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Guidebook for Developing and Managing Airport Contracts (2010)

Chapter: Chapter 2 - Concession Agreements

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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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Suggested Citation:"Chapter 2 - Concession Agreements." National Academies of Sciences, Engineering, and Medicine. 2010. Guidebook for Developing and Managing Airport Contracts. Washington, DC: The National Academies Press. doi: 10.17226/14482.
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15 Terminal concessions (e.g., food and beverage, news and gift, and passenger services of various kinds) and landside concessions (e.g., parking and rental cars) can provide important revenue to airports. Airport concession agreements represent an important mix of revenue generation and passenger service. Such agreements enable airports to earn revenues based on “market value” rather than just cost-recovery. As airports work to enhance the entire passenger experience, the overall concession program design as well as the service standards incorporated in the concession agree- ment are important tools in that effort. Airport concessions have been experiencing significant changes in all aspects of operations. Many of these changes are reflected in the make-up of the con- tracts under which they operate. Many contractual changes have been made as airport managers seek to increase concession revenues while optimizing use of land and facilities. Critical issues in concession agreements are as follows: • Financial terms – Rent structures – Defining gross revenues – Solicitation – Term – Improvements provided by airport – Improvements provided by concessionaire – Monthly reporting – Audit • Service and operational terms – Exclusivity of concession rights granted – Hours of operation – Personnel and on-site manager requirements – Street pricing – Maintenance of and title to improvements – Recapture or relocation of premises – Materials handling 2.1 Financial Terms Airports receive a significant amount of rent revenue and other fees from concessions. Unlike aeronautical rents which are geared toward the recovery of costs, concession revenues are estab- lished based on “market rent” principles and are designed to reflect the value of the privilege of doing business at the airports. Airport rents are typically much higher than their counterparts at “street” (local community) locations. This reflects that airport passengers provide concessionaires C H A P T E R 2 Concession Agreements

a solid customer base at their location, thereby providing a greater sales penetration and lower marketing requirements. 2.1.1 Rent Structures Most rent from concession operations is received through a revenue-sharing structure where the airport receives a percentage of the gross revenues from the concession, with a minimum annual guarantee (MAG) to protect the airport from a reduction in revenues. Some airports also charge separate cost recovery fees, such as utilities reimbursement, common area maintenance charges (for the cleaning and maintenance of food court seating, for example), or distribution and delivery charges. Many structures in use at U.S. airports today would be reasonable choices on which to model an article for a new contract. Concession managers must frequently balance maximizing the rental rates and cost recovery with the financial pressures on concessionaires to pay labor and other costs. Ideally, utilities should be paid by tenants proportionately. If possible, spaces should be metered individually. If that is not possible, a system that either allocates utility costs according to the util- ity loads of a tenant’s equipment or allocates according to sales levels should be used. It is possible to calculate the inclusion of utilities in a percentage rent structure; however, doing so exposes the sponsor to a loss of income if the market’s determination of percentage rent goes down. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the OAK concession agreement for a description of minimum guarantee and per- centage rent and an excerpt from the DFW concession agreement template for an example of concession rents. 2.1.2 Definition and Calculation of MAG The Minimum Annual Guarantee (MAG) is the total annual amount that the concessionaire agrees to pay at a minimum as rent under the concession agreement. The MAG may be estab- lished by the airport operator or may be bid by the concessionaire as part of its proposal. MAGs are stated in annual amounts and should be tied to the Contract Year, Lease Year, or other term defined in the agreement. These annual amounts should be further defined as required monthly payments equal to one-twelfth of the annual amount paid at the beginning of each month. MAGs may be defined so that they increase as the concessionaire’s business increases. Some air- ports define MAGs so that MAGs increase with enplanements. Many airports take an approach that the MAG is adjusted to a level that is close to, but less than the most recent year’s rent (e.g., MAGs may be set at 85% of the prior year’s total rent paid). The agreement should also stipulate that the MAG can never fall below its initial annual level. MAGs for terminal concessions may be established on a contract basis or on a per location basis. Establishing MAGs on a per location basis is useful if each location is viewed as likely to be prof- itable and/or if there are many operators. Single MAGs covering entire contracts are useful to ensure required revenue levels or if there is reason to believe that one or more locations under the contract may not be as profitable as the rest. In any case, MAGs should ensure that an adequate rate of return is earned. At the same time, they should support the established rent percentages to be paid. Airports should also consider the inclusion of a “catastrophe clause” in their agreements. These clauses stipulate the terms, when traffic declines by a specified percentage at an airport, under which rent can be proportionately reduced. 16 Guidebook for Developing and Managing Airport Contracts

