METHODOLOGY GUIDE

VALUING AIRPORTS IN ONTARIO

Valuation Date: January 1, 2016

AUGUST 2016

September 28, 2016

The Municipal Property Assessment Corporation (MPAC) is responsible for accurately assessing
and classifying property in Ontario for the purposes of municipal and education taxes.

In Ontario’s assessment system, MP!C assesses your property value every four years. This year,
MPAC is updating the value of every property in the province to reflect the legislated valuation
date of January 1, 2016.

MPAC is committed to provide Ontario property owners, municipalities and all its stakeholders
with the best possible service through transparency, predictability and accuracy in values. As
part of this commitment, MPAC has defined three levels of disclosure of information in support
of its delivery of this year’s assessment update. This Methodology Guide is the first level of
information disclosure.

This guide provides an overview of the valuation methodology undertaken by MPAC when
assessing airport properties for this year’s update, ensuring the methodology for valuing these
properties is well documented and in alignment with industry standards.

Property owners can access additional information about their own properties through
aboutmyproperty.ca. Login information for aboutmyproperty.ca is provided on each Property
Assessment Notice mailed this year. Additional information about MPAC can be accessed at
mpac.ca.

Antoni Wisniowski Rose McLean, M.I.M.A.

President and Chief Administrative Officer Chief Operating Officer

Table of Contents

1.0 INTRODUCTION ............................................................................................................... 4

1.1 PROPERTIES COVERED BY THIS METHODOLOGY GUIDE ....................................................................... 4

1.2 LEGISLATION .............................................................................................................................. 6

1.3 CLASSIFICATION .......................................................................................................................... 7

1.4 THE USE OF THIS METHODOLOGY GUIDE ........................................................................................ 8

1.5 CONSULTATION AND DISCLOSURE .................................................................................................. 8

2.0 THE VALUATION PROCESS .............................................................................................. 10

2.1 OUTLINE ................................................................................................................................. 10

2.2 APPROACH .............................................................................................................................. 11

2.3 DATA COLLECTION .................................................................................................................... 11

2.4 DATA ANALYSIS ........................................................................................................................ 16

2.5 VALUATION ............................................................................................................................. 17

2.6 VALIDATING THE RESULTS........................................................................................................... 17

3.0 THE INCOME APPROACH FOR AIRPORTS ........................................................................ 18

3.1 OUTLINE ................................................................................................................................. 18

3.2 APPORTIONMENT OF VALUE TO AIRPORT TENANTS ......................................................................... 19

3.3 AIRPORT REVENUES .................................................................................................................. 19

3.4 AIRPORT EXPENSES ................................................................................................................... 21

3.5 CAPITALIZATION RATE................................................................................................................ 22

4.0 THE COST APPROACH FOR AIRPORTS ............................................................................. 24

4.1 OUTLINE ................................................................................................................................. 24

4.2 STEPS IN THE COST APPROACH .................................................................................................... 25

4.3 REPRODUCTION COST NEW ........................................................................................................ 25

4.4 PHYSICAL DEPRECIATION ............................................................................................................ 25

4.5 OBSOLESCENCE ........................................................................................................................ 26

4.6 LAND VALUATION ..................................................................................................................... 29

4.7 PARTITION VALUE OF AIRPORT .................................................................................................... 30

4.8 ASSESSED VALUE ...................................................................................................................... 31

4.9 CONCLUSION ........................................................................................................................... 31

APPENDIX A – EXAMPLE OF AN AIRPORT VALUATION USING THE INCOME APPROACH ........ 32

APPENDIX B – EXAMPLE OF AN AIRPORT VALUATION USING THE COST APPROACH ............. 33

1.0 Introduction

The Municipal Property Assessment Corporation (MPAC) – mpac.ca – is responsible for

accurately assessing and classifying property in Ontario for the purposes of municipal and
education taxation.

In Ontario, property assessments are updated on the basis of a four-year assessment cycle. In
2016, MP!C will update the assessments of Ontario’s nearly five million properties to reflect
the legislated valuation date of January 1, 2016. Assessments updated for the 2016 base year
are in effect for the 2017–2020 property tax years.

The last Assessment Update was based on a January 1, 2012, valuation date. Increases between
the 2012 assessed value and the 2016 assessed value are phased in over a four-year period. Any
decreases in assessment are applied immediately.

It is important to ensure that the valuation methodology applied is capable of providing a

realistic estimate of current value at the relevant valuation date, which, in turn, enables all
stakeholders to understand the valuation process and have confidence in the fairness and
consistency of its outcome.

This Methodology Guide has been prepared for the benefit of MPAC assessors, property
owners and their representatives, municipalities and their representatives, Assessment Review
Board members, provincial officials, and the general public.

This guide outlines the valuation process to be followed by an assessor, including steps that
require appraisal judgment. It is incumbent upon the assessor to make informed decisions
throughout the valuation process when arriving at estimates in current value.

1.1 Properties Covered by This Methodology Guide

This Methodology Guide applies to airports and aerodromes in Ontario. An aerodrome is “any
area of land, water (including frozen surface thereof) or other supporting surface used or
designed, prepared, equipped or set apart for use either in whole or in part for arrival and
departure, movement or servicing of aircraft and includes any building, installations and
equipment in connection therewith.” !n airport is “an aerodrome for which, under Part III of
the Air Regulations, an airport certificate has been issued by the Minister.”1

1
Aerodromes Standards and Recommended Practices (TP 312), 5th edition (revised July 2015), 1.1:
https://www.tc.gc.ca/eng/civilaviation/publications/tp312-chapter1-1-1-4793.html
Airports vary from small, local airports to major international airports, with a variety of
different-sized regional airports in between the two extremes. This guide shapes how MPAC
uses the income approach and the cost approach in order to determine current value for
assessment purposes.

