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PORT OF SEATTLE MEMORANDUM COMMISSION AGENDA Item No. 4f ACTION ITEM Date of Meeting June 28, 2016 DATE: May 17, 2016 TO: Ted Fick, Chief Executive Officer FROM: James Schone, Director, Aviation Business Development James Jennings, Senior Manager, Aviation Properties SUBJECT: Tenant Reimbursement Agreement (TRA) for American Express Centurion Lounge Lease Expansion on Concourse B, CIP: C800154) Amount of This Request: $278,000 Source of Funds: Airport Development Fund Est. Total Project Cost: $278,000 Est. State and Local Taxes: $18,000 ACTION REQUESTED Request Commission authorization for the Chief Executive Officer to execute a tenant reimbursement agreement in the amount of $278,000 for costs to be incurred by American Express Travel Related Services for expansion of the Amex Centurion Studio Lounge. SYNOPSIS The Amex Centurion Studio Lounge, currently located on Concourse B, provides a premium passenger experience at Sea-Tac International Airport, but when compared to Amex's other airport locations it is significantly undersized (currently 3,200 square feet compared to their typical 10,000 square foot lounges elsewhere). Because of this small footprint, Amex frequently experiences lounge congestion and have to turn away valuable passengers during peak times. To make matters worse, the new construction of the adjacent Delta Airlines Lounge blocks all of the windows and natural light of the existing Amex lounge, creating a decreased level of service for passengers. Fortunately, the adjacent lounge construction also affords Amex an opportunity to expand their footprint by 1,400 square feet into a newly constructed area directly adjacent to the existing Amex Lounge. This expanded location would also return the opportunity for their lounge to have windows and natural light. Amex has indicated they are interested in expanding into this new expansion space, but since this area has never been occupied and does not have utilities or occupancy improvements, Amex has requested to construct all needed improvements as part of their tenant improvement project, requesting the Port provide a reimbursement for the landlord portion of the improvements via the Port established Tenant Reimbursement Procedure and Guideline (AV-2). Amex's request of a $278,000 reimbursement has been pre-negotiated as a fixed price, based on review of Port Template revised May 30, 2013. COMMISSION AGENDA Ted Fick, Chief Executive Officer May 17, 2016 Page 2 of 6 Project Management Group's estimate of likely costs based on the project scope. American Express assumes all risk of cost increases associated with construction. It requires Commission authorization because Resolution 3605 still limits staff authority delegation for tenant reimbursements to $200,000. BACKGROUND To support its growing operations at the Airport, Delta is constructing a new centrally located Delta SkyClub Lounge located between Concourses A and B. As part of this project, Delta's Lounge project construction obstructs all existing windows of the existing Amex Lounge, but is also constructing a separate HVAC tower that provides for the opportunity of approximately 1,400 square feet of expansion space for Amex to grow into and regain some of their exterior windows. Although this expansion opportunity gives them only a fraction of their desired expansion area, they are interested in the incremental buildout until the Port can find a long-term solution that meets their desired lounge requirement of 10,000 square feet. But because this area has never been occupied by a tenant, it is in a raw condition which requires basic improvements to allow for occupancy and lease. Using the Port's Tenant Reimbursement Policy/Guidelines, the Port would reimburse Amex the cost to construct basic utilities and other occupancy related improvements. Amex's leased premises would expand 1,400 square feet and would return some of the windows and daylight hidden by the current Delta construction project. This capital project funding is included in the 2016 2020 capital budget under CIP C800154 (Tenant Reimbursement) PROJECT JUSTIFICATION AND DETAILS At present there is not adequate space in the terminal to accommodate Amex' interest for a larger lounge to support current and projected passenger loads at the Airport; their desired program for Seattle is between 10,000 12,000 square feet. This project presents a strategic opportunity to utilize newly created space on the concourse level that will meet an important tenant's operational need, while generating increased non-aeronautical revenue for the Airport. When combined with their existing Premises, this expansion will provide Amex with a lounge that is approximately 4,500 square feet. The Port forecasts an increase of approximately $308,000 per year in revenue from this lease of this expansion area to Amex. Schedule Commission Authorization of TRA and project 