Template revised January 10, 2019.
COMMISSION
AGENDA MEMORANDUM
Item No.
10c
ACTION ITEM
Date of Meeting
May 10, 2022
DATE: May 3, 2022
TO: Stephen P. Metruck, Executive Director
FROM: Jeff Moken, Interim Director AV Business & Properties
Wayne Grotheer, Director Aviation Project Management
SUBJECT: Budget increase request – Concourse A Building Expansion for Lounges (C801205)
Amount of this request:
$26,500,000
Total estimated project cost:
$105,000,000
ACTION REQUESTED
Request Commission authorization for the Executive Director to (1) authorize a budget increase
for the Concourse A Building Expansion for Lounges project at Seattle-Tacoma International
Airport by Delta Air Lines, Inc; and (2) authorize an increase to the reimbursement amount to
Delta. Total cost of this request is $26,500,000 of an estimated total project cost of $105,000,000.
EXECUTIVE SUMMARY
Delta Air Lines, Inc. (Delta), in preparation to construct the Concourse A Building Expansion for
Lounges project at the Airport, has notified the Port of increased and escalating costs in
establishing the final contract value with their contractor. Delta staff indicated this is a result of
scope additions and schedule changes during design development from 60% design to 100%
design, escalating costs for construction materials and labor, and volatility in the construction
market and global supply chain.
This project constructs a building expansion towards the end of Concourse A that will incorporate
a new passenger lounge for Delta and provide a new buildout space for the Port of Seattle
common-use lounge: The Club at SEA. This project is expected to meet existing (pre-COVID-19)
passenger demand for Delta’s lounge. This project also supports Century Agenda Goal #2 to
advance this region as a leading tourism destination and business gateway.
To achieve this, Delta has designed and endeavors to construct an approximately 52,000 square
foot (SF) building expansion at the east side of Concourse A, across from Gate A11 and directly
south of the International Arrivals Facility (IAF), using a Tenant Reimbursement Agreement (TRA)
with the Port. Approximately 36,000 SF of the new space will be leasable, including the space
COMMISSION AGENDA – Action Item No. __10c__ Page 2 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
that will be directly leased by Delta for their lounge. Delta is investing an additional $35 million
in the tenant buildout of their lounge.
JUSTIFICATION
Delta has requested to construct a new lounge on Concourse A to accommodate passenger
demand that shifted from the South Satellite to Concourse A upon the opening of the IAF. The
Port currently lacks sufficient space to meet this demand. Thus, to satisfy this request for
additional leased space, the Port agreed to permit Delta to design and construct the lounge
addition in undeveloped space governed by a TRA. In December 2021, Port Commission
authorized the construction of this project. The value of the December TRA was based on 60%
design documents. Today’s request is to increase the budget to incorporate additional costs
based on the 100% design.
Diversity in Contracting
The Port collaborated with Delta and has included in the TRA a WMBE goal of 10%, an apprentice
hiring goal of 15%, a women apprentice hiring sub-goal of 12%, a minority apprentice hiring sub-
goal of 21%, and a priority worker goal of 20% for the construction contractor. Delta has stated
that they will strive to exceed these goals.
DETAILS
Existing national and local construction market and global supply chain conditions have created
significant cost uncertainty and volatility within the construction industry. As a result, Delta and
the Port are eager for Delta to execute a Fixed Guaranteed Maximum Price (FGMP) with their
contractor to reduce the risk of market volatility. The value of the request incorporates known
and potential costs currently identified by Delta and their contractor. The division of those costs
are still being negotiated between the Port and Delta, with both teams expediting their efforts
to stave off future cost escalations.
To secure a reasonable level of cost certainty, the Port and Delta are requesting an increase of
$26.5 million for the total project. The value of the TRA will be increased from the previously
authorized value of $65.92 million to $89.96 million. Delta’s original request to the Port was for
an increase of the TRA value to approximately $93 million. The Port and Delta continue to
negotiate over the approximate $3 million difference. The Port will retain that amount within the
Port controlled portion of the budget until these negotiations can be completed.
The increased project costs fall into five categories:
Issue Type
Value
Scope Additions
$8,000,000 (new items not previously estimated)
Market Conditions/Supply Chain
$8,500,000 (material price increases)
Buyout Contingency/Risk Contingency
$5,600,000 (risks due to volatile construction mkt.)
Delta Soft Costs
$800,000 (design fees for scope adds + Delta PM
COMMISSION AGENDA – Action Item No. __10c__ Page 3 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Port Costs
$3,600,000 (Port PM and contingencies)
TOTAL
$26,500,000
After the Commission’s authorizations on April 27, 2021, and December 14, 2021, the Port and
Delta entered into the TRA for this project on August 11, 2021, with an updated reimbursement
letter issued on January 20, 2022, reflecting a maximum reimbursement amount to Delta by the
Port of $65,920,000. If this Commission request is authorized, the Port will issue an updated
reimbursement letter that reflects an updated maximum reimbursement amount of
$89,960,000.
