Grounded Assets and Appropriable Rents: Hold-Up Risk in Hangar Ground Leases

Abstract

This paper develops a formal theoretical framework for understanding capitalization rate determination in airport hangar ground leases, drawing on transaction cost economics (Williamson 1975, 1985), the theory of appropriable quasi-rents (Klein, Crawford, and Alchian 1978), and the property rights approach to the firm (Grossman and Hart 1986). Airport hangars represent a real-world instantiation of the classical hold-up problem: tenants make large, relationship-specific investments in immovable, single-purpose structures on land controlled by a monopsony counterparty, the airport authority, who contractually acquires those improvements at zero cost upon lease expiration. We demonstrate that this institutional structure generates four types of asset specificity simultaneously (site, physical, dedicated, and temporal), a convergence that is uncommon in commercial real estate and that amplifies the standard leasehold discount predicted by financial economics. We derive a series of formal propositions linking the hold-up mechanism to observable pricing outcomes, develop a stylized model showing how appropriable quasi-rents evolve as a function of remaining lease term, and demonstrate that the interaction of hold-up risk with lender withdrawal thresholds generates a non-linear capitalization rate curve with a predictable inflection point. The framework generates testable predictions regarding the effects of reversion clauses, renewal options, airport governance structure, and tenant improvement intensity, predictions that distinguish this approach from standard time-value-of-money explanations. A companion empirical paper tests these predictions using transaction data from U.S. general aviation airports.

1. Introduction

The U.S. airport hangar market represents a multi-billion-dollar real estate asset class operating almost entirely on leasehold interests. The global aircraft hangar leasing market was valued at approximately $5.74 billion in 2024, with North America accounting for roughly $2.2 billion (Growth Market Reports 2024). Virtually all hangars at public-use airports sit on ground leases from municipal airport authorities rather than fee simple land. Despite this scale, no formal economic theory has been developed to explain the pricing of these leasehold interests, and specifically why the relationship between remaining ground lease term and capitalization rates departs so sharply from the predictions of standard financial economics.

Practitioners routinely apply lease-term adjustments of 25 to 300 basis points to hangar capitalization rates, a range so wide that it can swing a single property’s value by hundreds of thousands of dollars (Lindsey 2008a, 2008b). Yet these adjustments rest on professional judgment and anecdotal market evidence rather than on peer-reviewed empirical analysis or formal theory. The standard explanation, that shorter leases reduce the present value of income streams, is correct but incomplete. A pure time-value-of-money argument predicts a smooth, convex decline in leasehold value as term shortens. What market participants observe instead is a relatively stable capitalization rate premium at long remaining terms, followed by a sharp acceleration as leases approach the 15-20 year threshold where conventional lending disappears. This inflection pattern requires a richer explanation than discounting alone provides.

This paper proposes that the missing explanation lies in one of the most influential frameworks in institutional economics: the hold-up problem. Originally articulated by Williamson (1975, 1985) and formalized by Klein, Crawford, and Alchian (1978), the hold-up problem arises when one party makes a relationship-specific investment that has little value outside the relationship, and the counterparty can exploit the resulting bargaining asymmetry to appropriate a share of the investor’s quasi-rents. We demonstrate that the airport hangar tenant’s situation is a textbook instantiation of every element of this framework, and that recognizing the hold-up mechanism generates predictions about pricing dynamics that the standard financial model cannot produce.

The theoretical contribution of this paper is threefold. First, we identify a previously unexamined real-world market that exhibits all four types of Williamson’s asset specificity simultaneously (site, physical, dedicated, and temporal), a convergence that is uncommon in commercial real estate and that makes the aviation ground lease a particularly clean laboratory for studying hold-up dynamics. Second, we develop a formal model showing how the magnitude of appropriable quasi-rents evolves as a function of remaining lease term and how the interaction between hold-up risk and institutional lending thresholds generates the non-linear capitalization rate curve observed by practitioners. Third, we derive testable propositions that distinguish the hold-up explanation from the pure financial explanation, enabling empirical discrimination between the two theories.