This guide outlines the valuation process to be followed by an assessor, which contains steps
that require appraisal judgment. It is incumbent upon the assessor to make informed decisions
throughout the valuation process when arriving at estimates in current value.

There are many levels of infrastructure development at airports and aerodromes in Ontario. This
guide explains the valuation approaches for all of the airports and aerodromes in Ontario as
described by Transport Canada’s National !irport Policy.2 Properties with a primary use other than
an airport or an aerodrome will have a market value estimate based on one of the three standard
appraisal approaches that best suits the property type. These types of airports or aerodromes
generally have grass airstrips and are located on recreational- or farm-type properties.

The airports and aerodromes within Transport Canada’s National !irport System and described
in the Assessment Act as “designated airport authorities” are covered by this guide when
referring to the income approach to value. Billy Bishop Toronto City Airport is also valued using
the income approach to value. While the value estimates of these airports are based on the
income approach, some of the lessees may have a tenant tax liability value apportioned out
using the cost approach, as described herein.

The federal government and Transport Canada regulate the operation of airports and
aerodromes in Ontario. Transport Canada has a National Airports Policy that describes
aerodromes in Ontario. There are primarily three types of airports in Ontario, as described by
Transport Canada. The categories are:

 national airport system – annual traffic of 200,000 passengers or more

 regional/local airports – usually scheduled passenger traffic

 small airports – general aviation and recreational flying

The following MPAC property codes are used to categorize the various types of airports in
Ontario:

 737 Federal airport

 738 Provincial airport

2
National Airport Policy, 1994: https://www.tc.gc.ca/eng/programs/airports-policy-menu-71.htm
  739 Local government airport

 740 Airport leasehold

 741 Airport authority

It should be noted that these are general guidelines that vary depending on the specific
circumstances of a particular property.

An assessor may also make reference to additional Methodology Guides for properties that do
not fall precisely within the description of one of the property codes listed above.

1.2 Legislation

The main legislation governing the assessment of properties in Ontario for property tax
purposes is contained in the Assessment Act.3

The Act contains important definitions and states that all property in Ontario is liable to
assessment and taxation, subject to some exemptions. Section 19(1) of the Act requires that
land be assessed at current value, which is defined to mean, in relation to land, “the amount of
money the fee simple, if unencumbered, would realize if sold at arm's length by a willing seller
to a willing buyer.”

Airport authorities are exempt from property taxes pursuant to section 3(1)24 of the Act which
provides an exemption for “land that is owned or leased by an authority that operates an airport”
(subject to certain conditions identified in the legislation). Section 3(1)24.iv indicates that “the
exemption does not apply to any portion of the land leased by a tenant, other than a designated
airport authority, to whom section 18 applies.” This exemption applies for the 2013 and
subsequent taxation years. Note: despite being exempt from taxation, airport authorities are
required to make a payment in lieu of taxes (PILT) to the municipality in which they are located.

Section 18 (1)a of the Act provides that “the tenant of land owned by the Crown shall be
assessed in respect of the land as though the tenant were the owner if rent or any valuable
consideration is paid in respect of the land.” This section applies to several airport authorities,
including the five largest airports, which are owned by the Federal Government.

The Minister of Finance filed O. Reg. 430/15 on December 18, 2015 which added additional
rules affecting the valuation and classification of properties on which a third party sign
(billboard) is located. To comply with the Regulation, the income attributable to a third party
sign will not be included in the valuation of any property for assessment purposes.

3
Assessment Act, R.S.O 1990, c A.31: https://www.ontario.ca/laws/statute/90a31.
1.3 Classification

Multiple classifications are used for airports and aerodromes. These classifications are
determined by legislation and the use of the space that is occupied by the airport operator or
tenant of the airport. The tenants of an airport are taxable in the commercial property class
unless determined otherwise pursuant to Section 18 of the Act.

In Ontario, there are four designated airport authorities: Toronto Lester B. Pearson
International Airport, London International Airport, Ottawa McDonald-Cartier International
Airport and Thunder Bay International Airport. These four airport authorities make a payment
in lieu of taxes (PILT) to the municipalities in which the airports are residents, as regulated
under Section 45.1 of Ontario Regulation 282/98 of the Assessment Act. The regulation
specifies that PILT payments are set out on a per passenger basis based on location. If the
authority does not make the required PILT payments, they must pay the equivalent of
municipal and school taxes that would have been payable if the property were taxable.

The Toronto Port Authority also makes a PILT payment based on the land it owns at the Billy
Bishop Toronto City Airport. The Toronto Port Authority is listed in Schedule III Section 2 of the
PILT Act. Schedule III identifies corporations who manage, charge and direct property by virtue
of a lease with Her Majesty in right of Canada whose property is considered to be “Federal
Property” for purposes of the PILT Act. The leased areas of the Billy Bishop Toronto City Airport
are taxable under the same legislation as the airport authorities, pursuant to Section 18(1)(a) of
the Assessment Act.

The commercial tax class is used for tenants that occupy space in the terminal buildings and
also for commercial tenanted buildings on the field. However, if there is a part or parts of the
property which is/are used for other purposes, it may be necessary to apportion the value of
the property between the various uses.

In January of 2001, the Ontario Regulations were amended with a new definition under the
residential/farm class to include buildings used for private aircraft storage. Section 3(1)2.x of O.
Reg. 282/98 includes in the residential property class buildings that are used exclusively for the
storage of recreational private aircraft. This classification ensures that the appropriate property
tax rate is applied to the relevant parts of the property.

