PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
5a
FURTHER CORRECTED COPY Date of Meeting
August 9, 2011
DATE: August 8, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: James R. Schone, Director, Aviation Business Development
Wayne Grotheer, Director, Aviation Capital Development
Deanna Zachrisson, Manager, Aviation Concessions Business
SUBJECT: Preparation of Specialty Retail Concessions Spaces within Concessions Unit
Readiness Project (CIP # C-800147)
Amount of This Request: $578,000 Source of Funds: Airport Development
Fund
State & Local Taxes Paid: $4,000 Jobs Created: 8 (Eight) (Construction Only)
Total Estimated Project Cost: $2,087,000
ACTION REQUESTED:
Request Port Commission authorization for the Chief Executive Officer to authorize Port
Construction Services (PCS) to perform work in conjunction with small works contractors in
support of the Concession Unit Readiness Project (CIP# C800147) at Seattle-Tacoma
International Airport (Airport). This authorization is for $578,000 of a total estimated project
cost of $2,087,000.
SYNOPSIS:
The purpose of the Concessions Unit Readiness Project is to reconfigure and prepare concession
spaces for new tenancy. The Commission authorized design for the project in August 2008 and
some construction in September 2010. This authorization request is for construction work to
prepare four specific units for future tenants on Concourse A and the North Satellite. Port staff
has determined that the “highest and best use” of these units would be as specialty retail
locations because they will meet an untapped or under-served retail need. Retail use is also the
most likely to generate incremental sales and increase the Airport‟s non-aeronautical revenues.
The Port plans to tap the expertise of its third-party leasing consultant to conduct business
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 2 of 7
outreach and negotiate leases. Although these leases will also create new jobs, the new tenants
will not be in place until late 2012 or early 2013.
BACKGROUND:
In August 2008, the Commission authorized design of shell space improvements for specific
concession spaces at the Airport. Due to the downturn in the economy, Airport staff elected to
delay the first request for construction activity authorization until September 2010. At that time,
Commission authorized funding for improvements to prepare for a presumed new operator of the
Airport‟s duty free business. These improvements have been completed and await new tenancy.
This second request for authorization supports the next phase in concessions unit preparation for
future tenants. Each individual space is described below and all are intended for development as
future specialty retail. Staff intends to utilize its future concessions planning and leasing
consultant process to identify and negotiate lease agreements with new retail tenants. The
Airport also plans to conduct extensive business community outreach to provide information to
business owners about the opportunity to propose specialty retail concepts for these locations.
The outreach and leasing activity will not commence until sometime in early 2012, subsequent to
the completion of the current stakeholder involvement process for the concessions program.
While the concepts of each individual space have not yet been defined, careful consideration will
be given to adding concepts that meet an untapped or underserved retail need and have the
greatest likelihood of generating incremental sales. Increasing non-aeronautical revenues
whenever possible is critical to the Port‟s ability to invest in its strategic priorities.
PROJECT DESCRIPTION/SCOPE OF WORK/SCHEDULE:
The following units are included in this request (see Exhibit A):
Concourse A:
Unit CA-18 – This unit is 888 square feet and is anticipated to be developed as a specialty retail
location. The space was originally created as a concessions space as part of the Concourse A
expansion, but was built out as office space for the Transportation Security Administration
(TSA). The TSA vacated this space in 2009. The high traffic volumes of this location make the
space desirable for its intended purpose as a concessions unit. Based on the experience of
comparable airports, this size and location could be successful as an electronics, computer and/or
gaming store. The exact concept to be featured in the unit will be determined as part of the
leasing process.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 3 of 7
Unit CA-19 – This unit is 1,396 square feet and is anticipated to be developed as a specialty
retail location. This unit is located next to CA-18, on the southern flank of the Central Terminal
and also was part of the TSA‟s former office space.