The paper proceeds as follows. Section 2 describes the institutional setting of airport hangar ground leases. Section 3 develops the transaction cost economics framework and identifies the four dimensions of asset specificity. Section 4 models the hold-up mechanism and derives the main propositions. Section 5 extends the model to incorporate lender withdrawal thresholds and the non-linear inflection point. Section 6 develops comparative statics regarding governance structure, FAA grant assurances, and relational contracting. Section 7 relates the framework to Joskow’s coal contract evidence. Section 8 develops a real options perspective on the renewal decision. Section 9 discusses the relationship to the companion empirical paper and concludes.

2. Institutional Setting: Airport Hangar Ground Leases

This section describes the institutional features of airport hangar ground leases that give rise to the hold-up problem. These features are presented not simply as background but as the structural conditions from which the theoretical framework is derived.

2.1 Public Ownership and the Ground Lease Structure

Approximately 3,300 of the nation’s 5,000 public-use airports are owned by local governments or managed by independent airport authorities created by state enabling legislation (FAA NPIAS 2023). This public ownership is a legacy of federal land grants dating to the 1940s and has been reinforced by decades of federal funding conditioned on 39 grant assurances governing airport property use and disposal. Hangar development at these airports occurs through ground leases, typically 25 to 40 years in duration, under which the tenant builds, maintains, and operates the hangar facility on airport-owned land. The tenant owns the improvements during the lease term but does not own the underlying land.

2.2 The Reversion-Without-Compensation Clause

The defining contractual feature of airport ground leases, and the feature that most sharply distinguishes them from standard commercial real estate, is the reversion clause. Upon lease expiration, all improvements become the property of the airport authority at zero cost to the authority. The tenant receives no compensation for the residual value of the building, regardless of its condition, remaining useful life, or replacement cost. This is not a risk of hold-up in the probabilistic sense; it is a contractually guaranteed transfer of the tenant’s entire capital investment to the counterparty at a predetermined date. The clause effectively creates a terminal date at which the tenant’s appropriable quasi-rent is fully appropriated, not through opportunistic renegotiation but through the automatic operation of the contract itself.

2.3 Single-Purpose Building Constraints

Aircraft hangars are single-purpose structures. Their defining physical characteristics (clear-span construction with minimal interior columns, oversized bi-fold or hydraulic door systems, apron-grade concrete flooring, airside taxiway access, and specialized fire suppression and electrical systems) are designed exclusively for aircraft storage and maintenance. Adaptive reuse is severely constrained: FAA grant assurances and airport zoning typically prohibit non-aviation commercial activity, and the physical form of the building (enormous open bays with no partition walls, specialized door openings, aircraft-specific utility infrastructure) renders conversion to warehouse, retail, or office use impractical without fundamental reconstruction. The practical alternative use, demolition for scrap steel value, represents a tiny fraction of the original investment.

2.4 The Airport Authority as Monopsony Counterparty

At lease expiration, the airport authority occupies a monopsony position with respect to the hangar improvements. It is the sole entity that can grant continued access to the land on which the hangar sits, the sole entity that can provide airside access to the taxiway and runway system, and, through the reversion clause, the sole acquirer of the building at expiration. The tenant’s outside option is relocation to a different airport, which entails abandoning the existing structure (whose value reverts to the authority), forfeiting operational continuity and client relationships, and incurring the full cost of new construction at the alternative site. These switching costs are enormous relative to the concessions the tenant might extract in renewal negotiations, creating a structural bargaining asymmetry that the authority can exploit.

2.5 Renewal as Bilateral Monopoly

Where renewal options exist, they are typically structured as options to renegotiate at “market rates” rather than options to extend at predetermined terms. The “market” for airport ground lease renewals is not competitive; it is a bilateral monopoly in which the authority holds structural leverage because the tenant’s capital is physically embedded in the airport. The authority knows the tenant’s best alternative to a negotiated agreement (BATNA) is costly relocation; the tenant knows the authority knows this. The resulting zone of indeterminacy in renewal terms creates a channel through which the authority can capture a share of the tenant’s quasi-rents through above-competitive renewal rents, shortened renewal terms, or both.

