Audit Report Host and SRA FINAL

The Port of Seattle

Internal Audit Report

Host International, Inc and Seattle Restaurant Associates
Lease and Concession Compliance Audits

January 1, 2006 through December 31, 2007





Issue Date: February 27, 2009
Report No. 2009-01

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007
Table of Contents
INTERNAL AUDITOR'S REPORT...................................................................................... 3 
EXECUTIVE SUMMARY..................................................................................................... 4 
BACKGROUND .................................................................................................................. 5 
AUDIT OBJECTIVES.......................................................................................................... 7 
AUDIT SCOPE.................................................................................................................... 7 
AUDIT APPROACH............................................................................................................ 7 
CONCLUSION .................................................................................................................... 7 
SCHEDULE OF FINDINGS AND RECOMMENDATIONS.................................................. 8 











2

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Internal Auditor's Report
We audited Lease and Concession Agreement number 435, as amended, between the Port of
Seattle (Port) and Host International, Inc., and Lease and Concession Agreement number 439, as
amended, between the Port and Seattle Restaurant Associates (a partnership between Host
International, Inc. and Uwajimaya, Inc.) for the period January 1, 2006 through December 31,
2007. The purpose of the audits was to determine whether the lessees properly reported gross
revenue and that the provisions of the lease and concession agreements were adequately
monitored by Port management. 
We conducted our audits using due professional care, and we planned and performed the audits to
obtain reasonable assurance as to whether the Port and the lessees had complied with the
provisions of the agreement.
The audits identified opportunities for improvement, which are detailed in subsequent sections of
this report.
We extend our appreciation to the management and staff of the Aviation Business Development
and Accounting departments for their assistance and cooperation during the course of our audit.


Joyce Kirangi, CPA
Internal Audit Manger







3

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Executive Summary
Audit Scope and Objective
The purpose of our audit was to determine the level of compliance with the provisions of the Host
International Inc. and the Seattle Restaurant Associates Food and Beverage Lease and
Concession Agreements No. 435, as amended, and No. 439, as amended respectively. We
examined the books and records of Host International Inc., who maintained the accounting records
for both leases, to verify reported gross receipts and concession fees paid from January 1, 2006
through December 31, 2007. We also evaluated Port internal controls (Accounting and Aviation
Business Development Department) in order to determine whether lease and concession contract
provisions were adequately monitored.
Agreement Terms
Lease and Concession Agreements No. 435 and No. 439 authorize Host International, Inc. and
Seattle Restaurant Associates to operate certain food and beverage concessions in the Airport. In
accordance with the terms of the leases, Host International, Inc. and Seattle Restaurant Associates
pay the Port percentage fees based on gross receipts. The percentage fees are based on
concession categories, with a lower percentage fee base for the lessees' subtenants. The
agreements also contain specific lease provisions that the lessees must comply with.
Audit Result Summary
Host International Inc., and Seattle Restaurant Associates complied with the terms and conditions
of the lease agreements, and Port management effectively monitored the agreements, with the
exception of the following:
Franchise and license agreements were not obtained, reviewed, or approved Port by
management.
Revenue reconciliations between the lessee's and Port's records was not completed in a
timely manner.
Promotional and advertising income was not reported by the lessee.




4

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Background
Host International, Inc., and Seattle Restaurant Associates operate food and beverage
concessions at the Sea-Tac International. Seattle Restaurant Associates is a partnership between
Host International, Inc. and Uwajimaya, Inc., and all accounting functions for both leases are
performed by HMS Host in Bethesda, Maryland. The food and beverage concession agreements
state that a specific percentage of gross receipts are to be paid to the Port for categories such as
non-branded food and beverage; branded food and beverage; alcohol, beer, and wine; advertising;
and souvenir merchandise. The percentages for these same categories are slightly lower for
space that Host International, Inc., and Seattle Restaurant Associates sublease.
The Lease and Concession Agreements state that minimum rent payments are due on the first of
each month. The concession fee is required to be paid monthly within fifteen (15) days following
the end each calendar month as well as a statement of gross receipts generated from concessions
in the prior month.
Gross Receipts and Concession fees generated by Host International, Inc. are as follows:
2006                  2007
Gross  Concession       Gross  Concession  %
Receipts    Fees    % Fee  Receipts    Fees    Fees
Branded Food    14,507,410   1,668,352 11.5% 15,916,705   1,830,421 11.5%
Branded Food
Subtenants       5,879,709    587,971 10.0%  6,427,624    642,762 10.0%
Food         2,818,342   380,476 13.5%  3,998,390   539,783 13.5%
Food Subtenants    2,854,752    342,570 12.0%  3,384,317    406,118 12.0%
Gifts              333,858     88,472  26.5%    405,943     107,575  26.5%
Gifts Subtenants        969       242  25.0%    24,088      6,022 25.0%
Liquor          5,091,479    891,009  17.5%  5,897,619   1,032,083 17.5%
Liquor Subtenants    925,347    148,056  16.0%  1,054,790    168,766 16.0%
TOTAL       32,411,866  4,107,148 12.7% 37,109,476  4,733,530 12.7%
Source: PeopleSoft and HMS Host reporting





