PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
6c
Date of Meeting
May 24, 2011
DATE: May 16, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: Michael Ehl, Director, Airport Operations
Wayne Grotheer, Director, Aviation Project Management
James Jennings, Manager, Aviation Properties, Aviation Business Development
SUBJECT: Additional Tenant Reimbursement for Delta Air Lines (CIP # C800336)
Amount of This Request: $ 3,490,000 Source of Funds: Airport
Development Fund
State and Local Taxes Paid: $ 238,000 Estimated Construction Jobs: 65
Total Program Cost: $8,930,000
ACTION REQUESTED:
Request Commission authorization for the Chief Executive Officer to 1) approve a tenant
reimbursement to Delta Air Lines (Delta) and additional Port costs totaling $3,490,000
associated with the build-out of an airline lounge on the roof of the South Satellite at Seattle-
Tacoma International Airport (Airport) for a total program cost of $8,930,000 and 2) modify a
Tenant Reimbursement Agreement with Delta per the Port of Seattle’s AV-2 Policy.
SYNOPSIS:
Delta has requested that the Port of Seattle (Port) approve additional tenant reimbursement funds
to accommodate a 1,300 square-foot expansion of the Delta Sky Club, as well as accommodate
various change orders to the Port’s share of the project. The expansion of the new lounge is
driven by Delta’s continued international growth in the Seattle market, improving their level of
service in Seattle by having a lounge commensurate with their expected growth. The additional
square footage will increase Delta’s rent by $300,000, totaling $1,800,000 per year for the entire
facility.
The impact of this additional tenant reimbursement request will be an increased cost per
enplanement of $.03 and will further reduce the average terminal rental rate due to the increased
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
May 16, 2011
Page 2 of 6
total square footage of leased space. The airlines approved the original Delta Sky Club tenant
reimbursement project through a Majority In Interest (MII) vote in December 2010.
With Commission authorization, staff will finalize an adjustment to the current tenant
reimbursement agreement and add the additional 1,300 square feet to the existing lease.
BACKGROUND:
On March 23, 2010, the Commission approved $5.44 million of funding to reimburse Delta for
base building construction of a 6,800 square-foot airline lounge and for Port project support to
assist in building this facility on the roof of the South Satellite. Delta moved forward with
design of the project after Commission approval, but soon thereafter put the project on hold
before the design work was completed. Delta at that time was considering a proposal to move
their operation back to Concourse A from the South Satellite. After a brief delay, Delta decided
to commit to the South Satellite location and signed the Port’s tenant reimbursement agreement.
Delta was concurrently considering an expansion of the lounge footprint to accommodate their
anticipated growth as part of their location analysis.
Delta decided to add 1,300 square feet to their partially designed lounge, increasing the footprint
from 6,800 square feet to 8,100 square feet. The Port was only committed to costs associated
with the original scope, but the proposed change included additional shell construction that the
Port would typically pay for under the Tenant Reimbursement Policy AV-2. At Delta’s request,
and at their financial risk, they proceeded with this additional expansion work as a change order
to the project, with the understanding that the Port could not commit to additional compensation
for the lounge expansion unless approved by the Commission. Costs were provided to the Port
in late March 2011. Total costs are now anticipated to exceed the established budget for the
project, and are therefore part of this request for additional authorization.
In addition to the expansion scope, Delta also notified the Port of several change orders based on
unidentified project conditions as they prepared to submit their expanded lounge costs to the Port
in March. These necessary changes were identified as the tenant contractor investigated the
existing roof structure after construction began. Those change order costs further exceed the
established budget for this project and are also included in this request.
PROJECT SCOPE OF WORK AND SCHEDULE:
Expansion Scope of Work:
Additional 1,300 square feet of new building shell
Addition or expansion of existing building systems into the expanded building shell
Special inspection and commissioning of new Port infrastructure systems
Unidentified Project Conditions Scope of Work:
Resolve structural steel conflicts with existing or proposed infrastructure in the ceiling of
the South Satellite
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
May 16, 2011
Page 3 of 6
Resolve new elevator shaft conflicts with existing or proposed infrastructure
Additional modifications of the structural support system on the existing roof for the new
lounge
Corrective measures to resolve incorrect elevation data used for the new lounge floor
level
New fireproofing to replace asbestos containing fireproofing on existing structural steel
removed during installation of new structural steel for the lounge
See attached Exhibit A depicting the additional project area to be added to Delta’s lease.
Schedule:
Design (by Delta): 4
th
Qtr 2009 – 3
rd
Qtr 2010
Construction (by Delta): 4
th
Qtr 2010 – 3
rd
Qtr 2011
Completion: 3
rd
Qtr 2011
SCOPE OF AGREEMENT:
Use: Authorization to construct an 8,100 square foot
airline lounge and support space, with associated
terms for reimbursement.
Gross Rent: $1,800,000/year
Incremental Rent From Delta Expansion $ 300,000/year
Capital Reimbursement: The total project is currently estimated at
$7,106,797
Port Project Support Costs: $1,823,203
Term of Lease: Expires December 31, 2012
Note: A new signatory lease will be negotiated with all airlines prior to 2012. With Delta’s own
investment of $5,250,000 and recent expanses in international service, it is fully expected that
Delta will keep this lounge as part of that new lease.