If a portion of the property is used for other purposes, the total value of the property will be
apportioned between the various uses to ensure that the appropriate tax rate is applied to the
relevant parts of the property.
1.4 The Use of This Methodology Guide

This Methodology Guide is intended to:

 Ensure MP!C’s assessed values for these properties are fair, accurate, predictable and
transparent.

 Provide direction to assessors and clear explanations to municipalities, taxpayers and

Assessment Review Board members.

 Ensure that MP!C’s methodology for valuing these properties is well documented and
aligns with industry standards.

 Explain the thought process/decision-making process that an assessor should undertake

to apply the valuation methodology.

 Ensure a consistent approach to valuing these property types.

 Support MPAC assessors in conducting their due diligence in:

 applying Ontario’s legislation and regulations
 adhering to industry standards for market valuation in a mass appraisal
environment

It should be noted that this Methodology Guide is not intended to be a substitute for an
assessor’s judgment in arriving at a market value–based assessment (i.e., current value) for a
particular property. However, given that the Methodology Guide explains industry standards
for property assessment, conforms to valuation industry norms, and adheres to provincial
legislation and regulation, MPAC assessors are expected to follow the procedures in the
Methodology Guide and be able to clearly and satisfactorily justify any deviations from it.

1.5 Consultation and Disclosure

MPAC is committed to providing municipalities, taxpayers and all its stakeholders with the best
possible service through transparency, predictability and accuracy. In support of this
commitment, MPAC has defined three levels of disclosure as part of its delivery of the 2016
province-wide Assessment Update:

 Level 1 – Methodology Guides explaining how MPAC approached the valuation of

particular types of property
  Level 2 – Market Valuation Reports explaining how the methodology outlined in Level 1
has been applied at the sector level for the purposes of each assessment

 Level 3 – Property Specific Valuation Information available to property taxpayers, their

representatives and municipalities

Residential property owners can access detailed information about their assessment through
aboutmyproperty.ca. Login information is provided on every 2016 Property Assessment Notice
mailed.
2.0 The Valuation Process

The valuation process always begins with a determination of the highest and best use of the
subject property.

Any reliance upon this guide is made only after the assessor has determined that the highest
and best use of the subject property is that of an airport.

Assessors determine the value of a property using one of three different approaches to value:

 the direct (sales) comparison approach

 the income approach

 the cost approach

2.1 Outline

In the direct (sales) comparison approach, value is indicated by recent sales of comparable
properties in the market. In considering any sales evidence, it is critical to ensure that the
property sold has a similar or identical highest and best use as the property to be valued.

In the income approach (or, more accurately, the income capitalization approach), value is
indicated by a property’s revenue-earning power, based on the capitalization of income. This
method requires a detailed analysis of both income and expenditure, both for the property
being valued and other similar properties that may have been sold, in order to ascertain the
anticipated revenue and expenses, along with the relevant capitalization rate.

In the cost approach, value is estimated as the current cost of reproducing or replacing the
improvements of the land (including buildings, structures and other taxable components), less
any loss in value resulting from depreciation. The market value of the land is then added.

In this guide there are two valuation processes that are referenced when valuing airports and
aerodromes in Ontario.

The first valuation process in broad terms is the income approach, which estimates the annual
revenue that can be generated by an airport, deducts the annual expenditure reasonably
incurred, a Capex allowance for capital expenditures and then applies a capitalization rate to
the net income to arrive at a current value for the property.
For the airport authorities and Billy Bishop Toronto City Airport, MPAC uses a proforma-based
income valuation that uses the income approach predominantly and the cost approach for the
infield structures. All of the airport authorities are non-profit enterprises, and the Billy Bishop
Toronto City Airport is run by the Toronto Port Authority, which is also a non-profit enterprise.

The second valuation process is the cost approach, and it is based on developing reproduction
or replacement costs for the materials used in construction of the existing improvements.
Those costs are then adjusted to reflect any depreciation in the property being valued. Last, the
value of the land is added to derive market value.

Highest and Best Use

Airports consist of large tracts of land, often in close proximity to existing development.
MPAC assessors must consider the highest and best use and development potential of the
property. A property with a higher value under an alternate permitted use should not be
valued as an airport.

The highest and best use of the property must be determined as vacant and improved.
The four highest and best use tests will determine whether the alternative, higher value
use of the property is physically permissible, financially feasible, legally permissible and
maximally productive.

This guide assumes that the highest and best use of the property is the existing use, which is
that of an airport.

2.2 Approach

There are three main phases in the valuation process used by MPAC:

 data collection

 analysis of the data collected

 valuation

2.3 Data Collection

Different data is required for the two approaches used to value airports and aerodromes. There
is specific data that is required for each approach, but there are also similar data elements that
need to be collected from the airports regardless of approach to value.
Detailed financial information specific to the overall airport and to each individual terminal
tenant is needed for the income approach.

Property specific information is required to value airports using the cost approach. The physical
characteristics of the property, along with site information, are the basis for the cost approach.

The data requirements for airports to be valued using the two approaches (income and cost)
are outlined below.