5

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007
Gross Receipts and Concession fees generated by Seattle Restaurant Associates are as follows:
2006                  2007
Gross  Concession       Gross  Concession  %
Receipts    Fees    % Fee  Receipts    Fees    Fees
Branded Food     4,166,293    479,124 11.5%  6,536,915    751,745 11.5%
Branded Food
Subtenants            0        0 10.0%       0        0 10.0%
Food         2,108,620   284,664 13.5%  2,064,096   278,653 13.5%
Food Subtenants    1,829,000    219,480 12.0%  2,282,246    273,870 12.0%
Gifts                 517       137  26.5%        0         0  26.5%
Gifts Subtenants         0        0  25.0%        0        0 25.0%
Liquor          3,313,908    579,934  17.5%  3,982,931    697,013 17.5%
Liquor Subtenants    391,487     62,638  16.0%   482,278     77,164 16.0%
TOTAL       11,809,825  1,625,977 13.7% 15,348,466  2,078,445 13.5%
Source: PeopleSoft and HMS Host reporting













6

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Audit Objectives
We reviewed Host and Seattle Restaurant Associates accounting records in order to verify that the
company had:
Properly reported its gross sales to the Port in accordance with the terms of the lease and
concession agreement.
Properly calculated and paid the appropriate concession fee due to the Port.
Paid its concession fee on time and in accordance with the terms of the agreement.
We also reviewed Port management's monitoring processes over compliance of lease agreement
provisions.
Audit Scope
The scope of the audit covered the period January 1, 2006 through December 31, 2007.
Audit Approach
To achieve our audit objectives, we performed the following procedures:
Obtained an understanding of the lease agreement and the significant compliance
requirements
Reviewed Port internal controls and monitoring activities over lease requirements
Obtained relevant financial data from HMS Host and it's subtenants
Analyzed data (internal & external) to determine completeness & compliance
Conclusion
Host International Inc., and Seattle Restaurant Associates complied with the terms and conditions
of the lease agreements and Port management effectively monitored the agreements, with the
exception of the findings and recommendations discussed in this report.





7

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Schedule of Findings and Recommendations

1) Approval of Franchisees and Licensees
The monitoring system was ineffective with regards to reviewing and approving the franchise
and license branded food and beverage concession rate. The Port was charging Host and
Seattle Restaurant Associates the branded food rate in the instances where Host and Seattle
Restaurant Associates had identified establishments as franchisees or licensees. According to
the lease agreement, the branded food concession rate is lower than the non-branded food
concession rate. Host did not provide the license and franchise agreements to the Port.
According to the First Amendment to the Lease and Concession Agreement dated December
22, 2005 for Host International, Inc. Food and Beverage Lease and Concession Agreement
paragraph five and the First Amendment to the Lease and Concession Agreement dated
December 22, 2005 for Seattle Restaurant Associates paragraph four:
Definition of Branded Food & Beverage
"The franchisee or licensee must provide the Port and Lessee a copy of the franchise or license
agreement to substantiate that the franchisee or licensee is operating a bona fide franchisee or
licensee. The Port shall review and determine, in its sole discretion, if the gross receipts from a
branded food and beverage outlet shall qualify for payment of the branded food and beverage
percentage rental"
We found no evidence that management had obtained, reviewed or approved the franchise and
license agreements. Since management had not obtained these agreements, we had to
request the franchise and license agreements from Host.
Effective monitoring and administration of lease agreements assures that the lessee is properly
adhering to the terms and conditions of the lease agreement and properly reporting revenue.
Management review of the franchise and licensee agreements is a control to assure that the
Port is receiving the proper amount of concession fees from the lessee for branded and nonbranded
food. If the franchise and license agreements are not reviewed, management would
not know if the lessee was under reporting non-branded and over reporting branded categories
that would result in lost revenue to the Port.

