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What this option does do is change the distribution of risk. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Airports would also have to establish supply lines for products that they have not procured in the past. While many contracts include a "force majeure" clause, this does not necessarily cover pandemic scenarios and in many instances, there is no formal agreement in place to review commercial terms in the event of such a . The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. . While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. 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. No one is sure how long recovery will take. These supplier relationships are unlikely to have the same economies of scale as those of national concessionaires, which means the costs of operation may be higher. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. However, this still may not be the most effective solution. With standard concession management programs, the airport operator assumes all of the risk for leasing the property but stands to profit the most by receiving a larger amount of generated revenues. PFCs have been set at $4.50/passenger since 2000, and increasing the PFC maximum has been a priority of the airport industry for some time. Terminal Closure and Footprint Reductions. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. "We've already . This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Lets consider six potential options. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. Rent abatement should be tied to the changed circumstances caused by the public health emergency and done in accordance with Grant Assurances 22 and 24, as well as related statutes. Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. The joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. Some airports have had huge success in meeting ACDBE goals with the developer model. Wealth Management. 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. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. President Donald Trump has already tweeted his support for such an infrastructure bill. MAG - Minimum Annual Guarantee. That will, in turn, harm the concession program. If FAA does not receive emergency approval, the economic recovery of the nation's air Most simply, the airport and vendor could agree to a fixed percentage rent. When one partner tries to do too much, it will lessen the benefits of the joint venture. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Percentage Rent - In addition to the MAG, Concessionaires shall pay percentage rent but only to the extent that percentage rent exceeds the monthly installment of MAG, To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). In addition to the detailed guidance in the Revenue Use Policy, the CARES Act makes clear that the funds may not be used for any purpose unrelated to the airport. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. The Trinity model can be considered an extension of the joint venture model. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Option 5: The Trinity (or Trinity Plus) model. Concessionaires pay the Airport Authority a percentage of their gross sales each month, which is one-twelfth of a pre-determined minimum annual guarantee (MAG). them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement. 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 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. 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. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. softballrizer. . Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Option 6: The airport as concession operator. But opting out of some of these cookies may affect your browsing experience. Creation of the lounge would require around a $4-million investment from whichever group decides to take over the space, which is 9,100 square feet -- on the small side for most airport lounges. (1) On-Airport (% of Gross Receipts). The Secretary of Transportation may waive this workforce retention requirement if they determine that the sponsor is experiencing economic hardship as a direct result of the requirement, or that the requirement reduces aviation safety or security. Meanwhile, Aena is forecasting that in the period to 2023, the minimum annual guaranteed rents and fixed rents, corresponding to contracts in force at 30 June 2020, will decrease. 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. Terms in this set (15) What is MAG and what does it stand for? In either case, history has shown that MAGs are not supportable in the event of severe downturns. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. The key will be ensuring that airline charges remain fair and reasonable. The airport environment is complex and has become even more challenging due to COVID-19. Under the current process, minimum annual guarantee for the first year is the financial bid parameter for selection of bidder and the period of concession is 10 years from the commercial operations date. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Were here to help! 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. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. These three options do not change the underlying airport-concessionaire relationship. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. installments during the first year of the Term. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. 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 . First, and potentially most important, the FAAs position on rent abatements has gone from NO to: A decision to abate rent (including minimum annual guarantees and encompassing fees) is a local decision. Airport Operations. The joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. . If you have questions about COVID-19s impact on your business, please reach out to your Loeb relationship partner or email us directly atCOVID19@loeb.com. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). In North America, airports tend to look at MAGs as the least amount of acceptable rent. Rent abatement should be tied to the changed circumstances caused by the public health emergency and done in accordance with Grant Assurances 22 and 24, as well as related statutes. 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. That report and certification should include the number of full-time equivalent employees working at the airport as of March 27, 2020, as the baseline comparison. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. In this model, the airport takes on two roles: landlord and partner in the operation. Examples of Minimum Annual Guaranteed Rent in a sentence. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. 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. Tallahassee International Airport . Attention: Finance & Administration Division . All rights reserved. This . Primarily, in residual agreements, the rates vary based on airport revenue. Airports would also have to establish supply lines for products that they have not procured in the past. