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

Abstract

1. Introduction

The U.S. airport hangar market is a substantial real estate asset class operating almost entirely on leasehold interests. No reliable estimate of its aggregate value exists, and the market-sizing reports in circulation are syndicated products without disclosed methodology, so none is relied on here. What can be stated from primary sources is the scale of the underlying infrastructure: the national airport system comprises 3,247 existing airports (Federal Aviation Administration 2025b), and hangars at those airports sit predominantly on ground leases from public sponsors rather than on 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 apply lease-term adjustments to hangar capitalization rates across a range wide enough to swing a single property’s value by hundreds of thousands of dollars. The published practitioner literature on hangar valuation identifies the lease term as a value driver and recommends that it be addressed explicitly (Lindsey 2008a, 2008b), but supplies no schedule of adjustments, and no peer-reviewed empirical analysis of the relationship exists. The adjustments therefore rest on professional judgment. 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 three of Williamson’s six forms of asset specificity simultaneously (site, physical asset, and dedicated assets) and pairs them with a finite horizon carrying zero terminal value, 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 the leasehold discount literature, to Joskow’s coal contract evidence, to the Hong Kong study that runs the identifying comparison, and to the empirical work on expropriation risk and investment in land. Section 8 develops a real options perspective on the renewal decision. Section 9 sets out an estimating equation, the data from which it can be assembled, and which of its coefficients discriminate between this framework and the alternatives. Section 10 states the limitations and Section 11 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

The 2025-2029 National Plan of Integrated Airport Systems identifies 3,247 existing airports in the national airport system, together with eight heliports and thirty-two seaplane bases (Federal Aviation Administration 2025b). Airports in the plan are predominantly owned by local governments or managed by independent airport authorities created under state enabling legislation. That public ownership is a legacy of federal land grants dating to the 1940s and has been reinforced by decades of federal funding conditioned on grant assurances governing airport property use and disposal; there are forty as of the April 2025 revision, which added an assurance on leaded aviation fuel (Federal Aviation Administration 2025a). 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.

The clause is not merely tolerated by the federal regulator. It is prompted by it, and the prompting extends past reversion to the pricing that follows. The Airport Compliance Manual directs the reviewing office, when examining an aeronautical lease, to ask whether "title to tenant facilities vest in the airport sponsor at the expiration of the lease" and 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 2026, para. 12.3.b(5)). The same paragraph on lease term asks whether a lease provides "multiple options to the term with no increased compensation to the airport sponsor" (ibid., para. 12.3.b(3)).

Both questions are written from the sponsor’s side of the table. The first contemplates that once the improvements have reverted, the sponsor should be charging rent on assets the tenant paid for. The second treats a renewal option granted without additional compensation as a deficiency in the lease. Whatever else the hold-up mechanism modelled below is, it is not an unintended consequence of a drafting habit. The federal guidance that governs these leases directs sponsors to capture the value the reversion delivers, which is a considerably stronger foundation for the model in Section 4 than an inference from the presence of reversion clauses alone.

The same paragraph then forecloses the remedy. Paragraph 12.3.b(3) continues past the two sentences quoted above: "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. All disposals of federally acquired and federally conveyed property require concurrence of ACO-100. The Region or ADO should not consent to proposed lease terms that exceed 50 years" (ibid., para. 12.3.b(3)).

Read together, the two passages describe a regulator doing two things at once. It prompts sponsors to charge rent on improvements the tenant paid for, and it caps at fifty years the one contractual instrument that would put the reversion outside any tenant's or lender's planning horizon. The instrument is capped for a defensible reason, that a term longer than the useful life of the structure begins to look like a disposal of federal property rather than a lease of it, but the effect on the tenant is the same whatever the reason. A tenant cannot contract around the reversion by buying enough time, because the sponsor cannot sell it. Section 9.5 treats the bunching of initial terms at thirty, thirty-five and fifty years as an observable test of whether this constraint binds in practice.

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 Sponsor as Sole Counterparty

The sponsor’s market power should be characterised precisely, because the two sides of it operate differently and the literature treats them differently. In the ground lease itself the sponsor is a monopoly lessor: it is the sole entity that can grant continued occupancy of the parcel and the sole entity that can provide airside access to the taxiway and runway system. With respect to the improvements at expiration it is the sole possible taker, which is a buyer-side position, though one in which the price is fixed at zero by contract rather than set by bargaining. It is the first of these, the monopoly in ground, that drives the renewal dynamics modelled below. 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.

The taxonomy should be stated precisely, because it is often cited with the wrong number of members. Williamson (1991, 281-282) enumerates six forms: site specificity, physical asset specificity, human-asset specificity, brand name capital, dedicated assets, and temporal specificity. He attributes the sixth to Masten, Meehan, and Snyder (1991) and treats it as a species of site specificity, one in which what is at stake is timely responsiveness by on-site human assets. Joskow (2005, fn. 2) records the same reading and endorses it. Williamson (2010) repeats the six-fold list. The four-fold statement in Williamson (1985) is site, physical asset, human asset, and dedicated assets; it contains human-asset specificity, and it does not contain temporal specificity.

Airport hangar construction exhibits three of the six simultaneously, and does not exhibit the other three.

Table 1. Williamson's six forms of asset specificity applied to the airport hangar. Definitions condensed from Williamson (1991, 281-282).

