INTERNAL AUDIT REPORT
Limited Contract Compliance Audit
Concourse Concessions LLC
January 1, 2017 – December 31, 2019
Issue Date: September 10, 2020
Report No. 2020-08
INTERNAL AUDIT
Concourse Concessions LLC
January 2017 – December 2019
2
TABLE OF CONTENTS
Executive Summary ................................................................................................................................................ 3
Background ............................................................................................................................................................. 4
Audit Scope and Methodology ............................................................................................................................... 5
Schedule of Findings and Recommendations ....................................................................................................... 6
Appendix A: Risk Ratings ....................................................................................................................................... 9
Concourse Concessions LLC
January 2017 – December 2019
3
Executive Summary
Internal Audit (IA) completed an audit of the Lease Agreement (Agreement) between Concourse
Concessions LLC and the Port of Seattle (Port). The Period audited was January 1, 2017 through
December 31, 2019. The audit was performed to determine whether Concourse Concessions complied
with significant provisions of the Agreement, including whether reported gross revenues and percentage
fees were complete and accurate.
Our audit identified the following two issues:
1) (Medium) – Effective April 1, 2018, the Minimum Annual Guarantee (MAG) was removed from
the Agreement. As a result, the criteria, previously used to calculate the security deposit, was
eliminated and the Port was unable to verify the reasonableness of the current security deposit.
2) (Low) – Concourse Concessions did not report $12,721 in gross revenue during the period under
audit. These amounts were from cash shortages that Concourse Concessions removed from
their revenue reports prior to submittal to the Port. As a result, approximately $1,527 in additional
percentage fees are due to the Port.
The issues are discussed in more detail on page six.
We extend our appreciation to management and staff of the Airport Dining and Retail, the Aviation
Finance and Budget, and the Accounting and Financial Reporting (AFR) departments for their
assistance and cooperation during the audit.
Glenn Fernandes, CPA
Director, Internal Audit
RESPONSIBLE MANAGEMENT TEAM
Dawn Hunter, Director, Aviation Business Development
Khalia Moore, Senior Business Manager, Airport Dining and Retail
Concourse Concessions LLC
January 2017 – December 2019
4
Background
Concourse Concessions, headquartered in Washington State, was founded in 2002 with operations
starting at Seattle-Tacoma International Airport in June of 2004. The Port has two active agreements
with Concourse Concessions; Agreement Numbers: 002055 and 002362. The locations covered by
these agreements were Waji’s, Caffe D’arte, La Pisa Café, and Coffee Bean and Tea Leaf. Based on
the risk assessment conducted for 2020 audit plan, we selected Agreement No. 002055 for our audit.
The Port entered into Agreement No. 002055 on June 22, 2016, with a commencement date of January
1, 2017 and an expiration date of December 31, 2023. The Agreement included the following three
locations:
• La Pisa Café
• Waji’s
• Coffee Bean and Tea Leaf (lease terminated in September of 2019)
The original terms of the lease required a Minimum Annual Guarantee (MAG) equal to 90% of the prior
year’s determined rent or a monthly rent based on the percentages by location and concession category,
whichever is higher. Effective April 1, 2018, the Lease Agreement was amended and eliminated the
MAG. Additionally, the amended Agreement required Concourse Concessions to pay the Port a
graduated percentage fee based on combined annual gross receipts as shown in the table below. The
Percentage Fee is due by the 15
th
of the following month.
Combined Annual Gross Receipts
Percentage of Gross Sales
Less than or equal to $2,000,000
12.0%
Greater than $2,000,000 but less than or equal to $4,000,000
13.0%
Greater than $4,000,000
15.0%
The table below reflects the Gross Revenues as reported by Concourse Concessions and the
Minimum Annual Guarantee (MAG) and Percentage Fees, as billed by the Port of Seattle.
Year
Gross Revenue
MAG
1
Total Rent
2017
$7,434,388
$715,776
$975,036
2018
$7,539,330
$203,963
$998,156
2019
$7,199,177
$1,066,003
Total
$22,172,895
$919,739
$3,039,195
Source: Concourse Concessions Monthly Revenue Reports; PeopleSoft Financials, AFR year-end documents
1
MAG was used for “Minimum Rent” but was eliminated on April 1, 2018.
2
MAG for 2018 reflects three months; January – March.
Concourse Concessions LLC
January 2017 – December 2019
5
Audit Scope and Methodology
We conducted the engagement 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 conduct an engagement to obtain sufficient and appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our engagement objectives. We believe
that the evidence obtained provides a reasonable basis for our conclusions, based on our engagement
objectives.
The period audited was January 2017 through December 2019. After identifying significant provisions
in the Agreement, we performed the following audit procedures:
Revenue Completeness and Accuracy
• Traced concession payments to the Port records to verify payments were received by Agreement
dates.
• Agreed revenues reported to the Port, to the Concessionaire’s monthly revenue reports, charge
sheets, and to independently audited schedules.
• Analyzed deductions in the data sheets to determine whether they were properly classified and
correctly deducted from the gross revenues, as provided in the Lease Agreement.
Surety
• Reviewed the Concessionaire’s Rent Security Deposit for compliance with the Lease Agreement,
the Port Policy (Port RE-2) and Washington State Law (RCW 53.08.085).