Terminal concession contracts may also include temporary reductions in the MAG that may be granted in the case of construction in the immediate vicinity of the concession directly impacting exposure to passengers and sales. 2.1.3 Percentage Rents Concession agreements almost always contain provisions for the payment of additional rents on a percentage basis. The percentage rents are calculated by multiplying the rental rate by the sales defined as Gross Revenues or Receipts for the locations. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the DFW Concession Agreement template for an example definition of Gross Receipts. Some contracts will apply different percentages for different levels of sales, as shown in Table 2-1. The contract may also provide a lower level of percentage rents for branded concepts to recog- nize the franchise fees that must be paid to the franchisor. 2.1.4 Term As with many types of airport contract, the trend is toward terms shorter than the 30-year agree- ments of the past. The range of the sample agreements for terminal concessions was 5 to 2 years, and for rental cars, 2 to 6 years. The amount of required investment in facilities affects the term length—an airport’s development of pro forma income statements is essential to establishing term length. The larger the capital investment, the more time required to amortize the investment. If the capital investment is minimal, then it is better to have flexibility to introduce new concepts or new entrants, update the contract provisions, and possibly increase revenue more frequently. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the DFW Concession Agreement template. 2.1.5 Solicitation Depending on local purchasing requirements, airports may be able to renegotiate concession agreements without having to make requests for proposals (RFP). An airport operator may choose to negotiate a new agreement with an existing operator in order to reward an existing operator for great performance. An airport operator may also find it preferable to negotiate an agreement to bring in specified brands or concepts. An airport operator may also find that the extension of an existing agreement is appropriate when the concessionaire has made a recent reinvestment in facilities. A negotiated agreement approach may also be very appropriate at a small airport where it is difficult to attract new operators and renegotiating with the existing operator may result in more favorable terms than a bidding process would produce. However, in most instances, the Concession Agreements 17 Table 2-1. Percentages for different levels of sales. Category $0 to $1,000,000 $1,000,001 to $2,000,000 Greater than $2,000,000 Casual dining/bar 10% 12% 14% Quick-serve 12% 14% 16% Fast food 10% 12% 14% Specialty coffee 14% 16% 18% Café 12% 14% 16% Newsstand - Category 1 12% 12% 12% Newsstand - Category 2 16% 16% 16%

competitive solicitation of concessions will result in higher percentage rents and/or MAGs and a broader array of new or additional brands to choose from in a terminal retail program. This process may also be used to assign more favorable operating locations to the highest bidder in rental car processes. 2.1.6 Improvements Provided by Airport The contract should specify what facilities and improvements are being provided by the airport. The costs of facilities and improvements that the airport provides should be recovered in the space lease portion of the contract. In instances where the airport is investing a significant sum, it may be prudent for the agreement to have a net book value (NBV) provision whereby the tenant would have to pay the airport the unamortized portion of that investment if the agreement is terminated early. 2.1.7 Improvements Provided by Concessionaire Concession agreements have become increasingly clear with regard to defining not only the improvements permitted, but their value and amortization/depreciation schedule. Airports are encouraged to ensure that agreements spell out required investment levels and the schedule that will determine the net book value of those improvements throughout the term of agreement. Airports have also been successful in protecting the integrity of their asset(s) by including refur- bishment clauses. These clauses require tenants to re-invest in the assigned premises at regular intervals, thereby preserving a “like new” condition for the duration of the term. Some airports require major refurbishment at a midpoint of the term. Others require ongoing refurbishment. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the PVD concession agreement requiring refurbishment of the premises annually commencing during the midpoint of the agreement. Under some car rental agreements, the car rental company will construct the ready/return area and/or the service center. In this case, the airport may lease the land in an underlying ground lease at an appropriate land lease rate. The agreement should specify if the airport owns all improve- ments at the end of the lease. Additionally, there should be a procedure for valuation and buy out of facilities if the contract is terminated prior to its expiration or if the airport has to relocate the car rental operation for airport expansion or other valid reasons. 2.1.8 Monthly Reporting The format for reporting transactions and remittances of monthly payments should be provided in the agreement. Detailed items required for monthly reporting include the following: • Gross revenues • Breakdowns by concession location (each space) and product type (food vs. alcohol, or sundries vs. gifts) • Concessions fees/percentage rents/MAGs remitted • Customer Facility Charges (CFC) collections • Airport Concession Disadvantaged Business Enterprise (ACDBE) Reports See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. Transaction days and amounts for each car rental should be treated as confidential informa- tion when collecting monthly transaction information for rental car concessions, while the retail concessions reports generally will not require this. 18 Guidebook for Developing and Managing Airport Contracts