What the shortening lease supplies is not a fourth form of specificity but a distinct feature of the contract, and it is better named for what it is: a finite horizon with zero terminal value. The distinction is worth keeping because the two do different work. The three forms of specificity determine how much value is at stake and how little of it can be recovered elsewhere. The finite horizon with zero terminal value determines the date on which that value transfers and the window within which it has to be earned back. Sections 4 and 5 model them jointly, and it is their combination rather than either alone that produces the pricing pattern this paper sets out to explain.

Three simultaneous forms of specificity is not by itself unusual in the transaction cost literature. Joskow (2005, 21-22) uses coal supply as the worked example for site specificity, physical asset specificity and dedicated assets alike. What distinguishes the hangar is the second element. Standard net-lease properties, the closest comparable real estate asset class, typically exhibit site specificity but retain meaningful alternative uses (warehouse, retail, office) that limit the other dimensions, and a net-lease tenant forfeits no building at expiry because the tenant never owned one. Coal supply agreements create the risk of appropriation; the hangar ground lease schedules it.

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.

Two quantities have to be kept apart here, because the source keeps them apart and the distinction changes what the framework predicts. Klein, Crawford, and Alchian (1978, 298) write: "The quasi-rent value of the asset is the excess of its value over its salvage value, that is, its value in its next best use to another renter. The potentially appropriable specialized portion of the quasi rent is that portion, if any, in excess of its value to the second highest-valuing user." The quasi-rent is measured against salvage. The appropriable quasi-rent is measured against the second highest-valuing user, and it is the second figure that a counterparty can credibly threaten to take, because the asset owner can otherwise turn to that user instead.

For a $3 million corporate hangar the scrap value of the steel structure might be $50,000 to $100,000, so the quasi-rent is on the order of $2.9 million, close to the entire investment. The appropriable portion is smaller by whatever the second highest-valuing user of that hangar at that airport would pay for it, and how much smaller is a question about the local market rather than a modelling assumption. Klein, Crawford, and Alchian supply the limiting case (1978, 299): "If no second party were available at the present site, the entire quasi rent would be subject to threat of appropriation." General aviation fields differ sharply on this margin. At a field with a deep hangar waiting list the second party exists, is identifiable, and has revealed something about willingness to pay by joining the queue. At a field with standing vacancy there is no second party, and the limiting case applies. Proposition 9 in Section 4.3 states the resulting prediction, which runs against the intuitive reading of demand.

The distinction also disposes of an objection the framework would otherwise have to answer. A general aviation sponsor competing with neighbouring fields for hangar development does not look like a monopolist, and the argument here does not need it to. Klein, Crawford, and Alchian (1978, 299) are explicit: "An appropriable quasi rent is not a monopoly rent in the usual sense, that is, the increased value of an asset protected from market entry over the value it would have had in an open market. An appropriable quasi rent can occur with no market closure or restrictions placed on rival assets." The appropriable quasi-rent in a hangar arises from the sinking of the investment, not from the absence of competition at the point of entry. Section 2.4 characterises the sponsor's position as monopoly lessor of the ground; that characterisation describes the renewal negotiation, and the appropriation does not depend on it.

What distinguishes hangar ground leases from the relationship-specific investment contexts studied in the literature, such as coal supply (Joskow 1985, 1987) or automobile body manufacturing (Klein, Crawford, and Alchian 1978), is therefore not the size of the quasi-rent, and not the number of forms of specificity present. It is that the transfer is scheduled. In coal and in automobile bodies the appropriation is a hazard that governance structures are built to contain. In the hangar ground lease it is a term of the contract with a date on it.

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 its position as sole lessor 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). □

Proposition 4 has a counterpart in published industry practice. ACRP Legal Research Digest 46 reproduces a sponsor leasing policy that ties recommended lease term directly to the tenant's capital investment.

Table 2. Recommended ground lease term by capital investment level. Source: National Academies of Sciences, Engineering, and Medicine (2024), p. 11, reproducing Mobile Airport Authority, Leasing Policy (2018).

The schedule is a governance response of the kind Joskow (1987), Crocker and Masten (1988) and Bandiera (2007) estimate: contract length is set to protect an investment whose value depends on the relationship continuing. It also shows that the relationship in Proposition 4 is understood by practitioners and written down by at least one sponsor. Proposition 4 says that where the schedule is not followed, or where term has run down below it, the residual risk is priced rather than contracted away.

Proposition 9 (Substitute-Tenant Moderation). The hold-up premium is decreasing in the depth of the sponsor's queue of substitute tenants, holding remaining term, hangar type, and airport characteristics constant.

Proof sketch. From the definition in Section 3.2, the appropriable quasi-rent is the excess of the hangar's value in place over its value to the second highest-valuing user at the same field. A waiting list is a roster of candidate second users. As the queue deepens, the value to the second highest-valuing user rises toward the value to the incumbent, and the appropriable portion falls toward zero even though the quasi-rent itself is unchanged. The bound on what the sponsor can extract is therefore not the incumbent's relocation cost but the gap between the incumbent's valuation and the next tenant's. □

Proposition 9 runs against the intuition that strong demand strengthens the sponsor's hand, and that is what makes it useful as a test. A discounting model has nothing to say about queue depth, because the length of a waiting list does not enter the present value of a lease payment stream. It enters only through a bargaining quantity. The proposition is also measurable without proprietary data, since sponsors maintain hangar waiting lists and those lists are generally obtainable as public records.

