Paul Gessing, the president of the Rio Grande Foundation, a conservative think tank based in Albuquerque, has been studying, writing and podcasting about Spaceport America for years. The Sun interviewed Gessing by phone earlier this fall for this two-part series seeking answers to the questions of whether the Spaceport can eventually become self-sustaining and whether there will ultimately be an equitable return to New Mexico’s taxpayer on the $300-plus million public subsidy of that facility. Gessing explained why these goals will be difficult to achieve.
“When it comes to doing business in New Mexico,” he said, “we have an awful regime of taxes that create huge obstacles and then the legislature provides exemptions for favored businesses, such as the film industry and spaceport.”
RFG’s president was referring to a series of tax exemptions aimed at encouraging space companies to locate in New Mexico that were passed by the legislature in 2003, during the first year of Bill Richardson’s term as governor. These financial incentives or giveaways (depending on your point of view) took effect two years before Richardson and Sir Richard Branson shook hands on a mutual pledge to build a world-class spaceport and a world-class spaceline in the state. The exemptions may or may not have sparked Branson’s interest in doing business in New Mexico, but they will clearly boost the bottom line of Virgin Galactic, the space tourism company founded by Branson in 2004, at the expense of the public’s return on its Spaceport America investment.
On March 19, 2003, Bill Richardson held a signing ceremony to enact the Gross Receipts and Compensating Tax Act, which granted to space exploration and commercialization companies several generous tax exemptions with no sunset dates. An account published five days later in the Alamogordo Daily News provides insights into the motivations of the exemptions’ advocates.
The bill was sponsored in the New Mexico Senate by Mary Kay Papen (D-Las Cruces) and in the House by Andy Nuñez (D-Hatch). It was drafted with input from New Mexico State University, the Space Task Force in Las Cruces, NASA’s White Sands Test Facility and such private aerospace companies as Honeywell. Nuñez backed the bill, he explained, to “get companies a break in taxes so they can come in.” He predicted that “thousands of jobs” would be created as a result, most notably in southern New Mexico, where consideration was already being given to constructing a spaceport at a site near Hatch.
GRT AND COMPENSATING TAX EXEMPTIONS
The 2003 exemptions are breathtaking in the scope of space exploration and commercialization activities that are not subject to New Mexico’s gross receipts and compensating taxes. Gross receipt taxes are, in effect, sales taxes, while compensating taxes are excise taxes imposed on persons using property or services here.
The specific exemptions are as follows:
State law 7-9-30 (C) states: “Exempted from the compensating tax is the use of space vehicles for transportation of persons in, to or from space.”
State law 7-9-26.1 provides sellers and buyers of fuel to be used in space vehicles with an exemption from GRT and compensating tax, respectively.
7-9-52.2 exempts the imposition of GRT on “spaceport operations,” which includes such activities as managing a spaceport; transporting people to space; launching, operating and recovering space vehicles or payloads; payload services; and any space program services conducted for the United States Air Force Operationally Responsive Space Program.
Part 1 of this series examined the impact of the New Mexico Tax and Revenue Department 2019 ruling that Virgin Galactic’s ticket sales—reported as $80 million and growing—were covered by the 7-9-52.2 exemption.
State law 7-9-54.5 exempts the imposition of compensating tax on any space-related “test articles” used “pursuant to a contract with the United States Department of Defense. . . .”
The 2003 legislation initially added another exemption to the above list. That provision would have made the manufacture of space vehicles and their components in New Mexico tax exempt. The Legislative Finance Committee estimated that this tax exemption would deprive state and local government entities of $1.5 million in revenues annually—one of the few parts of the bill for which the LFC provided an analysis of economic impact. The manufacturing tax exemptions were subsequently removed from the legislation by the Senate Finance Committee.
Virgin Galactic recently announced plans to manufacture spacecraft to meet its projected 400 flights per year at each of the multiple spaceports it intends to operate. Since VG would have to pay gross receipts and compensating taxes on any manufacturing activities it chose to conduct in New Mexico, it is unlikely that the state will win the competition for the 1,000 jobs that will be created in the state in which VG decides to locate its plant.
2008 LEASE AGREEMENT
In addition to benefiting from the multiple tax exemptions that are awarded to all space exploration and commercialization that do business in New Mexico, Virgin Galactic negotiated a sweet deal on its lease agreement with the Spaceport Authority in 2008. The lease was amended in 2018, and the new provisions further hinder the Spaceport’s ability to bring in the needed revenues to cover its operating expenses, while also limiting state and local return on the public investment in the facility.