2.1.9 Audit All concession agreements should include provisions which permit the review of all books, and applicable records to substantiate the accuracy of the sales and other information reported to the airport. Typically these provisions also require the concessionaire to pay the expenses of the audit if underpaid fees are more than a specified percentage. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the DFW concession lease agreement regarding the right to audit for up to 3 years after expiration or termination of the lease. 2.2 Service and Operational Terms 2.2.1 Exclusivity of Concession Rights Granted Car rental operators are not granted exclusive rights. Until the 1990s, other terminal conces- sions had sometimes been granted exclusivity but that is now a rare practice at large or medium hub airports. 2.2.2 Hours of Operation Hours of operation should match airline operations. Ideally, terminal concessions should be open prior to first departure. The final arrival and final departure should govern how late conces- sions are open, with landside concessions being open until either the last departure or last arrival’s bags are on a bag claim belt. This should be specified in the contract, and monitored monthly for revisions. 2.2.3 Personnel and On-Site Manager Requirements Qualified, on-site, professional management must be required in the terms of the agreement. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. 2.2.4 Street Pricing Terminal retail concessions are operated under various street pricing assumptions. Agreements at U.S. airports have pricing policies ranging from strict street pricing to street plus an additional 5 to 10%. Other agreements do not restrict pricing at all. Pricing policy is a major determinant in establishing rent and term lengths, because it greatly affects expected revenues in the pro forma income statement. Airports are encouraged to establish the most competitive pricing policy pos- sible that will still allow them to achieve their goals for revenue and customer service. Most car rental agreements do not address the issue of street pricing. The percentage rents and other con- cession fees may require the car rental companies to price airport rentals higher than off-airport which is why most airport car rental agreements are silent on this subject. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for the RDU Concessions Pricing Policy 2009. 2.2.5 Maintenance of and Title to Improvements Maintenance arrangements between airports and terminal concessions tenants are becoming more specific, because these responsibilities had been the source of uncertainty in the past. Concession Agreements 19

