Residual cost agreements usually run for longer terms to provide security for revenue bond issues.

Residual cost agreements usually run for longer terms to provide security for revenue bond issues.

• A. True
• B. False
• C. Sometimes
• D. Not specified

Answer: (A)

Longer-term residual cost agreements provide a stable, predictable revenue stream that supports debt service on revenue bonds. In airport finance, bonds are repaid from net airport revenues, so agreements that guarantee residual payments from airlines or tenants help ensure those revenues will be available over time. Extending the term of these agreements aligns with the life of the bonds and reduces risk to investors by locking in a dedicated flow of funds for operating costs and debt service. Because this risk reduction is the primary reason bondholders accept favorable terms, these agreements are typically structured for longer durations rather than short or uncertain terms. If a residual cost agreement were short or not specified, it would offer less assurance to bondholders and could jeopardize the bond issue.

Longer-term residual cost agreements provide a stable, predictable revenue stream that supports debt service on revenue bonds. In airport finance, bonds are repaid from net airport revenues, so agreements that guarantee residual payments from airlines or tenants help ensure those revenues will be available over time. Extending the term of these agreements aligns with the life of the bonds and reduces risk to investors by locking in a dedicated flow of funds for operating costs and debt service. Because this risk reduction is the primary reason bondholders accept favorable terms, these agreements are typically structured for longer durations rather than short or uncertain terms. If a residual cost agreement were short or not specified, it would offer less assurance to bondholders and could jeopardize the bond issue.