3. Theoretical Framework: Asset Specificity and the Fundamental Transformation

3.1 Williamson’s Asset Specificity Taxonomy

Williamson’s (1975, 1985) central insight is that transactions supported by investments in specific assets cannot be redeployed to alternative uses or users without a sacrifice of productive value (Williamson 1985). This condition transforms a competitive market relationship into a bilateral dependency in which both parties have incentives to behave opportunistically. The degree of specificity determines the governance structure that efficiently supports the transaction: low-specificity transactions can be governed by markets; high-specificity transactions require hierarchies or long-term contracts with safeguards.

Airport hangar construction exhibits all four of Williamson’s types of asset specificity simultaneously:

The convergence of all four types of asset specificity in a single transaction is unusual in commercial real estate. Standard net-lease properties, the closest comparable asset class, typically exhibit site specificity but retain meaningful alternative uses (warehouse, retail, office) that limit the other three dimensions. This convergence is what makes the airport hangar a particularly powerful case study for transaction cost economics.

3.2 The Fundamental Transformation

When a hangar tenant signs a 30-year ground lease and invests $2-$5 million in hangar construction, the transaction undergoes what Williamson terms the “fundamental transformation.” Before the lease is signed, the tenant typically has multiple airports from which to choose: a large-numbers competitive environment. The tenant solicits proposals, negotiates terms, and selects the airport offering the best combination of location, rent, and lease terms. Competition among airports disciplines the authority’s pricing power. After construction, however, the tenant is locked into a bilateral relationship with a single counterparty whose cooperation is required for continued operation. The competitive market that existed ex ante has been replaced by a bilateral monopoly ex post.

The appropriable quasi-rent, defined by Klein, Crawford, and Alchian (1978) as the difference between the value of the asset in its current use and its next-best alternative use, is exceptionally large for hangar investments because the next-best alternative use (demolition for scrap value) is a tiny fraction of the original investment. For a $3 million corporate hangar, the scrap value of the steel structure might be $50,000-$100,000. The appropriable quasi-rent is therefore on the order of $2.9 million, virtually the entire investment. This magnitude distinguishes hangar ground leases from other relationship-specific investment contexts studied in the literature, such as coal mines (Joskow 1987) or automobile body manufacturing (Klein, Crawford, and Alchian 1978), where salvage values and alternative uses absorb a larger fraction of the sunk investment.

4. A Model of Hold-Up Risk and Capitalization Rate Determination

4.1 Setup

Consider a tenant who constructs a hangar at cost I on airport land under a ground lease of initial term T years. The hangar generates net operating income π per year. At expiration, the hangar reverts to the airport authority at zero compensation. The tenant’s outside option at any point during the lease is relocation to an alternative airport, which costs c (encompassing the loss of the existing structure, moving costs, new construction, and operational disruption). We assume c is large relative to π, reflecting the empirical reality that hangar relocation is prohibitively expensive for most operators.

The airport authority sets ground rent r and has the option to renegotiate terms at renewal. We abstract from interest rate dynamics and focus on the strategic interaction between the authority’s hold-up power and the tenant’s investment recovery.

4.2 Appropriable Quasi-Rent as a Function of Remaining Term

Let t denote remaining years on the lease. The tenant’s appropriable quasi-rent at any point is the difference between the value of the hangar in its current use and the tenant’s outside option:

Q(t) = Vcurrent(t) − Valternative(t)

where Vcurrent(t) is the present value of remaining income from the hangar in its current location and Valternative(t) is the net value of the relocation option. Because relocation requires abandoning the existing structure (whose value reverts to the authority regardless) and incurring cost c, the alternative value is approximately:

Valternative(t) ≈ Vnew(T′) − c − I′

where T′ is the term at the new airport, I′ is the new construction cost, and c captures transition losses. Because I′ + c is large relative to the incremental value of a new lease, Valternative is typically negative or very small, making Q(t) ≈ Vcurrent(t) for most practical purposes. The critical observation is that Q(t) is a decreasing function of t when measured as a proportion of remaining value. Although the absolute quasi-rent declines as t falls (because there is less income remaining to be appropriated), the ratio of quasi-rent to total remaining value increases because the tenant’s time to recover the investment shrinks faster than the authority’s hold-up window narrows.

