Template revised April 12, 2018.
COMMISSION
AGENDA MEMORANDUM
Item No.
8c
ACTION ITEM
Date of Meeting
September 25, 2018
DATE: September 17, 2018
TO: Stephen P. Metruck, Executive Director
FROM: James Schone, Director Aviation Commercial Management
Wayne Grotheer, Director Aviation Project Management
James Jennings, Senior Manager, Aviation Properties
SUBJECT: Federal Express Corporation (FedEx) Lease and Tenant Reimbursement Agreement
(CIP #C800950)
Amount of this request:
$4,612,000
Total estimated project cost:
$4,612,000
ACTION REQUESTED
Request Commission authorization for the Executive Director to (1) enter into a lease with
Federal Express Corporation, (2) execute a Tenant Reimbursement Agreement in the amount of
$3,054,000 with Federal Express Corporation to make necessary base building repairs and
infrastructure upgrades to a Port-owned cargo facility, and (3) authorize $1,558,000 of Port
costs associated with this project. The total request for authorization is $4,612,000.
EXECUTIVE SUMMARY
The Port intends to enter into a 10-year lease and execute a tenant reimbursement agreement
(TRA) with FedEx to make essential improvements to a vacant cargo handling facility. This lease
will co-terminate with their existing building lease on December 31, 2028. The proposed rent is
at a market rate of $16.00 per square foot, with five-year rent evaluations.
The vacant cargo handling facility, commonly referred to as the Bolanos Building, is 31 years old
and reverted to Port ownership in 2017 upon the expiration of the former tenant’s long-term
ground lease. Most of its base building systems and infrastructure have reached the end of
their useful lives. This building does not currently have direct airfield access. However, with
FedEx’s lease and improvements, the building will be converted to an on-airfield building with
direct airfield access.
FedEx is by far the largest cargo carrier at SeaTac. FedEx has a large handling facility just to the
north of the Bolanos Building. Because of the adjacency of the facilities, it creates a unique
opportunity to repurpose the Bolanos Building to on-airfield use. This will be accomplished by
COMMISSION AGENDA – Action Item No. _8c___ Page 2 of 6
Meeting Date: September 25, 2018
Template revised September 22, 2016; format updates October 19, 2016.
agreements reached with Airport Security, the Transportation Security Administration, and the
Federal Aviation Administration.
In order for this building to be leasable, the Port, as building owner, must make improvements
to the mechanical, roofing, fire suppression, electrical, exterior lighting, paving, site drainage,
and other systems in order to bring this facility up to leasable, code-compliant condition. In
addition, FedEx has agreed to be solely responsible for the maintenance of the building,
including the landlord-related infrastructure, during the term of the lease.
JUSTIFICATION
Detailed inspections of this facility reveal that significant upgrades to the base building
infrastructure are needed to extend its usefulness as a viable property to lease. These
improvements are also required to bring the building into compliance with current code
requirements. The location of this building will not be impacted by phase 1 of the Sustainable
Airport Master Plan (SAMP). This site may be impacted by the later stages of the second phase
of SAMP, suggesting the building would have a useful life of approximately 20 years.
Consequently, the financial analysis is based on twenty years. While the proposed lease is for
ten years, assuming the building is leased under similar terms for 20 years, the project would
have a positive Net Present Value ($1.2 million). The breakeven point (zero NPV) would be
approximately 15 years.
If these improvements are delayed, the existing systems and infrastructure are subject to
random failure, resulting in potential safety concerns, revenue loss, and further damage to the
facility and even more costly emergency repairs. Converting this building into an on-airfield
cargo building with direct airfield access and investing in the ongoing viability of the asset will
help the Port achieve the Century Agenda goals to triple air cargo volume to 750,000 metric
tons and triple the value of our outbound cargo to over $50 billion by 2036.
DETAILS
FedEx urgently needs additional lease space to meet their goal of efficiencies in air cargo
handling requirements and there are currently no suitable alternative facilities that have the
unique ability to provide on-airfield access.
The lease of this building to and improvements by FedEx will allow it to become on-airfield
cargo space with direct airfield access and will allow FedEx to accommodate their heavy cargo
handling capability prior to the end of Q1 2019. This is important because it aligns with the
annual export of substantial tonnage of Alaskan crab to foreign customers. In an effort to meet
this challenging schedule, FedEx has been negotiating in good faith with the Port and
proceeding at risk with the design for this project. Port staff has made it abundantly clear that
the Port cannot commit to a lease or improvements until after Commission authorization.
COMMISSION AGENDA – Action Item No. _8c___ Page 3 of 6
Meeting Date: September 25, 2018
Template revised September 22, 2016; format updates October 19, 2016.
Since FedEx plans to construct its own tenant improvements in the building, having FedEx also
construct the needed base building improvements via a TRA is an efficient, cost-effective
approach. A TRA is a proven project delivery method that will allow these improvements to be
made along with FedEx’s tenant improvements, translating into an accelerated schedule and
more efficient construction project than if the Port were to complete them under a separate
contract of its own.
