PORT OF SEATTLE 
MEMORANDUM 
COMMISSION AGENDA               Item No.      5d 
ACTION ITEM 
Date of Meeting     March 18, 2014 
DATE:    February 28, 2014 
TO:      Tay Yoshitani, Chief Executive Officer 
FROM:   James R. Schone, Director, Aviation Business Development 
Deanna Zachrisson, Manager, Concessions Business 
SUBJECT:  Host International Settlement Agreement 
Total One-Time Payment to the Port: $311,931 
ACTION REQUESTED 
Request Commission authorization for the Chief Executive Officer to enter into a settlement
agreement with Host International (Host) for certain unpaid concession rent on gross sales in its 
operations at Seattle-Tacoma International Airport (Airport). 
SYNOPSIS 
The proposed settlement agreement resolves a dispute between the Port and Host pertaining to
one of three findings in a 2013 internal audit of a lease and concession agreement for food
service operations  at  the  Airport.  Host did not dispute the other two findings and has
satisfactorily addressed them. With respect to the disputed finding, Host has agreed to pay
$311,931. Since the settlement amount is greater than $300,000, Commission authorization is
necessary for it to be executed under the current provisions of the Port's Master Delegation of
Authority, Resolution No. 3605, as amended by Resolution No. 3628. 
BACKGROUND AND JUSTIFICATION 
The Host lease and concession agreement encompasses a total of 24 food and beverage locations
at the Airport. Eight  of  these locations are operated by subtenant Airport Concessions
Disadvantaged Business Enterprise (ACDBE) businesses. In 2013, Host and its subtenants 
generated $43.3 million in gross sales. 
As is typical for food service agreements at the Airport, the operator pays a percentage of gross
sales as rent to the Port. The percentage in these particular agreements depends upon the type of 
product sold such as alcohol, branded food and beverage, or non-branded food and beverage.
The Host agreement was executed in 2003, near the end of the master concessionaire lease that
Host held at the Airport. As a means of encouraging brand name concepts, the Port afforded 2%
less percentage rent in the agreement for a branded concept rather than a generic, non-branded
concept. The original 2003 lease did not provide specific criteria to define a branded vs. nonbranded
concept. However, an amendment to the lease in late 2005 added such a definition. To

Template revised May 30, 2013.

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
February 28, 2014 
Page 2 of 4 
be considered a branded concept (or product), the lessee must pay at least 3% of gross sales to
the franchisor or licensee for use of the brand name.
Port Internal Audit staff conducted an audit of the Host agreements for the period January 1,
2009, through December 31, 2011. Specifically in the Host agreement, audit staff found that one
of Host'sfranchise concepts, Great American Bagel Bakery (GABB) did not meet the required
3% threshold to be considered branded food and beverage. Host paid only 2% in royalty to
GABB, thus the franchise did not qualify for the 2% lower rent. In addition, a smaller
discrepancy was discovered with regard to a Diva Espresso franchise location. In the latter
instance, branded Diva Espresso beverages qualified as branded, while other food items should
have been considered non-branded food at the higher rate. The amount that Internal Audit staff
identified as owed for these issues is as follows: 
Total Underreported Concession 
2009                      $121,514 
2010                      $132,546 
2011                      $141,040 
Total Additional Concession Due     $395,100 
Late Charge (5% Per Agreement     $19,755 
Terms) 
Interest Accrued Through 9/30/2013   $220,849 
Subtotal                      $635,704 
Cost of Audit                  $34,029 
Total Amount Due to Port        $669,733 
All of the audit findings are summarized below, as reported to the Port Audit Committee on
October 3, 2013: 
1) Host did not calculate rent payments correctly resulting in an additional $395,100 owed
to the Port. 
Host's Great American Bagel Bakery franchise did not fulfill the criteria to be considered
"branded food and beverage." In addition, a smaller discrepancy was discovered with regard to a
Diva Espresso franchise location. Including late penalties and accrued interest, the owed amount
totals $635,704. In addition, because the audit revealed a discrepancy of more than 2% of the
concession fee owed for any 12-month period, Host is required to pay for the full cost of the
audit. The cost of the audit was $34,029. 
2) Host did not provide adequate documentation to substantiate gross sales as required by
the agreement. 
The audit concluded that gross sales for an ACDBE subtenant with a location under the Host
lease agreement (as well as under Host's Seattle Restaurants Associateslease agreement) were
underreported. This was determined by examination of monthly reports that showed received