One caution belongs with it. Queue depth is plausibly correlated with local demand, and local demand raises rents through the ordinary channel as well. The prediction is about the premium attaching to short remaining term, not about the rent level, so the test is an interaction between queue depth and remaining term rather than a main effect. Section 9.2 writes it that way.

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 prefer that a ground lease run some years past the maturity of the loan secured against it. The published evidence on how many years is thinner than the figures in circulation, and it is worth stating as it stands rather than as it is usually repeated. ACRP Legal Research Digest 46 reports that "some Lenders state a preference that the debt on an airport ground lease should be retired at least five years before the end of a lease," and adds in the same passage that "none of the airport leases reviewed for this digest contained such a provision" (National Academies of Sciences, Engineering, and Medicine 2024, 11). That is a preference reported by some lenders, not a documented contractual requirement, and the digest's own survey of general aviation leases found no instance of it written down.

Two consequences follow, and both are consistent with the mechanism modelled here. First, the threshold is a lending convention rather than a term of the lease, so it can move with credit conditions and can differ across lenders at the same moment. Modelling it as a fixed number of years would overstate what is known; it is treated below as a parameter whose location is to be estimated. Second, because the convention lives in the lender's credit policy rather than in the lease, it constrains the buyer's financing rather than the tenant's occupancy. A lease does not become defective at fifteen years remaining. What contracts is the set of buyers who can finance a purchase of it, and that is a demand-side effect on price rather than a legal defect in title.

That 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.

Source: Author’s stylized illustration. The basis-point figures are constructed to show the shape of the interaction, not measured from transactions, and no observed decomposition of this kind exists.

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 sponsor’s pricing power. The constraint is incomplete in a way that is easy to miss and that matters to the model. Assurance 22 requires that the airport be made available "on reasonable terms and without unjust discrimination to all types, kinds and classes of aeronautical activities." That language disciplines differences between tenants. It does not cap the level of rent a sponsor may charge at renewal, provided the level is applied consistently. A sponsor that raises every tenant’s renewal rent to the top of the bargaining zone has not discriminated against anyone. The assurances are further incomplete in that they do not guarantee lease renewal, do not fix renewal terms, do not prevent a sponsor from declining to extend a lease for legitimate operational or development reasons, and are enforced on complaint through Part 16 proceedings rather than proactively. 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.

A further incompleteness is written into the one assurance that addresses this transaction directly, and it is the strongest institutional evidence available for the claim in this section. Assurance 38, headed "Hangar Construction," provides that where an airport owner or operator and an aircraft owner agree that a hangar is to be constructed at the airport at the aircraft 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" (Federal Aviation Administration 2025a). The duty is to grant a long lease. The phrase "long term" is not defined, no minimum is stated, and every material term is reserved to the sponsor.

Read against the fifty-year ceiling in Order 5190.6C paragraph 12.3.b(3), the federal framework fixes an upper bound on lease term and leaves the lower bound, the rent, the renewal mechanism and the disposition of improvements to the party that receives those improvements at expiry. That is an incomplete contract in the sense used by Grossman and Hart (1986) and Hart and Moore (1990): because the parties' obligations at the renewal point are not specified, the division of surplus is determined by the allocation of residual control rights, and here residual control sits with the sponsor. The assurance framework is not silent on the hangar tenancy. It creates an obligation and then assigns the content of that obligation to one side of it.

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.

6.4 What Regulating the Appropriating Party Changes

Sections 6.2 and 6.3 treat regulation as a partial brake on extraction. The literature on regulated long-term relationships is more specific than that, and it does not run in a single direction.

Goldberg (1976) is the founding statement and the one that bears most directly on the airport case. His argument is that a regulated relationship is best understood as a long-term administered contract; that entry restrictions and a protected right to serve have a plausible efficiency rationale rather than being pure rent; and that the degree to which that right is protected affects the capital intensity of the technology the regulated party is willing to build. Applied to an FAA-obligated sponsor, the assurance framework is not only a constraint on the sponsor. It is also the source of the tenant's confidence that aeronautical access at that field will continue to be available on reasonable terms for as long as federal obligations attach to the property. Part of the reason hangars get built on land the builder does not own is that those obligations exist.

Williamson (1976) supplies the counterpart. Franchise bidding substitutes competition for the franchise in place of competition within the market, and it degrades when the assets are long-lived and specific and the terms have to be renegotiated at renewal. An airport ground lease is a franchise awarded competitively and renegotiated at expiry over an immobile asset, which is the configuration Williamson identifies as the one in which franchise bidding fails to deliver what is claimed for it.

Levy and Spiller (1994) give Propositions 6 and 7 a firmer footing than the revenue-maximization assumption that Section 10 concedes has not been established. Their finding is that whether a regulator can credibly commit not to expropriate depends on an institutional endowment: judicial independence, administrative capacity, and the number of veto points over a change in terms. An independent airport authority and a city council differ on precisely those dimensions, and the differences are observable in enabling legislation and board composition rather than assumed. Gilbert and Newbery (1994) formalize how a regulatory constitution can sustain investment where the regulator cannot commit, which is the theoretical counterpart to reading grant assurances as an incomplete remedy.