4.3 Formal Propositions

Proposition 1 (Non-Linear Discount Curve). The equilibrium capitalization rate for a leasehold hangar interest is a non-linear, convex function of remaining ground lease term, with the rate of increase accelerating as the term approaches the lender withdrawal threshold.

Proof sketch. The required capitalization rate k(t) must compensate investors for two risks: (i) the standard time-value risk that the income stream terminates at t = 0 with zero terminal value, and (ii) the hold-up risk that the authority extracts quasi-rents through above-market ground rent increases, restrictive renewal terms, or other exercises of monopsony power during the renegotiation zone. Component (i) generates a smooth convex curve; component (ii) generates a discontinuous increase as t enters the range where the authority’s leverage becomes acute. The sum is strictly convex with an inflection point at the boundary of the renegotiation zone. □

Proposition 2 (Reversion Clause Amplification). The lease-term discount is strictly larger for hangars subject to reversion-without-compensation clauses than for hangars with compensation or buyout provisions at expiration.

Proof sketch. Let α ∈ [0,1] represent the fraction of improvement value that the authority captures at reversion, where α = 1 is reversion without compensation and α = 0 is full compensation. The tenant’s terminal value is (1 − α) × Vresidual. As α → 1, the terminal value approaches zero, increasing the required capitalization rate at every remaining term level. In addition, α amplifies hold-up severity because the authority captures the entire residual investment, not just a share of it, making the tenant’s bargaining position at renewal correspondingly weaker. The interaction of α with t is positive: the effect of α is largest when t is small. □

Proposition 3 (Renewal Option Mitigation). The presence of an explicit renewal option at tenant’s discretion reduces the hold-up premium at all remaining term levels and flattens the discount curve relative to leases without renewal options.

Proof sketch. A renewal option extends the effective horizon over which the tenant can recover the investment, reducing temporal specificity. Critically, it shifts the reversion threat from a certainty at year t = 0 to a contingent event whose probability depends on the option’s terms. If the option is at a pre-specified rent (rather than renegotiated market rates), it further constrains the authority’s ability to extract quasi-rents at the renewal point. The capitalization rate premium therefore falls: koption(t) < kno-option(t) for all t, with the gap widening as t approaches the renewal threshold. □

Proposition 4 (Investment Intensity Interaction). The lease-term capitalization rate premium is larger for hangars with greater tenant improvement investment, controlling for remaining term and other property characteristics.

Proof sketch. Higher investment I increases the appropriable quasi-rent Q at every remaining term level because more capital is at risk of expropriation at reversion. The tenant with a $5 million corporate hangar has a larger quasi-rent than the tenant with a $200,000 T-hangar, and therefore faces more severe hold-up risk. The capitalization rate must compensate for this additional risk, producing a steeper discount curve for high-investment properties. Formally, ∂k/∂I > 0 and ∂2k/∂I∂t < 0 (the cross-partial is negative because the premium differential widens as t falls). □

5. Lender Withdrawal Thresholds and the Non-Linear Inflection Point

The preceding propositions derive from the hold-up mechanism alone. In practice, the hold-up effect interacts with an institutional feature of real estate capital markets, lender withdrawal thresholds, to produce the sharp inflection point observed by practitioners. This section models that interaction.

