INTERNAL AUDIT REPORT
ATTESTATION ENGAGEMENT

AN EXAMINATION OF PORT MANAGEMENT'S ASSERTIONS
RELATED TO THE AIRPORT DINING AND RETAIL (ADR)
PROGRAM AT SEATTLE-TACOMA INTERNATIONAL AIRPORT

OCTOBER 1, 2012  SEPTEMBER 30, 2013 (and other)

ISSUE DATE: FEBRUARY 10, 2015
REPORT NO. 2015-01

AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013

TABLE OF CONTENTS 

INDEPENDENT INTERNAL AUDITOR'S REPORT ......................................................................................................... 3
BACKGROUND............................................................................................................................................................... 4
TESTING METHODOLOGY ............................................................................................................................................ 4
EXHIBIT A  RESULTS OF TESTING ............................................................................................................................. 5














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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013
INDEPENDENT INTERNAL AUDITOR'S REPORT

Luis Navarro
Director, Office of Social Responsibility
Port of Seattle

We have examined management's assertions related to the Airport Dining and Retail (ADR) Program at
the Seattle-Tacoma International Airport (STIA), for the period October 1, 2012  September 30, 2013,
and other periods as stated in the assertions (Exhibit A). The Aviation Business Development
Department management is responsible for the assertions. Our responsibility is to express an opinion
on the assertions based on our examination.
Our examination was conducted in accordance with Generally Accepted Government Auditing
Standards, and, accordingly, included examining, on a test basis, evidence supporting the assertions
related to the Airport Dining and Retail Program and performing such other procedures as we
considered necessary in the circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Exhibit A identifies the assertions and the results of our testing for each assertion.
In our opinion, management's assertions are fairly stated, in all material respects, for the period
October 1, 2012  September 30, 2013, and other periods, as stated in the assertions.


Joyce Kirangi, CPA, CGMA
Internal Audit, Director

ENGAGEMENT TEAM               RESPONSIBLE MANAGEMENT TEAM 
Ruth Riddle, Senior Auditor, Lead           Mark Reis, Managing Director, Aviation Division 
Jack Hutchinson, Audit Manager            James Schone, Director, Aviation and Bus. Development 





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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013

BACKGROUNDBACKGROUND 

On February 14, 2012, the Port of Seattle Commission directed the CEO and staff to create a
"Concession Master Plan" to guide the successful redevelopment of the Seattle-Tacoma International
Airport (STIA) concessions program for 2015  2017.
On May 27, 2014, the Airport Dining and Retail (ADR) program staff briefed the Commission on the
Master Plan, which was built on the foundations of the Port's Century Agenda.
On November 4, 2014, the staff of the Airport Dining and Retail Program provided the Commission with
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more information and a "Fact Sheet" about the ADR program.
On December 15, 2014, on behalf of the Commission and the CEO, the Director of the Office of the
Social Responsibility engaged the Internal Audit Department to examine and validate the accuracy of
certain assertions made by Port management related to the ADR program.

TESTING METHODOLOGYTESTING METHODOLOGY 

For each management assertion, we examined evidence provided by management or third parties in
support of the assertion. We performed additional objective procedures to determine the validity of
the assertions, which included:
Observations
Independent analyses
Verification against reliable, external sources of information
The assertions tested and the results of the testing are provided in Exhibit A.







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The statements in the "Fact Sheet" are the management's assertions, to which we refer in our opinion.
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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013

