Finding the right balance between property based and minimum guaranteed throughput rents at ports

Introduction

From a port authority’s standpoint, ‘port pricing’ is an exercise in determining how to structure leases and how to establish the rent to charge for the use of a port’s largest asset – property. Although operating concessions are also a form of rent for land and infrastructure usage, these types of leases are not the main focus of this article – it is the balance of a port’s property portfolio.

This article explores, on a cursory basis, the issues, motivations, objectives, challenges and ramifications of two main revenue streams for ports, namely rent on land and facilities and rent charged on cargo throughput.

Unlike asset based rent (which typically is somewhat informally developed by ports and often used as incentives) throughput or toll charges on cargo transported to and from leased facilities and the port are more easily understood by port authorities.

A port’s true business

The business model for port authorities has dramatically changed over the last few decades, evolving from port operators charging for services rendered to now asset managers leasing out port assets. This evolution is far from over and will more than likely take port authorities into ever expanding roles as transport leaders and logistics nexuses. One thing is certain though, the role of asset manager will remain a cornerstone of a port authority’s business model for a long time to come.

When ports privatized their operations and adopted the ‘landlord’ model, their revenue stream primarily came from charging rent for their fixed assets, specialized real estate facilities, infrastructure and land; all of which is charged directly in the form of rent or indirectly as in the case of wharfage, dockage and throughput charges.

Throughput versus port property based rent

Throughput charges are also known as ‘shared revenue’ leases or minimum annual guaranteed rents (MAGR). MAGR is meant to mitigate a port’s risks by generating an additional revenue stream to recapture infrastructure investment and other related costs, while the more traditional property based rent covers the financial return obligations of the fixed assets. MAGRs are also meant to balance a tenant’s or operator’s fixed overheads with a variable rent element and incentivize them to maximize the use of the leased asset in order to better pro-rate the lease costs. Ports are capital intensive entities requiring long-term leases to parallel the typically long-term financing they use, along with the extended amortization periods required of infrastructure and specialized real estate facilities. Only in this fashion can ports obtain a reasonable return of and on capital values.

Leases for port properties should also be structured so that they are ‘financeable’ to facilitate releasing tied up equity in property. To accomplish this, leases should have a certain degree of standardization and the ability to generate a reasonably predictable cash flow. In many respects, the aforementioned could easily have described the lease structuring needs of major, regional shopping centers, as their similarities with ports are both numerous and interesting.

Regional shopping centers also are capital intensive operations, requiring long amortization periods and are essentially distribution centers like ports. It is therefore no coincidence that certain similarities exist in the way rent is charged at both. For example, shopping centers have ‘anchor’ tenants while ports have terminal operators; shopping centers have a ‘base’ rent equivalent to ports, charging rent for land and facilities; and shopping centers have ‘percentage’ rents, which are the equivalent of MAGRs.

Also, like regional shopping centers, there is a question as to whether percentage rents or MAGR at ports benefit the landlord, tenant or both. Some believe that MAGR only benefits the port while others argue that, if properly structured, they can ‘motivate’ ports to not act short-sighted or opportunistic. How so? By motivating them to strive to establish the optimal tenant mix, rather than taking on just any tenant regardless of vacancies. In this fashion the greatest amount of externalities between tenants will result, along with tenants making the maximum use of their leased facilities to better amortize their rent costs. If this optimal tenant mix is accomplished, the port should also generate the maximum possible rent from its property assets and enhance the overall economic value of the port in the process.

Which raises the question, should MAGRs be the ‘carrots’ and the asset based rent the ‘stick’?

 

To read the full article download PDF

Franc J Pigna CRE FRICS CMC, managing director, Aegir, Florida, US
Edition: Edition 54

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