Template revised January 10, 2019.
COMMISSION
AGENDA MEMORANDUM
Item No.
10b
ACTION ITEM
Date of Meeting
June 27, 2023
DATE: June 20, 2023
TO: Stephen P. Metruck, Executive Director
FROM: Rick Duncan, Director, Aviation Business & Properties
Eileen Francisco, Director, Aviation Project Management Group
SUBJECT: Budget increase request – Concourse A Building Expansion for Lounges (C801205)
Amount of this request:
$21,507,000
Total estimated project cost:
$126,507,000
ACTION REQUESTED
Request Commission authorization for the Executive Director to (1) increase the authorized total
project budget by $21,507,000, and (2) increase the Tenant Reimbursement Agreement (TRA)
budget from $89,960,000 to $111,508,000. This results in a total estimated project cost of
$126,507,000.
EXECUTIVE SUMMARY
Delta Airlines Inc., (Delta) has designed and is under construction of an approximate 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. This project will incorporate a new passenger lounge for Delta
and provide a new buildout space for the Port’s common use lounge (Club at SEA). This project
also supports the Century Agenda Goal #2 to advance this region as a leading tourism destination
and business gateway.
Delta has notified the Port of additional project increases and escalations during their efforts to
execute an agreement for the Final Guaranteed Maximum Price (FGMP) with their Contractor.
These cost increases are a direct result of 1) a delayed construction start and subsequent
increases to the overall project duration, and 2) escalation in construction costs for materials and
labor and the volatility in the construction market and global supply chains.
The delayed construction start was the direct outcome of an extended permitting review period
resulting from multiple design packages, Port added scope changes, and outsourcing the Building
COMMISSION AGENDA – Action Item No. 10b Page 2 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
Department’s code compliance review to a third party, due to limited capacity to conduct the
review in-house.
JUSTIFICATION
Delta 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 has allowed Delta to design and construct the lounge addition in
undeveloped space, with the project delivered via a TRA.
On May 10,2022, the Port Commission authorized both an overall project budget and TRA
increase based off the 100% design / permit documents, for a total project value of approximately
$105 million, with a TRA value of $89.96 million. Delta’s original request to the Port was for the
TRA value to increase to $93 million; however, the Port was not able to validate the additional
$3 million, prior to the May 2022 Commission request. To advance the project, the Port held the
$3 million (still under negotiations) within a Port-controlled portion of the budget until the cost
validations between the Port and Delta were finalized. On May 13, 2022, the Port issued Delta a
revised reimbursement letter, reflecting the maximum reimbursement amount of $89.96 million,
which excluded the $3 million while still under negotiations. Consequently, the Port and Delta
eventually reached an impasse. Delta decided not to execute the full FGMP with their contractor
and instead elected to enter a partial Guaranteed Maximum Price agreement with their
contractor to begin the enabling work that relocated the PLB shop, reconfigured the concourse
and Club at SEA restrooms and purchasing long lead materials.
Between May 2022 to November 2022, project costs continued to rise due to escalation and
volatility within both the national and local construction markets, and global supply chains.
Without an executed FGMP, the Port was subject to additional project costs for reimbursable
scoped items.
In November 2022, Delta notified the Port of additional project increases since the May 2022
Commission authorization. By January 2023, Delta provided the revised bid packages for Port
review. After which, the Port and Delta underwent numerous negotiations to validate the cost
increases but were unable to reach an agreement until May 2023.
Today’s request is to increase the overall project budget to incorporate additional costs based on
the revised project estimates. Delta has informed the Port the Contractor’s FGMP pricing will
hold until the end of June 2023. It is the Port’s understanding Delta will execute the FGMP with
their Contractor upon Commission’s approval of additional funds and before the Contractor’s
pricing expires at the end of June.
COMMISSION AGENDA – Action Item No. 10b Page 3 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
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 markets and global supply chain conditions have created
significant cost increases. The value of this request incorporates all known cost increases,
separated into three categories listed below. This additional authorization is necessary because
construction costs were not locked in under an executed FGMP between Delta and their
Contractor after the May 2022 authorization – and costs continued to escalate.