See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the MSP General Terms & Conditions for Concession Agreements regarding Operator Main- tenance, Cleaning, and Distribution responsibilities and an excerpt from the PDX concession agreement for a matrix assigning maintenance responsibilities. Title to improvements at the end of a lease often remains with the airport, and agreement lan- guage should reflect this if at all possible. At the same time, airports should include language in their agreements that require a tenant to remove these improvements at the airport’s request. The maintenance requirement for car rentals will depend on whether the company or the air- port constructed the improvements. The agreement should clearly state which party is responsible for interior and exterior maintenance of the facilities. The airport should have a provision stating that any improvement to the leasehold becomes the property of the airport at the termination or expiration of the agreement. 2.2.6 Recapture/Relocation of Premises Historically, when concessionaires were sometimes given exclusive rights, some were also pro- tected from recapture or relocation. While concessions revenue is important, increased airline competition has made it necessary for some airports to protect their rights to recapture space. In those circumstances, recapture and relocation provisions are essential to protect both parties. The airport should retain similar rights to relocate the car rental operations if necessary for airport expansion, security mandates, or reasonable cause with provision for relocation costs and buy- out of unamortized improvements. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. 2.2.7 Materials Handling It should be specified whether the concessionaire or the airport is responsible for arranging for these services and which party will pay for them. For product delivery (generally applicable to ter- minal concessions), exhibits should be added to the agreement depicting acceptable truck routes, loading docks, storage locations, and acceptable routes in-terminal for product to be moved to con- cession locations. Similar detail should be added for recycling and trash removal, showing acceptable routes for these functions. Janitorial services must be addressed to first identify who is responsible for which functions. Who moves trash from concessions to dumpsters? Are there trash rooms on the con- course level for interim collection? Who moves it from there? Agreements should answer these questions to avoid misinterpretation later. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions and DFW Concessions Agree- ment Template. 2.3 Food and Beverage Concessions Additional Issues for food and beverage concessions include the following: • Food service standards • Approval of menus and pricing • Materials handling 20 Guidebook for Developing and Managing Airport Contracts

• Food safety responsibilities • Pest control • Maintenance of kitchen equipment • Cash and credit handling • Disputes with other tenants 2.3.1 Food Service Standards Food and beverage contracts are increasingly including standards that govern the level of ser- vices provided to the passengers and the operations of the facilities. Although the concessionaires are experts and need flexibility to manage their operations, based on sometimes inconsistent per- formance by airport concessionaires, many airport operators now include standards that dictate minimum levels of performance and include mechanisms for monitoring performance. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. 2.3.2 Approval of Menus and Pricing Establishing (and approving) menus and associated pricing is challenging for food service concessions. Among the major issues to address are defining the street price, menu variability, and service standards. Airports use various approaches to establish pricing. There is even more variety in the approaches to establishing menus and permitting or declining changes to them. Some existing contracts use language to protect the airports’ interest in tenants’ offering menus that satisfy all potential customers. Pricing language is generally used to ensure compliance with a policy that limits pricing to cer- tain levels (e.g., street or street plus a percentage). Many of these approaches use some variation of a “market basket” approach, where specific non-airport locations of the same restaurant brand or other similar concept are used as reference points to check airport prices and ensure they com- ply. Invariably, using the phrase “street pricing” results in complications and misunderstanding if the agreement is not worded appropriately. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the PHX and BNA concessions agreements regarding approvals of menus and pricing. Pricing language may also require a statement of policy on employee discounts. However, authors of food/beverage agreements should be aware that employee discounts affect other ele- ments of the agreement as follows: • The practice of offering employee discounts stems from a time when almost all airport retail prices were set well above “street” level. The discounts were used to ensure that employees were not subjected to the same inflated prices as travelers. If the agreement being drafted envi- sions street pricing or similar, the need for an employee discount may be less. • It is relatively common practice for sales generated with employee discounts to be excluded from gross sales when rent is calculated. On the surface, this may seem logical. However, any determination regarding the exclusion of discounted sales from rent calculations should be supported through the pro forma analysis. It is not recommended that this practice be imple- mented without that analysis. • In a small sample of cases, these policies are being evaluated with regard to the possibility that airport employees may be receiving inappropriate gifts from concessionaires. The justifica- tion for the argument is that an airport employee will pay less for exactly the same good or service as a passenger will pay. The larger population of airport managers does not perceive Concession Agreements 21