5.1 The Lender Threshold Mechanism

Conventional mortgage lenders require that the ground lease term extend a specified number of years beyond the loan maturity date, typically 10 to 15 years. When the remaining lease term falls below this threshold, conventional financing becomes unavailable, and the buyer must either pay all cash or secure more expensive alternative financing. The SBA 504 program, which finances many hangar acquisitions, imposes a similar but somewhat less restrictive threshold. The ACRP (2024) documents that lenders generally require debt to be retired at least five years before lease expiration, establishing an effective minimum remaining term of 20-25 years for conventionally financed hangar acquisitions.

This lender withdrawal operates as a demand-side shock to the leasehold market. Below the threshold, the pool of potential buyers shrinks to cash purchasers and income-only investors, who require higher capitalization rates to compensate for the illiquidity premium and the absence of leveraged returns. The band-of-investment framework (Ambrose and Nourse 1993) predicts that this shift in the financing structure will mechanically increase the overall capitalization rate because the higher-cost equity component constitutes a larger share of the capital stack.

5.2 Interaction with Hold-Up Risk

Proposition 5 (Compounding Non-Linearity). The hold-up premium and the lender withdrawal premium compound at short remaining terms, producing a capitalization rate curve that is steeper than either mechanism would generate independently.

The intuition is straightforward: lender withdrawal occurs precisely when hold-up risk is most acute, because both are triggered by short remaining terms. The lender withdraws because the hold-up risk threatens the collateral value; the hold-up risk intensifies because the lender’s departure reduces the tenant’s set of credible outside options (a leveraged buyer at another airport is no longer available as an alternative). This positive feedback loop generates the sharp inflection point that practitioners observe in the 15-20 year range.

5.3 Numerical Illustration

To illustrate the compounding non-linearity, consider a stylized example. A corporate hangar generates $200,000 in net operating income and was built at a cost of $3,000,000 on a 30-year ground lease.

The table decomposes the total capitalization rate premium into three channels: the standard time-value-of-money effect, the hold-up premium reflecting quasi-rent appropriation risk, and the lender withdrawal premium reflecting the financing constraint. The key observation is that the hold-up and lender premiums are not simply additive; they interact. The lender premium arises partly because of the hold-up risk (lenders recognize the collateral impairment), and the hold-up premium is amplified by the lender withdrawal (which eliminates a category of better-capitalized potential buyers from the tenant’s set of exit strategies).

6. Extensions: Governance, Regulation, and Relational Contracting

6.1 Airport Governance Structure

Proposition 6 (Governance Effect). The hold-up premium is larger at airports governed by dedicated airport authorities with independent revenue mandates than at airports governed by city councils subject to political pressure from aviation constituents.

A dedicated airport authority operates as a revenue-maximizing entity with a fiduciary obligation to the airport system. It faces no direct political cost from extracting maximum rents at renewal because its constituency is the airport, not the pilots or aircraft owners who constitute the tenant base. A city council, by contrast, faces political pressure from constituents who use the airport: voters who are also tenants or whose businesses depend on airport access. This political constraint functions as a partial check on hold-up behavior, analogous to the way that customer-owned utilities face softer rate-setting constraints than investor-owned utilities. The empirical prediction is that the capitalization rate discount curve should be steeper at authority-governed airports than at municipally-governed airports, controlling for other airport characteristics.

6.2 FAA Grant Assurances as an Incomplete Institutional Remedy

FAA grant assurances require airports that have accepted federal funding to make facilities available on “reasonable and nondiscriminatory” terms (Assurance 22) and to refrain from granting exclusive rights (Assurance 23). These assurances function as a partial regulatory constraint on the authority’s hold-up power, analogous to the way minimum wage laws constrain monopsony power in labor markets (Manning 2003). However, the constraint is incomplete in several important respects. The assurances do not guarantee lease renewal, do not fix renewal terms, do not prevent the authority from declining to extend a lease for legitimate operational or development reasons, and enforcement is complaint-driven through FAA Part 16 proceedings rather than proactive.

Proposition 7 (Regulatory Moderation). Airports with active FAA compliance oversight and a track record of enforcement actions exhibit a flatter lease-term discount curve than airports with no compliance history, because the expected severity of hold-up at renewal is reduced by regulatory constraint.