EXHIBIT A  RESULTS OF TESTINGEXHIBIT A  RESULTS OF TESTING 
* Although the assertion could be a true statement, independent 3rd party information or additional analyses from management,
with which to validate the assertion, was not available.
CONCLUSION
Separate                                           Cannot
Assertion                                 Not 
Assertion               Assertion Statements      Valid       Objectively         Auditor's Comments
Letters                                 Valid
Statements                                        Validate * 
The Port of Seattle operates a
successful ACDBE program as part
1           of the overall Dining and Retail     X
program at Seattle-Tacoma
a
International Airport.
Airport Dining and Retail (ADR)
2           generates nearly $200 million in    X
annual sales.
In 2013, ACDBE sales totaled $43.1
3                                 X
million
4           from 16 ACDBE tenants,         X
which equated to 20.5% of the
5       b    total Airport Dining and Retail     X
sales at Sea-Tac.
This exceeded the FAA approved
6           goal of 19.56% for the period from   X
2011-2014
For the fiscal year 2012-13, Sea-                          Total sales of $43.1 million (see Assertion
Tac's ACDBE's participation in                           3b) are accurate. However, we cannot
gross sales breakdown was:                          verify the allocation of gross sales among
African-American - $13.4 million,                        the three minority ethnic groups.
Asian-Pacific - $13 million, and                           We verified 4 of the 5 women-owned
Women - $16.7 million.                             businesses, based on the certification
letters from the OMWBE. We also
verified the designation for Wendy's
7       c                                    X
(refer to Assertion 24j) via other
appropriate means. Thus, we verified 6
of the 16 minority designations. We
could have submitted a public records
request to the OMWBE, but that process
would have taken a minimum of 30 days,
which was longer than the time available
for this engagement.




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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013
* Although the assertion could be a true statement, independent 3rd party information or additional analyses from management,
with which to validate the assertion, was not available.
Separate                                           Cannot
Assertion                                 Not 
Assertion               Assertion Statements      Valid       Objectively         Auditor's Comments
Letters                                 Valid
Statements                                        Validate* 
The new plan for 2014-17 has
8           raised the goal to 21.2% of total    X
sales and
Sea-Tac is well on its way to
9       d                         X
achieve this goal
with the addition of three new
10           ACDBE's and the continued record   X
numbers seen in airport sales.
A 2014 audit report of 64 U.S.
airports by the Office of the
Inspector General of the U.S.
Department of Transportation
specifically mentioned Sea-Tac's
success in unbundling large
contracts. It notes "the Seattle
11      e                         X
airport directly contracted or
leased to over 20 disadvantaged
firms since 2005" and noted
further that "direct award or
leasing can be the most effective
means for bringing new ACDBE
participation to an airport."
Inaccurate reports about a low
ranking from the OIG report failed
to note that the exhibit ("C") in the
back of the audit put Sea-Tac 59th
out of 64 airports, not as a
ranking, but rather as an
alphabetical listing of airport
names. More substantively, the
report notes that 33 out of 64
airports had no new DBE or ACDBE
12           contracts in the one year        X
reviewed, 2012 (this includes such
f       major airports as Dallas/Fort
Worth, Denver and Newark, as
well as Seattle). The report noted
this "does not indicate a lack of
support for DOT's DBE/ACDBE
program" as those airports did not
have contract opportunities during
that year as contracts were signed
during previous years.
With 90% of Sea-Tac's leases
expiring in the next 2 years, there
13                                 X
will be significant new opportunity
opportunities

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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013
* Although the assertion could be a true statement, independent 3rd party information or additional analyses from management,
with which to validate the assertion, was not available.
CONCLUSION
Separate                                           Cannot
Assertion                                 Not 
Assertion               Assertion Statements      Valid       Objectively         Auditor's Comments
Letters                                 Valid
Statements                                        Validate* 
Sea-Tac Airport's ADR program
redevelopment in 2004/5 shifted
the airport's offering of
restaurants and shops from one
major concessionaire for the
entire airport to a leasing
14                                 X
structure of large operators of
multiple units and direct leases
with independent operators. This
brought about an open bid process
g
for spaces during the central
terminal renovation in 2005.
During the next few years, those
15                                 X
leases will expire and
a renovation of airport space is
16           projected to nearly double sales    X
by 2025.
a renovation of airport space is                          We were unable to obtain documented
17           projected to  increase jobs by               X    evidence of management's analysis to
40% by 2025                                support this assertion.
Another false assertion claimed an                       With the arrival of McDonald's, sales
ACDBE tenant [Quiznos] went out                      decreased 11% in July, 16% in August,
of business due to the arrival of                          and 10% in September, as compared to
McDonald's. The entrance by                         the same months in the prior year.
18           McDonald's to Concourse B was               X    Whether the cause was McDonald's or
not the cause of this business's                          other factors, we could not validate. The
struggles.                                         Office of Social Responsibility will
conduct further follow up on this
assertion.
In fact, the business's monthly                          After the introduction of McDonald's,
sales were relatively stable after                          gross sales fluctuated as follows, which
h    the introduction of McDonald's in                  does not present a stable pattern:
June 2013,                                        increased 5% in July
19                                     X             decreased 6% in August
decreased 15% in September
decreased 23% in October
decreased 9% in November
increased 15% in December
but ended the year with a 3.4%
20                                 X
decrease in sales
Through September of 2014,                        Sales decreased approximately 8%.
21                                     X
[there was] a 30% loss in sales.


