10c. Memo
SeaTac Concourse A Building Expansion for Lounges Project Budge
COMMISSION AGENDA MEMORANDUM Item No. 10c ACTION ITEM Date of Meeting May 10, 2022 DATE: May 3, 2022 TO: Stephen P. Metruck, Executive Director FROM: Jeff Moken, Interim Director AV Business & Properties Wayne Grotheer, Director Aviation Project Management SUBJECT: Budget increase request Concourse A Building Expansion for Lounges (C801205) Amount of this request: $26,500,000 Total estimated project cost: $105,000,000 ACTION REQUESTED Request Commission authorization for the Executive Director to (1) authorize a budget increase for the Concourse A Building Expansion for Lounges project at Seattle-Tacoma International Airport by Delta Air Lines, Inc; and (2) authorize an increase to the reimbursement amount to Delta. Total cost of this request is $26,500,000 of an estimated total project cost of $105,000,000. EXECUTIVE SUMMARY Delta Air Lines, Inc. (Delta), in preparation to construct the Concourse A Building Expansion for Lounges project at the Airport, has notified the Port of increased and escalating costs in establishing the final contract value with their contractor. Delta staff indicated this is a result of scope additions and schedule changes during design development from 60% design to 100% design, escalating costs for construction materials and labor, and volatility in the construction market and global supply chain. This project constructs a building expansion towards the end of Concourse A that will incorporate a new passenger lounge for Delta and provide a new buildout space for the Port of Seattle common-use lounge: The Club at SEA. This project is expected to meet existing (pre-COVID-19) passenger demand for Delta's lounge. This project also supports Century Agenda Goal #2 to advance this region as a leading tourism destination and business gateway. To achieve this, Delta has designed and endeavors to construct an approximately 52,000 square foot (SF) building expansion at the east side of Concourse A, across from Gate A11 and directly south of the International Arrivals Facility (IAF), using a Tenant Reimbursement Agreement (TRA) with the Port. Approximately 36,000 SF of the new space will be leasable, including the space Template revised January 10, 2019. COMMISSION AGENDA Action Item No. __10c__ Page 2 of 8 Meeting Date: May 10, 2022 that will be directly leased by Delta for their lounge. Delta is investing an additional $35 million in the tenant buildout of their lounge. JUSTIFICATION Delta has requested to construct a new lounge on Concourse A to accommodate passenger demand that shifted from the South Satellite to Concourse A upon the opening of the IAF. The Port currently lacks sufficient space to meet this demand. Thus, to satisfy this request for additional leased space, the Port agreed to permit Delta to design and construct the lounge addition in undeveloped space governed by a TRA. In December 2021, Port Commission authorized the construction of this project. The value of the December TRA was based on 60% design documents. Today's request is to increase the budget to incorporate additional costs based on the 100% design. Diversity in Contracting The Port collaborated with Delta and has included in the TRA a WMBE goal of 10%, an apprentice hiring goal of 15%, a women apprentice hiring sub-goal of 12%, a minority apprentice hiring subgoal of 21%, and a priority worker goal of 20% for the construction contractor. Delta has stated that they will strive to exceed these goals. DETAILS Existing national and local construction market and global supply chain conditions have created significant cost uncertainty and volatility within the construction industry. As a result, Delta and the Port are eager for Delta to execute a Fixed Guaranteed Maximum Price (FGMP) with their contractor to reduce the risk of market volatility. The value of the request incorporates known and potential costs currently identified by Delta and their contractor. The division of those costs are still being negotiated between the Port and Delta, with both teams expediting their efforts to stave off future cost escalations. To secure a reasonable level of cost certainty, the Port and Delta are requesting an increase of $26.5 million for the total project. The value of the TRA will be increased from the previously authorized value of $65.92 million to $89.96 million. Delta's original request to the Port was for an increase of the TRA value to approximately $93 million. The Port and Delta continue to negotiate over the approximate $3 million difference. The Port will retain that amount within the Port controlled portion of the budget until these negotiations can be completed. The increased project costs fall into five categories: Issue Type Value Scope Additions $8,000,000 (new items not previously estimated) Market Conditions/Supply Chain $8,500,000 (material price increases) Buyout Contingency/Risk Contingency $5,600,000 (risks due to volatile construction mkt.) Delta Soft Costs $800,000 (design fees for scope adds + Delta PM Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 3 of 8 Meeting Date: May 10, 2022 Port Costs $3,600,000 (Port PM and contingencies) TOTAL $26,500,000 After the Commission's authorizations on April 27, 2021, and December 14, 2021, the Port and Delta entered into the TRA for this project on August 11, 2021, with an updated reimbursement letter issued on January 20, 2022, reflecting a maximum reimbursement amount to Delta by the Port of $65,920,000. If this Commission request is