General Airport Data

 airport statistics on annual number of passengers, aircraft movements and air cargo
tonnage

 building and site improvement plans, site plans, the master airport plan, noise planning
zones and aviation easements for the subject property

Airport Financial Data

 tenant income and expense statements from the airport for the preceding five years

 annual reports showing airport revenues and expenses and other income valuation
parameters

 income and expense statements from any operating tenants

Airport Rental Data

 rents for concessions, retail, office and infield tenants, as well as ground lease

information

Airport Improvement Data

 details of all airport improvements, measured, quantified and cross-referenced to site

and building plans as appropriate

 details of the function of all airport improvements, along with notes relating to any
issues concerning their use

Airport Land Valuation Data

 land values developed for airport land uses based on sales and/or recent land leases
Airport Exemption Data

 exemptions to taxation as per the Municipal Grants Act.

 exemptions for the airport authorities based on legislation

Airport Sales Data

Although sales of airports do not take place very often, where they do take place MPAC will
analyze the sale price to assist in:

 airport sales, analyzed to obtain capitalization rates and, in some cases, earnings before
interest, taxes, depreciation and amortization (EBITDA) multipliers

 airport sales, if available, analyzed to obtain information that may assist in ensuring that
current value obtained through use of the cost approach is in line with available market
information

 confirming final current values for property tax purposes

Sales data collected by MPAC will include:

 property address and legal description

 sales price

 date of transfer

 name and address of vendor and purchaser

 interests transferred (fee simple or other)

 purchaser motivation

 financing conditions

It is important for MPAC to ascertain as much information as possible regarding any sale of an
airport. All interests in the property sale must be isolated and separated to derive realistic
values for the assessable property. Airport sales will include non-assessable items, such as
inventory, personal property, intangibles (business value) and the contributory value of the
improvements. These items need to be excluded from the sale price so that data relating only
to the realty can be analyzed.
  airport sales, analyzed to obtain capitalization rates and, in some cases, earnings before
interest, taxes, depreciation and amortization (EBITDA) multipliers

 airport sales, if available, analyzed to obtain information that may assist in ensuring that
current value obtained through use of the cost approach is in line with available market
information

Airport Improvements

Airport improvements include buildings that serve specialized aviation functions, including
passenger and cargo handling and aircraft servicing and maintenance. The major classes of
improvements associated with airports can be identified as:

 runways, taxiways, aprons, paving

 security fencing

 passenger and cargo terminals

 administration buildings

 aircraft maintenance hangars

 cargo handling

 runway vehicle maintenance facilities

 storage buildings

 power facilities

 sewage facilities

 tunnels

Many airports also contain improvements such as car rental facilities, parking facilities, retail
shopping facilities (in the terminals), flight kitchens and airport hotels.
Services and Facilities

Within the overall airport, a wide range of services and facilities are provided, which can be
divided into three distinct groups:

 essential operation services

 traffic handling

 commercial activities

Passenger volume is the key factor at the major commercial airports, since it has the largest
impact on an airport’s revenue. Passenger volume will generally dictate airline demand for
concession and commercial space, driving the airport’s revenue potential.

Business activities and revenue from airport operations will typically be derived from airside
and groundside activities. The proportionate contribution will vary depending on an airport’s
size.

Airside Activities

These generally involve anything that is related to the operation of aircraft and aircraft
movement while on the ground (including runways, taxiways and air bridges).

Groundside Activities

These generally include the supply of parking, loading and terminal buildings for concessions
and retailing, together with any other ground lease agreements.

As a general rule, analysis of airport financial statements indicates that the large international
airports derive a greater percentage of income from groundside activities than from airside
activities. In other words, a greater percentage of gross revenue is derived from retail,
concessions, car parking and ground leases than from landing or aeronautical fees.

The level of departmental income also varies between airports. Airports with higher volumes of
international passengers versus domestic passengers typically derive greater revenue from the
trading or retail departments.

Airports with higher volumes of domestic passengers typically derive a higher percentage of
gross revenue from landing or terminal fees.
Confidentiality

As outlined above, it is important to be aware that, in order to enable MPAC to produce an

accurate valuation of the property concerned, information needs to be obtained from a variety
of sources.

This will include information from MP!C’s records, from the owner or operator of the property,
from the municipality in which the property is located, from the assessor’s visit to the property
and from other sources.

All stakeholders in the property tax system have an interest in ensuring that the current value
provided by MPAC is correct; in order to achieve this, it is necessary for all parties to cooperate
in the provision of information.

It is appreciated that some of the information outlined above may be of a commercially

sensitive nature. MPAC recognizes the need to ensure that any information provided to them is
properly safeguarded and only used for the purpose for which it is supplied. Assessors must
appreciate the nature of this undertaking and ensure data is treated accordingly.

If, after an appeal has been filed, MPAC receives a request for the release of actual income and
expense information, or other sensitive commercial proprietary information, the usual practice
is to require the person seeking the information to bring a motion before the Assessment
Review Board (ARB), with notice to the third parties, requesting that the ARB order production
of the requested information. The release of such information is at the discretion of the ARB.

The Assessment Act outlines in Section 53(2) that disclosed information may be released in
limited circumstances “(a) to the assessment corporation or any authorized employee of the
corporation; or (b) by any person being examined as a witness in an assessment appeal or in a
proceeding in court involving an assessment matter.”

2.4 Data Analysis

Having carried out the data collection outlined previously, the assessor needs to analyze it and
reach a conclusion regarding the appropriate valuation method to use and how it should be
applied.

MPAC will analyze the data obtained in respect of the particular airport to determine whether it
should be valued using the income approach or the cost approach.

If the income approach to value is being used, MPAC will analyze the data obtained in respect
of revenues and expenses at a particular airport to ensure that it is reasonable in comparison
with other similar airports and in line with industry expectations. It is important to stabilize
airport income and expenditures.

Stabilizing Income and Expenses

Airport income and expenses can vary by a significant amount from one year to the next. While
the valuation of an airport looks to the income returned over the long run, it would not be
appropriate for MPAC to value airports on the basis of one poor performance year or one
excellent performance year. By taking a weighted average of income and expenses over a
three-year period, the peaks and valleys of incomes and expenses can be reduced and the value
of the airport becomes based upon a more stable picture of the airport’s performance.

