INTERNAL AUDIT REPORT
LIMITED CONTRACT COMPLIANCE
HOST INTERNATIONAL, INC.
JANUARY 2015 – DECEMBER 2016
ISSUE DATE: MARCH 9, 2018
REPORT NO. 2017-26
Host International
January 2015 – December 2016
2
TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................................................................. 3
BACKGROUND .............................................................................................................................................................. 4
AUDIT SCOPE AND METHODOLOGY ........................................................................................................................... 5
SCHEDULE OF FINDINGS AND RECOMMENDATIONS............................................................................................... 6
APPENDIX A: RISK RATINGS ........................................................................................................................................ 7
INTERNAL AUDIT
Host International
January 2015 – December 2016
3
EXECUTIVE SUMMARY
Internal Audit (IA) completed an audit of the Lease and Concession Agreement (Agreement) between
Host International, Inc. (Host or Lessee) and the Port of Seattle (Port) for the period January 1, 2015 –
December 31, 2016. The audit was performed to verify compliance with key terms in the Agreement,
including the completeness and accuracy of concession fees paid to the Port.
The original Agreement (000439) between Host and the Port was executed June 6, 2003, for the right to
operate certain food and beverage concessions at the Airport. The Agreement required the Lessee to pay
the Port a Minimum Annual Guarantee (MAG) equal to ninety percent (90%) of the total amount paid by
the Lessee for the previous year.
An amendment to the original lease, allowed for a reduced concession rate applied to Branded Food and
Beverages, if a franchise fee was paid by the franchisee or licensee, to the franchisor or licensor. The fee
was established at a minimum of three percent (3%) of gross sales per year and gives the franchisee or
licensee the right to use the licensor’s and franchisor’s trademark and/or trade name.
We concluded that concession fees paid to the Port, by Host and its subtenants, were complete and
accurate (see page five for testing procedures performed). However, we determined that Disadvantaged
Business Enterprise (DBE) participation goals were not achieved. This issue is discussed in more detail
on page six.
1) For the period, October 2015 to November 2016, Host reported a DBE participation of 24.29%. Host
also reported a DBE participation of 17.15% under the Lease and Concession Agreement with
Seattle Restaurant Associates, a partnership of Host and Uwajimaya. The targeted DBE participation
goal in both Agreements was 25%.
We extend our appreciation to Port management and staff of the Aviation Commercial Management
Department for their assistance and cooperation during the audit.
Glenn Fernandes, CPA
Director, Internal Audit
RESPONSIBLE MANAGEMENT TEAM
Lance Lyttle, Managing Director Aviation
Jim Schone, Director, Aviation Commercial Management
Dawn Hunter, Senior Manager, Airport Dining and Retail
Scott Van Horn, Senior Business Manager, Airport Dining and Retail
Khalia Moore, Senior Business Manager, Airport Dining and Retail
Host International
January 2015 – December 2016
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The original Agreement between Host and the Port was executed June 6, 2003, for the right to operate
certain food and beverage concessions at the Airport. The Agreement required the Lessee to pay the Port
a MAG equal to ninety percent (90%) of the total amount paid by the Lessee for the previous year. In
March 2016, the MAG was adjusted downward to approximately $5.2 million, because seven stores/units
were deleted from the Agreement; nonetheless, the concession revenues from Host have consistently
exceeded the MAG.
The table below reflects the total concession revenue earned by the Port through the Host agreement.
HOST CONCESSION REVENUE BY CATEGORY*
Category
2015
2016
Food and Beverage (Includes branded and non-branded)
$5,563,032
$5,129,985
Alcohol, Beer, Wine
1,835,889
1,803,435
Retail
280,397
244,252
TOTAL
$7,679,318
$7,177,672
*
Data Source: PeopleSoft for Agreement 000435
In addition to the original Agreement, the Port and Host executed four amendments dated December 22,
2005, July 29, 2009, January 21, 2010, and March 30, 2016. Most notably, the first amendment lowered
the concession fee for Branded Food and Beverage, if a franchise fee of at least 3% of gross sales per
year was paid by the franchisee or licensee to the franchisor or licensor. Payment of the fee gives the
franchisee the right to use the franchisor’s trademark and/or trade name.
Rates paid to the Port by subtenant operated units are slightly lower than rates paid by Host operated
units. Seventeen Host and seven subtenant stores/locations are operated under this Agreement. The
table below reflects the aggregate percentage of gross receipts, paid to the Port, from these locations:
PERCENTAGE OF GROSS RECEIPTS PAID TO THE PORT*
Host Operated
Subtenant Operated
Concession Category
2006 - 2016
2006 - 2007
2008 - 2010
2011 - 2016
Non-Branded Food and Beverage
14%
12%
13%
13.5%
Branded Food and Beverage
12
10
11
11.5
18
16
17
17.5
27
25
26
26.5
Advertising and All Others
15
13
14
14.5
16
n/a
n/a
n/a
*
Data Source: Lease and Concession Agreement 000435 and first amendment
BACKGROUND
Host International
January 2015 – December 2016
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We conducted this audit in accordance with Generally Accepted Government Auditing Standards
and the International Standards for the Professional Practice of Internal Auditing. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The period audited was January 2015 – December 2016. After identifying significant provisions in
the Agreement, we performed the following audit procedures:
Disadvantaged Business Enterprises
• Compared the DBE participation goal in each contract (000435) and (000439) to the
participation calculation prepared by Host.
