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January 10 2012                                               2225 Alaskan Way
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Suite 103
Seattle, WA
98121 USA
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Audit Committee

The Port of Seattle
2711 Alaskan Way
Seattle, Washington USA. 98121

Re: Internal Audit Report  Lease and Concession Audit  Cruise Terminals of America (CTA) -
Report No. 2012-01

Ladies and Gentlemen:

The members and staff of Cruise Terminals of America, LLC ("CT ") have had the opportunity to
review and consider the Port of Seattle's Internal Audit Report referred to above (the "Internal Audit
Report"). To ensure that the record before the Audit Committee includes additional information and
perspective on the underlying issues addressed in the Internal Audit Report, CTA desires to submit to
the Audit Committee a letter prepared by its outside counsel. Please see the attached letter of Lane
Powell to CTA dated December 27, 2011 (the "Lane Powell Letter").

CTA's members look forward to reaching a resolution of this matter on
a basis satisfactory to all.

Very truly yours,

CRUISE TERMINALS OF AMERICA, LLC
By:    eral Steamship Agencies, Inc., Member

Daniel Blackmore, Executive Vice President

LANE POWELL
ATTORNEYS 8:. COUNSELORS
MICHAEL D. DWYER
206.223.7057
dwyenn'Qlanepowellcom

December 27, 201 1


Jean Cox
General Manager
Cruise Terminals of America, LLC
2225 Alaskan Way, Suite 103
Seattle, WA 98121-1604

Re:   Cruise Facility Lease Agreement dated December 21, 2005, as amended May 17,
2006 (the "Lease"), between the Port of Seattle ("Port") and Cruise Terminals of
America, LLC ("CTA")

Dear Jean:

You have requested advice about how to resolve a misunderstanding on the part of the Port's
auditor over the calculation of percentage rent due under the above-referenced Lease.

You have also indicated that you might consider sharing this letter with Port representatives
and that it should therefore discuss applicable facts and legal principles in a neutral and non
adversarial way without legal citations or legal argument. Without intending to disregard
that instruction, but instead to protect CTA's right to communicate frankly and provide a
framework for discussions without compromising its interests. we will invoke Evidentiary
Rule 408 limiting the admissibility of statements made in this letter for settlement purposes.

The rst step in resolving any misunderstanding is to make sure that each party understands
the material facts and the position that the other party is asserting with respect to them. We
will therefore address those matters briey.

mm

Since April 30, 2003, CTA has leased cruise terminal facilities from the Port and provided
cruise terminal services, including parking, dockage, wharfage. demurrage, storage.
equipment rentals, food and beverage services, and passenger trafc fees, both directly and
through approved subcontractors, to cruise lines and their customers, initially at the Terminal
30 Cruise Facility and Pier 66 Cruise Terminal, and later at the Pier 66 Terminal and the
Terminal 91 Cruise Facility. In exchange for the right to use the cruise terminal facilities and
provide the cruise terminal services. CTA pays the Port percentage rent consisting of a
percentage lease fee and a percentage preferential use fee at rates specied in Section 4.1 of
the Lease multiplied by its annual Gross Revenues as dened in Section 1.20 of the Lease.

www.|anepowel|.com             A PROFESSIONAL CORPORATION          LAW OFFICES

T. 206.223.7000                 1420 FIFTH AVENUE, SUITE 4100           ANCHORAGE, AK . OLYMPIA, WA
F. 206.223.7107                 SEATTLE, WASHINGTON                 PORTLAND, OR . SEATTLE, WA
98101-2338                        LONDON, ENGLAND

Jean Cox
December 27, 201 1
Page 2


One of the cruise terminal services that CTA provides under the Lease is parking and shuttle
services for cruise line customers and employees ("Parking Services").  To provide those
Parking Services, CTA subcontracts with Republic Parking.

Prior to relocating cruise berths from the Terminal 30 Cruise Facility to the Terminal 91
Cruise Facility in 2006, the gross revenue from Parking Services greatly exceeded the cost of
providing Parking Services, and Republic Parking would pay the resulting net revenue (Lg,
gross revenue less expenses and a management fee) to CTA, which included the net revenue
for Parking Services in CTA's annual Gross Revenue for purposes of calculating and paying
percentage rent to the Port.

In 2007, the Port conducted an internal audit of CTA's cruise terminal services for the period
2004 through 2006, and raised no issue about CTA's inclusion of Republic's net parking
revenue in CTA's Gross Revenue for calculating percentage rent. Following the internal Port
audit of CTA's cruise terminal services, in 2009, the Port requested that CTA engage an
external and independent accounting rm to conduct annual Lease compliance audits in
accordance with audit procedures that were agreed upon by the Port. Accordingly, CTA
engaged the accounting rm of Clothier & Head to conduct the external Lease compliance
audits for calendar years 2008, 2009 and 2010 in accordance with the Port's agreed upon
audit procedures.  All three years covered by the Clothier & Head audits showed "No
Deciencies," and written reports from the auditor were submitted to the Port. Based on
these ndings, CTA has assumed that all accounting has been reported properly and that it is
in compliance with the Lease.

