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Concession agreements contain the key terms and conditions that establish the business rela- tionship between the airport operator and the concessionaire; the parties will refer to and inter- pret this agreement throughout its term. Therefore, it is important that the language in the agreement be clear, concise, and comprehensive. All concession agreements are subject to applicable federal, state, and local laws and regula- tions. In addition, airport policies and rules must be taken into account and are often specifically referenced in concession agreements. Airport operators often review the provisions of the concession agreements in place at peer airports to determine industry standards. These standards have wide-ranging acceptance, and their use by airport operators is difficult to challenge successfully. This chapter presents a review of the principal business terms common among all concession agreements: â¢ Term â¢ Privileges â¢ Concession fees â¢ Obligations â¢ Performance standards â¢ Pricing â¢ Capital improvements â¢ Midterm investment requirements â¢ Other concession agreement provisions â¢ Business practices in need of review 9.1 Term Although survey results show that concession agreement term lengths of 5 years to 10 years are most common, in practice, terms may range from 30-day trials for small retail cart operations to long-term arrangements of more than 10 years (see Figure 9-1). Nearly 50% of the airport oper- ators surveyed for this research have included term extension options of 1 year to 5 years in their agreements to provide flexibility for the airport operator and a performance incentive for the concessionaire, as shown in Figure 9-2. In establishing term lengths, airport operators should consider the following: â¢ Expected capital investments. Larger capital investments may justify longer agreement terms so that adequate time is available to amortize the investments. The term should be long enough for the tenant to amortize its capital investment and receive a reasonable rate of return. â¢ The competitive environment. The expected amount of potential interest in the concession opportunity can be inversely related to the length of the agreement term. If little or no interest 137 C H A P T E R 9 Business Terms and Concession Agreements
is generated in a potential concession opportunity, a longer term may be needed for the con- cession opportunity to be viable. â¢ The contracting approach. Term lengths of concession agreements in the Direct Leasing and Prime Concessionaire approach are similar. The term lengths of Third-Party Developer agree- ments are longer because of the additional front-end hard (construction) and soft (marketing, leasing, and management) costs inherent in Developer agreements. â¢ Airport development plans. New concession locations or anticipated closures of existing locations for terminal redevelopment may justify longer terms to maintain continuity during periods of change, to offer additional periods of time to compensate for additional investment, or to offset sales decreases. â¢ Concession concept types. Customarily, the term lengths for convenience retail agreements are longer than the term lengths for specialty retail agreements because of the narrower mar- gins in newsstand merchandise. Food and beverage agreement terms are longer than retail agreement terms because of the additional equipment required and higher buildout costs. 138 Resource Manual for Airport In-Terminal Concessions Figure 9-1. Typical term lengths in concession agreements. Figure 9-2. Typical term extension option periods in concession agreements. 0% 10% 20% 30% 40% 50% 60% 1 Y ear 2 Y ear s 3 Y ear s 4 Ye ar s 5 Y ear s O th er Pe rc e n t o f r ep o rt in g a irp o rt s Ad ve rt is in g Du ty Fr ee F ood & Be ve r age Ne ws /G if t Se rv ic es Sp ec ia lt y Re ta il Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. 0 2 4 6 8 10 12 Advertising Duty Free Food & Beverage News/Gift Services Specialty Retail Ye a rs Large Hub Medium Hub Small Hub Non-Hub Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11.
â¢ 49 CFR Part 23. In accordance with Subpart E (âOther Provisionsâ), Section 23.75 (âCan Recipients Enter into Long-term Exclusive Agreements with Concessionaires?â) of 49 CFR Part 23, Participation of Disadvantaged Business Enterprises in Airport Concessions, Final Rule and Proposed Rule, airport operators may not enter into a long-term exclusive agreement for terminal concessions without prior approval of the FAA Regional Civil Rights Office. A âlong-termâ agreement is defined as one having a term longer than 5 years. An âexclusiveâ agreement is defined as one in which an entire category of a particular business opportunity is limited to a single business entity. If special local circumstances exist that make it important to enter into a long-term exclusive agreement, airport operators may submit detailed infor- mation with requests to the FAA Regional Civil Rights Office for review and approval to enter into such an agreement. Term extension options should be carefully crafted and managed so that they meet legal requirements, serve the airport operatorâs purposes, and are granted only to deserving conces- sionaires. Some concessionaires will volunteer to refurbish concession units in return for a term extension. These inducements should be carefully reviewed and, in most cases, avoided, as the airport operator is likely to derive greater benefit from a competitive solicitation for the spaces governed by the expiring agreement. From a concessionaire standpoint, term length is valuable, as it has a direct relationship to the companyâs profitability. Unlike other retail businesses where the proprietors own their places of business or have long-term leases and options on the property, airport concessions are operated under agreements that have a fixed expiration date. Term extensions can have a positive effect on company balance sheets, the value of the enterprise, and the share price. 9.2 Privileges Privileges are granted to concessionaires by airport operators in return for concession fees and other payments and for the benefit of having concessions available to airport users. This exchange of something of value for something else of value in contract language is referred to as consideration and is necessary for a contract to be enforceable. Concession agreements list the privileges granted to the concessionaire in return for the con- sideration the airport operator receives, e.g., rent payments or guarantees on the one hand and concession units selling goods and services to the public on the other hand. These privileges may differ somewhat from airport to airport, but generally include the following: â¢ Rights to operate a specific concession or concessions. These rights may be exclusive or non- exclusive. â¢ The right to access and use the airport for business purposes. â¢ The lease of certain designated space to conduct business. â¢ The right to make airport-operator-approved improvements to leased areas. â¢ The right to use certain areas for support purposes (food court seating, delivery corridors, office space, etc.). These areas may be part of the concessionaireâs leasehold (e.g., kitchens, office space, and storage areas) or they may be designated for common use (e.g., food court seating areas and product delivery/waste removal corridors) by multiple concessionaires. â¢ The types of products that can be sold. â¢ In some instances, the right to enter into airport-operator-approved subleases with third-party concessionaires. The manner and extent of the privileges granted to the concessionaire should be clearly stated in the concession agreement to help avoid any future disagreements regarding their interpreta- tion or application. Business Terms and Concession Agreements 139
