Airport FBO Terminal FAQ
In late 2017, the City of McKinney entered into a public-private partnership with WesternTKILeasing, Inc. (“Western”) for a $16 million construction project at the McKinney National Airport that included a new, state-of-the-art Fixed Base Operator (FBO) terminal, a 40,000-square-foot hangar, and related parking facilities. According to the partnership agreement, the FBO terminal and hangar buildings would be leased to the city with the right to purchase them.
The partnership agreement also included timeframes to complete both structures. Western completed the 40,000-square-foot hangar on schedule but failed to complete the FBO terminal by March 4, 2020, the deadline set out in the agreement.
Consequently, acting as the landlord under a ground lease, the City of McKinney issued a letter on March 5 to Western notifying the company of its default under the ground lease, including the city’s intent to terminate the lease if the defaults are not timely cured. Western notified the city on March 12 that it was unable to cure the default within the period allowed, thereby waiving its rights under the cure period and effectively terminating Western’s rights under the ground lease.
Western’s construction lender, Frost Bank, also had rights under the ground lease to complete the building within an additional cure period. Frost Bank notified the city on June 17 that it was electing not to cure Western’s default. Once Western and Frost Bank declined to complete the FBO terminal and the ground lease was terminated, the city owned the buildings. The city is now preparing to complete the project on its own.
Updated July 21, 2020
Q: When was Western selected to partner with the city on this project?
A: The city solicited an RFP for a development partner in July 2016. Western was selected and entered into public-private partnership agreements with the city in November 2017.
Q: Had the city / airport worked with Western before?
A: No. Western was selected for this project based on the strength of its response to the city’s RFP.
Q: What were the financial terms of the public-private partnership agreement?
A: According to the public-private partnership agreement, the city contributed $10 million in prepaid rent. Western financed approximately $6 million through its construction lender, Frost Bank, and was responsible for the construction and development of the facilities. Once the project was completed, the city agreed to pay rent payments to allow Western’s repayment of the $6 million construction loan, ultimately retaining ownership of the facilities constructed once the lease ended and the loan was retired.
City funding came from the McKinney Economic Development Corporation and the McKinney Community Development Corporation, with each contributing a $4 million grant toward the project. The remaining $2 million came from the airport construction fund.
Q: How much of the project has been completed?
A: The 40,000-square-foot corporate hanger is complete and has been operational since April 2019. The parking lot facilities are also complete. The FBO terminal building is approximately 50% complete.
Q: What happened to the $10 million the city invested in the project?
A: The $10 million the city invested has primarily funded the construction and completion of the hangar, its associated aircraft apron, the road and utility infrastructure to the access hangar site, and the parking facilities.
Q: Has the city lost money as a result of this delay?
A: No. In fact, the total value of the assets constructed under the project exceed the city’s initial $10 million investment. However, the city will need to invest funds into remediation of the existing incomplete structure and on the vacated construction site.
Q: Does Western still owe money to contractors for the construction that was completed before it defaulted on the project?
A: The city is aware of approximately $2.58 million in lien notices filed against Western by its subcontractors.
Q: Does the city intend to pay the lien claimants as it takes over the project?
A: All funds available to the city for the project are considered public funds. Under the Texas Constitution, the city cannot legally use public funds to pay private obligations or debts. To do so would be an impermissible, unconstitutional gift of public funds. The city was notified that Lone Western Star Development, the contractor for the original project, and WesternTKILeasing, the owner of the original project, filed for Chapter 7 bankruptcy relief. The city made a recommendation to Western’s contractors, subcontractors, and suppliers of materials to pursue their remedies for nonpayment against the contractor and the owner of the projects through the Chapter 7 bankruptcy process.
Q: Why was there no performance and payment bond issued on the initial project?
A: Since the project was not a city public works project, the city was not obligated to require payment and performance bonds on the buildings, which were owned by Western. However, some of Western’s subcontractors may have provided payment and performance bonds for contractors working under them or material suppliers.
Q: What happens to the project moving forward?
A: The city plans to issue bonds to fund the completion of the FBO terminal. The debt from the bond issue will be paid from the airport’s operating revenues. The city plans to retain CaCo Architecture, the firm that originally created the FBO terminal design, to update and finalize a set of construction plans suitable to bid the remaining subcontracts job. Further, the city plans to contract with McRight-Smith Construction, LLC as Construction Manager-At-Risk (CMAR) for the project and finish the project under an emergency procurement process. MNA Development will be responsible for bidding the project’s remaining subcontracts and managing the various contractors’ work to complete the building.
Q: What is the anticipated construction schedule going forward?
A: The city anticipates having the updated construction plans finalized by August 10. About four months will be needed for the CMAR to undertake the emergency procurement bid process, qualify the bids and award the subcontracts. Actual construction time to complete the building is estimated to be six months. The city plans to complete the project by the end of April 2021.
Q: What about the hangar that was built by Western?
A: The aircraft hangar has been producing revenue for the airport since April 2019.
Q: How has this delay affected operations at the airport?
A: The delay in finishing the new FBO terminal has not had a negative impact on the airport’s operations or its delivery of services to airport users. The new FBO terminal building is intended to replace an existing FBO terminal building that is fully-operational today. The portion of the project that is already completed, the 40,000-square-foot hangar, is a welcome addition to the airport’s aircraft storage inventory and enhances the airport’s ability to accommodate both McKinney-based customers and transient aircraft needing overnight storage. The hangar, which has been in service since April 2019, is averaging in excess of $50,000 in revenue each month.
Q: Why did the city decide to use the emergency procurement process in the selection of the contractor to complete the project?
A: The City Council voted to use an emergency procurement process because the FBO Terminal has remained unfinished for a significant period of time to the point where exposed beams and construction materials are becoming degraded and damaged. These materials pose a risk of being blown into the adjacent runway, taxiways and hangars as well as endangering aircraft on the airport property; all of which constitutes a threat to the public health and safety of the residents of the City of McKinney. In addition, the degradation and damage to the structure will worsen with time, leading to further expense in completing the project.
According to the Texas Local Government Code, cities are exempt from the state’s competitive bidding requirements for “a procurement necessary to preserve or protect the public health or safety of the municipality’s residents” and for “a procurement necessary because of unforeseen damage to public machinery, equipment, or other property.”
Q: How was McRight-Smith chosen as the contractor to complete the FBO terminal?
A: McRight-Smith was part of a team that submitted a response to the initial Request for Qualifications (RFQ) in August 2016. Their development team was the runner up to Western in that process. When Western failed to complete the project and City Council determined immediate action was necessary to complete the project, the city approached the next firm on the RFQ list to gauge their interest in taking over the project.