If the data shows that it is not appropriate to value the airport using the income approach, it
will be valued using the cost approach, as outlined in Section 4 of this guide.

2.5 Valuation

Having undertaken the necessary steps outlined above, the assessor should now be in a
position to apply the appropriate valuation model.

2.6 Validating the Results

Once the assessor has completed the valuation, it is necessary to carry out a series of checks to
ensure that all relevant parts of the property have been included in the valuation, there has
been no double-counting of any adjustments made for depreciation, the resulting valuation has
been compared with any market evidence that may be available in relation to similar properties
and the final valuation is in line with the valuation of other similar properties in Ontario.
3.0 The Income Approach for Airports

3.1 Outline

MPAC uses the direct capitalization method to apply the income approach to airport properties.
The direct capitalization method for the valuation of airports that are run by airport or port
authorities have the following steps:

 Determine stabilized airside and landside revenues for the airport.

 Determine the potential gross income (PGI).

 Determine stabilized operating expenses to determine the operating income (OI).

 Deduct stabilized expenses,

 Determine net operating income (NOI) before municipal taxes.

 Determine the average ratio of capital expenditures being spent on large international

airports around the world.

 Determine NOI, less capital expenditure.

 Determine the effective tax rate (ETR) used to represent property taxes. To determine
the ETR, the municipal commercial tax rate is referenced and adjusted to account for
the subsequent personal property deduction from the capitalized value.

 Calculate the effective tax rate.

 Add the effective tax rate to the capitalization rate.

 Capitalize the NOI (less capital expenditures) into an estimate of value.

 Deduct personal property from the capitalized value, with the result being the current
value assessment.

 Allow for the addition of leasehold airport improvements (eg., infield hangars and
buildings, structures only)
3.2 Apportionment of Value to Airport Tenants

MPAC is required to apportion the value of the airport to various tenants. This is done as
follows:

 Collect rent rolls (tenant space and rents) from airport and port authorities
management.

 Organize space lease tenants into logical classes (e.g., retail, office, concessions,
industrial storage).

 Determine any market influences that may affect the rents.

 Apply the appropriate gross expense rate to rents or adjusted rents (if required).

 Apply the same capitalization rate from the total airport valuation to the NOI of the
specific tenant.

 Using the cost approach, value tenants on the infield, who pay the airport authorities a
ground lease rent and build their own structures from where they operate.

 Analyze land lease tenant rental patterns.

 Add the total value of the tenant improvements (buildings only) to the capitalized NOI
value for the final valuation calculation.

3.3 Airport Revenues

There are various types of revenue available at airports:

Landing Fees from the Entire Airfield Operations

A landing fee is charged for each landing of an aircraft at the airport based on the arriving
aircraft’s maximum take-off weight (MTOW). The level of passenger activity at the airport
directly affects aircraft movement, and, consequently, MTOW and revenues from landing fees
will vary annually.

General Terminal Charges

These charges relate to the costs to operate the terminal, and are established on a cost per
landed seat, which reflects passenger activity levels. Thus, these charges will also vary annually
as a direct result of overall passenger traffic.
Car Parking Revenues

Parking revenues are derived from the operation of the public parking lots or garages as well as
remote and metered parking. An airport’s parking revenue is directly related to the origin and
destination traffic.

Concession Revenues

Concession revenues are a function of passenger space devoted to concessions. The main
sources of concession revenues are duty free sales, retail, food and beverage operations. The
majority of concession arrangements provide for payment of a percentage of gross revenues
with minimum annual payment guarantees.

Space and Office Rentals

These include income from airport-leased land. The revenues are adjusted to reflect the space
rented using the actual space leased according to the most recent information available. The
rents applied should be derived from actual data provided by the airport authorities.

Land Rentals

This refers to income generated from ground leases to aircraft maintenance facility operators,
private airplane hangar operators, flight kitchens, de-icing facilities, cargo operations, car rental
agencies, etc.

Other Operating Revenues

Other revenues comprise electrical power, fines for airport traffic regulations and the federal
Transportation Act collection expenses, interest on overdue accounts (variable and fixed rate),
exchange gain/loss, recovery of airport maintenance charges, sundry services, telephone
service, water, aircraft parking fees, aviation fuel, recoverable services, penalties issued under
the Aeronautics Act and other miscellaneous revenues. De-icing revenues are also listed in this
category.

Airport Improvement Fees

Airport improvement fees (AIF) are collected under an agreement (the AIF Agreement) with the
Air Transport Association of Canada and major air carriers serving the airport. The AIF
Agreement provides for a consultation process with air carriers on airport development, as well
as the collection of an AIF by air carriers. AIF revenues can only be used to pay for airport
infrastructure development and related financing costs.
As already indicated, MPAC stabilizes this income to reflect the annual income generated from
typical passenger loads over a period of three years.

In the valuation of airports, MPAC will select the revenues from calendar year figures that are
the closest figures to the base year valuation date.

3.4 Airport Expenses

As with revenues, MPAC will identify the expenses from three calendar years that are the
closest to the base year valuation date. Typical expenses are outlined below.

Salaries, Wages and Benefits

The airport authority pays salaries and wages and provides benefits to its unionized and non-
unionized employees, including pension plans, medical and life insurance benefits and certain
other benefits, provided for under collective agreements with its unionized employees.

Operations

Operations related to repairs, maintenance, materials, supplies and services are assumed to
apply to the whole airport. These expenditures are those costs associated with the operation
and maintenance of the airport’s facilities. Included would be utilities, supplies and services,
equipment and property rental, repairs and maintenance, engineering and professional
services, insurance, expenses related to the administration and management of the airport, as
well as policing and security.