Building Lease Summary:
(1) Tenant FedEx
(2) Building size 35,100 square feet
(3) Term 10 years plus (expires concurrently with existing lease)
(4) Rent $16.00/square foot
(5) Escalations Associated with Sea-Tac’s 5-year appraisal process
Scope of Work
FedEx will be reimbursed for the cost of replacing and upgrading base building infrastructure
that would otherwise be the Port’s responsibility. FedEx will be responsible for the cost of the
interior office and workspace modifications, cargo handling and storage equipment, bonded
storage warehouse area, and a small ground floor retail space.
The proposed reimbursable scope of work includes:
(1) Heating, venting, and air conditioning equipment replacement
(2) Electrical service panel replacement
(3) Repairs to damaged interior structural columns
(4) Fire suppression system upgrade
(5) Loading dock overhead door replacement
(6) Roof replacement and associated seismic upgrades
(7) Exterior glazing replacement
(8) Exterior paving and site drainage upgrades and replacement
(9) Exterior lighting upgrade and replacement
(10) General landscaping clean-up
(11) Airport security fence modifications and additions
Schedule
FedEx intends to break the construction work into two phases. Phase 1 will concentrate on
upgrading the infrastructure components necessary to make the cargo handling area ready for
use before the end of Q1 2019. Phase 2 will focus on interior office and work space
modifications that are not considered as urgent. Roofing and paving work may possibly be
scheduled to begin in Q2 2019 to avoid winter weather.
COMMISSION AGENDA – Action Item No. _8c___ Page 4 of 6
Meeting Date: September 25, 2018
Template revised September 22, 2016; format updates October 19, 2016.
Activity
Construction start
In-use date, Phase 1
In-use date, Phase 2
Cost Breakdown
This Request
Total Project
Design
$389,000
Construction
$4,223,000
Total
$4,612,000
ALTERNATIVES AND IMPLICATIONS CONSIDERED
Alternative 1 – Status Quo - Leasehold remains in current unsatisfactory condition and the Port
continues to make repairs on an as-needed basis as individual systems fail.
Cost Implications: Cost Estimate: Unknown
Pros:
(1) The Port could continue allowing existing systems, components, and equipment to ‘run
to failure’ for an indefinite period of time, foregoing a significant investment up front.
(2) Failures could be addressed on an as-needed basis instead of all at once.
Cons:
(1) The tenant would have to curtail or cease operation while repairs are made, which
would not be acceptable to FedEx with their commitment to a term lease.
(2) The Port could potentially lose the tenant and associated revenue because they are not
comfortable putting their operation at risk and there are no available alternative
facilities to which the tenant could relocate.
(3) The ‘run to failure’ method inevitably leads to unplanned and more costly capital and
expense costs.
(4) The cost to repair or replace individual items as they fail is collectively greater over time
than addressing them in one project.
(5) Failures and outages increase the risk of personal injury and further property damage.
(6) Not making these modifications results in a less energy-efficient facility that will be
more costly to operate.
This is not the recommended alternative.
COMMISSION AGENDA – Action Item No. _8c___ Page 5 of 6
Meeting Date: September 25, 2018
Template revised September 22, 2016; format updates October 19, 2016.
Alternative 2 – Make the capital investment required to improve known building deficiencies.
Cost Implications: $4,612,000
Pros:
(1) Proactively replaces or upgrades systems and equipment in a more cost-effective
manner.
(2) Extends the useful life of this facility (aligning with the Sustainable Airport Master Plan,
which will not impact the areas where this facility is located for another 15-20 years).
(3) Leaves the Port with a safer, more energy-efficient and code-compliant lease space.
(4) Mitigates the potential loss of a tenant and the potential negative impact to cargo
handling operations.
(5) Avoids unplanned expense and capital funding requests.
(6) The tenant will make these base building upgrades/replacements on their schedule and
be reimbursed by the Port for them under the TRA.
Cons:
(1) Requires $4,612,000 of capital funding in the short term in a capital constrained budget
environment.
This is the recommended alternative.
FINANCIAL IMPLICATIONS
Cost Estimate/Authorization Summary
Capital
Expense
Total
COST ESTIMATE
Original CIP estimate
$6,610,000
$0
$6,610,000
AUTHORIZATION
Previous authorizations
$75,000
$0
$75,000
Current request for authorization
$4,537,000
$0
$4,537,000
Total authorizations, including this request
$4,612,000
$0
$4,612,000
Remaining CIP amount to be authorized for
future cargo building improvements
$1,998,000
$0
$1,998,000
Annual Budget Status and Source of Funds
This CIP #C800950 was included in the 2018 – 2022 capital budget and plan of finance with a
budget of $6,610,000. The funding source for this project will be future revenue bonds to be
issued in 2019.
COMMISSION AGENDA – Action Item No. _8c___ Page 6 of 6
Meeting Date: September 25, 2018
Template revised September 22, 2016; format updates October 19, 2016.
Financial Analysis and Summary
Project cost for analysis
$4,612,000
Business Unit (BU)
Aviation Commercial
IRR/NPV (if relevant)
$1,200,000 (analysis based on 20 years)
CPE Impact
N/A
Future Revenues and Expenses (Total cost of ownership)
Over the course of asset life, the building is expected to generate over $12 million in lease
revenue. It will take seven years for the revenue to recover costs to improve the building.
ATTACHMENTS TO THIS REQUEST
(1) Slide presentation
(2) Lease Agreement
(3) Tenant Reimbursement Agreement
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS
None