Walking through LaGuardia Airport in 2023, you might forget that just a few years ago the terminals were woefully out of date. Featuring leaky roofs and cramped waiting areas, the Wall Street Journal commented that the old terminal B at LaGuardia was “possibly the worst major airport in the world.” To combat its woeful reputation, in 2015, the Port Authority of New York and New Jersey (the “Port Authority”) unveiled a Vision Plan for its redevelopment that included two new state-of-the-art terminals and significant public and private cooperation. Eight years and $8 billion later, LaGuardia now gleams as a beacon of modernity. In 2023, LaGuardia Airport’s Terminal B was named the world’s best new terminal and achieved the highest global 5-Star Airport Terminal Rating from Skytrax, the international transport rating organization.

LaGuardia’s transformation is just one of several new airport “glow ups” that are largely the product of the industry’s growing embrace of public private partnerships (also known as “P3s”). For instance, LaGuardia’s Terminal B, commenced in June 2016 and completed in January 2022, was part of a P3 between the Port Authority and LaGuardia Gateway Partners (“LGP”) through a Design-Build-Finance-Operate-Maintain model. The $4 billion Terminal B included 35 gates, two island concourses and dual pedestrian sky bridges, and was financed through a mix of approximately $2.5 billion special facilities revenue bonds issued by New York State Transportation Development Corp. (“TDC”), $1.5 billion in Port Authority funds and $200 million in equity from LGP.  LaGuardia’s Terminal C, which replaced Delta Air Lines’ (“Delta”) existing C and D Terminals, broke ground in July 2017 and was opened in June 2022 through a P3 between the Port Authority and Delta. Terminal C included 37 gates across four concourses and the largest Delta Sky Club within the airline’s system. Terminal C’s $4 billion price tag was financed through approximately $2.89 billion in TDC’s special facilities revenue bonds, $500 million from the Port Authority and the remainder financed by Delta. In addition, the Kansas City International Airport recently unveiled a new, 40-gate terminal featuring a modern environment with dedicated arrival and departure levels, covered parking in an adjacent garage, moving walkways and consolidated security checkpoints. This $1.5 billion project is the result of a design-build joint venture team including The Weitz Company and Clarkson Construction Company. In addition, there are several P3s that are currently under construction including, the Los Angeles International Airport Automated People Mover Project (“LAX APM”) and the ongoing transformation of JFK Terminal 1, Terminal 4 and Terminal 6.

P3s have long been a staple of airport projects in Europe and other regions of the world but have grown significantly in the United States over the last decade. P3s in the aviation industry can take a variety of forms including full privatization of airports, Design-Build-Finance, Design-Build-Finance-Operate and Design-Build-Finance-Operate-Maintain (“DBFOM”). Many European airports have embraced the full privatization model, in which an airport proprietor enters into a long-term concession and lease, or sale of an airport; however, in the United States, such model has faced regulatory hurdles and largely been viewed with skepticism.

Generally, pursuant to several federal laws, airport revenues of public airports and private airports receiving federal assistance must be used for the capital or operating costs of the airport or airport system. In 1996-1997, Congress created the Airport Investment Partnership Program that permitted up to five public airports to, among other benefits, be granted an exemption to federal airport revenue-use restrictions. In 2012, Congress increased the number of airports that can participate in the Airport Investment Partnership Program from five to ten. To date, only three airports have been approved through this program, Stewart International Airport in Newburgh, New York (from 2000 to 2007), Luís Muñoz Marín International Airport in Puerto Rico (from 2013 to date) and Hendry County Airglades Airport in Clewiston, Florida (from 2019 to date). Nine other airports have applied to the program but withdrew or terminated their applications.

Given the regulatory hurdles of full privatization in the United States, the majority of P3s in the US have utilized the DBFOM model. As the name suggests, under this model the private partner designs, builds, finances, operates and maintains the airport or terminal(s) pursuant to the terms of agreements with the public partner. These projects are typically financed either in whole or in part by upfront leveraging of revenue streams generated by the underlying project through debt financing.

Getting DBFOM public-private partnerships “off the ground” requires a lot of capital, negotiations and flexibility over the course of multiple years. In traditional public airport capital projects, public participants have a variety of capital sources available to them – but the most commonly used is tax-exempt municipal bonds. In the DBFOM model, financing is largely driven by the private partner. This private partner can obtain commercial financing, or if they meet certain conditions, they can access tax-exempt financing through private activity bonds, typically through a conduit issuer.

Whether the private partner decides to engage in tax-exempt conduit bonds or traditional private commercial financing is largely a project specific decision in which the private partner has to consider the project structure and market conditions. These structures can vary significantly from project to project. For instance, in the recent LAX APM transaction, the financing was a mix of tax-exempt conduit bonds, taxable private commercial loans and equity. The JFK Terminal 4 transaction was financed completely by conduit bonds and the JFK New Terminal 1 transaction was financed exclusively by private commercial loans.

In addition, deal participants need to be prepared for conditions to change over the course of the transaction as market conditions evolve. In the JFK Terminal 6 transaction, the original plan of financing contemplated a mix of tax-exempt conduit bonds, taxable private commercial loans and equity, but evolved to be primarily taxable private commercial loans and equity, with a smaller portion of privately placed tax-exempt bonds. The team needed to be flexible to address the possibility of tax-exempt refinancing of the taxable debt in the future. As Hari Rajan, head of infrastructure at Corsair Infrastructure Partners told Infrastructure Investor “we do expect there to a be a refinancing, post substantial completion of construction, though we don’t know when that will happen for sure… In terms of bank versus bond, the bond markets have been a very reliable source of capital for projects like this and we will carefully look at and consider that route when refinancing the project, alongside bank-centric financing, too.”

To be able to adapt to these changing structures, deal teams need to have a variety of expertise including public finance and traditional financial services, tax, regulatory issues and real estate. This allowed the JFK Terminal 6 transaction deal team to quickly pivot in the face of “headwinds” in the form of increased capital needs, rising interest rates, labor shortages and inflationary pressures.

As markets continue to evolve in the face of these headwinds, it is important that every member of your deal team embraces flexibility and a multidisciplinary approach to problem solving. Squire has demonstrated this approach in a variety of P3 transactions including LaGuardia Terminal B, LaGuardia Terminal C, JFK Terminal 4 and JFK Terminal 6. For more information on our expertise with P3s and global infrastructure projects generally please see our Global Projects View blog or join Squire at the 2023 P3 Airport Summit, including panels on “Lessons Learned from the Financing Side of the $4.2 Billion Terminal 6 JFK Airport Project” moderated by our Partner, Alethia Nancoo, “TIFIA in P3 Airport Projects” with our Partner, Catie Romanchek, and “Building the Business Case for P3s and Selling It to the Community” with our Counsel, Greg Johnson.