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
February 28, 2014 
Page 3 of 4 
amounts to be greater than reported. The effort to determine the cause of the discrepancies was
hampered by the lack of required documentation to substantiate gross sales. For the sample
period, the auditors determined that the amount owed to the Port including applicable late fees
and interest is $7,491. This amount is not included in the summary above as it has not been the
subject of negotiation in this settlement. 
3) Host did not provide accounting records and other documents in a timely manner. 
Port auditors experienced difficulties in securing financial information necessary to conduct the
audit. Host was reluctant to allow auditors to examine franchise and/or license agreements as
required. The ACDBE subtenant was uncooperative with the Port's and Host's requests for
documentation. 
Resolution of Audit Claims 
In response to  the audit on  the issue of branded food sales, Host maintained that the
interpretation of the lease language specific to the definition of branded vs. non-branded food
was unclear. By Host's interpretation,any payments to the concept franchisor should qualify
toward meeting the 3% threshold  including specifically any payments for required purchases of
branded product from the franchisor. The Port maintains that the 3% payment threshold is
specific to royalty or licensing fees. In addition, Host pointed out that the GABB agreement was
long-standing and had previously been reviewed by the Port with no exception taken. In addition,
the parties recognized that the issue extended beyond the specific audit period, potentially
through 2013. However, due to a revision in the agreement with GABB that was effective
January 1, 2013, the issue only extended through December 2012. The settlement specifically
encompasses all amounts through December 2012. With respect to Diva Espresso, the issue
continued through 2013. 
In the proposed settlement of the GABB issue, Host will pay one-half of the principal amount
identified by Internal Audit staff. Host also will pay the cost of the audit. However, the Port will
forego the remaining portion of the principal amount, interest, and late fees. In doing so, the Port
accepts some responsibility for failing to identify this issue earlier with Host. Logically, if Host
had understood that a 3% royalty was required to qualify as a branded concept, Host would
likely have paid GABB this additional 1% rather than pay the Port an additional 2% in
percentage rent. 
In the proposed settlement of the Diva Espresso issue, Host will pay the discrepant amount in
full and additionally amounts owed for 2012-2013. Host is aware that it must also pay accrued
state Leasehold Excise Tax of approximately $25,000, which is not included in the settlement
amount. 
This proposed settlement was presented to the Port's Audit Committee on February 4, 2014.

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
February 28, 2014 
Page 4 of 4 
Proposed Settlement 
The negotiated settlement is summarized in the table below: 
Total Amount Owed to Port 
GABB Underpaid Rent 2009-2011    $192,590 
Diva Espresso Underpaid Rent        $4,960 
2009-2011 
Cost of Audit                   $34,029 
Underpaid Rent GABB 2012        $70,821 
Underpaid Rent Diva 2012-2013       $9,531 
Total Amount Due to Port        $311,931 
The proposed settlement agreement accompanies this memo. 
ALTERNATIVES AND IMPLICATIONS CONSIDERED 
Alternative 1) Do not approve the proposed settlement agreement. Under this alternative,staff 
would need to pursue the Port's claims in court. Considering the likely transaction costs
associated, it is uncertain that this course would lead to a better net outcome for the Port. This is
not the recommended alternative. 
Alternative 2)  Approve the proposed settlement agreement. This alternative leads to a
reasonable recovery of underpaid rent that will conclude this matter with Host. Host
acknowledges the Port's interpretation of the branded food and beveragefranchise fee criteria
and is now in compliance with this interpretation. The settlement also accounts for the Port's role
in not identifying this issue in an earlier audit. This is the recommended alternative. 
ATTACHMENTS TO THIS REQUEST 
Exhibit A: Proposed settlement agreement 
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS 
February 4, 2014: Port of Seattle Audit Committee briefing on the proposed settlement
agreement with Host. 
October 3, 2013: Port of Seattle Audit Committee briefing on the internal audit of Host
and Seattle Restaurant Association's leases with the Airport.