140 Resource Manual for Airport In-Terminal Concessions 9.3 Concession Fees Concession fee payments to the airport operator are often based on the greater of a fixed min- imum payment (the minimum annual guarantee, or MAG) or a percentage(s) of the concession- aireâs gross receipts from sales, as defined in the concession agreement. The concession fee arrangement is a critical component of the financial success or failure of concessionaires. For air- ports, the MAG provides a source of guaranteed revenues that reduces the potential volatility of revenues in the event of traffic downturns. 9.3.1 Minimum Annual Guarantee The results of the surveys conducted for this research show that, on average, a MAG is included in more than 90% of food and beverage, retail, duty free, and advertising concession agreements. Only the services category (e.g., seated massage, Wi-Fi, shoeshine) reflected a lower rate of MAG use (80% on average). See Figure 9-3. The MAG can be computed in several ways, but a common rule of thumb is that the MAG should be no lower than the rental value of the space (e.g., the square footage leased to the con- cessionaires in each space category [retail or concession space, shop space, office space, storage space, etc.] multiplied by the established rental rate for that category of space). Not all airport operators set rental rates for concession space based on square footage. Some airport operators use a different method to calculate the MAG for a new concession agreement, as the use of a standard or average square-footage-based rental rate calculation often results in a MAG for some spaces that falls substantially below the actual rental rate for the same space. Airport operators setting a MAG based on average revenue per square foot often have to use a lower common denominator (average) to derive a MAG that is appropriate for all spaces, including lower-volume spaces. This approach can result in high-performing, well-located units with MAGs well below market rates. When a MAG based on square footage is used, it is best to combine it with a mechanism to reset the MAG based on performance each year of the agreement. The Year 1 MAG (which should never be less than the space rent based on square footage) is sometimes computed based on the concession fees received by the airport operator from the space in the most recent year or based on the projected Year 1 percentage fees that the airport opera- tor expects to receive under the new concession agreement. For example, the airport operator Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. 0% 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100% Ad ve rt is in g D ut y Fr ee Fo od & Be ve r age Ne ws /G if t S er vi ce s S peci al ty Re ta il Pe rc e n t a ge o f a i rp or ts re sp on di ng Lar ge Hu b Me di um Hu b Sm al l Hu b Figure 9-3. Use of minimum annual guarantee by category and hub size.
Business Terms and Concession Agreements 141 may set the MAG for Year 1 at 80% of the concession fees it is currently receiving, with the decrease to 80% implemented so that interested firms have a margin to offset the uncertainties associated with a new venture. This approach will usually result in more competition for the concession opportunity. The MAG for subsequent years is typically adjusted based on some predetermined factor. Some typical adjustment methods in use are as follows: â¢ Specified MAG amounts are designated for each subsequent year of the concession agreement. â¢ Annual adjustments are made based on economic factors (typically changes in the Consumer Price Index). â¢ Demand-driven adjustments are made based on a percentage of the prior yearâs concession fees (e.g., 85% of the percentage of gross sales concession fees from Year 1 would be set as the MAG for Year 2). â¢ In the case of the less commonly used enplaned-passenger-based MAGs, adjustments are made based on percentage changes in enplaned passenger traffic. When developing new concession agreements, airport operators need to determine which MAG adjustment methodology best serves their purposes. Regardless of the approach used, in most cases, concession agreements establish that the MAG in succeeding years may never fall below the Year 1 MAG amount, which constitutes the floor of the airport enterpriseâs minimum annual revenue throughout the term of the conces- sion agreement. Two events in the past decade have heightened the importance of having well-defined MAG provisions in concession agreements. The attacks of September 11, 2001, and the financial crisis and subsequent economic downturn in 2008 caused deep declines in airline travel. Because these events were felt around the world, the downturn in airline travel created financial hardships for many airlines and concessionaires. Events such as these spurred some concessionaires to request financial relief (e.g., lowering or eliminating their MAG) even though no clause was contained in their concession agreements allowing for such relief. Most airport operators declined this request because of the concern that it would establish an undesirable precedent and because air- port operators also faced similar declines in passengers and passenger-related revenues. An outcome of the systemic shock following the attacks of September 11, 2001, was that financial relief clauses were introduced in concession agreements at a few airports, whereby the MAG was to be reduced in proportion to certain significant decreases (say, 20% or more) in enplaned passengers compared with the number of passengers in the same month(s) of the prior year. Typically, when such financial relief clauses are included, the financial relief continues until enplaned passenger traffic resumes to a stipulated level (e.g., recovery of traffic above the 20% reduction threshold). The MAG is a traditional component of all commercial leases, including those at airports, and serves several purposes: â¢ The MAG provides a guaranteed source of income to the airport operator, which can help support the airport enterpriseâs financial needs and strengthen its credit rating. â¢ The MAG serves as an incentive to ensure that the concessionaire is committed to and diligent in its operations and motivated to reach certain sales targets. â¢ The MAG corresponds to a minimum sales threshold and thus discourages bidders that would not expect to achieve a sufficient level of sales. Bidding MAGs may have the effect of producing unsustainable MAGs that can lead to undesired outcomes such as high prices, poor service, attempts to renegotiate payment terms, or, in extreme