Amortization

Amortization as reported should reflect the amortization of capital assets, such as runways,
buildings, roadways, operating equipment and improvements to leased land. Amortization is
removed as an expense because it is an accounting construct, not a cash expense, and the
capitalization rate must be applied to net cash income. Instead, a replacement allowance
reflecting the stabilized cost for replacement should be deducted.

Property taxes

Property taxes are removed from expenses since the purpose of this analysis is to calculate the
value of the airport for property assessment. An effective tax rate calculation is included in the
capitalization rate to reflect this.
Other expenses

Other expenses are miscellaneous expenses not falling into any of the above categories.

Rent

Airport rent, which is the amount paid under a ground lease, is included as an expense. Airport
authorities have signed ground lease agreements with the Government of Canada, which
provides that the authorities will lease the airport facilities for an initial term of sixty years. A
twenty-year renewal option may be exercised, but at the end of the renewal term, unless
otherwise extended, the authority is obligated to return control of the airport to the landlord
(the Crown) without debt.

The operating lease for an airport requires the authority to pay a PILT to the Crown based on a
legislated calculation for each authority. The legislated rate is multiplied by the passenger count
to calculate the payment.

As with revenues, MPAC stabilizes the expenses using three years of financial data to reflect
typical annual expenditure for the airport concerned.

3.5 Capitalization Rate

The capitalization rate is the factor that connects the net income stream to the current value of
the property. MPAC researches local, national and international market data for sales of
airports. MPAC identifies the net operating income of the airport that sold and then analyzes
the sale price to identify the capitalization rate for that sale.

The capitalization rate is derived by using the following formula:

Capitalization Rate = Net Operating Income

Property Purchase Price

Once the stabilized annual net income of the airport to be valued is established, the amount
can be capitalized into an estimate of current value based on existing airport sales evidence.

The capitalization rate recognizes the future potential of the income stream to which it is
applied. It measures the quality of an expected income stream at a single point in time, as well
as opportunities for income enhancement and risks of income reductions known at that time.

The valuation arrived at through the direct capitalization of income will reflect a figure based on
the actual adjusted income as reported; in other words, the value of the airport operation as a
going concern.
MPAC then makes adjustments for personal property and any business enterprise value or
goodwill.

The leasehold improvements of the infield tenants (i.e., physical structures on leased land
outside the terminal buildings) are valued based on the cost approach to value and then added
onto the value of the capitalized NOI to get an overall value of the entire airport.

There may also be excess land at airports, which does not contribute to the income stream and
must therefore be valued separately and added to the value derived from the income
approach. Such excess land is likely to be valued on the indicated current value of surrounding
lands that have similar use and utility.

In this short guide, it is not possible to go into detail about the more complex aspects of the
valuation of airports using the income approach, but it is hoped that the brief outline provided
is helpful.

An example of an airport valuation using the income approach is contained in Appendix A.

4.0 The Cost Approach for Airports

4.1 Outline

The theory behind the cost approach to value follows the principle of substitution: the value of
a property is equal to the amount it would cost to replace it with a substitute of equal utility.

There are two main tasks in estimating current value using the cost approach.

Value the Land

Land value is usually established through analysis of comparable market sales data. Airport land
is usually extensive in size and may include land used for purposes other than direct airport use.

Value the Improvements

MPAC estimates the value of the improvements using the following process:

 Collect the physical and descriptive data about the airport site.

 Inspect the buildings and other improvements, quantify areas, note conditions and
analyze their utility.

 Quantify the building areas from plans and layouts or, if necessary, during the property
inspection.

 Using the online ACS system, estimate the reproduction costs new of the assessable
improvements as of the valuation date.

 Deduct from reproduction cost new an amount reflecting all forms of depreciation,
which may include:

 physical (curable and incurable)

 functional obsolescence (curable and incurable)
 external obsolescence (economic and locational)

The resulting value will be an estimate of the contribution of the improvements to the current
value of the subject, depreciated for all causes.

Assessed Value

The sum of land value plus depreciated improvement value is the estimated current value of
the real estate at the subject location.
4.2 Steps in the Cost Approach

The main steps in the cost approach used for valuing airport properties are as follows:

1) Determine the reproduction cost new of the building Improvements.

2) Determine depreciation (physical and functional and external obsolescence).

3) Calculate the net improvement value.

4) Determine the replacement cost new and all forms of depreciation of the airport
site improvements.

5) Determine the land value for various airport land uses.

6) Calculate the current value.

7) Determine which improvements are tax exempt (if any).

8) Determine the assessed value of partitions.

4.3 Reproduction Cost New

The first step in the process is to establish the value of the improvements if they were to be
reproduced as new. This step is accomplished by application of MP!C’s !CS system, which
enables the determination of reproduction cost new (RCN).

MP!C’s !CS system includes rates that take account of physical depreciation based on the age
of the existing improvements.

Separate exercises are undertaken to establish the RCN of both buildings and site
improvements (referred to as “yardwork”) at the airport.

4.4 Physical Depreciation

Physical depreciation acknowledges that all building improvements deteriorate over time and,
as a result, have limited lifespans. Physical depreciation generally relates to the age of the
property. Some forms of physical depreciation are curable while others are not economically
viable to correct (incurable). The loss in value from deterioration is a reflection of the fact that a
prospective purchaser would pay less for an older building in poor condition than a similar
newer one in good condition.
Establishing the current condition of the property and estimating the effective age against the
remaining physical life of the improvements determines such depreciation.

Physical depreciation can be analyzed in a very detailed manner by judging the condition and
expected remaining physical life of each building component, including such items as plumbing,
paint and roof covering. The amount of analysis required and the number of judgments
concerning the condition and expected life of each component limits the applicability of this
method; it is generally not appropriate for mass appraisal.