Units CA-18 and CA-19 both require demolition of existing office finishes and partitions,
installation of a demising wall between the spaces, as well as system adjustments to lighting,
HVAC and fire sprinklers in order to make these units into individual retail spaces. In order to
provide shell spaces suitable for tenancy, both spaces also will require communications and
electrical demarcation panels/pathways and the supporting infrastructure.
North Satellite:
Unit NS-2/11 – This space is 2,019 square feet and is currently one unit with a small „pass
through‟ between the units. In 2010, the Port included this space in its then-issued „Request for
Proposals‟ for a duty free/specialty retail operator. The transition of this business has been
delayed to such an extent that the sole remaining international flight will be in the process of
relocating to Concourse A before a new duty free operator is selected. Consequently, there will
be no passenger need for duty free in this location, and thus no need to award this square footage
to a duty free operator for that purpose.
Instead, the work would include fully separating the space into two specialty retail units, and
installing separate power and communications service to both. There is no existing specialty
retail in the North Satellite, and the addition of specialty retail in these locations could help
recapture Central Terminal specialty retail revenue lost to the Port when Alaska reallocated a
substantial portion of its enplanements from Concourse D to the North Satellite. The work
entails the installation of a demising wall between the two units and electrical/communications
demarcation packages and supporting infrastructure.
PROJECT SCHEDULE:
Commission Authorization to Construct August 2011
Construction Complete December 2011
DETERMINING HIGHEST AND BEST USE:
In an airport environment, there is often keen competition for terminal space between a variety of
uses. Whenever a particular use is evaluated for a certain space, the Airport looks at the myriad
of possible uses in order to assure the “highest and best use” is made of that space. Sometimes
this highest and best use may generate incremental non-aeronautical revenue, while other times it
may not. In the instance of these four units, Concessions staff has proposed development as
specialty retail locations. The base building configuration for all four spaces intended their use
as concessions spaces and no other operational needs compete for their use.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 4 of 7
In evaluating a concessions space for its highest and best use, the final determination is a
combination of financial analysis, knowledge of passenger needs and the surrounding passenger
flow and other nearby competing concessions. It is important to ensure that any additional
concessions capacity does not cannibalize existing businesses. The best choice will be one that
complements existing operations and raises overall sales.
Airport concession businesses generally fall into three categories: food and beverage, retail and
services. Each category has its unique sales and revenue potential, as well as associated
investment and operating costs, and all serve passenger needs. In the North Satellite, where two
new specialty retail units are proposed, there is already adequate food and beverage service by
multiple operators, as well as available services such as massage and shoeshine. Concessions
staff does not believe that there is a higher or better use for these spaces than for specialty retail,
particularly because significant investment would be required to add infrastructure to support
food and beverage operations. On Concourse A, both proposed locations for specialty retail are
located immediately adjacent to food and beverage service in the Central Terminal. While the
Central Terminal houses the majority of the Airport‟s specialty retail locations, there is still 20%
more square footage devoted to food and beverage than retail in this area. Yet, retail operators in
the Central Terminal are generating nearly as much sales as their food and beverage neighbors,
which confirms this central area is a strong location for specialty retail offerings. Future tenants
for these four spaces will be selected in a collaboration between a third-party leasing consultant
and Concessions staff.
The financial analysis below illustrates the anticipated performance and payback on investment
in these concession locations. The analysis does not include the anticipated services of the future
leasing consultant. Due to the unique percentage rent structure and high sales volumes of airport
retail locations, it may be misleading to use standard retail brokerage fees as illustrative of the
cost to lease these units. However, as part of the planning and leasing consultant procurement,
staff will work to negotiate a cost structure that will not negatively impact the justification for
this investment.
FINANCIAL IMPLICATIONS:
Budget/Authorization Summary
Total Project
Original Budget
2,231,000
Budget Decrease
($144,000)
Revised Budget
$2,087,000
Previous Authorizations
$586,000
Current request for authorization
$578,000
Total Authorizations, including this request
$1,164,000
Remaining budget to be authorized
$923,000
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 5 of 7
Source of Funds
The funding source will be the Airport Development Fund. The project is included in the 2011
capital budget.
