HOUSE BILL 543 "An Act establishing a preference when entering into state airport land leases." REPRESENTATIVE GARY DAVIS testified in support of HB 543. He stated that the Alaskan aviation industry has made significant progress and investment in developing a system which better meets the transportation needs of the State. That system is different than the one used by other states. Regulations have recently been proposed that could have a negative impact on the industry. The changes suggested may threaten the aviation infrastructure in Alaska by discouraging investment and development. Private aviators stand to lose any physical improvements added to airport structures at the conclusion of their lease. In some cases, the lessees have developed their leasehold. The potential loss could foster reluctance by the private sector to continue providing the infrastructure at aviation sites across the State. He added that the purpose for State involvement in airport management should be to promote, encourage and develop aviation in Alaska. It is important that airport leasing policy and practice in Alaska remain on a first come first served basis. HB 543 would give the current lessee preference if they are in compliance with the terms of the existing lease and have made substantial financial investments in developing that land. Representative Davis provided a sectional analysis of the bill. Representative Martin asked if a requirement exists in which "fair market value" must be considered for the leased space. Representative Davis advised that each five 4 years, a reevaluation will occur of the lease. The market value and rate of the lease would be indicated in regulation. JACK BURMINGHAM, (TESTIFIED VIA TELECONFERENCE), ALASKA AIR CARRIERS ASSOCIATION, ANCHORAGE, stated that the schedule implemented in 1991 by the Department of Transportation and Public Facilities (DOTPF) received strong opposition by the current lease holders. There have been instances where the rates were challenged because the scheduled rates exceeded the fair market value of the land. No one has been getting airport land at a "cheap" rate. Co-Chair Foster thanked the sponsor for proposing the legislation. He recalled that ten years ago the State decided to put all leases to bid. Co-Chair Foster emphasized that a company with a sizeable investment stands to loose a tremendous amount through the leasing process. The proposed legislation addresses the availability of land and gives preference to those companies already holding leases. He hoped that the legislation would force DOTPF to open more land for zoning of aircraft. Co-Chair Foster asked what would happen to the hangar, concrete floor and fuel tank when a company was forced to relinquish their lease. He pointed out that market rates have been met. Mr. Burmingham added that the committee substitute as passed by the House Transportation Committee had good intent but would not address the current concerns. The primary area of concern was with the Findings Section in Section #1, and Subsection (c), Section #3. The ownership of the lease-hold improvements is integral in a state renewal right. He stipulated that the company who makes the improvements must own those improvements. Mr. Burmingham reiterated that air carriers are requesting that language exist which clearly defines a renewal right and a clear understanding that the lease holders who have made improvements, own those improvements. ELISABETH HICKERSON, (TESTIFIED VIA TELECONFERENCE), ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, ANCHORAGE, noted that language which exists would clarify the procedure to be used. She noted that change was to Section #3, deleting "shall" and inserting "may", clarifying that the holding lessee could receive the right to the lease without competition. Other wording has also been considered. She added that an additional concern was to the time limit. Currently, in statute, the limit is fifty-five years. The Department of Law's position is that the lease should amount to fifty-five years, affecting concerns the court might have. She added, inclusion of the Findings Section is 5 extremely important to expand judicial scrutiny and constitutional challenge. Representative Brown distributed a handout titled "DOT&PF Comments to Suggested Changes". [Copy on file]. She asked for further discussion of disposition and improvements to the site and how that would be addressed. Ms. Hickerson replied that the issue of disposition and improvements was a policy issue. She added that all leases contain an existing provision that discuss the issue of improvements at the end of those leases. Most are written in such a way that there exists an option to sell, remove or vest in the State. Representative Brown questioned where that clause was located in the version before the Committee. Co-Chair Hanley pointed out that was delineated in Section (e), Page 3. KURT PARKAN, DEPUTY COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, remarked that currently, every lease has reference to the disposition of the investments made. (Tape Change, HFC 96-107, Side 2). Mr. Parkan stated that each lease has three options written into it including a removal and purchase. Co-Chair Foster stated that in the 1970's and 1980's, companies had the right to renew their contract each year at the adjusted inflation rate. He pointed out that the current options are not fair for the company currently holding the lease. Co-Chair Hanley agreed, indicating that concern had been suggested by many people. Mr. Parkan acknowledged that it was a problem. He thought that it would be fair to the purchaser of the improvements to purchase it at the appraised value. Co-Chair Hanley asked if that was written into the lease. Mr. Parkan stated that the language written into the leases was not specific. Currently, the Department is looking into language which would address the determination of the "fair market value" of the improvements made. Co-Chair Hanley mentioned that the concerns are the disposition and the value needed to be paid for the initial investment. Co-Chair Foster maintained that the regulations were created to fix something that was not "broken". Mr. Parkan