Purpose

To determine whether the Port Authority of New York and New Jersey was in compliance with certain key terms of the lease and ancillary agreements with New York City for the municipal airports. The audit covers the period from January 1, 2002 to December 31, 2013.

Background

New York City (City) and the Port Authority of New York and New Jersey (Port Authority) negotiated a lease agreement (lease) for the land and structures at John F. Kennedy (JFK) and LaGuardia (LGA) airports. The lease was executed on November 24, 2004. The lease term extends 49 years, from January 1, 2002 through December 31, 2050. It amended an existing lease, scheduled to expire in 2015, and is the culmination of 13 successive leases or amendments beginning on April 17, 1947. The lease required the Port Authority to pay the City a lump sum of $500 million and an additional lump sum of $280.2 million at execution. The Port Authority’s certified financial statements show these lump sum payments were made.

The lease also required the Port Authority to pay a base rent at the greater of either Minimum Annual Rent (MAR) or 8 percent of the annual gross revenue from various sources such as scheduled airline terminal rentals, flight fees, tenant parking, retail vendor percentage fees, and fixed rentals and fuel farm fees. For the years 2004-06, the lease set the MAR at $93.5 million. Subsequent to 2006, the MAR is reset every five years, to 10 percent of the average annual gross revenues of the prior five years. For the period 2007 through 2011, the MAR was $102.8 million, and for the next five-year period (2012 through 2016), the MAR is $129.8 million. Also, ancillary agreements to the lease required the Port Authority to fund capital projects in Queens, establish an Airport Board, and provide $60 million in its capital plan for feasibility studies of direct rail links from Downtown Manhattan to JFK and Newark Liberty airports.

Key Findings

• Based on our testing, we believe the Port Authority has complied with the terms related to base rent payments to the City.
• The Port Authority had not fully complied with the terms of the ancillary agreements, which included an obligation to provide information and support to the Airport Board.
• Based on an agreement between the Port Authority and the City, the City assumed responsibility for one of the Port Authority’s responsibilities under the ancillary agreements – to fund $100 million of capital projects in Queens. Although the lease agreement projected that Queens residents would have the full benefit of the $100 million in capital projects by December 31, 2009, by the end of fiscal year 2014-15 (or nearly a decade after the agreement was signed), the City had committed $24.9 million, but expended only $6.3 million of the $100 million earmarked for capital projects. Subsequently, for the 2015-16 through 2019-20 fiscal years, additional funding commitments totaling about $75 million were made.
• The Port Authority has not used the Aqueduct Parcel, a 26-acre parking lot adjacent to the Aqueduct race track, as required by the lease terms. The lease prohibits the Port Authority from using (or permitting the use of) the Aqueduct Parcel for any purpose other than employee and long-term parking lot facilities supporting JFK Airport. However, the Port Authority had a permit agreement with the New York Racing Association (NYRA) for the period February 1, 2013 to January 1, 2016, which allowed NYRA to use a portion of the property for parking. Under the terms of the lease, if the entire Aqueduct Parcel was not used for the purpose required by the lease, the City could terminate the lease by paying the Port Authority the fair market value of the Port Authority’s interest in the parcel.

Key Recommendations

• Actively coordinate with City officials to ensure that all identified capital projects, pursuant to the 2004 lease agreement, are funded and completed in a timely manner.
• In conjunction with the City, take the necessary steps to reconvene the Board and have the Board fulfill its responsibilities under the lease.
• Deliver a final report to the Steering Committee for its approval, and take appropriate action to determine whether to proceed with the project, and if approved, include funding provisions for the One-Seat Ride Access between Lower Manhattan and JFK Airport.
• Comply with the lease terms by using the Aqueduct lot for employee and long-term parking lot facilities supporting JFK Airport or obtain formal approval from the City for use of the parcel before signing off on any permit/contract for other use.

Other Related Audit/Report of Interest

Port Authority of New York and New Jersey: Inspecting Highway Bridges and Repairing Defects (2012-S-34)