142 Resource Manual for Airport In-Terminal Concessions cases, concessionaire failures. The evaluation of financial elements of the competitive selection process is discussed in Section 10.6. Historically, the MAG has been prorated on a monthly basis, and payment to the airport operator is due by the first day of each month. A sales report is subsequently filed within a cer- tain number of days following each month, and if the percentage of gross receipts payment due exceeds the prorated MAG paid for the same month, then the concessionaire owes an additional concession fee payment. At the end of each year, the numbers are reconciled; the percentage of gross receipts concession fee is compared to the MAG, and any additional amounts due are paid and any overpayments are refunded. This method thus takes seasonal variations in sales into account and may result in the issuance of refunds. Table 9-1 shows the calculation of a hypothetical MAG adjustment. Some airport operators charge a minimum monthly guarantee (MMG) rather than a MAG. Under this approach, the MMG is compared to the percentage of gross receipts payment due each month on a stand-alone basis. This approach provides the airport operator with a monthly revenue source that can be accurately recorded and eliminates the need for annual reconcilia- tions and credits or refunds. However, the MMG is not yet widely used in the industry and may create hardships for concessionaires because seasonal variations in sales may result in a higher effective percentage rent over the course of a year. Therefore, it is possible that a tenant could pay an effective percentage rate for an entire year that is higher than the nominal percentage rent set forth in the concession agreement, and the difference could be material, particularly in cases where the percentage rent is already high. Airport operators should carefully consider the pros and cons of this approach and the monthly variation in historical enplaned passengers before adopting this approach. 9.3.2 Percentage Rents The survey results indicate that percentage rents for the major concession categories typically average in the 10% to 15% of gross receipts range, except for terminal advertising (which is usu- ally considerably higher) and duty free (which is often somewhat higher). Although, in some cases, the concession fee may be based strictly on the percentage of gross receipts, it is far more common that a minimum guarantee payment is established as well (see preceding MAG discussion) and that concession fee payments are determined based on the MAG (or MMG) or the percentage(s) of gross receipts, whichever is greater. Monthly MAG (A) Monthly % of Gross (B) Amount Paid (C) (Greater of A or B) Under (Over) Payment (Greater of A or B minus C) January $50,000 $57,000 $57,000 February $50,000 $41,000 $50,000 March $50,000 $43,000 $50,000 April $50,000 $42,000 $50,000 May $50,000 $55,000 $55,000 June $50,000 $50,000 $50,000 July $50,000 $53,000 $53,000 August $50,000 $47,000 $50,000 September $50,000 $49,000 $50,000 October $50,000 $51,000 $51,000 November $50,000 $54,000 $54,000 December $50,000 $49,000 $50,000 Totals $600,000 $591,000 $620,000 ($20,000) Table 9-1. Sample MAG versus percentage of gross receipts reconciliation.
Business Terms and Concession Agreements 143 In the case of Third-Party Developer agreements, rent payments by the concessionaires to the Developer are typically based on the greater of a MAG (or MMG) or percentage(s) of gross receipts, as established in the Developerâs negotiations with each subtenant. The Developerâs payments to the airport operator are based on the greater of a MAG (or MMG) or percentage of rents collected from subtenant concessionaires. The percentage(s) of gross receipts (or rent in the case of a Third-Party Developer) conces- sion fee may be set by the airport operator or it may be established through the proposal as a component of the financial offer in the tenant selection process. In their solicitations, airport operators generally require that financial offers (e.g., MAG and/or percentage of gross receipts) and technical information be submitted as part of proposal packages for concession opportunities. The surveys conducted for this research show that the financial offer is often the most heavily weighed criterion in the selection process. Some airport operators choose to set concession fee percentages rather than asking for pro- posals to eliminate the biddersâ ability to âbuy the concession agreementâ by offering unrealis- tically high percentage payments, which can lead to the failure of the concessionaires or a reduced quality of service and product. Under this approach, the airport operator sets the percentage based on industry standards or a pro forma analysis of the potential of the concession spaces. Setting the percentage allows the airport operator to focus more on the technical capabilities of competing concessionaires than on the size of the percentage rent offered when evaluating pro- posals. The downside, however, of this approach is that it may limit the airport operatorâs con- cession fees. Airport operators need to carefully consider their goals and objectives and the associated risks in determining which approach is best. Average percentage rents reported in the surveys conducted for this research are shown in Figure 9-4. A brief discussion of the results in each category follows: â¢ Food and Beverage. Average concession fee percentages of 13% and 14% were most common among medium hub and large hub airports, respectively, but the percentages reported ranged from as low as 8% to as high as 20%. The operators of small hub airports typically establish concession fees that are somewhat lower on average (10% to 13%). Percentage rents may also be set by concept, with casual dining units at the low end of the range and bars (or alcoholic beverages) at the high end of the range. Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. 13.7% 16.5% 14.6% 12.8% 14.5% 14.7% 10.9% 13.8% 11.9% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Food & Beverage News/Gift Specialty Retail Large Hu b Medium Hub Small Hub Figure 9-4. Average percentage rent by category and airport size.