The 2008 lease agreement set forth the rental fees VG was to pay for use of the “Gateway to Space” main terminal and hangar and the surrounding grounds. Then Spaceport Authority Executive Director Steve Landeene and then Virgin Galactic Director Jonathan Peachey signed the lease agreement, which was good for a 20-year term, on Dec. 31, 2008.
The term did not begin immediately, but upon VG’s occupancy. Virgin Galactic didn’t start paying rent until 2013, two years after the Spaceport opened, according to the fiscal year 2019 audit that Spaceport America submitted to the New Mexico State Auditor. Yet VG received invaluable publicity and good will from its association with Spaceport America’s instantly iconic main terminal building, designed by Sir Norman Foster, without contributing a penny toward the cost of the building’s construction or its upkeep during this two-year interval.
The lease agreement also set forth Virgin Galactic’s “user fees” for its use of the runway and the Spaceport in general, although the terms are not sharply defined. There are general guideposts providing that user fees are to be based on the Spaceport Authority’s operating and maintenance costs and may be adjusted yearly. The user fees are higher or lower depending on variables such as the number of flights conducted in a year, whether VG has exclusive or nonexclusive use of the airfield, whether its flights are for test or commercial purposes and whether it is flying employees or paying customers. In general, as the number of flights and passengers increase, per-flight user fees decrease.
This makes some sense, because the anticipated economic return on the state and local investment in the Spaceport is premised on the assumption that “if we build it, they will come”—and the more who come, the better. The belief is that VG’s well-heeled and celebrity “astronauts” and their entourages—as well as tourists eager to visit the world’s first purpose-built spaceport—will liberally indulge in hospitality services, retail opportunities and sightseeing attractions available in Sierra and Doña Ana counties, thus boosting local lodgers’ tax and GRT. This scenario was why the two counties agreed to impose a Spaceport-dedicated GRT on their residents and visitors. The GRT, which went into effect in 2009 and has no sunset, is 25 cents per $100 purchase. In 2020, this dedicated GRT produced about $7.5 million, most of it going to pay debt related to two bond issues that helped build the Spaceport.
The 2008 lease agreement gave the Spaceport Authority an easy exit, should Virgin Galactic’s plans and projections fall short. If VG didn’t fly at least 25 times a year, the Spaceport Authority could cancel the lease agreement, returning the company’s $2 million deposit. VG also was granted the ability to walk away from the lease agreement at any time, thus forfeiting its $2 million deposit. Alternatively, if VG wanted to avoid the lease’s cancellation, it could agree to pay the equivalent of 50 flights a year in user fees. However, the abovementioned permutations and variables that affect user fees makes determining the exact fee that would be charged in those circumstances unclear and open to interpretation.
WHAT VIRGIN GALACTIC HAS PAID FOR THE USE OF THE SPACEPORT
The Sun examined the Spaceport Authority’s yearly audits for fiscal 2013 through fiscal 2017, which are available on the State Auditor’s website. The audits give a collective figure for the rent and user fees collected from all Spaceport tenants each year. VG has paid the lion’s share of these charges, Spaceport America Executive Director Scott McLaughlin acknowledged to the Sun earlier this fall, so a general idea of the rent and user fees paid by VG for the first five years of its lease agreement can be obtained from this data.
The rent paid by all tenants ranged from a low of $503,000 in fiscal 2013 to a high of $1.16 million in fiscal 2017. The total rent collected was $4.86 million, meaning that VG’s rent for the five-year period was less than that figure.
User fees for tours and launches for all tenants ranged from $372,000 in fiscal 2013 to a high of $1.3 million in fiscal 2014. The figure fell to $1 million in fiscal 2017. The total user fees for the five-year period were a little more than $4.7 million. Again, VG paid something less than that figure.
In summary, during Virgin Galactic’s first five years of Spaceport occupancy, its rent went up, and its user fees went up and down.
In addition to examining Spaceport Authority’s publicly available audits, the Sun submitted an Inspection of Public Records request that permitted us to examine other financial documents dating from October 2018 to October 2021 that were provided by the Spaceport Authority.
These documents offered a more granular picture of the revenues that the Spaceport has derived from Virgin Galactic’s tenancy.