Recommendation
We recommend that Aviation Business Development department review and approve all
franchise and license agreements to assure that the proper concession categories are reported
by Host and Seattle Restaurant Associates in accordance with the lease agreements.

8

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Department Response:
Concessions management concurs that the franchise agreements should be reviewed and
placed in the lease file for each concessionaire. We believe, however, that the absence of
most franchise agreements from the lease files should not be seen as evidence that
concessions staff has not actively monitored the accurate reporting of category sales for
branded or non-branded food. The audit team has made no recoveries as the result of errors
in the reporting of branded and non-branded food.
Two examples also demonstrate the effective staff monitoring of branded vs. non-branding
reporting:
In 2005, a Host DBE subtenant (Backdraft LLC) opened a Diva Espresso coffee shop. The
subtenant began reporting sales as 'branded' while Host made payments to the Port as 'nonbranded.
' Concessions staff immediately directed Host's attention to this inconsistency. The
subtenant subsequently provided concessions staff with its franchise agreement, which
demonstrated that Host was over-paying by reporting non-branded sales.
In 2006, Host opened a new restaurant under the name "Jose Cuervo Taquileria." The first
reporting from Host was submitted as 'branded' at the branded rent percentage. Concessions
staff immediately questioned this operation's franchise status and requested that Host provide
the franchise agreement. When Host could not provide such an agreement, staff directed Host
to report sales as 'non-branded' and retroactively pay percentage rent in accordance with the
required percentage for non-branded food.
The vast majority of branded food establishments in the Airport, which pay a lower percentage
rent than non-branded operations, are nationwide franchise chains such as Burger King,
Starbucks, Manchu Wok, Sbarro and Tully's Coffee. In the experience of concessions staff,
there are no known instances of these types of restaurants being operated as any other type of
operation than as a franchise, when not operated by the corporate entity.
With the review and placement of the franchise agreements in the lease files, this issue should
be satisfactorily resolved for Host International.
2) Yearly Revenue Reconciliation
The management monitoring system was ineffective to ensure that Host and Seattle
Restaurant Associates revenue reconciliations were completed timely. We noted that the
independent Certified Public Accountant's reports of the audited gross receipts for both Host
and Seattle Restaurant Associates were issued on April 27, 2007 and April 23, 2008 for the
years ending on 2006 and 2007 respectively. However, management reconciliations of the
2006 and 2007 reported revenue, with the independent Certified Public Accountant's report
were not completed until in January of 2009. Sound business practices dictate timely
reconciliation of accounting records in order to assure timely credit or billing of balances.
9

Internal Audit
Host International Inc., Lease No. 435 and
Seattle Restaurant Associates Lease No. 439
Audit Period: January 1, 2006  December 31, 2007

Recommendation
We recommend that both Aviation Business Development department and Accounting and
Financial Reporting (AFR) departments ensure that reported concession revenue is reconciled
with the independent Certified Public Accountant's report on a timely basis.

Department Response
AFR takes responsibility to support the Aviation Business Development department by
reviewing the annual audited financial statements of the concession tenants and comparing the
revenues contained in those reports with that reported by the concession tenants. AFR has
protocols and procedures in place to accomplish this. The area for improvement identified in
the audit was caused by an interim staffing difficulty experienced by AFR. A key senior team
member unexpectedly left for an extended period of time under the Family Medical Leave Act
(FMLA). With already a conservative staffing level and now facing a notable staff resource
challenge, AFR ensured coverage of the highest priority items with a conscious decision to
defer less critical tasks until the AFR Billing team resumed with full staff resources. Upon
subsequent return of the senior team member, immediate attention was given to areas such as
these that had to be deferred. AFR is now fully staffed again and review of audited financial
statements against revenues reported by the concession lease tenants are being timely
accomplished. It remains a key priority for the AFR Billing team to ensure timely & accurate
monthly billings, timely revenue collection, and subsequent reported revenue accuracy
verification.








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