an employee discount as inappropriate, and this Guidebook does not recommend assuming such unless the airport’s policies, procedures, or overriding law/ordinance specifically state so. In addition to the information above, it is also recommended that airports consider using indices based on some variation of the Consumer Price Index (CPI) to standardize annual inflation-based price increases. 2.3.3 Materials Handling Most materials handling issues are addressed above. However, for food and beverage agree- ments, there is an additional concern to address—grease traps and removal. The language dealing with this issue does not need to be extremely complicated; however, airports are cautioned that governing environmental law is becoming increasingly stringent with regard to grease storage. Air- port managers are advised to ensure that tenants facilitate, rather than hinder, the airport’s com- pliance with environmental requirements. Airports should require tenants ensure that grease traps are installed and checked and/or cleaned at least monthly in all concession locations. The agreement should mandate that if a problem devel- ops because of a clogged or under-maintained grease trap, the concessionaire shall repair, or cause to be repaired, all damages caused thereby at its sole expense. The concessionaire must agree that the airport may assess a fine for repeated instances of overflowing or malfunctioning grease traps in accordance with the agreement. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. 2.3.4 Food Safety Responsibilities At its most basic level, a food service concession agreement should mandate the sharing of health department inspection reports with the airport, as suggested by the following language. An airport, aside from mandating compliance with all relevant rules and laws regarding health code compliance, can require compliance of its own cleanliness standards. Sample standards include the following: • All areas within the tenant space shall be kept clean and well maintained. • Any and all debris shall be removed from counters and tables within 2 minutes. • Areas shall be kept free of unpleasant odor. • Floors shall be kept free of debris and stains and shall be clean and well maintained. • Carpeting shall appear vacuumed and floors shall appear washed. • Entrance doors shall be free of smears, smudges, and dirt. • Glass windows and display cases shall be clean and free of smudges. • Any and all food being used for display purposes shall be rotated daily. • Sales and cashier areas shall appear clean and organized. • Tray slides (if present) shall be clean. • Food trays shall be washed regularly (not just wiped down). • Light fixtures and their attachments shall be kept clean and free of dust. • Exhaust hoods, fans, and filters shall be appropriately maintained and cleaned. • Grease traps shall be maintained and inspected for leaks regularly. • Tenant waste shall be placed inside garbage compactor(s) and compacted. • Delivery palettes and milk crates shall be neatly stacked and organized (while on the loading dock or outside tenant space) between deliveries. • All cardboard boxes shall be broken down and placed within the designated cardboard receptacles. 22 Guidebook for Developing and Managing Airport Contracts

See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the PHX Concessions Agreement. 2.3.5 Pest Control Airports should ensure that tenants are solely responsible for a pest-free environment within assigned premises by maintaining its own pest control services, in accordance with the most modern and effective control procedures. All materials used in pest control shall conform to fed- eral, state, and local laws and ordinances. All control substances utilized shall be used with all precautions to obviate the possibility of accidents to humans, domestic animals, and pets. Pests referenced should include all those typically encountered by pest control specialists in the area. Whenever the airport deems that pest control services must be provided to a building or area that includes assigned premises under the agreement, the Airport should ensure that the tenant pays for the costs of services provided. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the SFO Concessions Agreement. 2.3.6 Maintenance of Kitchen Equipment Maintenance of kitchen equipment is not a topic traditionally encountered in food service concession agreements. Typically, its maintenance is presumed to be covered in other articles related to maintenance of the assigned premises or similar. There are good examples, though, of language used to ensure adequate care of other airport facilities; this language can be used to fash- ion a clause or article that addresses the appropriate maintenance of kitchen equipment. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for sample material from a concessions agreement. 2.3.7 Cash and Credit Handling In a world that is becoming increasingly “cashless,” most airports require that all food service providers accept credit cards for goods and services. Often, small concessionaires contend that the size of their business makes it impractical to pay the fees charged by major credit cards. As discussed before, however, the Airport can use the pro forma income statement to assess the effect of these fees on the concessionaire’s profitability, and determine the appropriate rent structure to ensure that credit cards are accepted. Airports typically mandate the acceptance of at least three credit cards, with MasterCard and VISA a must, and American Express strongly recommended, partic- ularly if an airport has a high percentage of business travelers. Airports should also strongly encour- age tenants to provide a “swipe and go” credit card (no signature required) service to customers. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for an excerpt from the MSP Concessions General Terms & Conditions. 2.3.8 Disputes with Other Tenants This is a critical element to address because well-written articles and clauses in food service agreements can diffuse disagreements before they escalate and cause confusion and in-fighting that may be apparent to customers. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the ELP and CHS concessions agreements regarding resolving disputes among tenants. Concession Agreements 23