Financial Analysis
CIP Category
Revenue/Capacity Growth
Project Type
Business Expansion/New Business Development
Risk adjusted Discount rate
9%
Key risk factors
The financial risk is the possibility that the lease-up
does not occur as planned (by January 1, 2013) and
revenue generation is delayed.
Project cost for analysis
$578,000
Business Unit (BU)
Aviation Business Development
Effect on business performance
NOI after depreciation increases $300K-$500K per
year.
IRR/NPV
Total project NPV of $1.7 million. Based on
projected build-out costs and sales projections,
payback is three (3) years.
CPE Impact
None.
ECONOMIC IMPACTS AND BUSINESS PLAN OBJECTIVES:
This project will create new business and employment opportunities and provide passengers with
a greater selection of merchandise than was previously available. In addition, the future tenants
can be expected to employ approximately 10-15 employees per location.
Project Cost Breakdown
This Request
Total
Authorizations
(including this
request)
Construction costs
$437,000
$620,000
Port furnished equipment
$0
$0
Sales tax
$4,000
$21,000
Outside professional services
$0
$186,000
Aviation PMG and other soft costs
$137,000
$337,000
Total
$578,000
$1,164,000
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 6 of 7
ENVIRONMENTAL SUSTAINABILITY AND COMMUNITY BENEFITS:
There are no negative environmental impacts anticipated as a result of this project. Upgrades
will be constructed using carefully chosen materials with demonstrated long life and durability in
an airport environment. Recycled materials for construction will be evaluated and used wherever
appropriate and available.
STRATEGIC OBJECTIVES:
Ensure Airport and Seaport Vitality
The purpose of this work is to bring existing base building infrastructure up to Port standards so
a future tenant can complete their construction in ready concession spaces. The new units will
enhance the concession program and generate additional income to the Port. The estimated
payback is three years.
Exhibit Environmental Stewardship through Our Actions
This project has no specific impacts to the Port‟s environmental goals.
TRIPLE BOTTOM LINE:
This work will develop new economic and employment opportunities by enhancing the
concessions program; generate additional non-aeronautical revenue; and allow for the quickest
possible tenant build-out of new concession concepts. The traveling public will have a greater
range of choice in retail shopping.ALTERNATIVES CONSIDERED AND THEIR
IMPLICATIONS:
Alternative 1: Do not develop these concession spaces. This alternative means that the
Concessions Unit Readiness Project would not move forward with preparation of these units for
new tenants. No new revenue would be generated. No new business or employment
opportunities would be created. This is not the recommended alternative.
Alternative 2: Require the future tenant to make infrastructure improvements. This
alternative would require no Port expenditures. The future tenant would be required to perform
the base building infrastructure improvements, in addition to their concession build-out
construction. This course of action would result in higher costs borne by the tenant. The
business opportunity would be less attractive in the marketplace, which potentially could make
leasing of the space more difficult. Tenant sponsored construction could lead to lower
negotiated rent to the Port over the life of the lease term, and thus lower the Net Present Value.
This is not the recommended alternative.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 7 of 7
Alternative 3: Authorize construction to prepare these concession unit spaces. This
alternative would add to prime locations for non-aeronautical revenue generating leasable space
and benefit the concessions program at the Airport. This is the recommended alternative.
OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST:
Exhibit A: Map of concession locations.
Exhibit B: Concept rendering of Concourse A locations
PREVIOUS COMMISSION ACTION:
On August 26, 2008, the Commission authorized $357,000 for project design work on multiple
concessions shell spaces in preparation for new retail concession development.
On September 7, 2010, the Commission authorized $229,000 for construction work to prepare
certain units for new tenants.
On July 26, 2011, the Commission authorized the procurement of Concessions Planning and
Leasing Services.