The Port and CTA mutually recognized that the relocation of the cruise berths from the
Terminal 30 Cruise Facility to the Terminal 91 Cruise Facility in 2006 would signicantly
and adversely impact the nancial results to both of them from parking operations. This
adverse impact was principally caused by the need to operate shuttles to transport passengers
and their luggage to the departure terminal. Shuttle services had not been required at the
Terminal 30 Cruise Facility since the parking lot was immediately adjacent to the departure
terminal.  When the Port designed the Terminal 91 Cruise Terminal, it was necessary to
move the parking areas away from the departure terminal.

In advance of the relocation to the Terminal 91 Cruise Terminal, the Port and CTA
understood that the ILWU would assert jurisdiction over the shuttle work, and that the
consequence of engaging union labor would be that the parking expenses would substantially
consume parking revenues. The upshot of the changed circumstances was that while parking
operations had provided a net benet to both parties due to the low costs at the Terminal 30
Cruise Facilities, parking operations would no longer provide a benet to either the Port or
CTA. However, if parking revenues were to be divided as recently suggested by the Port's
auditor (which, with parking costs roughly equal to parking revenue, would mean that for

Jean Cox
December 27, 2011
Page 3


every dollar of parking revenue, CTA would lose up to 76 cents), CTA obviously would not
have accepted this arrangement. This would have turned the entire economics of the cruise
terminal operations upside down. That was not anticipated by either the Port or CTA, and
doesn't make any sense. This was not the intention of either party.

In light of the dramatic change in parking costs, CTA derives no revenue from Parking
Services and believes that losses on Parking Services should be treated as Allowable
Expenses under Section 1.5.5 of the Lease, which provides that Allowable Expenses include

1.5.5  Costs associated with parking at the Pier 66 Cruise
Facility and parking operations at the Terminal 30 Cruise Facility or Terminal
91 Cruise Facility.

CTA also believes that the negative net revenue for Parking Services should be excluded
from Gross Revenues under Section 1.20.12, which provides that Gross Revenue shall not
include:

1.20.12     Revenue derived from any item of expense
which is passed directly through to a thirdparty (e.g., the cost of security
provided for the benet of cruise ships during port calls); provided, however,
any markup on such pass-through expense shall be included within Gross
Revenue.

But, in a recent internal audit, the Port's auditor has interpreted the term Gross Revenues
more broadly to include not only the Gross Revenues of CTA, as the parties have historically
interpreted Gross Revenues, but also the gross revenue of Republic Parking even though it
generates a net loss on Parking Services and produces no revenue whatsoever to CTA.

To understand the Port's interpretation, we need to examine the denition of Gross Revenues
in Section 1.20 of the Lease, which provides in relevant part as follows:

1.20  Gross Revenues. "Gross Revenues" shall mean and refer to the
aggregate gross amount of revenue derived in, on or about the Premises or
from Tenant's Operations, and whether: (i) in cash, on credit or in kind, (ii) at
wholesale, at retail or otherwise, and (iii) transacted by Tenant, by any
persons, rms or corporations on Tenant's behalf, or by any subtenants,
licensees or concessionaires of Tenant (specically including any Parking
Operator), from, in or upon the Premises. Without limiting the generality of
the foregoing, Gross Revenue specically includes the following:

Jean Cox
December 27, 2011
Page 4

1.20.1      All charges for parking, dockage, wharfage,
demurrage, storage, equipment rentals and passenger trafc fees attributable
to the Premises
. . . .
Thus, the question is reduced to whether the term Gross Revenues means the gross amount of
revenue derived by the Tenant from Tenant Operations in person or through subcontractors,

as CTA believes, or the gross amount of revenue derived by every person conducting any
business on the Premises even if it produces no revenue whatsoever to CTA, as the Port's
auditor contends.

If the Port auditor's broader interpretation of the term Gross Revenues as gross revenue of all
persons is correct, we understand that the monetary effect of the interpretation is that CTA
would owe approximately $1.2 million in additional percentage rent for the previously
unreported gross revenues of Republic Parking that generated a net loss and produced no
revenue for CTA. On the other hand, if CTA's interpretation of the term Gross Revenues as
gross revenues of CTA is correct, CTA would owe no additional percentage rent.

In addition, the Port's auditor has proposed to disallow expenses of approximately $1.1
million that Republic Parking has paid to SSA Pacic for providing shuttle labor and
equipment to Republic Parking, contending that SSA Pacic is an Afliate of CTA and that
Allowable Expenses shall not include under Section 1.5.14 of the Lease

1.5.14 .
.  . any
amounts paid to an Afliate or Qualifying
Person (other than bona de cost of compensation specically allowed by
Section 1.5.3) unless expressly approved, in advance and in writing, by the
Port as necessary and reasonable
. . . .
Conceding for the sake of discussion that SSA Pacic is afliated with one of the CTA
owners, CTA does not believe that amounts paid to SSA Pacic for shuttle labor and
equipment should be disallowed because CTA does not pay any of those expenses. Instead,
they are paid by Republic Parking to SSA Pacic in accordance with a third-party
Management Agreement.  Consequently, under the accounting treatment that had been
consistently applied by CTA and the Port, these expenses were not characterized as
"Allowable Expenses" otherwise requiring Port approval.

