By Paul Gable
Washington, D.C. politicians have nothing on Horry County Council members when it comes to bailing out business.
In an attempt to help AvCraft Technical Services, Inc. become profitable, county council reduced the rent on three hangars occupied by the company at Myrtle Beach International Airport by approximately $1.25 million over a five-year period.
Third and final reading of the lease agreement, Ordinance 53-11, is scheduled for the regular meeting of Horry County Council Tuesday night January 10, 2012. The lease is between Myrtle Beach International Airport and KNH Aviation Services, Inc. the holding company for AvCraft assets.
However, while final approval of the lease awaits council action Tuesday, according to the Horry County Public Information Office, AvCraft has been paying the lower rent since October 2010 through a space use agreement between the airport and the company.
Criticism over AvCraft’s failure to meet incentive goals for employment since 2005 erupted last week after it was announced that AvCraft received an additional $200,000 in incentive payments, $100,000 each from Horry County and the state, as an economic development initiative.
Horry County Council chairman Tom Rice and Myrtle Beach Regional Economic Development Corporation CEO Brad Lofton answered that criticism by claiming that this AvCraft was a new company with new ownership and management.
But, it was this “new company” that came to county council on September 7, 2010 claiming that it needed a reduction in rent in order to survive.
AvCraft rents three hangars at Myrtle Beach International Airport with total space of 136,600 sq. ft. When the company first came to Horry County in 2004, it paid $2 per sq. ft. ($273,200) annual rent for those hangars.
By September 2010, the rent had risen, per the terms of the rental agreement, to $3.35 per sq. ft. ($457,610) annually. AvCraft was in danger of being sold off piecemeal at auction by the Maple Financial Bank, its principal creditor and operator since late 2005.
Mike Hill, AvCraft General Manager, had found a possible new investor to take the company off the books of the bank and keep it operational. That company, Indaer (Industrial Aeronautica S.A.) headquartered in Medellin, Colombia, came before council September 7, 2010 to make the case for a rent reduction.
Derek Nice, CEO of Indaer, told council his company was interested in investing in AvCraft. He said his company would diversify AvCraft into servicing multiple aircraft types used around the globe and grow the business from its current 50 employees to over 100 employees in three years.
Nice told council that in order to invest in AvCraft, Indaer needed a cost structure that is competitive with other companies that are in the same business Avcraft will be.
“And today, the lease agreement is not competitive with what your competitors and other airports in this country are offering,” Nice said. “So we need to adjust the initial fixed cost base for this business so that when we make our investment we’re investing in the growth of the business not to fund continued losses. Then we want to tie the growth of the business to the growth in the revenue that you realize from that business over the coming three to four years.”
Nice provided no examples of lower costs or other airports that were lower in rent, just general statements that Horry County’s rate structure was too high. He also admitted AvCraft couldn’t become profitable unless the rent was reduced.
He concluded by saying AvCraft had great potential for growth and success in the future, “And if you want to work with me, then I want to work with you,” Nice concluded.
Council approved Resolution 97-10 by an 11-1 vote, council member Marion Foxworth voicing the Nay. The resolution authorized the county administrator to enter into negotiations with AvCraft Support Services, Inc. to amend the current lease.
What actually happened was a space use agreement was signed with a significantly reduced rent; AvCraft Support Services was bought by Indaer with a new company, KNH Aviation Services, Inc., formed to hold its assets and the new name AvCraft Technical Services, Inc. would be used for the AvCraft division.
Since September 2010, the rent on the three hangars has been $181,050 annually or an average of $1.32 per sq. ft. The three hangars have differing rental rates from a low of 50 cents per sq. ft. to a high of $1.75 per sq. ft., but the three rates average out to $1.32 per sq. ft. for the total 136,600 sq. ft. rented.
The rental rates will rise, beginning July 2015, when the company is projected to be experiencing increased revenue. The county has estimated an overall average rent of $2.85 per sq. ft. over the life of the new 10 year lease with most of that revenue coming in the final five years of the lease.
For the first five years, the county is foregoing $1.25 million in rent revenue, allowing AvCraft to keep and invest that money in order to attempt to become successful. In addition, the council voted last month to give $100,000 in additional economic stimulus funds to AvCraft. In short, the county is providing a form of bailout to AvCraft.
It will be difficult for council chairman Tom Rice to argue for fiscal conservatism and limited government involvement in the economy, during his campaign for the new 7th Congressional District seat, while he and his council are practicing just the opposite in Horry County.
One other factor must be considered on the county rent fluctuations from $2 to $3.35 to $1.32 per sq. ft. The FAA provides Myrtle Beach International with millions of dollars in grant funds each year through Airport Improvement Grant and Military Airport Program for former military air bases now operating for commercial use. The county, in accepting those federal grants, assures the FAA that it will charge fair market value on property it leases in order to “maximize its revenue from that property.”
Does this roller coasting of rental rates for AvCraft align with those grant assurances or is the county endangering future grants by lowering the rent paid by AvCraft for five years by nearly 70 percent, while accepting significant grant money for the airport’s new east side passenger terminal?
Should the county consider business profitability when it sets its rental rates or should the county charge fair market value? Should the county provide a form of stimulus to struggling businesses or should the free market be allowed to work to determine business success or failure?
In the case of AvCraft, county council, so far, has chosen to provide stimulus and ignore the free market. Nice told council AvCraft’s gross revenue in the year prior to September 2010 was $7 million. The $451,610 in annual rent the county was charging AvCraft at that time is just over seven (7) percent of that gross revenue. Surely, there were changes that could have been made with the remaining 93 percent to help move the company toward profitability.
Paul Gable is a veteran investigative reporter residing in Horry County, South Carolina and is the current editor of the Grand Strand Daily an online magazine featuring all things local and political.