6.3 Relational Contracting and Reputation

Baker, Gibbons, and Murphy (2002) demonstrate that repeated interaction can mitigate hold-up through implicit commitments: relational contracts sustained by the threat of future non-cooperation. In the airport context, an authority that develops a reputation for fair renewal practices reduces the expected hold-up severity for all current and prospective tenants, thereby attracting higher-quality investment and reducing vacancy. Conversely, an authority that exploits its hold-up power aggressively at renewal imposes a reputation cost: prospective tenants demand shorter initial terms, invest less in improvements, or avoid the airport entirely.

Proposition 8 (Reputation Effect). Airports with a documented history of lease renewals at or near prior terms exhibit lower capitalization rate premiums at equivalent remaining terms than airports without such a track record, because the implicit relational contract reduces the probability of hold-up at renewal.

This proposition has a direct empirical test: the ratio of expired-and-renewed leases to expired-and-not-renewed leases, compiled from public airport records, can serve as a proxy for the authority’s renewal reputation.

7. Relationship to Prior Literature: The Joskow Coal Contract Analogy

Joskow’s (1987) study of coal supply contracts provides the closest published empirical precedent for the framework developed here. Joskow found that contract duration increases with the degree of relationship-specific investment: coal mines located adjacent to a specific power plant (“mine-mouth” plants exhibiting extreme site specificity) had significantly longer contracts than mines serving multiple buyers. The parallel to aviation is direct.

Joskow’s mine-mouth power plants are analogous to our hangars: both involve immovable assets with extreme site specificity that lock the investor into a bilateral relationship with a single counterparty. Joskow’s dependent variable, contract duration, captures the governance response to hold-up risk: parties negotiate longer contracts to protect relationship-specific investments. Our dependent variable, the capitalization rate, captures the pricing response: when governance structures (lease terms) are insufficient to fully protect the investment, the residual hold-up risk is priced into the required return. The two variables are complementary perspectives on the same underlying phenomenon.

The hangar case extends the Joskow framework in two ways. First, it introduces the reversion clause as a mechanism that contractually guarantees full appropriation of the tenant’s investment at a specific date, whereas Joskow’s coal contracts create the risk of hold-up that governance structures attempt to mitigate. The hangar case is thus a setting where the hold-up is built into the contract’s architecture, and the pricing response reflects the market’s assessment of this known-in-advance expropriation. Second, the hangar case exhibits simultaneous specificity along four dimensions (site, physical, dedicated, and temporal), whereas Joskow’s mine-mouth plants primarily exhibit site specificity with some physical specificity. The convergence of multiple specificity types provides a stronger test of the theory.

8. A Real Options Perspective on the Renewal Decision

The hold-up framework can be enriched by incorporating real options theory (Capozza and Sick 1991; Titman 1985). The renewal provision in a ground lease is analogous to a call option: the tenant has the right, but not the obligation, to continue occupying the site at renegotiated terms. The value of this option depends on the volatility of the underlying asset value (the income-producing hangar), the exercise price (the renewal rent), and the time to expiration (the remaining lease term).

In standard real options theory, option value increases with volatility and time. In the hangar context, however, the option is distorted by the hold-up mechanism. The “exercise price” is not fixed but is endogenously determined by a bilateral monopoly negotiation in which the authority can set the renewal rent anywhere within a zone of indeterminacy bounded by the tenant’s relocation cost and the authority’s cost of finding an alternative tenant. This endogenous exercise price reduces the option value below what standard Black-Scholes-type models would predict, because the authority captures a share of the option value through the renewal rent.

The real options perspective provides an additional insight: uncertainty about future aviation demand may actually increase the tenant’s willingness to accept a short initial term if the lease includes a renewal option, because the option value compensates for the shorter guaranteed period. This suggests that the interaction between remaining term and renewal option in the capitalization rate regression (Proposition 3) may be non-monotonic: a short lease with a valuable renewal option may command a lower capitalization rate than a medium-length lease without one, depending on the terms of the option and the volatility of local aviation demand.