Furthermore, there was no secret that SSA Pacic was employing the labor required to man
the shuttle services. This arrangement was subject to extensive discussion between CTA, the
Port and SSA Pacic. The simple reality is that, since SSA Pacic was engaged to provide
stevedoring services to the cruise lines calling at the Terminal 91 Cruise Terminal, it would
be highly impractical (and almost certainly more expensive) for another longshore employer
to perform the services.  It is now extraordinarily inequitable for the Port's auditor to claim
that any amount paid to SSA Pacic by anyone for shuttle labor and equipment should be

Jean Cox
December 27, 2011
Page 5

disallowed unless expressly approved by the Port as necessary and reasonable and that the
Port should enjoy for free the benet of services it was fully aware of and for which there
was no practical alternative.

Discussion

A Lease term is ambiguous if it is reasonably susceptible to more than one meaning. Here,
the term Gross Revenues is ambiguous because it can be read, as CTA reads it, to mean the
gross amount ofrevenue received by the Tenant from Tenant Operations in person or through
subcontractors, or it can be read as the Port's auditor reads it to mean the gross amount of
revenue derived by every person conducting business on the Premises even if it generates no

revenue at all for CTA.

If a Lease term is ambiguous, a court will consider extrinsic evidence of the parties'
intentions based on their conduct and performance of the Lease, because actions oen speak
louder than words.  In that respect, CTA has consistently reported, and the Port has
consistently accepted, Gross Revenues as CTA interprets them from 2003 to 2011. In
addition, the Port's internal audit in 2007 for the years 2004 through 2006, and the Clothier
& Head Lease Compliance Audits in accordance with agreed upon procedures for calendar
years 2008 through 2010 reported no deciencies or other issues in reporting Gross
Revenues or calculating percentage rent. To these extents, the Port auditor's newly adopted
and broader interpretation of Gross Revenues as all gross revenues generated by anyone on
the Premises is contrary to the conduct of the parties and performance of the Lease from
2003 through 2011.

In addition to extrinsic evidence of the parties' conduct and performance of the Lease, a court
may also consider the parol testimony of the parties as to what they intended the term Gross
Revenues to mean. In this respect, CTA would testify that it intended that the term Gross
Revenues would mean the gross revenue of CTA, because it is an accounting term that is
commonly understood to mean the gross "receipts" of a person and not the gross "receipts"
of many persons, and because it would make no sense for CTA to pay percentage rent on
losses from Parking Services that generated no revenue whatsoever to CTA.  We are
uncertain how the Port would testify about what it intended the term Gross Revenues to
mean, or why it has not said anything on the subject from 2003 to 2011, or why the Port's
own auditor and independent auditors have not previously raised the issue, or why it would
make sense for CTA to pay percentage rent on losses from Parking Services that generated
no revenue at all to CTA.

A court may also examine how the term Gross Revenues is used in the context of the Lease
as a whole. Since it is used to calculate percentage rent for CTA's use of the premises and
results of operations on the premises, it may be difcult to rationalize charging percentage
rent for use of the premises and results of operations that produce no benet to CTA.

Jean Cox
December 27, 2011
Page 6


of the
In the nal analysis, a court must evaluate such extrinsic evidence and decide which
conicting interpretations is the more rational and probable interpretation in light of the
evidence. Under the circumstances presented, there should be an ample basis to support the
Port
CTA interpretation as the more rational and probable one, and we see no reason for the
to criticize the oversight of its senior managers in charge of cruise terminal operations for
that the Port
alleged failure to identify and assert the less rational and probable interpretation
should be able to charge percentage rent on negative net revenue or losses, especially when
its own auditor in 2007 for calendar years 2004 through 2006 and independent auditors for
calendar years 2008 through 2010 found no basis for that position.

However, the point of this letter is not to convince anyone that there is no basis for a
misunderstanding of the Lease terms. Instead, the purpose of the letter is to explain why the
CTA interpretation of the Gross Revenues denition is more rational and probable than the
interpretation given that term by the Port's internal auditor.

On the separate issue of disallowing the expenses that Republic Parking pays to SSA Pacic
for providing shuttle equipment and union drivers: (i) CTA should ask the Port to approve
the Management Agreement between Republic Parking and SSA Pacic; (ii) the Port should
let CTA know what, if anything, it considers unnecessary or unreasonable about that
asked to address the Port's
Agreement; and (iii) Republic Parking and SSA Pacic should be
reasonable concerns by amending the Agreement.

Respectfully,

LANE PO'W'ELL PC
W
Michael D. Dwyer

MDDzjlb

124258.0004/5249216.4