144 Resource Manual for Airport In-Terminal Concessions â¢ Convenience Retail. Average concession fee percentages reported in the survey ranged from 9% to 22%. The most common concession fee percentage reported was 15%. â¢ Specialty Retail. Approximately 75% of the airport operators that responded to the survey reported average concession fee percentages in the 12% to 16% range. As with convenience retail, 15% was the most often reported concession fee percentage. â¢ Duty Free. 42% of the respondents reported that they do not charge a percentage rent for duty free operations. These were all medium or small hubs; 8 out of 13 medium hubs and 3 out of 4 small hubs indicated that they had a fixed fee for duty free. No large hubs had fixed fees. Air- ports charging a percentage rent reported percentages ranging from a low of 10% to a high of 30%, with 20% being the most common. â¢ Advertising. Percentage rents in the advertising category ranged widely, from 0% to 85%. Nearly half of the airport operators reported advertising concession fees in the 60% to 70% range. The surveys conducted for this research also showed that the MAG (fixed fee) versus percent- age fee (based on transaction volume or transaction fees) approach is most commonly used at those airports with banking service (including ATMs) and foreign currency exchange concessions. The survey results for this category are shown in Figure 9-5. 9.3.3 Other Concession Fee Approaches Other concession fee approaches may include, but are not limited to, profit-sharing, per enplaned passenger fees, or some combination thereof. With the profit-sharing approach, a formula is established whereby an amount of net rev- enue, after certain defined expenses and fees are deducted, is shared with the airport operator. Profit-sharing may increase the amount of revenue paid by the concessionaire to the airport operator and further solidify the two parties as partners. However, consistent receipt of revenue from profit-sharing cannot be counted on, as such revenues are subject to sales and expense fluctuations, allocation methodologies, and auditing challenges that may greatly reduce or elim- inate profit-sharing payments to the airport operator. As such, care needs to be taken before reducing the amount of otherwise achievable concession revenues in favor of less certain profit- sharing revenues. Profit-sharing arrangements may provide marginally improved revenues, but may also transfer risk to the airport operator when passenger traffic declines or concessionaire costs increase. Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. 18% 0% 59% 24% 44% 13% 38% 6% 50% 10% 30% 10% 0% 10% 20% 30% 40% 50% 60% 70% Fixed fee % of volume or transaction fees Both No bank concession Large Hub Medium Hub Small Hub Figure 9-5. Type of revenues from banking and foreign exchange services by category.
Fees based on numbers of enplaned passengers are sometimes established as a way to link con- cession MAGs with passenger numbers. Under this approach, the airport operator establishes a fixed fee to be paid by concessionaires for each enplaning passenger at the airport. This approach has advantages for the concessionaire, as the MAG is set in proportion to the business opportu- nity, and for the airport operator, in that the MAG can increase as passenger activity increases. At the same time, if passenger activity declines, so would the MAG. Care needs to be exercised in setting the per-passenger fee if this approach is used, as several factors can reduce the num- bers of passengers exposed to a concession location, including the economy, construction plans, gate relocations or closures, airline relocations, and other factors. 9.3.4 Additional Fees and Charges Payments for support space (e.g., offices and storage areas) rentals, common area mainte- nance (CAM), marketing fund contributions, storage and delivery fees, utility use, employee parking, employee badging, and other items may also be required. These fees and charges are discussed below: â¢ Rent for Support Space. This cost may be included in the concession fee calculation or may be separately charged. If support space is provided at no additional cost, airport operators must be careful that concessionaires do not occupy more free support space than they reason- ably need to operate their concessions. â¢ CAM Fees. These fees are often paid by concessionaires as reimbursement for the expense of services provided by the airport operator (or the Third-Party Developer) in common or shared areas, e.g., food courts. CAM fees may cover maintenance, janitorial, utilities, replacement of expendable items such as trays or trash containers, signage, and other common-area costs. Specific costs to be covered by CAM fees should be spelled out in detail, along with the methodology for apportioning costs among tenants on a fixed basis, variable basis, or com- bination of the two. â¢ Marketing Fund Contributions. The airport operator (or Third-Party Developer) may estab- lish a fund for marketing the concessions, which is supported by required contributions (often determined based on a fixed percentage of sales) from the concessionaires. Periodic accountings of moneys spent and defined purposes for which moneys can be used should be established. Some airports make contributions to the marketing fund. â¢ Storage and Delivery Fees. A warehousing and delivery program may be established whereby products are received for subtenants at a centralized location and delivered to concession units for a fee. â¢ Utility Charges. Airport operators may or may not require concessionaires to pay separate charges for the use of utilities. When required, separate meters may be installed so that the utility companies bill the concessionaires directly, or charges may be determined based on allocations from submeter readings or estimated use calculations. â¢ Employee Parking. Typically, the airport operator only provides free parking for a minimal number of the concessionaireâs management personnel. â¢ Employee Badging. The concessionaire may be obligated to pay fees for employee badging. The concessionaires may or may not elect to pay airport employee badging charges for their employees. 9.4 Obligations Similar to all contracts, concession agreements create the obligations of the parties. While not all potential issues can be foreseen, clearly defining each partyâs obligations under the agreement helps avoid or minimize responsibility uncertainties and associated disputes throughout the term of the agreement. Business Terms and Concession Agreements 145