Concourse Concessions LLC
January 2017 – December 2019
6
Schedule of Findings and Recommendations
Effective April 1, 2018, the Minimum Annual Guarantee (MAG) was removed from the
Agreement. As a result, the criteria, previously used to calculate the security deposit, was
eliminated and the Port was unable to verify the reasonableness of the current security
deposit.
A valid and adequate security deposit is important in the event the lessee fails to pay amounts owed or
goes out of business.
State law (RCW 53.08.085), requires the surety to be an amount equal to one-sixth of the total rent,
but not less than an amount equal to one year's rent or more than an amount equal to three years'
rent. One year’s surety would have been $715,776 in 2017; equal to one year’s MAG, however the law
allows the Port Commission to waive the rent security requirement, or lower the amount, at their
discretion, which the Port chose to do by approving Policy RE-2 (RE-2). Surety for 2017 was set at
$357,888.
The Port Commission approved RE-2 which provides guidelines for the calculation of surety. The
Policy was last updated on October 20, 1995 and per this policy, if the term of the agreement is five
years or more, the security deposit should be an amount equal to six months of rent. After consulting
with Legal, Aviation Properties confirmed that rent, per RE-2 refers to the MAG. RE-2 does not provide
criteria to calculate a security deposit amount in situations when there is no MAG.
In alignment with RE-2 the Agreement requires the lessee to
obtain and deliver to the Port an
irrevocable stand-by letter of credit, a bond, or other security deposit in a form approved by the Port.
The security deposit must be an amount equal to one-half of the MAG, however, there was an
amendment to the Agreement, in April of 2018, that eliminated the MAG. Section 11.1 of the
Agreement was not updated to align with the amended terms, resulting in the elimination of the criteria
needed to calculate the security deposit.
The current surety amount of $357,888 was calculated based on the first year’s MAG (2017). Once the
MAG was eliminated in 2018, the surety amount was carried forward without adjustment due to the
absence of a criteria in the amendment.
Additionally, in order to provide relief to concessionaires, because of business closures related to the
COVID-19 pandemic, the Port eliminated MAG requirements for the period of March 2020 through
December 2020. With the elimination of MAGs, there is a potential that the Port may encounter an
issue like the one discussed above.
Recommendations:
1) Policy RE-2 should be reviewed and revised to address the issues identified above.
2) The Agreement should be amended to include criteria for the security deposit calculation, in
alignment with the revised Port RE-2 policy.
1) Rating: Medium
Concourse Concessions LLC
January 2017 – December 2019
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Management Response/Action Plan:
Management has identified that this is an issue within many contracts outside of the current contract
undergoing audit. Management is seeking Legal review and recommendations for modifications of the
Port Policy RE-2 as the current policy is not aligned with industry standards, does not account for
varying contract terms, and could be considered a barrier to entry for many small and minority
businesses.
DUE DATE: 12/31/2020
Concourse Concessions LLC
January 2017 – December 2019
8
Concourse Concessions did not report $12,721 in gross revenue during the period under audit.
These amounts were from cash shortages that Concourse Concessions removed from their
revenue reports prior to submittal to the Port. As a result, approximately $1,527 in additional
percentage fees are due to the Port.
Cash “Short/Over” is an income statement account within the company's general ledger, where
Concourse Concessions records any over or under cash between the daily cash receipts and what is
counted in the cash register.
During the three-year audit period, $12,721 was coded as cash shortages and was not included in the
revenues reported to the Port. The Agreement does not list cash shortage as an allowable deduction
from gross revenues.
Prior to the first amendment of the contract, percentage fees were billed according to the following
concession categories:
Concession Category
Percentage of Gross Receipts
A. Non-Branded Food and Beverage
13.5%
B. Branded Food and Beverage
11.5%
C. Alcohol, Beer, and Wine
17.5%
D. Souvenir Merchandise
26.5%
E. Advertising and All Others
14.5%
The cash shortage was listed as a monthly lump sum amount, and not separated by category. Therefore,
Internal Audit was unable to accurately calculate the amount due to the Port. To determine a reasonable
estimate of the percentage fee due, Internal Audit used the lowest rate applicable in the current tier
system, which is 12% (refer to the table on page 4). As a result, approximately $1,527 is due to the Port.
Recommendation:
1. Seek and recover $1,527 in underpaid percentage fee.
Management Response/Action Plan:
Management has identified that the tenant did in fact understate their revenues generated at the
airport resulting in an incorrect billing of percentage fees due to the Port by the tenant. Management
will be seeking immediate payment of fund from the tenant once a final amount (amount owed
including interest and late fees) has been determined.
2) Rating: Low
DUE DATE: 12/31/2020
Concourse Concessions LLC
January 2017 – December 2019
9
Appendix A: Risk Ratings
Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one
of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will be
evaluated and may or may not be reflected in the final report.
Rating
Financial
Stewardship
Internal
Controls
Compliance Public
Commission/
Management
High Significant
Missing or not
followed
Non-compliance
with Laws, Port
Policies,
Contracts
High probability
for external audit
issues and / or
negative public
perception
Requires
immediate
attention
Medium Moderate
Partial controls
Not functioning
effectively
Partial
compliance with
Laws, Port
Policies
Contracts
Potential for
external audit
issues and / or
negative public
perception
Requires
attention
Low Minimal
Functioning as
intended but
could be
enhanced to
improve
efficiency
Mostly complies
with Laws, Port
Policies,
Contracts
Low probability
for external audit
issues and/or
negative public
perception
Does not
require
immediate
attention