2.4 Specialty Retail/News and Gifts Additional Issues for specialty retail/news and gift concessions include the following: • Definition of product categories • Carts and kiosks 2.4.1 Definition of Product Categories As concessionaires have continued to add more brand names to their portfolios, they have increasingly been able to offer not just specialty retail brands, but branded merchandise in the gift sections of newsstands. This makes classifying certain products a challenge. “Gifts” typically bring different percentage rents than “Specialty Retail.” Airports are encouraged to be specific in describ- ing which product categories are expected in which locations (the RFP process should reflect these desires). 2.4.2 Carts and Kiosks Many airports supplement their retail offerings through product carts where there is insufficient space or passenger exposure to support a full retail unit. Product carts are also sometimes used to sell individual specialty products (e.g., Rosetta Stone language software). Some airports are begin- ning to offer electronic vending kiosks selling electronics, cosmetics, and even over-the-counter medical supplies. Concession agreements for carts and kiosks typically have a shorter term, reflect- ing the reduced investment and different rental structures to reflect the margins. Similarly, conces- sion agreements for these types of operations typically will need provisions for flexibility in changing out product mix with airport approval in order to adjust to changing market preferences. 2.5 Passenger Services Airports offer various passenger services. Historically, such services were limited to shoe shine stands and business centers, but now these services range from battery-charging stations and massage stations to full-service spas and pharmacies and medical centers. These services typically carry a different range of rental levels and may have either only percent- age rents or a fixed rental amount, depending on the service and the level of investment required. 2.6 Parking Additional issues for parking concessions include the following: • Management responsibilities • Revenue control procedures • Additional services 2.6.1 Management Responsibilities As with all airport functions involving direct contact between contractors and customers, great care must be taken to ensure that the governing contract language explicitly states the requirements of the contractor in all facets of the operation. For parking managers, various functions and ser- vices are often required or contemplated that may not be directly related to vehicle parking. It is especially important to call out such functions in contract language. 24 Guidebook for Developing and Managing Airport Contracts

See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the BWI parking management services agreement which includes a detailed dis- cussion of the management responsibilities to be performed. 2.6.2 Revenue Control Procedures Vehicle parking at an airport generates significant revenue. In many cases, it generates the high- est level of non-airline revenue for the airport sponsor. A sponsor must have detailed revenue con- trol procedures to ensure this revenue is maximized. Revenue control is ensured by monitoring several key contract elements. These include parking tickets for which there is no accounting, miss- ing or lost ticket inventory, and the requirement that a parking manager utilize a computerized parking facilities management system. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the CMH parking management services agreement which includes a detailed dis- cussion of revenue control procedures. 2.6.3 Additional Services Airports have been expanding their parking operations so as to enhance revenue and protect their market share from competition from off-airport parking operators. These services typically include all of the self-parking operations, and, more recently, have included provisions for valet parking. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the OAK parking management services agreement which includes a detailed description of valet parking services. 2.7 Rental Cars Additional Issues for rental car concessions • Location of operations • Definition of gross revenues • Definition and calculation of MAG • Definition of transaction days • Credit card acceptance • Dual branding privileges • DBE requirements • Valet, pick-up, drop-off restrictions • Vehicle sales • Pass-through of concession fees • Space leases • Consolidated facilities • CFC calculation and customer presentation • Shuttle bus operations • Employee parking • Performance security • Underground storage tanks • Environmental conservation Concession Agreements 25

