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FAA Finds Santa Monica Mishandled Airport Loans

Bob Kronovetrealty
We Love Property Management Headaches!

Have Extra Room for the Holidays 2019

Santa Monica Apartments

Santa Monica College
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Santa Monica, CA 90405
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By Jorge Casuso

December 2, 2019 -- In what aviation advocates called "a morsel of good news," the Federal Aviation Administration (FAA) last month found the City of Santa Monica mishandled loans to its airport.

The agency's November 8 decision, which also included findings the City violated leases and landing fees, was the result of a 2016 complaint filed by airport tenants and major aviation groups.

The FAA also found the City charged Santa Monica College (SMC)
below-market rent for non-aeronautical property and refused to extend the leases of aeronautical tenants beyond month-to-month.

The main complaint accuses the City of charging excessive interest rates as high as 8 percent on loans to the airport and overcharged the airport for up to $2.78 million in interest between Fiscal Years 2008-2009 and 2013-2014.

After reviewing the City's documents, the FAA's top compliance official found the loans were "insufficiently and improperly documented as such and fail to satisfy the requirements of loans" under the agency's policy.

"This includes agreements lacking signatures, no stated or documented interest rate (and) no substantive terms to validate the transaction," according to the determination by Kevin C. Willis, the FAA's director of airport compliance.

Willis also found documents were backdated, lacked a loan instrument for claimed transactions or were superseded by earlier documents.

"There are also changes in interest rate on entire balances without adequate justification and there is a lack of information on principal repayments,” Willis determined.

Willis rejected the City's argument that "formal loan agreements" are not required and that "contemporaneous documentary evidence of an expectation of repayment" is enough documentation to show the advances were loans.

Subject to FAA review and approval, Willis ordered the City to "adjust the outstanding allowable loan balances to reflect the payment, in full, of the November, 2004 advance of $2,839,729."

He also ordered the City to "credit the improper interest payments charged to the airport fund totaling $743,665 and $515,672 and the principal overpayment of $188,873, plus interest from the date of each improper payment."

The City also must supplement its corrective action plan concerning rent payments from the college that found under payments, with interest through 2016, of $1.1 million, and ensure future compliance.

Concerning landing fees and rates -- which the plaintiffs call "excessive and unreasonable" -- the City has 60 days to "update its methodology and fees to reflect current and actual costs in the use of the Airport," according to the determination.

Willis also required the City to show "evidence that the leases being offered to aeronautical service providers at the airport are no less than three years in duration."

The complaint contends that in an effort to convert the airport to non-aeronautical uses, the City adopted a program of financially "squeezing" airport tenants and users ("City is “Squeezing” Santa Monica Airport Aviation Tenants, FAA Complaint Charges," February 10, 2016).

“Simply put, the City has created a financial structure which imposes enormous, ongoing, unsustainable -- and clearly impermissible -- financial burdens and deficits on the Airport,” the plaintiffs said.

The complaint was filed by Santa Monica Airport tenants, the Aircraft Owners and Pilots Association (AOPA) and the National Business Aviation Association.

AOPA's Communications Coordinator Amelia Walsh called the agency's decision "a morsel of good news."

City officials said they are considering their options.

"The City is reviewing the Director's Determination to determine its implications and consider next steps, including a possible appeal," said Constance Farrell, the City's spokesperson.

Under a January 2017 agreement with the FAA, the City will close Santa Monica Airport by December 31, 2028 ("City, FAA Agree to Close Santa Monica Airport in 2028," January 28, 2017).

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