Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Given the focus on bottom line profits, the investment in variable costssuch as employees, training, maintenance, and product developmentrequired to earn additional sales may no longer make economic sense. Where abatement results in shifting costs between various classes of airport tenants and users, the airport sponsor is encouraged to consult with all affected parties. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. If the airport sponsor determines that its in its best interest to defer the MAG, the revenue should still be recorded in the period earned, and the receivable should be considered for treatment as noncurrent depending on the new repayment terms. Airport concession fees in the era of COVID-19, Airports should carefully consider how they structure deals and their business models, Do Not Sell or Share My Personal Information, Limit the Use of My Sensitive Personal Information. There are numerous ways to frame a contract without a MAG. When passenger traffic does come back, airports should rethink how their concession contracts work. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Most airports already calculate a PSF rent amount in their airline rates and charges (e.g., office space with passenger access) that applies to concession-type spaces. President Donald Trump has already tweeted his support for such an infrastructure bill. Off-airport companies pay up to 8% of gross revenue from their airport-related car rentals. Notably, the GASB has deferred the implementation date of GASB Statement No. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. Regardless, this shifting of risk may not be acceptable to airports. The company, which . To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). There are means of counting passengers who pass a concession location, but few airports have installed such technology. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. [1]https://www.law.cornell.edu/cfr/text/49/part-23 jQuery('#footnote_plugin_tooltip_333_1_1').tooltip({ tip: '#footnote_plugin_tooltip_text_333_1_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top center', relative: true, offset: [-7, 0], }); The entire premise of the DBE program is based on: The writers of AirportU do so not for recognition, rather for learning, sharing, and empowering others. By using this site you agree to our use of cookies. CREDIT UPDATE Prior to the pandemic, Terminal 4 was observing strength in its operational performance with enplanements reaching 10.8 million in 2019, the leader across all terminals at JFK. Lets consider six potential options. The Board of Airport Commissioners at Los Angeles World Airports has recently approved a recommendation by management to permit concessionaire relief measures, including moving all concessionaires with contracts based on Minimum Annual Guarantee fee payments to percentage rent-based agreements This category only includes cookies that ensures basic functionalities and security features of the website. Paid parking went into effect at . This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. If you are a sponsor who controls multiple airports the FAA has stated in its CARES Act FAQ, an airport sponsor may use funds at any airport under its control. With the new economic and industry realities, capital access may be an even greater hurdle. The big change at Los Angeles International Airport allows concessionaire partners, which include DFS Group, Hudson and HMSHost, among others, to pay percentage rent rather than a minimum annual guarantee (MAG) from April 1 through June 30 as a result of passenger traffic declines due to the coronavirus pandemic. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Non-airport retail leases typically charge rent on a per square foot (PSF) basis. The FAA issued an extension of limited waiver (PDF) through October 29, 2022 of the minimum-slot-usage requirement for international operations at John F. Kennedy International Airport (JFK), LaGuardia Airport (LGA), and Ronald Reagan Washington National Airport (DCA).Additionally, the FAA extended through October 29, 2022, our . The actual process is the easiest for the airport sponsor since there are minimal contracts. Percentage Rent to the Board as set forth in Article 1 based on Concessionaire's Gross Receipts, subject to a Minimum Annual Guarantee (MAG) as set forth in Article 1, and as further provided below. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. This is only for the passenger traffic, while for . Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. . While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. The adjustment in Guaranteed Annual Rent may not, in any event, result in a decrease in the current amount of Minimum Annual Guaranteed Rent.. Any increase in Minimum Annual Guaranteed Rent shall be based upon an average increase in the index calculated over a period of 90 days prior to the end of the current five year term. There are numerous ways to frame a contract without a MAG. Guarantee: 50% of Minimum Annual Guarantee. Because this rate base is not related to passenger numbers, it is equally as inflexible as a MAG set by any other means in the event of significant changes in enplanements. One-twelfth of the MAG shall be due in advance on the first day of each month 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. Most simply, the airport and vendor could agree to a fixed percentage rent. October 09, 2020, 11:40 a.m. EDT 4 Min Read. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). The single factor most tied to concession success is the footfall past the concession locations. If the basis for a MAG is what the airport thought it should be earning, the amount may never be supportable even if a concessionaire signed the contract. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . The airport operator also brings knowledge of how to do business in an airport environment while allowing the concessionaire to concentrate on what they do best: operate a highly successful restaurant or shop. The 10-year contract was awarded on the basis of the minimum annual guarantee payment totaling $352,000 or a percentage of gross receipts, whichever is greater. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. That will, in turn, harm the concession program. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. To help develop firms that can compete in the marketplace outside of the DBE program. View bio. Concessions are typically leased with a percentage type lease so that a specific percentage of gross sales are given to the airport as part of their lease agreement. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). The competitive landscape may beby necessityaltered. Very hands off for the airport sponsor. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. In North America, airports tend to look at MAGs as the least amount of acceptable rent. This simplified agreement includes the requirements under the CARES Act and makes funds immediately available for expenses, other than airport development, including payroll, debt service, utility expenses, service contracts, and supplies. . Minimum Annual Guarantee: Each Proposer shall submit its proposal as a minimum annual guarantee (MAG) for each of the first two (2) years of the Concession Agreement. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. Under one version of an infrastructure plan floated by House Democrats (the Moving Forward Framework), airports and airspace improvements would be funded, in part, by an increase in PFCs. Most experts agree that there will be no quick snapback of passengers, so airports face the issue of having too many concessions locations or even too many operators. In airports with residual airline agreements, the airlines will be required to make up the difference between revenue to the airport and required revenue to pay for airport development and other expenses. A different methodology is required to ensure that vendors are allowed to earn a fair return on their investments, are able and willing to reinvest to improve and grow, and still provide a reasonable return to the airports. The key will be ensuring that airline charges remain fair and reasonable. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. Learn how your comment data is processed. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . To meet aggressive congressional deadlines for request submissions, a new airport industry request is being made with three potential components: $13 billion in additional emergency assistance, a gap financing program for airports, and a touchless journey through security. The minimum annual guarantee of $3.25 million to the airport for the right to run the restaurant is too high and could result in the partners cutting corners to make the payments or, even worse . In airports with residual airline agreements, the airlines will be required to make up the difference between revenue to the airport and required revenue to pay for airport development and other expenses. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. The policies and procedures are available for review here. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. The recent COVID-19 pandemic has highlighted the need for an alternative outlook on the way that commercial contracts between airports and concessionaires are structured to reflect the current and future uncertainty around passenger profiles and passenger traffic volumes.

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