9. Discussion and Conclusion

9.1 Summary of Theoretical Contributions

This paper has developed a formal transaction cost economics framework for understanding capitalization rate determination in airport hangar ground leases. The framework makes three contributions to the literature. First, it identifies the airport hangar ground lease as a previously unexamined real-world setting that exhibits all four types of Williamson’s asset specificity simultaneously, a convergence that is rare in commercial real estate and that makes the hangar market a powerful natural laboratory for testing hold-up theory. Second, it derives a series of formal propositions (Propositions 1-8) that generate testable predictions about the shape of the lease-term discount curve, the amplifying effect of reversion clauses, the mitigating effect of renewal options, the role of investment intensity, the interaction with lender withdrawal thresholds, and the moderating effects of governance structure, FAA regulation, and relational contracting. Third, it demonstrates that the hold-up framework explains features of the observed capitalization rate pattern, particularly the sharp inflection point and the non-linear acceleration at short terms, that the standard time-value-of-money explanation cannot account for.

9.2 Relationship to the Companion Empirical Paper

This paper is designed as the theoretical companion to an empirical study, “Terminal Value or Terminal Risk? Estimating the Relationship Between Remaining Ground Lease Term and Capitalization Rates for Airport Hangar Properties,” which tests Propositions 1-4 using transaction data from U.S. general aviation airports. The empirical paper’s regression specification includes remaining lease term (linear and quadratic), reversion clause indicators, renewal option indicators, hangar type (as a proxy for investment intensity), and airport-level controls. If the empirical results confirm the non-linear discount curve (P1) and the mechanism tests (P2-P4), the combined papers provide both the theoretical logic and the empirical validation for a new understanding of how airport ground lease characteristics are priced in the real estate market.

Propositions 5-8 (regarding lender withdrawal interaction, governance structure, FAA regulation, and relational contracting) represent a broader research agenda that requires additional data collection. These extensions are presented here as theoretical predictions that can guide future empirical work and that position this contribution as the foundation for a multi-paper research program on aviation real estate institutions.

9.3 Implications for Policy and Practice

The framework developed here has practical implications for three constituencies. For appraisers and investors, it provides a theoretical foundation for the lease-term adjustments that have historically been applied on the basis of professional judgment alone. The propositions identify the specific institutional features (reversion clauses, renewal options, investment intensity) that should drive the magnitude of the adjustment, enabling more precise and defensible valuation opinions. For airport authorities, the framework illuminates the tradeoff between short-term revenue extraction and long-term development incentives. Authorities that exercise hold-up power aggressively at renewal may capture quasi-rents in the short run but suppress private investment in airport infrastructure over time, as prospective tenants discount expected hold-up into their willingness to invest. For policymakers and the FAA, the analysis suggests that the current grant assurance framework provides incomplete protection against hold-up behavior, and that more specific regulatory guidance on renewal practices, or standardized compensation provisions in ground lease templates, could reduce the quasi-rent appropriation that increases the cost of capital for airport infrastructure development.

9.4 Limitations and Future Research

The theoretical model presented here is deliberately stylized. It abstracts from inter-temporal dynamics in ground rent adjustment, competition among airports within a metropolitan area, the role of airport master plans in constraining authority discretion, and the endogenous determination of initial lease terms. Each of these extensions represents a productive avenue for future theoretical work. The model also does not formally incorporate asymmetric information between the authority and the tenant regarding the tenant’s valuation of the site, an extension that could draw on the mechanism design literature to characterize optimal lease contract structures.

More broadly, the identification of the airport hangar market as a clean laboratory for hold-up theory opens possibilities for scholarship that extends beyond real estate valuation. The airport setting offers observable, standardized contracts (ground leases), publicly accessible transaction data, measurable asset specificity, identifiable governance variation across hundreds of airports, and a regulatory framework (FAA grant assurances) that provides exogenous variation in the institutional constraints on hold-up behavior. Few other settings offer this combination of theoretical cleanness and empirical tractability.

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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.