A partial listing of obligations typically included in concession agreements is provided below: â¢ Rents and fees. At a minimum, the concession agreement should state the rents and fees that the concessionaire must pay; how and when rents and fees are determined and adjusted; the definition of gross receipts for purposes of computing percentage fees due; how any CAM, marketing, and other use fees will be charged; and whether a mechanism exists for adjusting the MAG (or MMG). â¢ Reports and payments. At a minimum, the concession agreement should state when reports and payments are due, the format of the reports and what information should be included, whether any reports need to be prepared by a Certified Public Accountant (CPA), the penal- ties for not filing reports or not making payments on time, and when annual reconciliations of the MAG versus the percentage of gross receipts concession fee need to be performed and by whom. â¢ Auditing. The agreement should list airport operator rights with regard to auditing the books and records of the concessionaire. The agreement should state whether the rights are limited to auditing gross receipts or whether more comprehensive audit reviews are allowed, indicate whether the airport operator can hire outside third parties to conduct audits and how often audits can be conducted, indicate where books and records are to be maintained for audit pur- poses, and indicate who pays for the audit (especially if travel to audit the records is involved). Finally, the agreement should indicate whether there will be any consequences if audit results show significant errors. â¢ Maintenance and janitorial. The concession agreement should detail the maintenance and janitorial responsibilities of the airport operator and the concessionaires. A responsibility matrix for such purposes should be included in the concession agreement. Maintenance responsibilities are one of the most common questions that arise during the life of the con- cession agreement. A responsibility matrix provides a convenient and straightforward means of delineating responsibility between the airport operator and the concession tenant that can be quickly referenced. Table 9-2 presents a maintenance responsibility matrix used at Sacramento International Airport. â¢ Installation and payment of utilities. The concession agreement should clearly indicate the responsibilities of the airport operator and the concessionaire regarding the installation of and payment for utilities. For example, the airport operator may bring utilities (electricity, gas, water, and sewer) to the perimeter of the leased premises and the concessionaire may be responsible for the necessary connections. Concession contractors are typically responsible for changes to existing utility systems, subject to the approval of the airport operator. As noted earlier, airport operators have different approaches to utility cost recovery, and may or may not pass these costs on to the concessionaires. â¢ Capital improvements. The concession agreement should detail the process and require- ments for the construction of capital improvements, including the following: â capital improvement plans, including any design submittal requirements; â permitting requirements; â the required development schedule; â minimum capital investment, annual refurbishment, and midterm renovation requirements; â construction contracting requirements; â the schedule and documentation required for submittal of final project costs; â whether the concessionaire or the airport operator will hold title to the improvements; â buyout provisions; â financial penalties, such as liquidated damages, for failure to complete the project on time; and â any requirements for removal of improvements and restoration of property upon agree- ment expiration or termination. 146 Resource Manual for Airport In-Terminal Concessions
Business Terms and Concession Agreements 147 # Co un ty R espo ns ib il it y Co nc es si on ai re Re sp on si b ili ty No t Ap pl ic ab le El ec tr ic al 1 I nf ra st ru ct ur e (w it hi n Le as ed Pr em is es or e xcl us iv el y ser vi ng Le ased Pr em is es ) X 2 T r ansf or me r - Co ncess io na ir e El ec tr ic al Se rv ic e X 3 T r ans fo me r( s) - ot he r th an ma in se rv ic e X 4 P an el s X 5 T im e Cl oc ks X 6 R ecep ta cl es X 7 S wi tc he s X 8 U PS Sy st em s (w it hi n Le ased Pr em is es or ex cl us iv el y se rv in g Le as ed Pr em is es ) X 9 T es ti ng X 10 Re pa ir X 11 Ma in te na nce X 12 Li gh ti ng - In te ri or wi th in th e Le as ed Pr em is es X 13 La mp s X 14 Ba ll ast s X 15 Fi xt ur es X 16 Co mmo n ar ea li gh ti ng - Ex te ri or Li gh ti ng Lo ca te d in com mo n ar ea s of th e Ai rp or t X 17 La mp s X 18 Ba ll ast s X 19 Fi xt ur es X 20 X 21 La mp s X 22 Ba ll ast s X 23 Fi xt ur es X 24 Si gn ag e - li gh te d X 25 La mp s X 26 Ba ll ast s X 27 Fi xt ur es X 28 Ai rc ra ft Ra mp lig ht in g X 29 Ha n gar li gh ts X Pl um bi ng 30 In fr ast ru ct ur e X 31 P- Tr aps X 32 Tr ap pr im er s X 33 Se we r Li ne s X 34 Wa te r Pi pe X 35 Ve nt s X 36 Fl oo r si nk s X 37 To ile ts X 38 Gr ea se Tr ap s X 39 Mo p si nk s X 40 Wa st e dr ai ns X 41 Ba ck flo w pr ev en te rs X Fi re Su pp re ss io n Sy st em 42 Fi re Al ar m De te ct io n (i nc lu di ng 24 -h ou r 43 Fi re Su pp re ss io n Sy st em (B ui ld in g Wi de Sy st em ) X 44 X Fi re Su pp re ss io n Eq ui pm en t Ex cl us iv e to th e Le as ed Pr em is es Eq ui pm en t Te na nt ar ea li gh ti ng - Li gh ti ng lo ca te d in com mo n ar ea s il lu mi na ti ng Le as ed Pr em is es Bu il din g In te ri or 45 Si gn ag e - no n- li gh te d X 46 Wa ll fin is he s (i nc luding st or e fr on t) X 47 Ca bine tr y - re pa ir X 48 Ca bine tr y - ne w X 49 Do or s (I nc lu ding lo ck s, hi n ges an d cl os er s) X 50 In ter io r le as ed sp ac e do or s X 51 Co unt y sp ac e/ le as ed sp ac e do or s X 52 Fi re do or s X 53 Ro ll up Do or s X 54 Ba g be lt Sy st em s X 55 Re st ro om s fi xt ur es (t ow el /s oa p di sp en se rs , mi rro rs , pa rt itio ns , etc.) 56 Flo or Til es /C ar pe t X 57 Ce ilin g (t iles an d gr id ) X 58 Di sp la y ca se s (w ithi n Le as ed Pr em is es ) X 59 X Bu il din g Ex te ri or 60 Pa ve m ent X 61 Re pai r an d Pa tc h Ro of X 62 Cl ea n an d Cl ear Gu tt er s X 63 St ru ct ur al Ma in te na nc e an d/ or re pa ir s X 64 Ex ter io r Wa ll s, Ro of an d Foun da tio n X 65 L and sc ap in g X HV AC 66 U PS Sy st em HV AC (c om mo n to bu ilding HV AC ) X 67 U PS Sy st em HV AC (l ea se d sp ac e HV AC ) X 68 Ki tc he n ve ntil ati on sy st em s X 69 Ex ha us t Fa ns X 70 Co mmo n to bu ildi ng HV AC X 71 Ce ilin g V ents X 72 The rm os t ats X 73 L eas ed sp ac e HV AC X Mi sc el la ne ou s 74 Pe st Co ntr ol (a s ne cc ea ry to ma in tai n a pe st an d ve rm in fr ee co nd it io n) X 75 X 76 Ja nitor ia l X 77 Tr as h Re mo va l X 78 Po we r M onito ri ng an d Co nt ro l Sy st em (P MC S) X Eq ui pm en t an d Im pr ov em en ts in st a ll ed by Te na nt gi ven or no t) monitoring ) X (i.e. Fire Extinguisher, etc.) X Art work (within Leased Premises) (whether authorization was Table 9-2. Sample preventive/corrective maintenance responsibility matrix (Sacramento International Airport).