2nd Quarter 2016 Building Permit Issued/Construction Begins 3rd Quarter 2016 Construction Complete/Grand Opening 4th Quarter 2016 Amex is planning to work with the same contractor as Delta, so that the completion of their tenant improvements will be scheduled in tandem with the completion of Delta's Sky Club project. COMMISSION AGENDA Ted Fick, Chief Executive Officer May 17, 2016 Page 3 of 6 FINANCIAL IMPLICATIONS Budget/Authorization Summary Capital Expense Total Project Original Budget $278,000 $0 $278,000 Previous Authorizations $0 $0 $0 Current request for authorization $278,000 $0 $278,000 Total Authorizations, including this request $278,000 $0 $278,000 Remaining budget to be authorized $0 $0 $0 Total Estimated Project Cost $278,000 $0 $278,000 Project Cost Breakdown This Request Total Project Design Phase $0 $0 Construction Phase $260,000 $260,000 Sales Tax $18,000 $18,000 Total $278,000 $278,000 Budget Status and Source of Funds This project, C800154 (Tenant Reimbursement) is included in the 2016 2020 capital budget and plan of finance. The funding source is the Airport Development Fund. Financial Analysis and Summary CIP Category Revenue/Capacity Growth Project Type New Business Development Risk adjusted discount rate 8% Key risk factors Risks that may affect performance and financial returns, as displayed below, include: -schedule delays may impact rent payments -expanded lounge may reduce revenues at the Port's Club at SEA on Concourse A Project cost for analysis $278,000 Business Unit (BU) Terminal Building Effect on business performance Lease payments are assumed to begin 10/1/16. Annual lease payments of $308,000 are assumed COMMISSION AGENDA Ted Fick, Chief Executive Officer May 17, 2016 Page 4 of 6 IRR/NPV Remaining lease term analysis (expansion premises only; existing Amex lease, expires March 26, 2020): NPV: $634,467 IRR: 136% Payback: < 1 year Assumptions: -lease rate of $220.00 per square foot per year -lease space of 1,400 square feet. -lease payments begin 10/1/2016. CPE Impact Less than $.01(should actually reduce CPE due to revenue sharing) Lifecycle Cost and Savings This project will upgrade for occupancy approximately 1,400 square feet of shell space. Tenant will be responsible for maintenance of these improvements. STRATEGIES AND OBJECTIVES This project supports the Port's goals of: Advancing the region as a tourism destination and business gateway by providing the improved facilities and amenities that are expected by international and business travelers. Operating a world class airport by anticipating and meeting the needs of our tenants and passengers. ALTERNATIVES AND IMPLICATIONS CONSIDERED Alternative 1) Do not allow Amex to expand into this new area. Additional Cost: $0 Pros: Port defers costs of upgrading shell space to leasable condition. Cons: No additional lease revenue for space. Keeps Amex operating in a windowless lounge that does not meet their desired customer service standard. Does not meet the business requirements of an important tenant. This is not the recommended alternative. COMMISSION AGENDA Ted Fick, Chief Executive Officer May 17, 2016 Page 5 of 6 Alternative 2) Allow Amex to expand into this newly created expansion area, but do not reimburse them for basic occupancy and system improvements in the expanded lounge space which the landlord is typically responsible for. Additional Cost: $0 for the Port Pros: This would be the least cost option, with Amex bearing 100% of the costs to expand the terminal and build out the space for their lease. Cons: Although the Port has made no formal commitment for reimbursement pending Commission approval of this action, not reimbursing Amex for this work is inconsistent with past practice. This would put an undesirable financial burden on Amex, making them pay for the costs of both the landlord and tenant improvements. This is not consistent with industry norms, where the landlord is generally responsible for costs associated with the development of building systems, utilities and other occupancy related improvements. This is not the recommended alternative. Alternative 3) Authorize a TRA with Amex for costs associated with the construction of basic systems and finishes in the new lounge space. Cost: $278,000 Pros: Port will receive annual lease revenues of approximately $308,000 per year. Minimizes the Port's costs to bring the space to leasable condition, combining the landlord's occupancy and systems scope with the tenant's interior improvements and finishes. Puts the otherwise inaccessible space into productive use. Cons: No perceivable cons. This is the recommended alternative. ATTACHMENTS TO THIS REQUEST Exhibit A: Expanded premises Exhibit B: Tenant Reimbursement Agreement and associated support documents COMMISSION AGENDA Ted Fick, Chief Executive Officer May 17, 2016 Page 6 of 6 PREVIOUS COMMISSION ACTIONS OR BRIEFINGS None
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