PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
6b
Date of Meeting
August 9, 2011
DATE: August 8, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: Mark Reis, Managing Director, Aviation Division
James Schone, Director, Avation Business Development
Deanna Zachrisson, Manager, Concessions Business
SUBJECT: Lease termination agreement for the Borders Group, Inc. (Borders) bookstore
lease and concession agreement at Seattle-Tacoma International Airport (Airport).
Amount of This Request: $70,000 (not including waiver of unpaid rent and charges, totaling
approximately $28,000)
Source of Funds: Aviation Development Fund
ACTION REQUESTED:
Request authorization for the Chief Executive Officer to enter into a lease termination agreement
for the former Borders bookstore location at Seattle-Tacoma International Airport, including the
payment of $70,000 to the Borders Group, Inc., bankruptcy estate in consideration for the lease
termination and release of the Airport lease from the bankruptcy liquidation proceedings. The
transaction also includes waiver of amounts owed the Port for percentage rent, utility and other
charges totaling approximately $28,000. The lease termination proposal has been negotiated
directly with the bankruptcy liquidators.
SYNOPSIS:
Borders entered Chapter 11 bankruptcy protection on February 16, 2011. Although an attempt
was made to secure a buyer for the company in order to continue operations, a sale was
unsuccessful and the company’s assets are being liquidated. The Airport Borders location closed
on August 5, 2011. Under the terms of the bankruptcy, all Borders retail leases will be sold at
auction in order to generate money to compensate creditors. If the lease agreement were to be
acquired by an outside bidder and depending on the court’s ruling regarding the protection of
airport leases under the “shopping mall” provisions of the bankruptcy code, there is a risk that
the space could be auctioned off to a bidder intending to use it for other than a bookstore until
the lease expires on August 28, 2015.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 2 of 4
The Port’s bankruptcy counsel, at the directions of the Port staff, initiated discussions with
Borders’ bankruptcy counsel to pursue the purchase of the Airport lease, prior to auction, in
order to preserve the use of this space as a bookstore, and preferably as a locally owned
bookstore. The amount presented as the Port’s offer, $70,000, was based on a staff assessment of
the magnitude of lost revenue due to the shuttering of the store during the period between the
lease auction and court approval of a new tenant/operator. This included both lost percentage
rent and a reduced minimum annual guarantee in 2012 (which is based on the prior year’s sales)
under a new operator secured in the auction process. While under the proposed settlement the
Port waives the right to collect unpaid percentage rent and other charges (approximately
$28,000), that loss does not outweigh the benefits of proceeding with the lease termination. Staff
did not take into account the possible value of this lease to other bidders, although staff was
aware that a number of large concessionaire companies were interested in purchasing groups of
former Borders airport locations, as a means of securing desirable airport locations outside of a
competitive process. There are a total of 23 Borders airport locations, including Seattle, that were
slated for auction on August 31, with court approval scheduled for September 8, 2011.
By entering into this lease termination agreement, the Airport will have the ability to secure a
new locally owned bookstore for the space, provided a lease can be negotiated. Staff
recommends acceptance of this negotiated proposal, which is fair and reasonable for the Port.
ADDITIONAL BACKGROUND:
The Airport’s Borders store opened on May 31, 2005. The lease agreement with Borders was
negotiated as an independent direct lease with the Port by the then-contracted third party leasing
consultant. As a result of public outreach, some local bookstores, as well as Borders, examined
the retail opportunity at the Airport. The Port preferred to lease to a locally owned bookstore;
however, at the time, the location did not have any proven track record of success, as the Central
Terminal was a brand-new facility. Given the perceived risk, and high occupancy costs, Borders
became the one operator interested in leasing the bookstore location. Borders already operated
over a dozen airport bookstores and was familiar with the unique requirements and challenges of
airport operations.
In spite of problems that plagued Borders, the Seattle location was a resounding success. It
quickly became the Borders airport network’s highest grossing location. In its top grossing year,
2008, Borders achieved sales of nearly $5 million. In 2009-2010, Borders began suffering from
inventory problems, yet still achieved sales of $3.9 million each year. The Port earned 12% of
gross sales; $470,000 in 2010. With this consistent track record of strong sales potential, Airport
staff believes that it should be possible to identify a local bookstore operator interested in this
space under terms of a new lease and concession agreement.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 3 of 4
FINANCIAL IMPLICATIONS:
The Commission’s approval of this request will allow Airport staff to shift its attention toward
securing a new bookstore tenant as soon as possible. If this process appears to take any
significant period of time, Airport staff does have the ability to identify an existing Airport retail
tenant that may be willing to operate the store location as a bookstore on an interim basis, thus
preserving revenue generation in the short term.
Source of Funds
Aviation Development Fund.
ECONOMIC IMPACTS AND BUSINESS PLAN OBJECTIVES:
This proposal will reduce the loss of revenue to the Port, through leasing to a new tenant, either
temporary or permanent, in the short term. It also is consistent with the Port’s desire to provide
concession opportunities to local operators and/or concepts, when possible.
STRATEGIC OBJECTIVES:
Ensure Airport and Seaport Vitality
The continued operation of this concession location as a bookstore supports the maximization of
non-aeronautical revenue for the Port, as well as provides a valuable amenity to the traveling
public.
ENVIRONMENTAL SUSTAINABILITY AND COMMUNITY BENEFITS:
This proposal benefits the community through the restoration of jobs lost to the closure of
Borders. It is, however, unlikely to result in the re-hire of the same workers as nearly all former
Borders employees have already found employment in other Airport retail shops.
TRIPLE BOTTOM LINE:
The Airport’s concessions program follows a triple bottom line philosophy that values the
concurrent pursuit of positive economic, social and environmental outcomes. The Port’s
termination of the Borders lease and concession agreement provides for the greatest flexibility in
achieving these outcomes.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
August 8, 2011
Page 4 of 4
ALTERNATIVES CONSIDERED AND THEIR IMPLICATIONS:
Alternative 1: Allow the Borders lease to be purchased by an outside bidder as part of the
liquidation auction. The most likely scenario for the purchase of the Borders lease would be a
sale as a group of units to a large airport concessionaire company. Depending on the court’s
ruling regarding the protection of airport leases under the “shopping mall” provisions of the
bankruptcy code, there is a risk that the space could be auctioned off to a bidder intending to use
it for other than a bookstore. In such event, it is unlikely that this speciality retail location would
be operated by a locally owned business. This is not the preferred alternative.
Alternative 2: Participate in the bankruptcy auction in order to purchase/terminate the
Borders lease. There are two significant risks with this approach. First, there is the risk that the
competition for this particular location would be very keen, due to the unit’s attractive size, sales
potential and central location in the Airport. Second, the Airport lease could be grouped with
other airport units in order to generate a higher price, and it may be difficult to convince the
liquidators to remove one single location from a group of units for auction. This is not the
preferred alternative.
Alternative 3: The lease termination proposal restores control of the unit to the Port for a fair
and reasonable remuneration. It provides an opportunity for a new bookstore operator in this
attractive location, possibly a locally owned bookstore. It also allows the Port to reopen the store
as soon as possible under a temporary or permanent operator and restore revenue generation to
the Port. It is the preferred alternative.
OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST:
Exhibit A: Lease Termination Agreement
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS:
None.