Taken together, this literature says that regulating the appropriating party changes the hold-up equilibrium along three margins the model in Section 4 does not separate. It bounds the level of extraction, but only where the institutional endowment supports commitment. It changes the form of extraction, pushing it away from rent increases, which Assurance 22 makes visible and comparable across tenants, and toward non-price terms such as shortened renewal periods, use restrictions and capital improvement obligations, which it does not. And it makes extraction contestable after the fact through Part 16, converting what would be a one-shot appropriation into a repeated game with an outside enforcer. Goldberg's point is that the third margin can raise efficiency rather than lower it, because contestability is part of what makes the capital-intensive structure worth building at all.

One study cuts against the framework and should be stated plainly. Lyon and Mayo (2005) look for regulatory opportunism toward sunk, specific, immobile investment in the U.S. electric utility industry, which is the closest analogue in the empirical literature, and largely do not find it. Their reading is that regulators were driven by a desire to punish particular poorly managed utilities rather than by systematic extraction. If that result transfers, the prediction here needs reformulating: what would be observed at airports is targeted action against particular tenants rather than a general level effect. That happens to be the distinction Assurance 22 itself draws, and it is separable in data, because a sponsor-wide rent effect and a tenant-specific rent effect load on different fixed effects. Section 9.3 keeps them apart.

The concession literature supplies a base rate for Proposition 7. Guasch, Laffont, and Straub (2008) study 307 infrastructure concessions awarded in Latin America between 1989 and 2000, model renegotiation as arising from imperfect enforcement of the concession contract, and relate the probability of renegotiation to regulatory institutions, economic shocks and contract characteristics. Renegotiation of long-lived infrastructure contracts is common rather than exceptional. Engel, Fischer, and Galetovic (2013) set out the public finance of these arrangements. The renewal of an airport ground lease is a renegotiation of a long-lived infrastructure contract, and Proposition 7 is a hypothesis about the same object in a smaller setting.

Finally, a strand of the aviation literature runs against the framing of Section 6.2 and is worth confronting rather than omitting. Fuhr and Beckers (2006) apply transaction cost economics to the airport-airline relationship and conclude that privately crafted governance modes complement or even replace external regulation. Section 6.2 argues the reverse for the hangar tenancy: that regulation is an incomplete substitute for private governance. Both claims can hold at different levels of asset specificity and different scales of counterparty. A hub carrier negotiating with a hub airport can craft safeguards and can credibly threaten to move capacity; a single aircraft owner negotiating a T-hangar lease can do neither. The disagreement is therefore testable, and the testable version is whether the hold-up premium falls with tenant size.

7. Relationship to Prior Literature

7.1 The leasehold discount literature, and why convexity alone does not identify the mechanism

A body of empirical work already documents the phenomenon this paper sets out to explain, in settings with far better identification, and attributes it to something other than hold-up. Any claim this paper makes has to be stated against it.

Giglio, Maggiori, and Stroebel (2015) exploit the coexistence of freehold and very long leasehold housing in the United Kingdom and Singapore to estimate discount rates at horizons of one hundred years and beyond, and find leasehold properties trade at substantial discounts to otherwise identical freeholds, with the discount a function of remaining term. Bracke, Pinchbeck, and Wyatt (2018) estimate the term structure of that discount directly from UK leasehold transactions. Giglio, Maggiori, Stroebel, and Weber (2021) extend the design. Fesselmeyer, Liu, and Salvo (2022) document the same decay in Singapore’s ninety-nine year leasehold market, and add a methodological warning about location controls that applies to any hedonic study of hangars, where airport fixed effects and remaining term are correlated by construction.

The closest structural analogue is Gautier and van Vuuren (2019), who study Amsterdam’s municipal ground lease system: a public ground lessor, periodic rent resets, and privately financed improvements standing on municipally owned land. That is the institutional setting of this paper in a different industry, and it has been studied with transaction data this paper does not have.

That literature has measured what this paper has so far only described, and the estimates belong in the text rather than in the citations. They bound what a hangar study should expect to find, and they are the right backdrop against which to read the illustration in Section 5.3.

Table 3. Measured leasehold discounts and term effects in comparable markets, as reported by the cited authors.

Two entries bear directly on the hangar case. The Capozza and Sick estimate is the largest in this literature and the closest in magnitude to the adjustments hangar practitioners describe, which suggests the practitioner range is not implausible on its face even though no one has measured it. And Bracke, Pinchbeck, and Wyatt, having estimated the term structure directly, concluded that their results "stand in direct contrast to rule-of-thumb approaches to valuing lease term used by market practitioners" and that the divergence implies transfers between leaseholders and freeholders out of line with market values (2018, 1842). That warning applies to the hangar adjustments described in Section 1, with the difference that the hangar case has not been measured at all, so it is not known in which direction practice errs.

The difficulty this literature creates is not that it contradicts the model. It is that it produces the same observable. A finite-horizon claim on a cash flow stream with zero terminal value is convex in remaining term for purely arithmetic reasons, and Capozza and Sick (1991) and Dale-Johnson (2001) show that the redevelopment option embedded in a ground lease generates further curvature without any opportunism at all. Convexity is therefore consistent with discounting plus an option, and with hold-up, and with both. Proposition 1 is not an identifying prediction.

