6b memo
COMMISSION AGENDA MEMORANDUM Item No. 6b ACTION ITEM Date of Meeting January 9, 2018 DATE: January 2, 2018 TO: Dave Soike, Interim Executive Director FROM: James Jennings, Senior Manager, Aviation Properties Wayne Grotheer, Director, Aviation Project Management SUBJECT: Delta Inflight Services Tenant Reimbursement Agreement (CIP #C800883) Amount of this request: $1,116,000 Total estimated project cost: $1,196,000 ACTION REQUESTED Request Commission authorization for the Executive Director to: execute a Tenant Reimbursement Agreement with Delta Air Lines, Inc. for $975,000 of this total under the Airport's AV-2 Policy for the design and construction of a project to prepare for occupancy approximately 4,000 square feet of office space in the main terminal at Seattle-Tacoma International Airport and $221,000 for non-tenant reimbursement Port costs associated with this project. This request seeks a single Commission authorization to reimburse Delta for design and construction and for non-tenant reimbursement costs associated with the project, a total of $1,196,000. EXECUTIVE SUMMARY This project will develop currently unoccupied space on the second floor of the original Airport Administration Building, adjacent to the Main Terminal Mezzanine, for use by the Delta Air Lines (Delta) Inflight Services Group using a Tenant Reimbursement Agreement (TRA) between the Port and Delta. This will allow Delta to locate all of their Inflight Services staff in one space and convert a currently unleasable area in this location to leasable space. By using a TRA, design and construction can be completed as one project with one team, ensuring Delta will be able to complete the work on their preferred timeline. The space currently occupied by Delta's Inflight Services group will be returned to the Port for possible future development as a common-use club. JUSTIFICATION This project supports the Century Agenda goal to meet the region's air transportation needs at the Airport by providing additional leasable space in a currently unoccupied area. This allows Delta to operate their Inflight Services more efficiently and provides the Port with additional revenue. It also supports the Aviation Division priority of financial performance by developing space in existing buildings rather than constructing new facilities. Template revised September 22, 2016. COMMISSION AGENDA Action Item No. 6b Page 2 of 6 Meeting Date: January 9, 2018 DETAILS This project will prepare for occupancy approximately 4,000 square feet of raw un-leasable shell space on the second floor of the original Airport Administration Building, one level up from the Ticketing Level, using a Tenant Reimbursement Agreement with Delta for its design and construction. Delta is additionally improving another approximately 4,400 square feet of adjacent existing office space, which will be built out by Delta as a tenant expense project for their Inflight Services Group. The total of the two spaces will create an 8,400 square foot Inflight Services office to support Delta's expanding flight attendant group. This work is possible because of the completion of the CTE Stairs project. Once Delta's Inflight Services group has moved, the space they are vacating on the Mezzanine level of the South Satellite will be returned to the Port for future development. Scope of Work Approximately 4,000 square feet of this location is in a raw condition because it has been partially demolished during previous projects including regulated materials abatement. This project's scope therefore includes the following: (1) Additional demolition as required (2) Additional regulated materials spot abatement as required (3) Basic wall, ceiling, and floor finishes per Port standard (4) Necessary life/safety and other infrastructure connection points to the lease line Schedule Activity Preliminary Design start 2017 Quarter 3 Commission design and construction authorization 2018 Quarter 1 Construction start 2018 Quarter 1 In-use date 2018 Quarter 3 Cost Breakdown This Request Total Project Design $81,000 $81,000 Construction $1,115,000 $1,115,000 Total $1,196,000 $850,000 Template revised September 22, 2016; format updates October 19, 2016. COMMISSION AGENDA Action Item No. 6b Page 3 of 6 Meeting Date: January 9, 2018 ALTERNATIVES AND IMPLICATIONS CONSIDERED Alternative 1 Leave the space vacant and do not build it out into leasable space Cost Implications: $0 from the Port. The estimated cost of the