In calendar year 2018, VG paid $254,331 a month for the Gateway terminal and hanger, $2,670 a month in ground rent and $166,666 a month in user fees for the months of October, November and December. An amendment to the lease executed in 2018—to be discussed in detail later—makes it clear that VG paid $83,333 a month in user fees for the first half of the year and $166,666 a month for the second half of the year, or $1.5 million in total user fees for the year. The lease amendment did not change the building and ground rental fees; therefore, VG paid nearly $3.1 million in rent, as it has done every year since. Rent and user fees in 2018 totaled about $4.6 million.
In calendar year 2019, the company’s user fees were $83,333 a month or $1 million a year. Rent and user fees totaled about $4.1 million.
In calendar year 2020, the company paid the same rents and user fees as the year before, totaling about $4.1 million.
In calendar year 2021, VG’s user fees went up to $188,888 a month, meaning the company will probably pay on the order of $2.26 million this year. This year’s rent and user fees are likely to run more than $5.3 million.
Revenues from Virgin Galactic and other Spaceport users account for only 60 percent of the facility’s current operating budget, Spaceport Executive Director Scott McLaughlin recently explained recently to a legislative committee of the New Mexico Legislature. The legislature must allocate another $2 million a year for Spaceport operations, McLaughlin informed the committee, to “keep momentum going.”
Virgin Galactic’s rent cannot be raised under the terms of the present lease, however. It appears that $3.1 million a year is the set amount Virgin Galactic will pay for leasing the main terminal and grounds through 2033, as prescribed in the 2008 lease agreement that took effect upon VG’s occupancy in 2013.
What are the prospects for raising VG’s user fees? Until Spaceport Executive Director Scott McLaughlin responded to the Sun’s questions, it was unclear what circumstances had dictated the up-and-down fluctuation in user fees over the years from $83,333 a month to $166,666 and then back to $83,333 before climbing to $188,888 a month.
2018 LEASE AMENDMENT GIVEAWAYS
In answer to several questions posed by the Sun, mostly concerning VG’s user fees, Scott McLaughlin provided a copy of a letter that amended the 2008 lease agreement.
Virgin Galactic, not the Spaceport Authority, took the lead in modifying the lease. The modifications, which are in effect for a 10-year term ending in 2028, heavily favor Virgin Galactic’s interests and bottom line.
George Whitesides, the former CEO of Virgin Galactic, sent the letter amending the lease agreement to then Spaceport Authority Executive Director Dan Hicks on Dec. 21, 2018. “The Parties have agreed to enter into this Letter Agreement in order to clarify certain provisions of the Facilities Lease and minimize the uncertainty of their obligations during the upcoming transition period in VG operations at the spaceport,” Whitesides stated.
Despite Spaceport America’s public ownership, the lease amendment appears to have been concluded behind closed doors in the executive suite. Hicks’s successor, Scott McLaughlin, stated in a Nov. 9 email to the Sun there is no evidence the Spaceport Authority board of directors was made aware of or approved the amendments to the lease agreement. Hicks was fired by the board for financial mismanagement and other administrative misdeeds in October 2020.
The letter, which is posted here, documents that Virgin Galactic paid $1 million in user fees or $166,666 a month for six months in 2018 for an unlimited number of flights.
In 2019 and 2020, the letter states VG was to pay $83,333 a month or $1 million a year for unlimited flights.
Starting Jan. 1, 2021, and ending June 30, 2028, the company was to pay $188,888 a month or $2,266,666 a year for up to 20 “revenue-generating” flights of its WhiteKnightTwo mothership and its passenger-carrying SpaceShipTwo rocket. In any month that VG conducted more than 20 passenger space flights, however, it would be required to pay an additional $10,000 per flight over 20.
For the same base user fee of $188,888 a month, the lease amendment granted VG the right to use the Spaceport for general aviation flights. This provision suggests that the municipal airport in Truth or Consequences will probably not get much spinoff business from VG’s spaceflights because of this option, which allow astronauts and their entourages to be flown directly into and out of the Spaceport.
New downside protections for Virgin Galactic were provided, too. Another amendment granted the company the right to reduce its usual monthly user fee of $188,888. If VG gave three months’ prior notice of its inability to conduct revenue-generating flights, it would be required to pay only $50,000 a month for two out of every three flightless months. If VG experienced a year of no revenue-generating flights and gave proper notice, it would pay four months at $188,888 and eight months at $50,000, or $1.15 million in user fees that year.
“In the event VG does not anticipate having three (3) or more consecutive calendar months without conducting revenue-generating spaceflights, but such a situation occurs,” the lease amendment offered a further protection. Virgin Galactic would continue to pay $188,888 for the first three months it did not conduct revenue-generating flights. Then it would pay only $50,000 a month until one month before it started revenue-generating flights again. Therefore, if VG went a year without conducting any revenue-generating flights, it would pay only $1.01 million a year in user fees.