The propositions that do discriminate are Propositions 2, 3, 6, 7 and 8, and they discriminate because the pure financial explanation is silent on each. A discounting model predicts no effect of governance structure on the curve, because a dollar arriving in year twelve is worth the same whether the sponsor is an independent authority or a city council. It predicts no effect of a sponsor’s renewal track record, because a reputation is not a cash flow. It predicts no effect of active Part 16 compliance history. And it predicts that a renewal option at a pre-specified rent and a renewal option at renegotiated market rent should price alike once expected rent is held constant, where the hold-up account predicts they should not, because the second returns the tenant to the bargaining zone and the first does not.

An empirical test of this framework should therefore be built on the governance and contract-form predictions rather than on the shape of the curve. A study that establishes convexity and stops has established what the leasehold literature already established, and has not distinguished this paper’s mechanism from theirs. That is a real limitation of the design space available here, and Section 10 restates it.

Curvature in lease-term pricing is itself becoming an object of study in the commercial real estate literature, and the empirical ground is moving. Anderson, Sirmans, Sirmans, and Smersh (2025) analyse 8,293 U.S. single-tenant transactions from 2000 to 2019 and find that capitalization rates compress steeply with term at first and then flatten substantially beyond twenty years, a convexity they attribute to competing insurance and encumbrance effects. Two cautions attach to carrying that result across. Their term variable is the tenant lease rather than the ground lease, so the party that reverts and the party that sank the capital are not the same. And their curvature runs the other way from the mechanism here: they find an encumbrance penalty at long horizons, where this paper predicts a hold-up premium at short ones. The study is nonetheless a useful benchmark for scale, because it shows what a credible commercial lease-term study looks like in sample size, and Section 9.4 takes that as the standard the hangar question has to meet.

7.2 The Joskow coal contract analogy

Joskow's work on coal supply contracts provides the closest published empirical precedent for the framework developed here. Joskow (1985) documents the site specificity of mine-mouth generating plants, where the plant is built adjacent to the mine that supplies it and neither asset can be redeployed without a large loss of value. Joskow (1987) then shows that contract duration rises with the importance of relationship-specific investment, and Joskow (1988a) surveys the wider empirical record on asset specificity and vertical structure. The parallel to aviation is direct, and it is stated here at the level the published results support: duration responds to specificity, and the mine-mouth case sits at the extreme of specificity. Nothing below turns on a particular comparative magnitude between mine-mouth contracts and contracts with mines serving several buyers.

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, and this is where a natural comparison does not survive checking, the coal setting exhibits the same forms of specificity the hangar does. Joskow's own survey uses coal as the worked example for site specificity (the mine-mouth plant), for physical asset specificity (a boiler designed to burn a particular coal), and for dedicated assets (a remote deposit developed to supply one large user) (Joskow 2005, 21-22). A claim that the hangar is distinguished by the number of specificity types present therefore does not hold, and it is not made here. What distinguishes the hangar is the first point: the appropriation is scheduled rather than hazarded.

The wider contract-duration literature sharpens the analogy. Crocker and Masten (1988) treat contract length as the choice variable that responds to contractual hazard, which is the closest formal treatment of the variable at the centre of this paper. Masten and Crocker (1985), Goldberg and Erickson (1987) and Joskow (1985, 1988b, 1990) supply the surrounding empirical record, and Lafontaine and Slade (2007) survey it. Kozhevnikova and Lange (2009) replicate Joskow on more recent coal plant data. Mackay (2022) gives a modern treatment in which the cost of a long contract is the buyer and seller matching it forecloses over time, which supplies the missing half of a question this paper otherwise leaves open: why sponsors and tenants do not simply write the longest lease the FAA will consent to.

Bandiera (2007) is the closest of these to the hangar problem, because it is contract duration in land, with investment incentives, estimated jointly on real contracts. Studying tenancy agreements signed in Sicily between 1870 and 1880, she concludes that "the choice of contract length is driven by the need to provide incentives for nonobservable investment, taking into account transaction costs and imperfections in the credit markets that make incentive provision costly." That is the Joskow result restated in a land tenancy setting with a public-record contract archive, which is what a sponsor lease file is. Her methodological finding carries a warning for any test of the propositions here, and Sections 9.4 and 10 take it up: because length and the compensation scheme are used together to provide incentives within a single contract, they have to be analysed jointly, and a regression that treats remaining term as assigned independently of rent and reversion terms will misread the evidence.

7.3 The contested status of the hold-up mechanism

A paper resting on Klein, Crawford, and Alchian (1978) owes the reader an acknowledgement that the empirical illustration on which that article was built has been contested for a quarter of a century. The claim that General Motors acquired Fisher Body in response to hold-up was challenged directly by Coase (2000, 2006), who had been present at the time and returned to the dispute six years after the symposium, and by Casadesus-Masanell and Spulber (2000) and Freeland (2000) in the same symposium; Klein (2000, 2007) replied. Whinston (2003) raises a separate and more general difficulty, that the empirical literature on vertical integration rarely distinguishes the transaction cost and property rights mechanisms from one another. Hart and Moore (1990) supply the formal property rights alternative, and Gibbons (2005) sets out four distinct formalizations that are routinely conflated under a single label.