agreed that Section (e), Page 3, would not need to be included in statute. The section which needs to be addressed in statute is the option to allow someone to continue lease renewal. The first right of refusal is language provided by DOT&PF, although, the Department of Law 6 should provide an opinion regarding the constitutionality of that language. In response to Representative Kelly's question, Mr. Parkan advised that the Department has not been challenged in court regarding the existing statute. He added, the Department of Law has expressed concerns with the current language. Representative Brown asked if consideration had been given to make the disposition a simple surface right, questioning the constitutional issue. Ms. Hickerson replied that the federal patent requires that the land be held for public purposes and used for aviation. There are existing restrictions on federal money used to support airports. She spoke to the constitutional issue that arose. Under Article 8, Section #10 requires public notice of any lease. Existing regulations of the Department have been in effect since the 1970's. They require that there be competing applications offered at a public auction. What occurred was that long term leases were beginning to expire, and consequently, they were public noticed. The tenants were very concerned with the possibility of being in a competitive situation, at which point the issue became of major concern. A resolution has not yet been found. REPRESENTATIVE NORMAN ROKEBERG commented that the disposition of the improvements is important and should be addressed in the proposed statute. Currently, existing leases leave to the Department, the determination of the disposition of the improvements. He pointed out that a "truly" market competitive situation does not exist. He thought the State had created a "semi-monopoly" in their interest of land surrounding the airport. Representative Rokeberg noted that the concern has become of legislative interest because of the leases and the way that they have been drafted. He recommended that the language proposed by the Air Carriers Association be included in the proposed legislation. Representative Parnell questioned why fair market value would not work with the proposed legislation. Representative Rokeberg stated that the free market does not work because there is no alternative land to select. A lack of clarity exists in the current leases. The intention of the House Transportation Committee was to provide for direction to DOT&PF regarding when the current leases would expire. Co-Chair Hanley remarked that this is a transition period and that provisions now need to be created. He suggested 7 that Section (e) be more clearly defined and that the negotiations should be made at the front-end of the lease. The legislation should be "fair" to those people that have made the initial investments. He thought that Section (e) would not guarantee fairness. Representative Davis agreed, lessee have had problems and concerns in dealing with the State. He noted that the Department recommended that the Findings Section provide the fair language. Representative Davis stated that the bill has focused on the findings in order to provide fairness to the lessee regarding the policy. Co-Chair Hanley pointed out that the findings does not address the disposition of assets. Co-Chair Foster noted that no bank would loan to a business about to expand if the disposition of assets had not been resolved in regulations. He added, expansion possibilities are checked by the physical confinements established by DOTPF, and requested that they open up additional land. Representative Foster predicted that a crisis will soon exist, as new people come forward and over-bid current lessee holders. He suggested that scenario would not happen if undeveloped land was made available. Mr. Parkan agreed that more land should be opened at the rural airports, and that airports would make more revenue with more lessee holders. He added that the Alaska Industrial Development & Export Authority (AIDEA) bank would be willing to lend on airport leasing conditions. In response to Representative Parnell, Co-Chair Hanley recommended that Section (e) should remain in the bill as it clarifies that deposition should be addressed. Mr. Parkan advised that the Department supports the current language of the legislation. Representative Rokeberg pointed out that Section (e) was a clause moved from another draft. Language presented by the Air Carriers Association had been removed before the bill reached the House Finance Committee. He recommended that additional language be added to address the deposition problem. Representative Rokeberg continued, the original bill, as it moved from the Department, contained a section addressing the First Right of Refusal. In common law, this concept is based on the idea that the modified third party offer would help generate what is considered a fair market value price at that point in time. He suggested that the first right of refusal no longer works in our society. Representative Rokeberg noted that what has been utilized over the past 8 years is a "renewal option" for an extension of a lease. He recommended changing that language to the first right of offer, thus allowing the Department to create the regulations for implementation. (Tape Change, HFC 96-108, Side 1). Representative Brown asked how the price would be determined in the right of the first offer. Mr. Parkan replied that the intent was to have the lease approach fair market value. Representative Brown asked if something other than price could be used in the negotiations. Mr. Parkan stated that an option exists in regulation to give a break on the rate for public purposes. Representative Brown asked how fair market value was determined. Mr. Parkan replied that it was difficult to do. A survey is being implemented of all rural airports leases to identify the values. Representative Brown asked what a "hold-over" lease was. Mr. Parkan stated that a "hold-over" lease was one in which the term had expired, but the State continues those leases on a temporary basis. HB 543 was HELD in Committee for further consideration.