Item
Direct Construction Costs
Schedule Delay Costs
Additional Port Contingency
TOTAL
Direct construction costs include escalation and increased pricing associated with the six required
addenda to the design package in order to receive a permit. These six addenda contributed
significantly to the prolonged permitting process. Additionally, costs continued to increase as a
result of multiple design packages, which the contractor was unable to accurately price until the
final set was accepted, prior to permit issuance. These cost escalations have impacted the total
cost not only for the Port portion of the project, but also Delta’s costs for their Lounge buildout.
As a result of the expanded permit review, construction was delayed, which is represented
above in schedule delays.
Lastly, this request includes additional Port-controlled contingency to secure a reasonable level
of cost certainty for the project moving forward.
If Commission approves this request to increase the total project budget by $21.5 million, the
value of the TRA will be increased from the previously authorized amount of $89.96 million to
$111.5 million. Upon such approval, the Port will issue Delta a revised reimbursement letter that
reflects an updated maximum reimbursement. It is then expected that Delta will execute the
FGMP with their Contractor.
Under this TRA, 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 will be completed by
the Concourse A Port Shared-Use Lounge (Club at SEA) project.
COMMISSION AGENDA – Action Item No. 10b Page 4 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
Scope of Work
(1) Construct a building addition of approximately 52,000 SF that will provide shell space for
two lounges (one for DL, one for the Port) and associated building systems.
(2) Reconfigure approximately 13,500 SF of existing space 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 3,000
SF standalone 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.
Schedule
Activity
Commission design authorization
2021 Quarter 2
Design start
2021 Quarter 2
Commission construction authorization
2021 Quarter 4
Construction start
2022 Quarter 3
In-use date
2024 Quarter 4
Cost Breakdown
This Request
Total Project
Design
$0
$6,300,000
Construction
$21,507,000
$120,207,000
Total
$21,507,000
$126,507,000
ALTERNATIVES AND IMPLICATIONS CONSIDERED
Alternative 1 – Do not increase the total project budget or TRA value. Request Delta complete
the underground utility work outside the existing Concourse A – which preps the area for the
building expansion (already underway) and restore the ground to functional use. Under this
alternative, the Port would not move forward with the Concourse A Expansion and neither lounge
will be built.
Cost Implications: Estimated $25,000,000 for costs incurred to date.
Pros:
(1) This is the lower cost alternative.
(2) The airport will have a newly constructed Aviation Maintenance PLB Shop that was
completed in April 2023 and new restroom on concourse level. These components were
part of the required enabling work for the Concourse A Expansion.
(3) Upon completion of the underground utility work and restoring the area to a functional
condition, the area will be available for future use by the Port, should it be desirable to
take over this project and self-perform the build-out (in whole or part).
COMMISSION AGENDA – Action Item No. 10b Page 5 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
Cons:
(1) If Delta does not complete construction of the new building shell and core, the
forthcoming Club at SEA could not expand into the new shell space further limiting non-
aeronautical revenue opportunities.
(2) This will not support Delta’s operations on Concourse A, nor provide Delta with a new
lounge space.
(3) Passengers will not have an alternative to waiting for flights in crowded hold rooms at
this area and the Club at SEA will not be able to expand to support international airlines
that do not possess their own branded lounge.
This is not the recommended alternative.
Alternative 2 – Increase the budget by $21,507,000 for the project. Increase the TRA value to
$111,508,000.
Cost Implications: $21,507,000
Pros:
(1) Passenger lounge spaces will be expanded to accommodate 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.