FINANCIAL IMPLICATIONS:
Budget/Authorization Summary:
Original Budget
$5,440,000
Budget Increase
$3,490,000
Revised Budget
$8,930,000
Previous Authorizations
$5,440,000
Current request for authorization
$3,490,000
Total Authorizations, including this request
$8,930,000
Remaining budget to be authorized
$0
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
May 16, 2011
Page 4 of 6
Budget Status and Source of Funds:
This project was included in the 2011 – 2015 capital budget and plan of finance for $5.44 million
(CIP #C800336). The funding sources include the Airport Development Fund and the 2010
revenue bonds. Upon Commission approval, the budget increase will be transferred from the
aeronautical allowance CIP, resulting in no net change to the Aviation Capital Budget.
Financial Analysis and Summary:
CIP Category
Revenue/Capacity Growth
Project Type
Business Expansion
Key risk factors
Delta is the second largest airline in the world, as
measured by passengers, thus the risk of default is
low. However, Delta’s lease expires December 31,
2012, and Delta could theoretically return the
premises at that time. Port staff believes the
likelihood of this is low, especially in light of their
own $5,250,000 investment.
Project cost for analysis
$8,930,000
Business Unit (BU)
Terminal Cost Center
CPE Impact Effect on business
performance
This project will increase CPE by $.03 in 2012;
however, there will be no change to the forecasted
CPE as this project (and the needed budget transfer
from the aeronautical allowance CIP) was included.
Lifecycle Cost and Savings:
Airport maintenance of new electrical and mechanical systems for Delta’s lounge is estimated at
$20,000 annually (ongoing expense). Additional lifecycle costs for maintenance of electrical and
mechanical systems extended to the expanded area of the lounge are minimal.
ENVIRONMENT AND SUSTAINABILITY:
Staff will ensure existing Port environmental standards are followed on Port infrastructure
included in this additional scope. However, because this is a tenant project, the Port has minimal
influence on the type of materials used within the additional space included in the expanded
lounge.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
May 16, 2011
Page 5 of 6
STRATEGIC OBJECTIVES:
Like the original tenant reimbursement request, this project supports the strategy of “Ensuring
Airport Vitality” through expanding the footprint of the Airport and leasable space and adds to
the Airport’s asset base. Staff is working with Delta to incorporate “Environmental
Stewardship” elements within the project design. Additionally, hazardous materials formerly in
place at the South Satellite have been removed, decreasing future risk of exposure. The project
also supports the “Be a Catalyst for Regional Transportation Solutions” strategy by helping to
provide the airline with a facility that will augment its customer service initiatives as well as
contribute to a competitive environment between carriers, that ultimately benefits the traveling
public.
BUSINESS PLAN OBJECTIVES:
Similar to the original reimbursement request, this additional project scope enables Delta to more
effectively market their overseas flights and grow the market that serves the Puget Sound region.
This, in turn, benefits local businesses and travelers. The added square footage that drives a
portion of this reimbursement request resulted from Delta putting the project on hold during the
later stages of design to specifically evaluate whether a larger lounge was needed to support their
projected future growth. The expanded lounge is a direct result of that positive analysis.
The construction included in the expansion and additional structural work will generate sales tax
revenues and construction jobs. It is estimated that this Commission authorization will generate
sales taxes that may exceed $238,000 and generate greater than 65 construction jobs that vary in
length over the project. Please note that this project is exempt from the Project Labor Agreement
since it is a tenant project.
TRIPLE BOTTOM LINE SUMMARY:
This project provides a new, comfortable facility for Delta’s traveling customers as they wait for
flight departures, and gives them an opportunity for sanctuary from what can be a very busy
airport concourse. The facility will be located on the roof of the South Satellite. The building
envelope does not take up additional valuable ramp space at a busy airport with a small overall
footprint. Delta will use this lounge as a customer marketing tool in their plan to build their local
viability to provide more overseas flights to and from the Airport.
ALTERNATIVES CONSIDERED AND THEIR IMPLICATIONS:
Alternative 1: Authorize the Chief Executive Officer to authorize $3,490,000 of additional
tenant reimbursement budget associated with the build-out of an airline lounge on the roof of the
South Satellite at the Airport and to execute an updated tenant reimbursement agreement with
Delta under the Airport’s AV-2 policy. This alternative allows the Port to reimburse Delta for all
work associated with the building shell of their new lounge as per the original Tenant
Reimbursement Agreement. This is the recommended alternative.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
May 16, 2011
Page 6 of 6
Alternative 2: Do not authorize the budget or Agreement required to reimburse Delta for the
additional portion of Port costs for construction of Delta’s airline lounge. This would be
inconsistent with past Port tenant reimbursement practice, conflict with the original Tenant
Reimbursement Agreement negotiated for this project, and could result in Delta halting the
tenant project mid construction, forcing the airline to maintain its existing undersized airline
lounge. This would hamper Delta’s ability to grow the Seattle market, decrease Delta’s long-
term rent to the Airport and eliminate the ability for the Airport to relocate its Club International
shared lounge to Delta’s existing facility. This alternative is not recommended.
OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST:
Exhibit A- Updated Delta Air Lines Sky Club Lounge drawing.
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS:
On February 2, 2010, Port Commission was provided a briefing on Delta Air Lines Growth
Plans, Sky Club, and other potential future aviation projects.
On February 9, 2010, the Port Commission approved the Delta Air Lines Sky Club Regulated
Materials Management Abatement project, in support of Delta’s airline lounge tenant project at
Seattle-Tacoma International Airport in the amount of $1,750,000.
On March 23, 2010, the Port Commission approved Tenant Reimbursement for Delta Air Lines,
in support of Delta’s airline lounge tenant project at Seattle-Tacoma International Airport in the
amount of $5,440,000.
On May 3, 2011, the Commission was briefed on this request.