Additionally, any improvements to be provided by the airport operator should be described, along with their schedule for completion if they do not already exist. A Tenant Design Manual should be included with the solicitation document and incorporated into the completed conces- sion agreement. (Capital improvements are discussed in depth in Chapter 12). â¢ Insurance and bonding. Insurance requirements for the concessionaire and its subtenants and contractors should be clearly stated in the concession agreement. Likewise, any require- ments for construction-related bonds, payment guarantee bonds, and performance bonds should also be described. It is important to specifically indicate the types of guarantee instru- ments that may be submitted to meet the bond requirements. â¢ Indemnification. Indemnification language is typically included in concession agreements, as specified by the airport operatorâs legal counsel. â¢ Security. Language should be included in concession agreements requiring concessionaires, their subtenants, and their contractors to comply with all of the security rules and regulations in force at the airport. The concessionaires should be responsible for paying any fines imposed on the airport operator resulting from security violations by the concessionaire, its subtenants, contractors, or any other associated parties. â¢ Other obligations. Damage or destruction of premises, environmental cleanup, employee badges, employee parking, prohibition of liens, and taxes are some of the other provisions typ- ically included in concession agreements. 9.5 Performance Standards A well-written concession agreement will specify the performance standards with which con- cessionaires are expected to comply. An understanding of the required performance standards will assist concessionaires in projecting expenses and determining the concession fees they can afford to pay. Additionally, clearly stated performance standards reduce the potential for dis- agreements between the airport operator and concessionaire during the term of the agreement. Performance standards also play an important role in the concession unitâs physical appearance and the quality of customer service. Failure to monitor and enforce compliance with performance standards on a regular and con- sistent basis can easily lead to a deterioration of customer service and a culture of bad habits that may be difficult to correct. Performance standards often cover hours of operation, requirements for responding to cus- tomer complaints, minimum management qualifications, dress code, staff training, signs, mer- chandising, cleanliness of facilities, and recycling (see Table 9-3). Airport operators should tailor the performance standards in their concession agreements to the policies, procedures, goals, and objectives in place at their particular airport. Some airport operators include financial sanctions, fines, or other financial penalties in their concession agreements as a disincentive for concessionaires to fail to meet performance stan- dards and to compensate for lost revenues that may result from such failure. The terminology usedâfines, sanctions, administrative penalties, or other termsâwill vary depending on state and local laws. This approach, where feasible, can be helpful to concession managers. Airport concession managers may have no mechanism to alert a concessionaire that is failing to meet performance standards except to issue a formal notice of default of the terms of the concession agreement, which is a serious action that may be disproportionate to the performance problem. Financial sanctions or fines should not be viewed as a substitute for maintaining effective com- munications with the concessionaireâs representatives. Misuse of fines or sanctions can create an adversarial relationship that is not in the best interests of either party. 148 Resource Manual for Airport In-Terminal Concessions
Business Terms and Concession Agreements 149 Even a small fine will get the attention of the local concession manager and, in particular, cor- porate management, and can be helpful in communicating the airport operatorâs dissatisfaction with the concessionaireâs performance, if necessary. 9.6 Pricing For many years, the typical policy regarding airport concessions was simply that concession- aires had to submit the prices they intended to charge their customers to the airport operator for a review of reasonableness and subsequent approval. âReasonableâ pricing in that context was not generally well defined. A movement to a structure based on street pricing later emerged and has been adopted at many of todayâs airports. At some airports, the concession agreement requires a strict compliance with street pricing, while, at others, an add-on, such as street pricing plus 10%, is in place. The surveys conducted for this research indicated that street pricing plus 10% is now the most commonly used pricing policy among airport concessions (except for duty free where prices are most often bench- marked to those at other airports); straight street pricing with no markup was a close second. Between 41% and 46% of the airport operators surveyed indicated the use of street pricing plus 10% for their food and beverage, convenience retail, and specialty retail concessions, while between 33% and 38% indicated that they use street pricing with no markup. Other than duty free, only 5% of the airport operators reported having no pricing policy. Airport pricing policies identified in the surveys conducted for this research are summarized in Figure 9-6. The pricing policy is usually stated in the concession agreement, but, in some cases, the pric- ing policy document may be referenced but not included. Pricing policies need to be clearly Section A Violations: Occurrence Amount of Sanction 1 Written Notification Hours of Operation Operations, Service Standards and Employee Standards 2 $200 Sanction Pricing Quality 3 $400 Sanction Signage Interference with Utilities 4 $750 Sanction Deliveries and Vendor Access 5 $1,000 per occurrence thereafter or default under Section 3.23 of the Agreement Section B Violations: Occurrence Amount of Sanction Maintenance and Repairs 1 $250 Sanction Sanitation Hygiene and Cleanliness 2 $500 Sanction Waste Disposal, Grease Disposal Recycling Health Code Violations 3 $1,000 per occurrence thereafter or default under Section 3.23 of the Agreement Table 9-3. Sample list of financial sanctions in a concession agreement (Sacramento International Airport).