2.7.1 Location of Operations The location of rental car operations has also seen changes in the past 10 years. Smaller and medium-sized airports may offer the convenience of locating these operations in the parking garage—this can reduce or eliminate the need for buses, but can reduce available parking spaces. At larger, space-constrained airports, there is a movement toward consolidated car rental facil- ities (CONRACs) located close to the terminal or located more remotely to increase parking rev- enues or expand terminal areas. 2.7.2 Definition of Gross Revenue Airport operators seek to maximize the gross revenue definition because this becomes the basis for the calculation of percentage rents and MAGs. In addition to time and mileage expenses associated with car rental transactions, revenues from the sale of personal accident insurance coverage, car seat rentals, global positioning system (GPS) unit rentals, or any fees associated with future technology amenities should be included in the gross revenue definition. Exclusions from the gross revenue definition are items such as the following: • Revenues collected for damage or repair of vehicles • Fuel sales • Sale of vehicles if permitted on the airport (Some airports ban the sale of vehicles on the air- port premises.) • Federal, state, and local taxes • Customer Facility Charges (CFCs) • Sales of uniforms to employees See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement for definition of gross revenues. 2.7.3 Definition and Calculation of MAG The MAG is the minimum amount the car rental operator must pay to the airport. The amount can be a minimum fixed-dollar amount or a minimum percentage amount. Using a fixed-dollar amount enables the airport to determine budgeted revenue amounts. The fixed-dollar amount can be stated as an annual amount divided by 12 to calculate the monthly amount due from the operator. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement. There is typically a process to calculate the difference between the percentage rent calculation and the MAG to determine if the percentage rent is higher and therefore the Operator may have an amount due to the airport. The process should occur within 90 days of the end on the con- tractual year. 2.7.4 Definition of Transaction Days The Transaction Day definition can either encompass a 24-hour period for regular rentals or calendar days for rentals used for insurance replacement purposes. In many cases, if a rental exceeds a 24-hour period by more than 2 or 3 hours, the customer will be charged for another full day. This definition has less effect when the Gross Revenue definition includes all charges for time and mileage. It is relevant for CFCs. 26 Guidebook for Developing and Managing Airport Contracts

On-airport car rental operators require a minimum 1-day rental. The advent of Smart Cars, which specialize in short-term hourly rentals off-airport, may spur the traditional car rental com- panies to offer a rental period of less than 24 hours. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement. 2.7.5 Credit Card Acceptance Some car rental agreements, such as those for the Metropolitan Washington Airports Author- ity (MWAA), which operates Dulles International Airport (IAD) and Ronald Reagan Washing- ton National Airport (DCA), specify that a minimum number of credit cards must be accepted for payment (e.g., one to three cards). Car rental companies have various policies with regard to debit cards. Companies that accept debit cards may require large minimum hold requirements or $300 to $500 per transaction. Companies may also require additional identification or credit checks with the use of debit cards. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement concerning credit card acceptance. 2.7.6 Dual Branding Privileges Currently, Avis and Budget are both owned by The Avis Budget Group, while Alamo and National are both owned by Vanguard Car Rental. Under newer agreements, these brands may want to operate two brands under the same contract. The concessionaires may also want the abil- ity to separate in the future if a brand is sold or discontinued. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the MWAA Car Rental Agreement. 2.7.7 DBE Requirements DOT 49 CFR Part 23 governs the disadvantaged business participation presently defined as Airport Concession Disadvantaged Business Enterprise (ACDBE). The goals established for car rental concessions tend to be lower than the goals for other concessions. Historically, car rental operations had achieved lower levels of participation because the business had less participation by minority- and women-owned businesses available to meet the goals. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the MWAA Agreement concerning meeting ACDBE participation through pur- chase of goods and services. 2.7.8 Valet, Pick-up, Drop-off Restrictions Airports may specify where customers can be picked up and dropped off for car rental oper- ations. This location will depend on the location of the ready and return lots and provisions made for customer transportation between the terminal areas and the ready and return lots. Valet ser- vices permit the customer to return vehicles somewhere other than the ready and return lot areas. Most airports prefer to restrict customer pick up and drop off to specified loading areas and/or ready and return lots. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement. Concession Agreements 27