A more generalized approach requires a review of the condition of the property as a whole,
determination of its effective age and, given the expectation of typical maintenance, a
determination of the physical life of the buildings.

As airports constantly evolve to deal with security issues as well changing passenger and cargo
volumes and aircraft movements, the traditional concept of physical life must be constantly
compared to actual economic life of the facilities and adapted to the specifics of the airport
business.

As already indicated, physical depreciation due to age is reflected in the ACS rates used by
MPAC; this is shown in the sample airport valuation contained in Appendix B. (See the line
described as “Life Table Depreciation”.)

4.5 Obsolescence

Depreciation arising as a result of obsolescence can be broken down into two components:

 functional obsolescence

 external obsolescence (including locational and economic obsolescence)

Obsolescence is not necessarily related to the age of the property but arises out of analysis of
property functionality and the external conditions that may affect the value of the property.

The obsolescence factor is a reflection of the simple proposition that people pay less for items
or properties that are obsolete. A loss of functionality, attractiveness or utility translates to a
corresponding loss in current value.

Many of the functional obsolescence factors arise as a result of inefficient layout and
improvements that are poorly adapted to the function they are supposed to fulfill. Analysis of
the functionality of a property addresses a number of the obsolescence issues.
Functional Obsolescence

The following list of factors that may give rise to functional obsolescence is not intended to be
all-inclusive, as many functional problems are property specific.

 inefficient layout

 lack of adaptability to current or future uses

 lack of suitability of buildings or site improvements for current use

 extra operating costs

 excessive or inferior construction

 inferior materials or construction

Quantifying any functional obsolescence requires knowledge of the existing deficiencies at the
airport. This information may be obtained through a site inspection, but is likely to require
input from the airport operator.

It may also require comparison between the airport being valued and a modern airport that
may be used as the basis for costing a notional “replacement” of the existing facility.

External Obsolescence

Arising from causes external to the property, and therefore outside the control of the airport
operator, economic obsolescence is evaluated in relation to external issues, whether they are
economic conditions or current airport performance standards. This type of obsolescence can
be difficult to quantify and must rely, in many instances, upon the assessor’s judgment. There
are several factors that may contribute to external obsolescence.

A Change in Market Demand for the Airport

Examples of causes of external depreciation include the merger of two airlines (creating a
decline in competition), increased competition from another airport or a permanent fall off in
air travel demand due to changed demographics. In such instances, the property has lost some
ability to generate revenue and therefore can incur a corresponding drop in value.
A Change in the Attractiveness of the Location

Commonly referred to as locational obsolescence, this decline in value is caused by any number
of factors that change the attractiveness, and therefore value, of a location. For example, the
closure of a rail line serving the airport and locality.

A Change in Government Restrictions or Regulations

Government regulations may be introduced to govern the airport, affecting the viability of the
operation (for example, noise near residential properties). This situation may produce external
obsolescence for an airport through increases to the cost of operations, without a
corresponding increase in revenue.

Physical Site Restrictions

The demand for the airport may be such that an expansion is desired. However, due to zoning
or physical restrictions, this may not be possible on the existing site. Anything from the
unfulfilled need for more parking spaces and hotel facilities to a desired yet unavailable building
expansion may cause this form of external depreciation.

A Decline in General Economic Conditions

A recession can cause a drastic and long-term fall in the demand for air travel, leading to a
reduction in the value of airports.

Quantification of external obsolescence can be complex, and the various methodologies that
may be used are too detailed for the purposes of this brief guide.

Application of External Obsolescence to Other Uses

Obsolescence should also be measured for improvements that are not strictly related to the
land’s use as an airport. One example would be the presence of warehousing operations at the
various aerodromes.

Warehousing operations at aerodromes must be reviewed with the same methodology as other
warehouses. The capital improvements that form the components of the warehousing
operation at an aerodrome may exceed a comparable market value.

Once a warehouse proforma has been completed, the resultant value can be compared to the
replacement cost value of the improvements. Any differences between the income valuation of
the warehouse operation and the replacement cost value can be calculated. An adjustment can
be made to the replacement cost new less depreciation for the golf course components to
reflect obsolescence, if necessary.

4.6 Land Valuation

The cost approach requires a value for land owned and used by the airport. Land is valued using
the market sales comparison approach.

Land should be valued as if vacant. Preferably, the assessor will compare land sales of sites in a
comparable location, area and zoning of the subject site.

Once comparable sales data has been obtained with reference to sales that occurred on and
around the valuation date, it is possible to determine the airport site’s market value using the
market sales comparison approach.

While it is likely that an airport will be zoned for transportation uses, the actual uses in place will
be more diverse (i.e., aviation-related, commercial or industrial). It is unlikely that sufficient
sales of large sites equal to the size required for a modern urban airfield will be available. This,
in turn, will require the use of land sales with other types of zoning to arrive at a value
conclusion. For example, some land associated with airfields may be used for commercial
purposes (such as office buildings), in which case the land can be valued accordingly.

Vacant land on airport sites is valued according to the uses designated on the airport master
plan. Consideration is given to the designated use, level of servicing and timing of likely
development. In the absence of a formal master plan, discussions with airport administrators
can be used to ascertain likely uses and potential development horizons.

Adjustments to value may have to be made for the following points of comparison between the
airport lands and the sites that have sold:

 location

 size of site

 site utilization or intended use

 zoning

 airport master plan designation

 aviation easements
  topography

 soil conditions

 date of sale

Once the land has been valued, its value can be added to the replacement cost new less
depreciation, or net value, for the airport buildings and site improvements to give a final value
for the airport.

A simplified example of a summary valuation of an airport using the cost approach is contained
in Appendix B.