None of this is fatal to the framework here, and the reason is specific to the setting. The difficulty in the Fisher Body debate was establishing that hold-up rather than some other consideration drove an observed integration decision, in a case where the parties’ reasoning had to be inferred. In the hangar case the appropriation is not inferred. It is written into the lease as a term, and Section 2.2 shows the federal regulator prompting sponsors to price the position the term creates. What is contested in the general literature is whether hold-up explains observed governance choices. What this paper claims is narrower: that a contractually guaranteed transfer of the tenant’s capital at a known date, in a setting where the counterparty is also the sole lessor, should be priced. That claim does not require the Fisher Body reading to be correct.

7.4 The Design That Identifies the Mechanism Has Already Been Run

Section 7.1 concedes that convexity cannot separate hold-up from discounting and that a design turning on contract form would be needed instead. Such a design exists, it has been run in a ground lease market, and it produced an effect size.

He, Hu, Wang, and Yao (2024) study Hong Kong housing, where land is held on government leases and a large share of them run to 2047 under arrangements settled at the handover. Some leases carry a contractual promise of extension and some do not, and which a given property carries is a function of historical arrangements rather than of the property itself. Their estimate is that properties on unprotected leases sell at a discount of eight percent relative to otherwise comparable protected leases, and that older colonial leases suffer a further discount of about eight percent. They then estimate the model structurally and recover an implied additional ground rent of about twenty percent after 2047, which matches the observed discounts across lease horizons.

Three things follow for the framework here.

The appropriation is priced, and priced separately from the passage of time. The eight percent is not a discount-rate effect, because remaining term is held fixed across the comparison. It is the price of a reversion that is not contractually protected, which is the quantity Proposition 2 concerns.

The twenty percent ground rent figure is the extraction itself, recovered from prices rather than assumed. It is the closest published analogue to the renewal rent increase that Section 4 models as the channel through which a sponsor captures quasi-rent, and it is the first number available to this framework that was not constructed for illustration.

The third point is methodological and matters most. He and coauthors identify the effect by comparing leases that differ in whether renewal is contractually protected while holding remaining term constant. That is Proposition 3 estimated in a real market. A hangar study that compares a renewal option at a rent fixed in advance against a renewal option at renegotiated market rent is running the same comparison on a different asset, with a known expected magnitude to power it. Section 9.2 writes it as a coefficient restriction.

The settings also differ in ways that bound the transfer, and the differences run in a consistent direction. The Hong Kong reversion is a sovereign act with political risk attached, and He and coauthors find discounts increasing over time and larger in areas with greater pessimism about the city's future. An airport sponsor is not a sovereign, is subject to federal obligations enforceable by an outside regulator, and interacts repeatedly with a small and identifiable tenant population. The sign of the effect should transfer. The magnitude should be treated as an upper bound rather than a point prediction.

7.5 Expropriation Risk and Underinvestment in Land

Section 11.3 argues that aggressive extraction at renewal suppresses private investment in airport infrastructure. There is an empirical literature on that exact claim, in land, and it supports the behavioural half while qualifying the welfare half.

Jacoby, Li, and Rozelle (2002) study farmland in northeast China subject to periodic village-level reallocation. They quantify expropriation risk with a hazard analysis of individual plot tenures, then enter the predicted hazard in a plot-level investment equation for organic fertilizer, which has long-lasting benefits for soil quality. Higher expropriation risk significantly reduces application. Their welfare analysis then finds that guaranteeing tenure in this setting would yield only minimal efficiency gains. Both halves should be carried across. A measurable behavioural response to insecure tenure does not establish a large efficiency loss, and the policy argument in Section 11.3 is accordingly stated as a hypothesis about behaviour rather than a claim about welfare. Besley (1995), Goldstein and Udry (2008) and Hornbeck (2010) establish the same relationship between security of rights and investment in other settings.

The Jacoby, Li, and Rozelle design is directly transportable to airports, and it is cheaper to run than the price regression proposed in Section 9. Sponsor lease files record which leases expired, which were renewed, and on what terms. Municipal building permit records show capital reinvestment in hangars by parcel and date. A hazard model of non-renewal estimated on the first, with the predicted hazard entered in a reinvestment equation estimated on the second, tests the investment channel directly and needs no transaction prices. Both sources are public records in most states.

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. A Testable Specification

Sections 4 through 8 derive propositions, and Section 7.1 concedes that most of them do not discriminate between hold-up and discounting. This section states what would. It is built only from data that exists in public or commercially available records, and from functional forms already used in the leasehold literature. The purpose is to make the framework falsifiable by someone other than its author.

9.1 Data That Exists

Table 4 lists what each proposition requires and a source from which it can be assembled. Nothing in the table depends on a dataset being created; every entry is a record someone already keeps.

Table 4. Variables required by Propositions 1 through 9, and a source for each.

The binding constraint on this project is not the price data. It is the lease coding, because remaining term, reversion terms and renewal option form have to be read out of lease files one contract at a time, and the public records process runs at the speed of the slowest sponsor.

9.2 The Estimating Equation

Follow the functional form used by Giglio, Maggiori, and Stroebel (2015): remaining-maturity bucket dummies rather than a polynomial, with granular location by time fixed effects.