2.7.9 Vehicle Sales The car rental contracts should specify whether or not vehicle sales are permitted on the airport premises. If vehicle sales are permitted, then the Gross Revenue definition must specify whether or not the revenues from vehicle sales are included or excluded from the Gross Revenue definition. 2.7.10 Pass-through of Concession Fees The car rental operators will want to pass through the concession fees to their customers and display the fee as a separate line item on the customer receipt. The contract should specify whether the fees can be passed through to the customers and whether the fees can be displayed. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH Car Rental Agreement. 2.7.11 Space Leases In addition to concession fees, airports can charge car rental operators for leased areas as an annual fee per square foot that is charged on a monthly basis. The price per square foot should be based on the type of area, and the associated costs that the airport needs to recover for the space. The typical leased areas for car rentals include the following: • Service Counters. Counter positions within the terminal areas used to serve customers. • Telephone Alcoves. Used instead of or as a supplement to service counters in the terminal ground transportation areas. • Ready/Return Lots. Place where customers can pick up and drop off vehicles for rental. For cus- tomer convenience, it is preferable to have the ready and return lot in easily accessible parking garages, thereby reducing the need for shuttle buses or other forms of ground transportation between the passenger terminal areas and the ready and return lots. • Quick-Turnaround Areas. Usually used for car wash and fueling, but no heavy maintenance. • Service Centers. Maintenance and vehicle service area. 2.7.12 Consolidated Facilities The current trend is to consolidate car rental operations in one area, which can be a park- ing garage for ready and return lots or a building remote from the terminal areas. The ready and return lots are usually separated from the service centers in consolidated operations. 2.7.13 CFC Calculation and Customer Presentation The Customer Facility Charge (CFC) may be instituted by ordinance by the local governing jurisdiction, or it may be tied to a bond issue to fund construction of new car rental facilities. The document governing the CFC may be referenced in a section of the car rental concession agree- ment and it may be documented with associated bond issues in separate agreements (e.g., Special Facility Leases). The CFC is considered property of the airport or the bond trustee to be used to service debt associated with constructing new facilities. The CFC may expire once all approved costs have been paid and is normally stated as a fixed-dollar amount per transaction day. The amount of the CFC is calculated to cover the applicable costs of new facilities within a specified period. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the BNA Agreement for provisions regarding separate statement of concession recovery fee. 28 Guidebook for Developing and Managing Airport Contracts

2.7.14 Shuttle Bus Operations Shuttle busses are usually operated by the car rental companies to transport customers and employees between the passenger terminal areas and the ready/return operations. The contract should specify what entity will operate the bus (i.e., whether it is the car rental operator, the air- port, or a third party) and should also assign loading and drop off areas using an exhibit and include specifications for any signage standards. The airport may choose to limit the number of buses at the loading area to minimize curbside congestion. 2.7.15 Employee Parking Airports may permit car rental employees to park in designated airport employee parking areas. Employees using these lots may require a badge or medallion to access the lot. This per- mission and any associated rules should be provided in the car rental agreement. 2.7.16 Performance Security The airport may require a performance bond from the car rental operator. The amount is fre- quently within the range of 3 to 5 months or up to 100% of the annual MAG. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH agreement concerning performance security. 2.7.17 Underground Storage Tanks Car rental operators may require fuel storage tanks at the Quick-Turnaround Area and/or the Service Centers. Provisions in the contract should address descriptions of tanks, location, owner- ship, installation, removal, operation and maintenance, leak detection, and vapor recovery. Addi- tionally, the contract should require airport approval of installation of additional fuel storage tanks. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the IAH agreement concerning installation, removal operation and maintenance of tanks. 2.7.18 Environmental Conservation Car rental operations consume large amounts of water and paper. Some car rental companies are conducting internal reviews to improve conservation efforts. Drought conditions affecting various areas of the country may necessitate formal conservation policies and recycling meas- ures as part of future agreements. See CRP-CD-81 (enclosed herein), Appendix to Chapter 2, Concession Agreements, for excerpts from the MWAA Car Rental Agreement. Concession Agreements 29

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TRB’s Airport Cooperative Research Program (ACRP) Report 33: Guidebook for Developing and Managing Airport Contracts is a guidebook of best practices for developing, soliciting, and managing airport agreements and contracts for use by a variety of airports.

The agreements referenced in this guidebook range from airline-related agreements to communication and utility service as well as common-use, ground transportation, and concessions agreements for a variety of passenger services. An accompanying CD-ROM provides sample agreements in each of these areas.

The CD-ROM included as part of ACRP Report 33 is also available for download from TRB’s website as an ISO image. Links to the ISO image and instructions for burning a CD-ROM from an ISO image are provided below.

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