150 Resource Manual for Airport In-Terminal Concessions written and made available during solicitations, as potential concessionaires need to understand the pricing policy since it will influence their pro forma revenue and expense projections and their financial offers. Many in the industry believe that street pricing yields more transactions and higher sales vol- umes, but there is little empirical evidence to support this belief. However, concession develop- ers are adamant that street pricing has a positive effect on both sales and customer satisfaction. Survey respondents indicated that they generally believed that pricing limits resulted in higher overall sales, but they also could not cite empirical evidence to support this belief. In interviews with concession managers, several noted that complaints were received about concession prices even where true street pricing is in effect. Enforcing pricing policies and, in particular, conducting price comparisons to support enforce- ment, can be difficult and time consuming. Comparisons of prices for branded concessions with off-airport equivalents are straightforward and easiest to conduct. For generic concepts, or those with no other branded concepts in the region, care must be taken to identify reasonable compa- rables. The selection of comparables has often been a source of disagreement. Clear definitions of comparables in the concession agreement help to reduce such disagreements. While pricing is important to customers, it is just one element of the value proposition of the concession program. Several concession managers noted that the location, surroundings, types of products, customer service, portion size, and other factors also weigh heavily in the customersâ per- ceptions of their shopping experience at the airport and influence the amount of sales generated. In interviews with several concessionaires, it was noted that street pricing policies may not be realistic given the high cost structure at many airports, particularly large hub airports where wage rates, delivery costs, and other operating costs are high. The concessionaires also noted that the difference between true street pricing, for example, and street pricing plus 10% can make a difference between profit and loss. Concessionaires generally believed that pricing poli- cies need to reflect the sales volume and cost structure of the airportâs concessionaires and take into account percentage rents, development costs, local wage rates, and other costs. 0% 5% 10 % 1 5% 20% 25% 30% 35 % 4 0% 45 % 5 0% Be nc hm arke d to Ot he r Ai r por ts St r eet Pr ic in g + 5% St re et Pr ic in g + Ot he r St r eet Pr ic in g St r eet Pr ic in g + 10% F ood Co nv en ie nc e Re ta il Sp ec ia lt y Re ta il Du ty Fr ee Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. Figure 9-6. Airport pricing policy at surveyed airports by hub size.
9.7 Capital Improvements Airport operators most often provide unfinished space (e.g., concrete floors, demising studs and walls, and utility connections) for new concession locations. Existing space is either provided in as-is condition for renovation or delivered by the airport operator in a shell and core condi- tion. In the case of common or shared areas (e.g., food courts serving multiple concession oper- ators), the airport operator must decide in advance of issuing its solicitation documents whether it will take responsibility for the buildout and upkeep or make buildout and upkeep a require- ment of one or more concessionaires. The concession agreement should indicate the condition in which each leasehold space will be provided. It is good practice to include Tenant Design Criteria in the concession solicitation documents to enable the concessionaires to better plan and estimate more accurately the costs of construction and to avoid later disagreements with the airport operator over designs and con- struction plans. Capital investments vary greatly based on the level of finishes, prevailing wage rates, unit design, airport operator requirements, market conditions, and other factors. At many airports, the design review and permitting process can be cumbersome and slow moving, which may also add to the cost. (Capital costs for concessions are discussed in Chapter 12.) Airport operators should periodically review the effects of such process costs on concessionaires and consider whether such processes can be streamlined to reduce costs without sacrificing safety or quality. Concession agreements and RFPs more often than not include minimum investment require- ments and midterm refurbishment expenditure requirements. Minimum investment require- ments indicate to proposers that the airport operator expects a certain standard/quality of buildout and establish a commitment from the concessionaires to spend at least a target amount on their capital improvements. Further, including minimum investment requirements avoids the poten- tial for some proposers to increase their financial offer in an attempt to win the concession while reducing the investment in the concession space by minimizing the capital investment and substi- tuting a cheaper level of finishes and fixtures in the buildout. In establishing minimum investment requirements, airport concession managers should be aware of any recent costs for building con- cession facilities at their airport, as well as at other airports. As the result of security requirements, delivery restrictions, materials durability and quality requirements, and other cost factors, conces- sion buildout costs at airports are often significantly higher than at similar branded off-airport loca- tions. Use of a realistic minimum capital investment requirement will force all potential proposers to consider the actual capital costs they are likely to incur and will help avoid later disputes. Concession agreements should contain requirements for capital investment cost information on completed projects to be submitted to the airport commercial management staff within 90 days of project completion. This information should be reviewed by airport concession staff, and any questions or incomplete information should be promptly addressed. This information can be used to confirm that minimum investment requirements have been met and, should the need arise, as the basis for any later buyout that may become necessary. It is standard practice for the concessionaire to pay the airport operator the difference between its financial investment commitment and any shortfall. Approval of the design and construction drawings does not necessarily guarantee that cost cutting will not occur during construction; the requirement to pay any shortfall to the airport operator serves as a major disincentive to substi- tute inferior finishes, fixtures, signage, and equipment and helps achieve the high quality of buildouts that airport operators typically desire. Many airport operators include a provision in their concession agreements allowing for the buyout of capital improvements if a concession location must be reclaimed or reduced in size Business Terms and Concession Agreements 151