Here i indexes the hangar, s the airport and t the year of sale. T is remaining ground lease term at sale, bucketed at under 10, 10 to 14, 15 to 19, 20 to 24, 25 to 29, 30 to 39, and 40 or more years. Bucket dummies let the data draw the curve rather than imposing a shape on it, and these knots straddle both the 15 to 20 year inflection this paper claims and the 30, 35 and 50 year points the FAA guidance in Section 2.2 creates. RenewFixed and RenewMarket are indicators for a renewal option at a rent fixed in advance and a renewal option at a rent renegotiated at market, with no renewal option as the omitted category. Improvement is the tenant's capital investment, from building permit valuations or the lease file. Queue is the depth of the sponsor's hangar waiting list for the relevant hangar class, scaled by based aircraft. X holds square footage, clear height, door width and type, apron area, year built, and hangar class. μ is a full set of airport by year fixed effects, which implements the location-control warning that Fesselmeyer, Liu, and Salvo (2022) raise and that Section 7.1 flags. Standard errors are clustered by airport, with the heteroskedasticity-consistent estimator of White (1980) as the within-cluster base.

9.3 Which Coefficients Identify the Mechanism

The propositions are not equally informative, and a study that reports them all with equal emphasis will have buried its own contribution.

Table 5. Which coefficients discriminate between the hold-up account and the pure discounting account.

The contrast between γ₃ and γ₄ is the whole empirical contribution. A renewal option at a rent fixed in advance and a renewal option at a rent renegotiated at market are, once expected rent is held constant, claims on the same expected cash flow. Under discounting they must price alike. Under hold-up the second returns the tenant to the bargaining zone with the building already standing on the sponsor's land and the first does not, so γ₄ < γ₃. Section 7.1 makes this argument in prose. It is written as a coefficient restriction here because that is the form in which it can be rejected, and because Section 7.4 shows it has already produced a result of about eight percent in another market.

Proposition 9 supplies a second identifying contrast, and one that is harder to reconcile with any discounting story at all. The depth of a sponsor's waiting list does not enter the present value of a lease payment stream. It enters only through the value of the hangar to the second highest-valuing user, which is a bargaining quantity. Because queue depth is correlated with local demand, and local demand raises the rent level through the ordinary channel, the prediction is carried by the interaction γ₇ rather than by the main effect γ₈.

Two further restrictions follow from Section 6.4 and should be estimated rather than assumed. The Lyon and Mayo (2005) result implies that extraction, if it occurs, may be targeted at particular tenants rather than applied across a sponsor. A sponsor-wide effect and a tenant-specific effect load on different fixed effects, so the two are separable by estimating the governance and compliance terms with and without sponsor fixed effects and comparing. And the Fuhr and Beckers (2006) argument that private governance substitutes for regulation implies that the hold-up premium should fall with tenant size, which is testable by interacting the contract-form terms with an indicator for corporate or commercial tenancy.

9.4 Magnitude, Power, and Two Specification Hazards

Table 3 gives the range within which the price effect should be expected to fall. An effect of eight to twenty percent on price corresponds to roughly fifty to two hundred basis points on the capitalization rate at a six and a half percent base. With airport by year fixed effects absorbing the cross-airport variation, detecting an effect of that size requires on the order of several hundred transactions carrying within-airport variation in both remaining term and contract form. For calibration, Anderson, Sirmans, Sirmans, and Smersh (2025) use 8,293 single-tenant commercial transactions, Zhou (2023) uses 1,195 Dollar General transactions, and Joskow (1987) used 277 coal contracts. A hangar study with fifty transactions will not resolve the question, and should say so rather than report a coefficient.

Two hazards deserve attention before the data is collected rather than after. The first is joint determination. Bandiera (2007) shows that contract length and the compensation scheme are chosen together to provide incentives within a single contract, so remaining term at sale is not assigned independently of the rent and the reversion terms sitting beside it in the same lease. The variation to lean on is the variation that comes from when a hangar happened to change hands rather than from how its lease was designed, which argues for within-lease comparisons across sales and against treating every lease in the sample as an independent draw. The second is the interaction between age and term. Sia (2022) finds that building age carries a negative coefficient for freehold property and a positive one for leasehold, which means age and remaining term interact with opposite signs under leasehold and cannot be entered as separable controls. A hangar built in 1975 on a lease with forty years left is not the same asset as a hangar built in 2015 on a lease with forty years left, and a specification that assumes it is will attribute part of the term effect to depreciation.

9.5 Two Cheaper Tests

Two predictions can be tested without assembling any transaction data at all, and either would be a useful first result.

The first is bunching in lease terms. Order 5190.6C paragraph 12.3.b(3) endorses thirty to thirty-five years as sufficient and instructs field offices not to consent to terms beyond fifty. If that guidance binds, the distribution of initial lease terms in sponsor files should show mass at thirty, thirty-five and fifty years and little beyond fifty. A histogram of initial terms compiled from public records tests it directly. A null result would say that the regulatory ceiling this paper treats as a foreclosed remedy is not in fact where terms are being set, which would weaken the argument in Section 2.2 and should be reported if found.

The second is the investment channel described in Section 7.5. A hazard model of non-renewal estimated on sponsor lease files, with the predicted hazard entered in a hangar reinvestment equation estimated on municipal building permit records, tests Proposition 8 and the policy claim in Section 11.3 without any prices at all. It also has the advantage that its dependent variable, capital reinvestment by an existing tenant, is a decision made by the party this paper says is bearing the risk.

10. Limitations

Five limits bear on how this framework should be used.

It is theory, and nothing here is tested. The propositions are derived, not estimated. No transaction dataset of hangar leasehold sales was assembled for this paper, and none is known to exist in accessible form. Every numerical figure in Section 5.3 is constructed to illustrate a shape, not measured.