Revenue Completeness and Accuracy
• Agreed daily sales detail (z-tapes) to monthly sales and profit and loss reports and to the
general ledger.
• Agreed calculated concession fees by category, to amounts reported to the Port.
• Verified the accuracy of the concession fee by agreeing the percentage rate applied to the
revenue category and agreeing to the fees invoiced.
Franchise Fees
• Obtained certification from the Chief Financial Officer of Host for the following:
Royalty payments paid as a percentage of 2015 and 2016 gross revenue.
Royalty percentages as reflected in the Franchise Agreements.
• Recalculated franchise fees to verify mathematical accuracy.
• Reviewed a sample of invoices and check details from Host to validate franchise fees that
were paid.
• Validated that at least three percent (3%) of gross receipts was paid in franchise or license
fees for Host and a sample of Host subtenants, per the agreement.
AUDIT SCOPE AND METHODOLOGY
Host International
January 2015 – December 2016
6
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
The Port established a Disadvantaged Business Enterprises (DBE) participation goal of 25% for the
Lease and Concession Agreements with Host International, Inc. (Agreement 000435) and Seattle
Restaurant Associates (Agreement 000439).
Both Agreements state that the Lessee shall make every reasonable effort to meet the Port DBE goal of
at least twenty-five percent (25%) participation, measured in gross receipts. The Agreements also state
that failure to meet the participation levels shall be deemed a material default and 90 days will be
provided to satisfy the participation levels or the Port may issue a notice of default.
For the period October 2015 – November 2016, Host reported the following DBE participation:
• 24.29% - Host International, Inc. (Agreement 000435)
• 17.15% - Seattle Restaurant Associates, a partnership of Host International, Inc. and Uwajimaya,
Inc. (Agreement 000439)*
*This agreement was not included in the original audit scope.
Recommendation:
Internal Audit recognizes that under agreement 000435, Host materially complied with the requirement.
However, under agreement 000439, the DBE percentage achieved was significantly under the
participation goal. We recommend, Port management inquire with Host as to what steps they have taken
or plan to take to meet participation goals.
We also recommend assessing alternative penalties, if permitted by FAA regulation, into future Lease and
Concession Agreements, as opposed to issuing a notice of default. With over 15 stores operating under
Agreement 000435 and 9 stores operating under Agreement 000439
1
, terminating the contract is not
realistic or beneficial to the Port, Host, or DBE subtenants.
Management Response/Action:
Host contractually agreed to 25% ACDBE participation. The federal regulation requires Host to make
good faith efforts to maintain the 25%. Port staff has asked Host to present documentation on their good
faith efforts to achieve the ACDBE participation goal for the period of the audit as well as for the time
subsequent to that covered by the audit by the end of March 2018. Also, Port staff recognizes the need
for additional mechanisms in the lease, short of default, for holding tenants accountable for non-
compliance with lease provisions including ACDBE good faith efforts. Port staff will develop
recommendations towards this goal for incorporation into future leases by the end of September 2018.
1
As of 2016
1) RATING: MEDIUM
Host International
January 2015 – December 2016
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APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The
risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on
the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be brought to the final report.
Rating Financial Internal Controls Compliance Public
Port Commission/
Management
HIGH
Large financial
impact
Remiss in
responsibilities
of being a
custodian of
public trust
Missing, or inadequate
key internal controls
Noncompliance
with applicable
Federal, State,
and Local Laws,
or Port Policies
High probability
for external audit
issues and/or
negative public
perception
Important
Requires immediate
attention
MEDIUM
Moderate
financial impact
Partial controls
Not adequate to identify
noncompliance or
misappropriation timely
Inconsistent
compliance with
Federal, State,
and Local Laws,
or Port Policies
Potential for
external audit
issues and/or
negative public
perception
Relatively important
May or may not
require immediate
attention
LOW/
Exit Items
Low financial
impact
Internal controls in place
but not consistently
efficient or effective
Implementing/enhancing
controls could prevent
future problems
Generally
complies with
Federal, State and
Local Laws or Port
Policies, but some
minor
discrepancies
exist
Low probability
for external audit
issues and/or
negative public
perception
Lower significance
May not require
immediate attention
Efficiency
Opportunity
An efficiency opportunity is where controls are functioning as intended; however, a modification would make
the process more efficient