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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013
* Although the assertion could be a true statement, independent 3rd party information or additional analyses from management,
with which to validate the assertion, was not available.
CONCLUSION
Separate                                           Cannot
Assertion                                 Not 
Assertion               Assertion Statements      Valid       Objectively         Auditor's Comments
Letters                                 Valid
Statements                                        Validate* 
During this same period, every
other Concourse B food location
22       i                          X
has experienced sales increases
between 15%-41%.
It is also worth noting that one of                         In terms of dollars, Wendy's was the
the most successful [quick serve                        second highest grossing quick serve food
food] businesses in the central                          business in the central terminal (behind
terminal is Wendy's,                                Qdoba), with sales of $3.9M, (2012),
23                                           X    $3.6M (2013) and $3.5M (2014).
j                                                                              However, Wendy's gross sales also
decreased 4.4% (2012), 2.3% (2013) and
7.5% (2014).
an African-American family-owned
24                                 X
business
sales of $3.8 million in 2013
25                                 X
[calendar period].
From a rent standpoint,
26           all [food] tenants pay rent as a     X
percentage of gross sales.
Some leases provide lower rent
based on branded restaurants or
services which require the
27           franchisee to pay additional fees    X
k
of between 2 to 10% to the
franchisor for the use of the brand
name product.
Businesses operating their own
brand (as is the case for some of
28                                 X
the ACDBE tenants) do not have to
pay these franchise fees.
The Host subtenant ACDBEs
29           received significant rent relief and   X
two year lease extensions in 2005. 
This relief was provided in tiers
30                                 X
over the term of the lease.
For much of the lease term, the
31           ACDBEs paid significantly less rent   X
than their lessor, Host.
l
An analysis in early 2013 showed                        Of the 37 food service locations on the
that of all food service tenants                           analysis provided by management, only 3
32           regardless of rent schedule           X           had average rents within the cited range. 
(category, tiered or flat) paid
similar percentage rent, 12.5-13%. 
Tenants serving high-margin
33           alcohol pay somewhat higher rent,   X
about 15%

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AIRPORT DINING AND RETAIL PROGRAM                             INTERNAL AUDIT 
OCTOBER 1, 2012  SEPTEMBER 30, 2013
* Although the assertion could be a true statement, independent 3rd party information or additional analyses from management,
with which to validate the assertion, was not available.
CONCLUSION
Separate                                           Cannot
Assertion                                 Not 
Assertion               Assertion Statements      Valid       Objectively         Auditor's Comments
Letters                                 Valid
Statements                                        Validate* 
Anthony's [has a] current 8% flat
34                                 X
rent.
However, as an anchor tenant for
the central terminal, they had very
35                                 X
high investment costs in a location
that was at the time unproven,
36           serves fresh cooked food        X
with glassware and silverware
37                                 X
rather than plastic
m  and has daily operational costs far            We were unable to obtain documented
exceeding those for other food                         evidence from management for the
38                                           X
and beverage units.                                operational costs of Sea-Tac food and
beverage units.
The location has proven to be the                       We were unable to obtain documented
highest grossing restaurant in any                        evidence from management to support
U.S. airport.                                         this assertion. Subsequent to this
39                                           X    engagement, Port management reached
out to its peer airports to support the
assertion, but that information was not
available when the assertion was made.










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