Convexity does not identify the mechanism. Section 7.1 sets this out. The leasehold discount literature predicts the same curvature from discounting and the redevelopment option, without opportunism. An empirical design that tests only the shape of the curve cannot separate the two, and a design that would separate them has to turn on governance structure, renewal option form, compliance history and reversion terms.

The governance propositions assume a revenue objective that has not been established. Proposition 6 treats an independent airport authority as closer to a revenue maximiser than a city council. That is plausible and it is testable, but it is asserted here rather than demonstrated, and the public finance literature on special districts would have something to say about it.

Behaviour at signing may not match the model. The airport leasing literature recommends that a general aviation lease carry a separate signature line or initials box for the reversion provision, so that the lessee acknowledges it specifically (National Academies of Sciences, Engineering, and Medicine 2024). That recommendation implies practitioners observe lessees failing to internalise reversion when they sign. A fully rational hold-up model does not predict that, and to the extent it is true, some of the pricing this paper attributes to anticipated appropriation may instead reflect a correction that arrives later, when a lender or a buyer prices what the original tenant did not.

There is no economics of the landside general aviation ground lease to extend, though the adjacent fields are not empty. Transaction cost economics has been applied to airports: Fuhr and Beckers (2006) analyse the vertical governance of the airport and airline relationship, and Barbot (2011), Bel and Fageda (2013) and Albalate, Bel, and Fageda (2014) address vertical contracts, market power and ownership form. The concession literature addresses renegotiation of long-lived infrastructure contracts (Guasch, Laffont, and Straub 2008; Engel, Fischer, and Galetovic 2013). What is absent is the landside general aviation ground lease specifically, and a search of that literature turned up no treatment of a sponsor's position as ground lessor to hangar tenants. That narrower absence is part of what makes the question worth asking. It also means the framework has adjacent work to check itself against, but no direct predecessor.

Remaining term is not exogenous to the other terms of the lease. Bandiera (2007) shows that contract length and the compensation scheme are chosen together to provide incentives within a single contract. Section 9 proposes to regress price on remaining term, reversion terms and renewal option form as though the first were assigned independently of the others. It is not, and the design has to lean on variation in remaining term that arises from the timing of a sale rather than from the design of a lease. This is a limitation of the test, not of the theory, but it bounds what any single cross-section can establish.

One close analogue found against the mechanism. Lyon and Mayo (2005) looked for regulatory opportunism toward sunk, specific, immobile investment in the U.S. electric utility industry and largely did not find it. Section 6.4 sets out how the prediction here would be reformulated if that result transfers. A reader who thinks it does transfer should read the propositions below as claims about targeted action against particular tenants rather than about a general level of extraction.

11. Discussion and Conclusion

11.1 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 three of Williamson’s six forms of asset specificity simultaneously and pairs them with a finite horizon carrying zero terminal value, a combination that is uncommon in commercial real estate and that makes the hangar market a usable natural laboratory for testing hold-up theory. Second, it derives a series of formal propositions (Propositions 1 through 9) 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.

11.2 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 through 4 using transaction data from U.S. general aviation airports. That study specifies remaining lease term in linear and quadratic form alongside reversion clause indicators, renewal option indicators, hangar type as a proxy for investment intensity, and airport-level controls. Section 9 of this paper recommends two departures from that specification: bucket dummies in place of the polynomial, so that the data rather than the functional form determines where the curve bends, and a renewal option variable that distinguishes a rent fixed in advance from a rent renegotiated at market, since it is that distinction and not the presence of an option that carries the identifying content. 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 through 9 (lender withdrawal interaction, governance structure, FAA regulation, relational contracting, and the depth of the sponsor’s queue of substitute tenants) require data collection beyond a transaction sample, and Section 9.1 identifies a source for each. 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.

11.3 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.

The compensation provision suggested here has a legislative precedent, and it comes from the market that produced most of the empirical evidence cited above. The Leasehold and Freehold Reform Act 2024 removes the qualifying period for lease extension claims, prescribes a statutory valuation method for the premium, creates a right to vary a long lease to a peppercorn ground rent, and abolishes marriage value in the extension premium. Marriage value is the increment in value created when the leasehold and freehold interests are joined, which under the prior law the leaseholder had to share with the freeholder in order to extend. Abolishing it reallocates that increment by statute to the party seeking the extension.

That is the same operation a compensation-at-reversion rule would perform in the airport setting. Both take a surplus that accrues to the holder of the residual interest by operation of the contract and assign it instead to the party whose capital created it. The Act is worth reading as evidence on feasibility rather than as a template to copy, since the freeholds it addresses are residential and privately held, while an airport sponsor holds land encumbered by federal obligations and is required to apply revenue to the airport. It does establish that a legislature has been willing to reallocate exactly this quantity, and that the reallocation was argued on the ground that the leaseholder's position in the bargain was structurally weak rather than freely chosen.

A second implication of Section 7.5 should temper the first. Jacoby, Li, and Rozelle (2002) find a significant investment response to tenure insecurity and then find the welfare gain from removing that insecurity to be minimal. The behavioural claim here, that tenants facing anticipated extraction invest less, is well supported by analogy. The welfare claim, that the resulting underinvestment is large enough to justify a rule change, is not established by this paper and should not be read into it.

11.4 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.