authorized, the Port will issue an updated reimbursement letter that reflects an updated maximum reimbursement amount of $89,960,000. The project has been identified as a Tier Two project under the Port's Sustainable Evaluation Framework. The project team analyzed concepts to reduce energy and carbon emissions, along with other initiatives to reduce solid waste, promote public transportation, and support employees. The team also calculated the total cost of ownership for the different sustainability concepts. The project will implement (1) triple-glazed electrochromic faade ("smart glass"); (2) all electric appliances (no natural gas); (3) low-flow water fixtures in the Delta lounge; (4) signage for public transportation options; (5) an employee breakroom; and (6) three new electric vehicle charging stations. The sustainability work and recommendations were reviewed by the Commission Sustainability, Environment and Climate Committee on November 18, 2021.The cost increases Delta has notified the Port about include unanticipated scope changes during design development notably to address the relocation of the Port's maintenance shop and escalating costs for construction materials and labor. Delta will be responsible for the cost and construction of the interior buildout of their lounge within the new building shell. The Port's common use lounge, authorized by Commission for design on December 14, 2021, will be completed by the Concourse A Port Shared Use Lounge project. Scope of Work (1) Construct a building addition of approximately 52,000 SF that will provide shell space for two lounges and associated building systems. (2) Reconfigure existing spaces to provide additional leasable office area, an entry foyer, a replacement restroom, and vertical circulation. (3) Demolish an existing airport building deemed unfit to renovate and construct a new building in its place to house the relocated Aviation Maintenance Department Passenger Loading Bridge shop that is being displaced by this project. The expense cost to move the shop is included in the budget. (4) Provide temporary restrooms for the Port common use lounge to keep the lounge operational during construction of the building expansion. Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 4 of 8 Meeting Date: May 10, 2022 Schedule Activity Commission design authorization 2021 Quarter 2 Design start 2021 Quarter 2 Construction start 2022 Quarter 3 In-use date 2024 Quarter 1 Cost Breakdown This Request Total Project Design $0 $6,300,000 Construction $26,500,000 $98,700,000 Total $26,500,000 $105,000,000 ALTERNATIVES AND IMPLICATIONS CONSIDERED Alternative 1 Limit the budget increase to $23,500,000. Cost Implications: $102,000,000 Pros: (1) This is the lower cost alternative. Cons: (1) This alternative unilaterally eliminates some of the design development and risk contingency built into the request from Delta. Port staff may not be able to reach an agreement at this cost with Delta. (2) Reducing the contractor risk contingency available to the project will hinder Delta's ability to reach a Fixed Guaranteed Maximum Price (FGMP) with their contractor. (3) Market volatility may result in a need to return to the Commission for additional authorization in the future, risking further cost increase. This is not the recommended alternative. Alternative 2 Increase the budget by $26,500,000. Increase the TRA value to $92,890,000. Cost Implications: $105,000,000 Pros: (1) Passenger lounge spaces will be expanded to accommodate anticipated return of demand. (2) Location of the lounge on Concourse A will support Delta's operations on Concourse A. (3) The expanded lounges (Delta's and the Port's common use) will provide passengers an alternative to waiting for flights in crowded hold rooms, and the Club at SEA will support international airlines who do not possess their own branded lounge. Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 5 of 8 Meeting Date: May 10, 2022 Cons: (1) This alternative commits the highest amount to the TRA. Approximately $3,000,000 of this amount is still under review and may not be necessary. (2) Funds are unavailable for other uses. (3) This is a higher cost alternative. This is not the recommended alternative. Alternative 3 Increase the budget by $26,500,000 for the project. Increase the TRA value to $89,960,000. Cost Implications: $105,000,000 Pros: (1) Passenger lounge spaces will be expanded to accommodate anticipated return of demand. (2) Location of the lounge on Concourse A will support Delta's operations on Concourse A. (3) The expanded lounges (Delta's and the Port's common use) will provide passengers an alternative to waiting for flights in crowded hold rooms and the Club at SEA will support international airlines who do not possess their own branded lounge. (4) This alternative authorized the full amount of the estimated project costs but retains Port control of the portion of the contractor request increase still under negotiations. This provides the flexibility to adjust the TRA value once those potential costs are realized in a timely fashion. Cons: (1) Funds are unavailable for other uses. (2) This is the higher cost alternative. This is the recommended alternative. FINANCIAL IMPLICATIONS Cost Estimate/Authorization Summary Capital Expense Total COST ESTIMATE Original estimate $60,000,000 $0 $60,000,000 Previous changes net $18,450,000 $50,000 $18,500,000 Current change $26,500,000 $0 $26,500,000 Revised estimate $104,950,000 $50,000 $105,000,000 AUTHORIZATION Previous authorizations $78,450,000 $50,000 $78,500,000 Current request for authorization $26,500,000 $0 $26,500,000 Total authorizations, including this request $104,950,000 $50,000 $105,000,000 Remaining amount to be authorized $0 $0 $0 Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 6 of 8 Meeting Date: May 10, 2022 Annual Budget Status and Source of Funds This project, CIP C801205, was included in the 2022-2026 capital budget and plan of finance with a budget of $71,400,000. A budget increase of $33,600,000 was transferred from the Aeronautical Reserve CIP (C800753) resulting in zero net change to the Aviation capital budget. The funding source will include the Airport Development Fund and future revenue bonds. This project was approved Majority-In-Interest by the airlines on December 7, 2021. Financial Analysis and Summary This project is an investment in additional terminal space that is intended to be used for both aeronautical and non-aeronautical purposes. As a hybrid project, the financial analysis looks at the projects as both a standalone non-aero investment and a terminal investment that flows through airline rates and charges. Aeronautical Rate Base Impacts 2024 ($000s) Aero Non-aero Total Rentable sqft without Conc A sqft 76.78% 23.22% 100% Rentable sqft WITH Conc A sqft 76.89% 23.11% 100% Project cost $ 80,731 $ 24,269 $ 105,000 Incremental Revenues WITHOUT Conc A SF $ 6,655 Terminal distribution 10 Incremental Revenues WITH Conc A SF 6,665 Incremental Debt Service 6,665 2,002 8,667 Incremental Amortization 2.6 0.8 3.4 Incremental CPE 0.26 Incremental Terminal Rental Rate 4.61 With the Concourse A expansion, the net terminal square footage distribution has a minor impact on the analysis as the existing project space allocation is reasonably close to the existing allocations. The table above shows that before Concourse A expansion, 76.78% of the terminal costs are allocated to the aeronautical rate base, which equates to incremental revenue of $6,655,000. After adding the incremental square footage of this project, the percentage of terminal costs increases to 76.89%; this reflects an $10,000 increase to Aeronautical revenue. Thus, in 2024 the net impact of the Concourse A expansion project is to contribute $6,665,000 in incremental revenue to the aeronautical rate base. Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 7 of 8 Meeting Date: May 10, 2022 Terminal rents are established based on the total cost center costs. The project would be completed in Q1 2024. The full year of debt service and equity amortization begin in 2024. The incremental terminal rent would be $4.61 and CPE of $0.26 in 2024. Non-aeronautical Investment Analysis The purpose of this section is to demonstrate that the Port has a compelling business case as a non-aero investment. The non-aeronautical investment includes both the cost of new space included in this authorization request and cost of the interior build-out and furnishings ($24.7 million) included in CIP C801207 (note that C801207 has not changed). The table below shows the allocation of capital costs based on rentable square footage. For nonaero purposes, 18.17% of the rentable square footage, equating to $19 million in capital cost, establishes the basis of the non-aero portion of the project. The lower part of the table identifies an incremental revenue increase of $4.3 million in 2027. This new revenue, attributed to the airport lounge generates the positive Net Present Value of $240K, which signifies a good investment. Given that the existing space is currently generating revenues, the NPV is netted against a base case (do nothing). Non-aero Investments Non-aero Aero Total Concourse A rentable sqft 6,499 29,264 35,763 Concourse A rentable sqft % 18.17% 81.83% $ in 000s Base Building, C801205 $ 19,081 $ 85,919 $ 105,000 Furnishings, C801207 $ 24,726 $ - $ 24,726 Total Capital $ 43,807 $ 85,919 $ 129,726 Non-Aero Analysis Payback (years from opening) 8 NPV (through 2043) $ 40,330 NPV Incremental to Base $ 240 2024 2027 Incremental Non-aero Revenue $ 1,114 $ 4,948 Incremental Non-aero O&M $ (337) 1,210 Debt service TERMB to Non-aero $ (2,004) (2,004) Non-aero Net Cashflow $ (553) $ 1,734 Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. __10c__ Page 8 of 8 Meeting Date: May 10, 2022 Future Revenues and Expenses (Total cost of ownership) The tenants would pay operating and maintenance annual costs in their space since maintenance of exclusive premises is the responsibility of the lessee. Those costs are not included in the amount shown below. This project provides 29,264 SF of aeronautical rentable space, as well as 6,499 SF of rentable non-aeronautical space. Facility elements outside of or supporting the exclusive premises, such as custodial services, domestic water, power, and HVAC will generate some additional demand for Aviation Maintenance services, and those annual operating and maintenance costs for the new space are estimated to be $340,000, according to the cost breakdown below: Custodial services $275,000 Facilities services 30,000 Electrical systems 18,000 Mechanical systems 17,000 ATTACHMENTS TO THIS REQUEST (1) Presentation slides PREVIOUS COMMISSION ACTIONS OR BRIEFINGS December 14, 2021 The Commission authorized construction and reimbursement to Delta Air Lines and utilization of Port crews for construction and support. April 27, 2021 The Commission authorized design and execution of a TRA for this project. Template revised June 27, 2019 (Diversity in Contracting).
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