project, $1,196,000, would be avoided. Pros: (1) No capital funding costs are associated with this alternative Cons: (1) Leaving this space unimproved would keep the area un-leasable and would not address the crucial need for additional leasable space. (2) Would not realize the revenue from Delta for leasing this, and adjacent space not subject to reimbursement by the Port, of approximately $1.27M annually. (3) Does not provide Delta a key operational resource they are requesting This is not the recommended alternative. Alternative 2 The Port build out this space to leasable condition without using a TRA, Delta would then make their tenant improvements (TIs) after the Port's improvements were completed. Cost Implications: $1,394,000 Pros: (1) Would not require a TRA between the Port and Delta (2) Port would receive approximately $1.27M in annual revenue from the lease of this, and adjacent space not subject to reimbursement by the Port. (3) Frees up space on Mezzanine level of South Satellite for development as common use club (4) More control related to Port project costs due to direct control of project by Port staff Cons: (1) Would require two separate projects. Port would construct improvements to make the space leasable, then Delta would make their tenant improvements, which would likely require them to remove portions of the Port's original project scope (2) More costly than Alternative 3 (3) Would take approximately 28 months to complete, missing Delta's preferred occupancy date by 22 months. This is not the recommended alternative. Template revised September 22, 2016; format updates October 19, 2016. COMMISSION AGENDA Action Item No. 6b Page 4 of 6 Meeting Date: January 9, 2018 Alternative 3 Build out this space to leasable condition through a single construction project, with a TRA with Delta to reimburse the Port's leasable improvements portion. Cost Implications: $1,196,000 Pros: (1) Allows Delta to move their Inflight group on their preferred occupancy timeline (2) Port would receive approximately $1.27M in annual revenue from the lease of this, and adjacent space not subject to reimbursement by the Port. (3) Frees up space on Mezzanine level of South Satellite for development as common use club (4) Less costly than other alternatives to build out the space Cons: (1) Because Delta is proceeding at risk with the design, there is a possibility that Port standards may not be fully incorporated into the design until much later in the review and approval process (2) Less control on Port project scope and costs due to Delta completing leasable space improvements This is the recommended alternative. FINANCIAL IMPLICATIONS Cost Estimate/Authorization Summary Capital Expense Total COST ESTIMATE Original estimate $5,289,000 $0 $5,289,000 Previous changes net ($4,093,000) 0 ($4,093,000) Revised estimate $1,196,000 0 $1,196,000 AUTHORIZATION Previous authorizations $80,000 0 $80,000 Current request for authorization $1,116,000 0 $1,116,000 Total authorizations, including this request $1,196,000 0 $1,196,000 Remaining amount to be authorized $0 $0 $0 Annual Budget Status and Source of Funds The Delta Inflight Services Relocation (CIP #C800883) was included in the 2018-2022 capital budget and plan of finance at $5,289,000. The scope of work has changed to a tenant reimbursement and the decrease in budget was transferred to the Aeronautical Allowance (CIP #C800753), resulting in no net change to the capital budget. The funding source for this project will be Airport Development Fund (ADF). Template revised September 22, 2016; format updates October 19, 2016. COMMISSION AGENDA Action Item No. 6b Page 5 of 6 Meeting Date: January 9, 2018 Financial Analysis and Summary Project cost for analysis $1,196,000 Business Unit (BU) Terminal Building Effect on business performance NOI after deprecation will increase (NOI after depreciation) IRR/NPV (if relevant) N/A CPE Impact Less than $0.01 in 2018 Future Revenues and Expenses (Total cost of ownership) Leasing the 8,400 square feet of space will generate in excess of $1.2 million per year based on the 2018 terminal rents. ATTACHMENTS TO THIS REQUEST None PREVIOUS COMMISSION ACTIONS OR BRIEFINGS None Template revised September 22, 2016; format updates October 19, 2016. COMMISSION AGENDA Action Item No. 6b Page 6 of 6 Meeting Date: January 9, 2018 Template revised September 22, 2016; format updates October 19, 2016.
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