The financial documents provided by the Spaceport Authority for October 2018 to October 2021 do not show that Virgin Galactic has made any $50,000 monthly payments. For some reason, VG has yet to exercise its ability, which began on July 1, 2020, to pay reduced user fees, despite continuing delays in the start of its commercial spaceflights.
The last giveaway in the 2018 lease amendment letter is the most potentially damaging to Sierra and Doña Ana counties’ hopes that their investment of GRT in the Spaceport’s construction and operations will result in an economic boost to their local tourism industries.
The amendment letter gives Virgin Galactic the sole right to market and profit from the members of the “general public” who visit Spaceport America to view VG spaceflights. The company will pay the Spaceport Authority 20 percent of the resulting proceeds after its costs are subtracted.
“VG shall contract for, and shall be responsible for the costs of engaging, additional security, vendors, and other resources, and net revenues shall be calculated by subtracting these and other event expenses from gross revenues,” the amendment letter states.
However, the company is under no obligation to market—and thus generate revenue from—visits of the general public to the Spaceport, the letter states. Virgin Galactic’s decision of whether or not it will actively help to promote Spaceport America as a world-class tourist attraction will affect for better or worse a Spaceport revenue stream and the boost Sierra and Doña Ana counties are likely to get from visitors who come to southern New Mexico to view VG flights.
VG WILL NOT COVER SPACEPORT BILLS
The total building and ground rent and the user fees the Spaceport Authority can collect under VG’s current amended lease agreement is a maximum of $5.36 million and a minimum of about $4.11 million a year through 2028, until such time as Virgin Galactic’s commercial spaceflights regularly exceed more than 20 a month.
In a phone call with the Sun on Nov. 8, McLaughlin confirmed that rent and user fees are the major sources of revenue the Spaceport will collect from Virgin. GRT on ticket sales for its commercial flight ticket sales, as Part 1 of this series reported, has been exempted.
In an email on Nov. 9, McLaughlin elaborated on Virgin Galactic’s contributions to the Spaceport’s bottom line. “On the operational side, the spaceport is about 60 percent self-funded through customer revenue, with the bulk of that from Virgin Galactic,” he stated. “The Virgin Galactic payments come from a combination of lease and user fees as determined by their agreements with NMSA [New Mexico Spaceport Authority]. We do have increasing revenue from other customers, but VG payments are the main source of operating revenue.”
The estimated operating expenses for Spaceport America for fiscal year 2021 and 2022 were presented to the Spaceport Authority board of directors during at a board meeting on May 6. For fiscal year 2021, which ended last June 30, the total estimated operating expenses were $9.75 million. Expenses are estimated to be $10.36 million in fiscal year 2022. Virgin Galactic will therefore cover a little more than half of the Spaceport Authority’s operating expenses, if it continues to pay $188,888 a month or $2.26 million a year in user fees and its standard rental fee of $3.1 million a year. If VG pays only the minimum $1.01 million in user fees and $3.1 million in rent, the portion of the Spaceport’s operating costs it covers in fiscal 2022 will drop to about 40 percent.
Projecting costs through 2028, which is the end of Virgin Galactic’s amended lease term, Spaceport America will expend at least $10 million a year in operating expenses or another $70 million over the next seven years, with about $35 million coming from public funds. During that time, Doña Ana and Sierra counties will collect $7.5 million a year in Spaceport-dedicated GRT, for a total of about $52.5 million in additional taxpayers’ subsidies.
Adding the $35 million and the $52.5 million to the $330 million of already-committed public investment in the Spaceport brings New Mexico’s support of the facility to $417.5 million. This figure excludes the costs of capital improvements included in the Spaceport’s five-year capital improvements plan, making the above estimate of the total public subsidy through 2028 very conservative.
Since it took occupancy in 2013 through the end of fiscal 2021, Virgin Galactic has directly paid the Spaceport about $26 million in rent and user fees. The company will pay in the neighborhood of $38 million in rent and user fees over the next seven years, unless it begins regularly conducting more than 20 commercial space flights a month.
So, “we built it” to the tune of $417.5 million and counting. And Virgin Galactic may have paid somewhat more than $64 million —or somewhat less—to use it when the 10-year term of its amended lease provisions expire in 2028.
Branson definitely got the better end of his handshake deal with Bill Richardson.