The project has been identified as a Tier Two project under the Port’s Sustainable Evaluation
Framework. The project team analyzed concepts to reduce energy and carbon emissions, along
with other initiatives to reduce solid waste, promote public transportation, and support
employees. The team also calculated the total cost of ownership for the different sustainability
concepts. The project will implement (1) triple-glazed electrochromic façade (“smart glass”);
(2) all electric appliances (no natural gas); (3) low-flow water fixtures in the Delta lounge;
(4) signage for public transportation options; (5) an employee breakroom; and (6) three new
electric vehicle charging stations. The sustainability work and recommendations were reviewed
by the Commission Sustainability, Environment and Climate Committee on November 18,
2021.The cost increases Delta has notified the Port about include unanticipated scope changes
during design development notably to address the relocation of the Port’s maintenance shop and
escalating costs for construction materials and labor.
Delta will be responsible for the cost and construction of the interior buildout of their lounge
within the new building shell. The Port’s common use lounge, authorized by Commission for
design on December 14, 2021, will be completed by the Concourse A Port Shared Use Lounge
project.
Scope of Work
(1) Construct a building addition of approximately 52,000 SF that will provide shell space for
two lounges and associated building systems.
(2) Reconfigure existing spaces to provide additional leasable office area, an entry foyer, a
replacement restroom, and vertical circulation.
(3) Demolish an existing airport building deemed unfit to renovate and construct a new
building in its place to house the relocated Aviation Maintenance Department Passenger
Loading Bridge shop that is being displaced by this project. The expense cost to move the
shop is included in the budget.
(4) Provide temporary restrooms for the Port common use lounge to keep the lounge
operational during construction of the building expansion.
COMMISSION AGENDA – Action Item No. __10c__ Page 4 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Schedule
Activity
Commission design authorization
2021 Quarter 2
Design start
2021 Quarter 2
Construction start
2022 Quarter 3
In-use date
2024 Quarter 1
Cost Breakdown
This Request
Total Project
Design
$0
$6,300,000
Construction
$26,500,000
$98,700,000
Total
$26,500,000
$105,000,000
ALTERNATIVES AND IMPLICATIONS CONSIDERED
Alternative 1 – Limit the budget increase to $23,500,000.
Cost Implications: $102,000,000
Pros:
(1) This is the lower cost alternative.
Cons:
(1) This alternative unilaterally eliminates some of the design development and risk
contingency built into the request from Delta. Port staff may not be able to reach an
agreement at this cost with Delta.
(2) Reducing the contractor risk contingency available to the project will hinder Delta’s
ability to reach a Fixed Guaranteed Maximum Price (FGMP) with their contractor.
(3) Market volatility may result in a need to return to the Commission for additional
authorization in the future, risking further cost increase.
This is not the recommended alternative.
Alternative 2 – Increase the budget by $26,500,000. Increase the TRA value to $92,890,000.
Cost Implications: $105,000,000
Pros:
(1) Passenger lounge spaces will be expanded to accommodate anticipated return of
demand.
(2) Location of the lounge on Concourse A will support Delta’s operations on Concourse A.
(3) The expanded lounges (Delta’s and the Port’s common use) will provide passengers an
alternative to waiting for flights in crowded hold rooms, and the Club at SEA will support
international airlines who do not possess their own branded lounge.
COMMISSION AGENDA – Action Item No. __10c__ Page 5 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Cons:
(1) This alternative commits the highest amount to the TRA. Approximately $3,000,000 of
this amount is still under review and may not be necessary.
(2) Funds are unavailable for other uses.
(3) This is a higher cost alternative.
This is not the recommended alternative.
Alternative 3 – Increase the budget by $26,500,000 for the project. Increase the TRA value to
$89,960,000.
Cost Implications: $105,000,000
Pros:
(1) Passenger lounge spaces will be expanded to accommodate anticipated return of
demand.
(2) Location of the lounge on Concourse A will support Delta’s operations on Concourse A.
(3) The expanded lounges (Delta’s and the Port’s common use) will provide passengers an
alternative to waiting for flights in crowded hold rooms and the Club at SEA will support
international airlines who do not possess their own branded lounge.
(4) This alternative authorized the full amount of the estimated project costs but retains
Port control of the portion of the contractor request increase still under negotiations.
This provides the flexibility to adjust the TRA value once those potential costs are
realized in a timely fashion.
Cons:
(1) Funds are unavailable for other uses.
(2) This is the higher cost alternative.
This is the recommended alternative.
FINANCIAL IMPLICATIONS
Cost Estimate/Authorization Summary
Capital
Expense
Total
COST ESTIMATE
Original estimate
$60,000,000
$0
$60,000,000
Previous changes – net
$18,450,000
$50,000
$18,500,000
Current change
$26,500,000
$0
$26,500,000
Revised estimate
$104,950,000
$50,000
$105,000,000
AUTHORIZATION
Previous authorizations
$78,450,000
$50,000
$78,500,000
Current request for authorization
$26,500,000
$0
$26,500,000
Total authorizations, including this request
$104,950,000
$50,000
$105,000,000
Remaining amount to be authorized
$0
$0
$0
COMMISSION AGENDA – Action Item No. __10c__ Page 6 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Annual Budget Status and Source of Funds
This project, CIP C801205, was included in the 2022-2026 capital budget and plan of finance with
a budget of $71,400,000. A budget increase of $33,600,000 was transferred from the
Aeronautical Reserve CIP (C800753) resulting in zero net change to the Aviation capital budget.