4.7 Partition Value of Airport

MPAC may also have to apportion the final value of the airport based on how the land is
occupied and used. This is done as follows:

1) Collect rent rolls from airport management.

2) Organize space leased by tenants into logical classes (i.e., retail, office, concessions,
hangars, etc.).

3) Analyze space rental patterns.

4) Organize the land leased by tenants into logical classes.

5) Analyze land lease rental patterns.

6) Create tables containing the median and range of rents, excluding outliers, which
should apply to each type of space and land use in the airport.

7) Partition property value by percentage of occupied improvement along with

associated land area.

The summation of the partitioned values by property class will be recorded on the assessment
roll as required under Section 14(5) of Assessment Act.

When the subject airport is Crown-owned, the apportioned value for each tenant will be
recorded on the assessment roll as required by Sections 17 and 14 of the Assessment Act,
through the clause set out in Section 18(1).
4.8 Assessed Value

Having arrived at the value of the airport through the above process, MPAC assessors will check
the outcome of the valuation to ensure no errors have been made and that the approach to
estimate value is in line with the valuation of similar airports.

4.9 Conclusion

This guide sets out how MPAC assessors approach the valuation of airports for property
assessment purposes.

Although it outlines the general approach adopted, it does not replace the assessor’s judgment
and there may be some cases where the assessor adopts a different approach for justifiable
reasons.

For further information about MP!C’s role, please visit mpac.ca.

Appendix A – Example of an Airport Valuation Using the Income Approach

Revenue (stabilized)
Landing Fees $75,000000
Airport Improvement Fee $150,000,000
Car Parking and Ground Transport $60,000,000
General Terminal Fees $100,000,000
Land and Space Rentals $35,000,000
Concessions $40,000,000
Other Operating Revenues $5,000,000

Total Revenue $465,000,000

Direct Expenses (stabilized)

Salaries and Wages $50,000,000
Materials and Supplies $110,000,000

Total Expenses $160,000,000

Earnings Before Deduction of Interest, $305,000,000

Taxes, Depreciation and Amortization
(EBITDA)

Capital Expenditure $100,000,000

Net Operating Income $205,000,000

Capitalization Rate: 6%
Adjusted for Tax: 2%
Effective Capitalization Rate: 8%

Total Value $2,562,500,000

Less: Reserves for FF&E $150,000,000

Final Estimate of Value $2,412,500,000

Leasehold Improvement $600,000,000

Total Current Value $3,012,500,000

Appendix B – Example of an Airport Valuation Using the Cost Approach

Property Value Summary Valuation of Buildings Total Land Value

Total Building Net Value: Total Gross Floor Area (SF): 90,220 Site area: 950 acres
$2,235,000 Total Buildings RCN: $ 7,024,590 Industrial: $10,000,000
Total Yardwork Net Value: Functional Obsolescence: $0 Farm 1: $1,000,000
$1,500,000 Life Table Depreciation: $4,789,000 Farm 2: $950,000
Total Land Value: Economic Obsolescence: $0
$11,950,000 Total Buildings Net Value: $24,500,000 Total Land Value: $11,950,000
$2,235,000
Property Current Value:
$15,685,000 Valuation of Yardwork Excess Land
Total Yardwork RCN: $3,500,000 None
Functional Obsolescence: $500,000
Life Table Depreciation: $1,500,000
Economic Obsolescence: $0
Total Yardwork Net Value: $1,500,000

Valuation of Buildings
Bldg# Bldg Use Level Floor Area Bldg RCN Year Built Int. Fin. Area LifeTable RCNLD

T-1-3 TERMINAL BUILDING 2 1784 166,090 1995 50 OR 114,648

T-1-2 TERMINAL BUILDING 1 1718 240,264 1995 50 OR 202,261
T-1-1 TERMINAL BUILDING 1 7298 1,345,700 1975 50 OR 630,501
NAV-1-5 NAVIGATIONAL SERVICES 3 435 39,140 1990 50 OR 24,490
NAV-1-4 CONTROL CAB 3 754 149,264 1990 50 OR 92,726
NAV-1-3 ADMINISTRATIVE 2 1950 214,021 1990 50 OR 128,600
NAV-1-2 SERVICE AREA 1 2000 262,120 1990 50 OR 164,618
H-5-2 AIRCRAFT REPAIRS 1 38,229 1990 3318 40 OR 22,175
H-5-1 HANGAR NO 5 1 36751 2,164,530 1939 50 OR 516,020
H-4-2 OFFICE/SCHOOL 1 22,013 1980 2542 40 OR 3,108
H-4-1 HANGAR NO 4 1 36910 2,314,983 1939 40 OR 300,683
GP-1 GLIDE PATH 1 125 14,730 1985 30 OR 6,752
FO-1 FUELING OFFICE 1 290 29,875 1990 50 OR 17,356
DF-1 DIRECTIONAL FINDER 1 80 10,163 1985 30 OR 4,866
LOC-1 LOCALIZER 1 125 13,468 1985 30 OR 6,537

Total Gross Floor Area: 90,220 Total Building Net Value: $2,235,341

Yardwork
Year Tax L.T. Life % %
Description Im provem ent Quantity Rate RCN Am t. OBSOL Net Value
Built Class Type Table OBS Good
RUNWAYS, APRON, TAXIWAY PAVING ASPH 1975 1 E 2,512,000.00 2,512,000 OR 0 50 1,256,000
APRON PAVING CONCRETE 1954 1 E 500,000.00 500,000 OR 100 500,000 0
PARKING PAVING ASPHALT 1995 1 E 488,000.00 488,000 OR 0 50 244,000

Note: The above figures are for illustrative purposes only.