financeable assets. The buyer pool changes and so does the rate, and the two effects compound.

Do not import a relativity curve. Compute the factor from the discount rate and growth rate the assignment supports. Section 6.4 shows why a borrowed curve built on a 2.3 to 3.4 percent net discount rate does not describe a commercial leasehold.

Do not present cost as value without the factor. A cost estimate on a reverting hangar is an input to the analysis, not a conclusion of it. Where the cost approach is used, the finite-horizon factor belongs in the reconciliation, stated and supported, and the report should identify the interest appraised as the leasehold rather than the improvement.

11. Limitations

The factor in Section 4.2 is arithmetic, and its inputs are not. A discount rate for a hangar leasehold cannot be extracted from market evidence in the ordinary way, because no published capitalization rate series, transaction database or peer-reviewed study reports hangar rates. Reported per square foot evidence for hangars disperses widely (Carter 2026b), and a working appraisal in the public record states that leased hangar sale comparables could not be identified and builds the rate from mortgage-equity and debt coverage components instead (Elkhorn Appraisal Services 2023). The table is therefore reported across a range of rates rather than at a point, and an analyst who prefers different rates should recompute rather than interpolate.

The empirical literature in Section 6.3 is residential. It establishes that markets discount finite horizons more steeply than conventional practice assumes, in several countries and across several decades, but none of it concerns a commercial building the tenant constructed as a separate capital asset. The English relativity graphs are used here only for the shape of the decay and for the discount rate that shape implies, and Section 6.4 sets out why their levels do not transfer. The commercial estimate in Section 6.5 is closer to the problem but prices a leased fee rather than a terminating leasehold, and it remains a working paper.

The lease evidence in Section 2.3 is four instruments from one tenant. They are executed leases at four airports in four states and they are consistent with the digest's finding that reversion clauses appear in every airport ground lease it examined, but four leases are an illustration and not a sample. No systematic survey of American airport ground lease reversion terms exists.

The statutory survey in Table 6 reports the provisions confirmed from statutory text. Several states could not be confirmed and are omitted rather than estimated; the omission of a state from the table is not evidence that it has no cap.

Two further questions are open and neither is answered here. No published work estimates the relationship between remaining ground lease term and observed capitalization rates for hangars, which is the empirical test that would either confirm or refute the factor in the market. And the characterization on a taxpayer's return of unrecovered basis in an improvement surrendered at reversion is a tax question that the valuation literature has not addressed.

12. Conclusion

A hangar on leased land is a claim that ends. The share of perpetual value that survives a finite horizon is computable from two inputs, it falls convexly as the term runs down, and at ordinary real estate discount rates it is about 90 percent at forty years, 68 percent at twenty and 43 percent at ten. That is the reason a new building can appraise well below what it cost, and it operates whether or not the ground rent is favorable and whether or not the sponsor behaves opportunistically.

Three bodies of practice already price it. Accounting caps the asset's life at the lease term and accelerates the charge as expiry nears. Lenders require the term to outrun maturity by five to thirty years depending on the structure, and refuse to count renewal options the borrower does not control. Housing markets where leasehold and freehold trade side by side discount the finite title by 10 to 20 percent even at a century of remaining term, roughly ten times what a constant discount rate would predict.

Appraisal doctrine is the exception. The rent differential rule governs a case this is not, the profession publishes no guidance on tenant-owned improvements on leased land, and the national form that does treat the improvements as a separate component of value measured over the remaining term is a title insurance endorsement. Until that gap closes, the analyst's obligation is to identify the interest correctly, read the surrender clause, count only the options the tenant controls, set the reversion at its contractual value, and compute the factor rather than borrow one.

The federal guidance supplies the closing arithmetic. The agency treats 30 to 35 years as sufficient to retire a tenant's financing and 40 years as the useful life of a building. The difference between those two numbers belongs to the sponsor, it is written into the lease on the day it is signed, and it is not depreciation.

This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement. Illustrative model figures are the author's own and are provided for education; they are not a valuation of any specific property.

References

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