The funding source will include the Airport Development Fund and future revenue bonds. This
project was approved Majority-In-Interest by the airlines on December 7, 2021.
Financial Analysis and Summary
This project is an investment in additional terminal space that is intended to be used for both
aeronautical and non-aeronautical purposes. As a hybrid project, the financial analysis looks at
the projects as both a standalone non-aero investment and a terminal investment that flows
through airline rates and charges.
Aeronautical Rate Base Impacts
With the Concourse A expansion, the net terminal square footage distribution has a minor impact
on the analysis as the existing project space allocation is reasonably close to the existing
allocations.
The table above shows that before Concourse A expansion, 76.78% of the terminal costs are
allocated to the aeronautical rate base, which equates to incremental revenue of $6,655,000.
After adding the incremental square footage of this project, the percentage of terminal costs
increases to 76.89%; this reflects an $10,000 increase to Aeronautical revenue. Thus, in 2024 the
net impact of the Concourse A expansion project is to contribute $6,665,000 in incremental
revenue to the aeronautical rate base.
($000s)
Aero Non-aero Total
Rentable sqft without Conc A sqft 76.78% 23.22% 100%
Rentable sqft WITH Conc A sqft 76.89% 23.11% 100%
Project cost 80,731$ 24,269$ 105,000$
Incremental Revenues WITHOUT Conc A SF 6,655$
Terminal distribution 10
Incremental Revenues WITH Conc A SF 6,665
Incremental Debt Service 6,665 2,002 8,667
Incremental Amortization 2.6 0.8 3.4
Incremental CPE 0.26
Incremental Terminal Rental Rate 4.61
2024
COMMISSION AGENDA – Action Item No. __10c__ Page 7 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Terminal rents are established based on the total cost center costs. The project would be
completed in Q1 2024. The full year of debt service and equity amortization begin in 2024. The
incremental terminal rent would be $4.61 and CPE of $0.26 in 2024.
Non-aeronautical Investment Analysis
The purpose of this section is to demonstrate that the Port has a compelling business case as a
non-aero investment. The non-aeronautical investment includes both the cost of new space
included in this authorization request and cost of the interior build-out and furnishings ($24.7
million) included in CIP C801207 (note that C801207 has not changed).
The table below shows the allocation of capital costs based on rentable square footage. For non-
aero purposes, 18.17% of the rentable square footage, equating to $19 million in capital cost,
establishes the basis of the non-aero portion of the project. The lower part of the table identifies
an incremental revenue increase of $4.3 million in 2027. This new revenue, attributed to the
airport lounge generates the positive Net Present Value of $240K, which signifies a good
investment. Given that the existing space is currently generating revenues, the NPV is netted
against a base case (do nothing).
Non-aero Investments
Non-aero Aero Total
Concourse A rentable sqft 6,499 29,264 35,763
Concourse A rentable sqft % 18.17% 81.83%
$ in 000s
Base Building, C801205 19,081$ 85,919$ 105,000$
Furnishings, C801207 24,726$ -$ 24,726$
Total Capital 43,807$ 85,919$ 129,726$
Non-Aero Analysis
Payback (years from opening) 8
NPV (through 2043) 40,330$
NPV Incremental to Base 240$
2024 2027
Incremental Non-aero Revenue 1,114$ 4,948$
Incremental Non-aero O&M (337)$ 1,210
Debt service TERMB to Non-aero (2,004)$ (2,004)
Non-aero Net Cashflow (553)$ 1,734$
COMMISSION AGENDA – Action Item No. __10c__ Page 8 of 8
Meeting Date: May 10, 2022
Template revised June 27, 2019 (Diversity in Contracting).
Future Revenues and Expenses (Total cost of ownership)
The tenants would pay operating and maintenance annual costs in their space since maintenance
of exclusive premises is the responsibility of the lessee. Those costs are not included in the
amount shown below. This project provides 29,264 SF of aeronautical rentable space, as well as
6,499 SF of rentable non-aeronautical space.
Facility elements outside of or supporting the exclusive premises, such as custodial services,
domestic water, power, and HVAC will generate some additional demand for Aviation
Maintenance services, and those annual operating and maintenance costs for the new space are
estimated to be $340,000, according to the cost breakdown below:
Custodial services $275,000
Facilities services 30,000
Electrical systems 18,000
Mechanical systems 17,000
ATTACHMENTS TO THIS REQUEST
(1) Presentation slides
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS
December 14, 2021 – The Commission authorized construction and reimbursement to Delta
Air Lines and utilization of Port crews for construction and support.
April 27, 2021 – The Commission authorized design and execution of a TRA for this project.