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
$44,950,000
$50,000
$45,000,000
Current change
$20,824,131
$682,869
$21,507,000
Revised estimate
$125,774,131
$732,869
$126,507,000
AUTHORIZATION
Previous authorizations
$104,950,000
50,000
$105,000,000
Current request for authorization
$20,824,131*
$682,869
$21,507,000*
Total authorizations, including this request
$125,774,131
$732,869
$126,507,000*
Remaining amount to be authorized
$0
$0
$0
COMMISSION AGENDA – Action Item No. 10b Page 6 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
Annual Budget Status and Source of Funds
This project, CIP C801205, was included in the 2023-2027 capital budget and plan of finance with
a budget of $104,950,000. A budget increase of $20,825,131 will be transferred from the
Aeronautical Allowance
1
CIP (C800753) resulting in zero net change to the Aviation capital
budget. The funding sources will include the Airport Development Fund and revenue bonds. This
project was approved by Majority-In-Interest (MII) with the airlines on December 7, 2021. With
the budget increase, Port management elected to utilize the MII Management Reserve
2
provision
within the Signatory Lease Operating Agreement (SLOA) without requiring additional MII
approval from the airlines.
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 project as both a standalone non-aero investment and a terminal investment that flows
through airline rates and charges.
Aeronautical Rate Base Impacts
1
The Aeronautical Allowance is included in the Capital Improvement Plan to ensure funding capacity for
unspecified projects, cost increases for existing projects, new initiatives, and unforeseen needs. This ensures
funding capacity for unanticipated spending within the dollar amount of the Allowance CIP.
2
The Signatory Lease and Operating Agreement (SLOA) requires airline’s approval for New Projects meeting the
Majority-In-Interest (MII) threshold. The Port may increase the budgets of New Projects up to an aggregate
additional $210,000 million dollars in Management Reserve without further MII review.
Airlines rates and charges impact
($000s) Aero Non-aero Total
Rentable sqft without Conc A sqft 76.55% 23.45% 100%
Rentable sqft WITH Conc A sqft 77.09% 22.91% 100%
Project cost 97,519$ 28,981$ 126,500$
Incremental Revenues WITHOUT Conc A SF 7,994$
Terminal distribution 57
Incremental Revenues WITH Conc A SF 8,052
Incremental Debt Service 8,052 2,393 10,443
Incremental Amortization 2.6 0.8 3.4
Incremental CPE 0.30
Incremental Terminal Rental Rate 5.70
2025
COMMISSION AGENDA – Action Item No. 10b Page 7 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
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, 76.55% of the terminal costs are
allocated to the aeronautical rate base, which equates to incremental revenue of $7,994,000.
After adding the incremental square footage of this project, the percentage of terminal costs
increases to 77.09%; this reflects an $57,000 increase to Aeronautical revenue. Thus, in 2025 the
net impact of the Concourse A expansion project is to contribute $8,052,000 in incremental
revenue to the aeronautical rate base.
Terminal rents are established based on the total cost center costs. The project would be
completed in Q4 2024. The full year of debt service and equity amortization begins in 2025. The
incremental terminal rent would be $5.70 and CPE of $0.30 in 2025.
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 ($29.6
million) included in CIP C801207.
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 $231 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 $7.4 million in 2030. This new revenue, attributed to the
airport lounge which generates the negative Net Present Value of $7.5M. Given that the existing
space is currently generating revenues, the NPV is netted against a base case (do nothing).
COMMISSION AGENDA – Action Item No. 10b Page 8 of 9
Meeting Date: June 27, 2023
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
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 22,988$ 103,512$ 126,500$
Furnishings, C801207, assumed 20% cost increase 29,671$ -$ 29,671$
Total Capital 52,659$ 103,512$ 156,171$
Non-Aero Analysis
Payback (years from opening) 9
NPV (through 2043) 29,390$
NPV Incremental to Base (7,540)$
2025 2030 2035
Incremental Non-aero Revenue 692$ 7,452$ 11,567$
Incremental Non-aero O&M 535$ (2,045) (3,786)
Debt service TERMB to Non-aero (2,393)$ (2,393) (2,393)
Debt Service Furnishing 100% Non-aero (2,451)$ (2,451) (2,451)
Non-aero Net Cashflow (3,616)$ 564$ 2,938$
COMMISSION AGENDA – Action Item No. 10b Page 9 of 9
Meeting Date: June 27, 2023
Template revised June 27, 2019 (Diversity in Contracting).
ATTACHMENTS TO THIS REQUEST
(1) Presentation slides
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS
May 10, 2022 – The Commission authorized a budget increase for the project and an increase
to the reimbursement amount to Delta.
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.