for âairport development purposesâ such as modifications or expansions of the terminal build- ing. The basis for the buyout is usually straight-line depreciation over the lease term based on the documented capital investments made by the concessionaire and approved by the airport operator. The buyout provisions in concession agreements typically favor the airport operator. Deadlines for completion of capital improvements should be established in the concession agreement. Failure to complete concession improvements on time can, in fact, cause a terminal or concourse to operate with inadequate concession facilities or even result in the delay of a new terminal or concourse opening. Financial penalties, such as liquidated damages, should be imposed on concessionaires for failure to complete the work needed for concession facilities to open on schedule. Historically, when the economy was strong and passenger traffic was growing rapidly, some concessionaires would propose on a space expecting that their return on investment would be low in the early years, but that the low return would be offset by higher returns in later years. The attacks of September 11, 2001, and the 2008 financial crisis demonstrate that this offset should no longer be taken for granted. 9.8 Midterm Investment Requirements It is standard practice for airport operators to include a requirement for concessionaires to make additional investments near the midpoint of the agreement term, especially in those cases where the term spans more than 5 years. The midterm investment requirement is established by the airport operator in the solicitation process and included in the concession agreement. The purpose of the midterm reinvestment requirement is to provide for the renewal and replacement of worn surfaces, furnishings, fixtures, and equipment in the concession facilities. The midterm investment requirement is not recom- mended as a substitute for ordinary maintenance or as a funding source for deferred maintenance. Nevertheless, at many airports, the midterm investment requirement has sometimes been used, by agreement, for other purposes, such as the reconcepting of underperforming units, expansions of concession facilities, or upgrades to infrastructure, as allowed by the airport operator. The use of the midterm investment funds is often a matter of negotiation between the concessionaire and the airport operator. Nearly 80% of airport operators responding to the surveys conducted for this research indi- cated that they include a midterm investment requirement in their concession agreements. How- ever, there appears to be no standard practice or consensus for determining the midterm investment requirement. Surveyed airport operators identified several methods for establishing midterm investment requirements, including the following: â¢ A fixed dollar amount per square foot ($50, $75, $100, etc.) â¢ A negotiated amount â¢ A percentage of the concessionaireâs original capital investment (e.g., 15%, 20%, or 25%) â¢ A percentage of the concessionaireâs sales (e.g., 5%) â¢ The amount submitted as part of the concessionaireâs proposal 9.9 Other Concession Agreement Provisions Many other business terms appear in concession agreements in addition to those identified above. Many terms are similar in purpose from one airport to another, but are worded some- what differently as part of the boilerplate provisions each airport operator develops for its agree- 152 Resource Manual for Airport In-Terminal Concessions
ments. Additionally, ACDBE participation goals are set forth in concession agreements (see Chapter 7). Certain airport operators include concession employee-related clauses, such as labor peace, living wage, and worker retention. When survey respondents were asked if they include unique, innovative, or unusual provi- sions in their concession agreements, the operators of only a few airports responded affirma- tively. The provisions cited included the following: â¢ Assignment and sublease clauses. Airport operators may establish requirements for approval of assignment of the concession agreement including criteria for their approval and fees for the review and approval of assignments, subleases, novation, and other legal transactions brought forward by the concessionaire. Many airports have strong sublease and assignment clauses to discourage sales of a concession agreement. Similarly, most airports will include in concession agreements an outright prohibition on subletting unless it is contemplated in the concession management approach, such as a prime concession agreement with subleasing obligations. â¢ MAG reconciliations at contract year end. Airport operators may base their annual MAG adjustment on data available a few months prior to the MAG adjustment date to avoid the need for retroactive adjustments once data become available (e.g., they may base a July MAG adjustment on March data). â¢ Higher rent for airport-operator-built concession units. Airport operators may build out a concession location to receive a higher MAG or concession fee from concessionaires or to limit the need for longer agreement terms. The operator of Denver International Airport, for exam- ple, developed a multi-unit concession to serve the arrivals and meeter and greeter market, which was earmarked for small business enterprises. â¢ Key money. Airport operators may require an upfront cash payment (essentially prepaid rent) as a condition of award. â¢ Supplemental rent after depreciation period ends. Some airport operators, including the operator of Los Angeles International Airport, require concessionaires to pay additional per- centage rent if the agreement term is extended. The original investment is assumed to have been amortized over the original term of the agreement. 9.10 Business Practices in Need of Review In the surveys conducted for this research, airport concession managers were asked to identify general business practices that are most in need of change or improvement. The top three practices cited were (1) lack of transparency in the solicitation process, (2) percentage rents, and (3) length of the term. The concessionaires surveyed had different views; the top three business practices that concessionaires thought airport operators should consider changing were (1) MAG requirements, (2) the costs of constructing improvements, and (3) the length of the agreement term. Figure 9-7 shows the relative importance of the issues mentioned by both airport operators and concession- aire representatives. 9.11 Additional Concession Agreement Resources The ACI-NA Commercial Management Committee maintains a resource center for members that includes RFPs and concession agreements from a number of airports. It is located at http://www.aci-na.org/content/commercial-management-committee. ACRP Report 33: Guidebook for Developing and Managing Airport Contracts is a guidebook of best practices for developing, soliciting, and managing airport agreements and contracts for use by a variety of airports (Vanden Oever et al. 2011). The agreements covered in ACRP Report 33 Business Terms and Concession Agreements 153
154 Resource Manual for Airport In-Terminal Concessions include, among other types, in-terminal concession agreements. An accompanying CD-ROM provides sample agreements. The CD-ROM included as part of ACRP Report 33 is also avail- able for download from the Transportation Research Boardâs website as an ISO image. The report and sample agreements may be downloaded at http://www.trb.org/Publications/Blurbs/ Guidebook_for_Developing_and_Managing_Airport_Cont_164803.aspx. 1. 0 1 .5 2. 0 2 .5 3. 0 3 .5 4. 0 4 .5 5. 0 Street pricin g RFP processes Performanc e sta ndards in concession agreements Perc entage rent s Minimum annual gua ra ntees Mid-term refurbishment re quirements Length of term Lack of transparency in so lic itation proc es s Design review processes Cost of constructin g im provement s Concessionaires Airport operators No Impo rt ance High Importance Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. Figure 9-7. Airport concession industry business practices in need of improvement.