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . These MAGs are usually based on some percentage of the prior years revenue and are intended to provide the airport sponsor with a revenue floor from these concession contracts. Please pay it forward. A prepaid monthly "lease" to do business on the property. This financial shock has created a number of legal and financial issues. Test. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Paid parking went into effect at . The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. The single factor most tied to concession success is the footfall past the concession locations. Airport sponsors should carefully review the maintenance and operation (M&O) expense allocation methodology in their terminal leases to confirm the method for allocating costs for vacated space. This Minimum Annual Guarantee must exceed $100,000. 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. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. One-twelfth of the MAG shall be due in advance on the first day of each month The FAAs Office of Airports will administer these grant funds to airport sponsors. There are numerous ways to frame a contract without a MAG. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Car rental companies are concessionaires at the airport. Strategic agency for engagement and transformation. Land . Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? Airlines are likely to oppose any PFC increase, and in the absence of any increase, infrastructure spending would likely be funded through additional appropriations to the Airport and Airway Trust Fund. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. The company, which . That will, in turn, harm the concession program. Bid. Most simply, the airport and vendor could agree to a fixed percentage rent. Performance. Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. 4.1.3 Percentage Fees. 1, their minimum annual guarantee was superior to anybody . Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . When passenger traffic does come back, airports should rethink how their concession contracts work. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. 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. To ensure that the program is performed in accordance with law. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. Find out how our purpose shapes our culture, people, and mission-driven work. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. This is only for the passenger traffic, while for . October 09, 2020, 11:40 a.m. EDT 4 Min Read. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. If the metric for rent resumption is comparing the current period to the same period in the previous year, by the time the world reaches year two of recoveryeven if the improvement is only slight and slowthe contract may reinstate the original MAG. A MAG, as currently developed, is unsustainable in anything but relatively normal times. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). Elsewhere, airports do not expect vendors to exceed their MAGs. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) The $10 billion in funding is divided into four main categories: For airport grants, after the Secretary of Transportation announces awards under the CARES Act, each airport sponsor must submit a grant application to access those funds. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. . A concessionaire's rent structure in an airport may differ from the traditional model. The competitive landscape may beby necessityaltered. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. They will typically lease space for counter and office space and additional space for the vehicle storage. If, on the other hand, an airport sponsor decides to enforce the M&O expense allocation in its terminal leases, then the terminal leases should be carefully reviewed to determine the terms of enforcement and what rights the airlines have under those leases. Tax. https://www.law.cornell.edu/cfr/text/49/part-23, Airport Concessions Disadvantaged Business Enterprises, Developing An Operating Budget - Airport University, Disadvantaged Business Enterprises - Airport University. At least for the immediate future, there will be reduced demand for concession services. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. These three options do not change the underlying airport-concessionaire relationship. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. The airport operator is always present and has a wealth of knowledge about the airport. Without this expertise, the concession will almost certainly fail to operate at an optimum level. One such excerpt from this guide (Paragraph 6.81) indicates nonoperating revenues would generally include, among other things, grants that may be used, at the recipients discretion, for either operating purposes or capital outlay. That being said, while there seems to be a compelling argument that most of the CARES Act funding for airports may be operating, each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. 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. At SAN, rent is calculated as a percentage of the gross revenues supported by a minimum annual guarantee, or MAG, that is a part of the leasing requirements. This strategy is particularly applicable for a hub airport where the hub airlines brand expression is likely already an important part of the airports perceived brand. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 49 CFR Part 23 requires airports to have a concessions-based DBE program. 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. Where do we go from here? View bio. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. There are a few limitations, however, that make this a less than optimal solution. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. Match. For construction contracts over _____ federal regulations require the airport to obtain a bid guarantee to equal at least _____ of the bid price, as well as performance and payment bonds equaling _____ percent of the contract. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Guarantee: 50% of Minimum Annual Guarantee. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. Majority-In-Interest (MII) clauses. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. However, this still may not be the most effective solution. 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. Flashcards. 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. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. There are several types of concessionaires that lease space to operate at the airport. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Audit. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. There will still be passengers, and the concession industry needs to be ready to serve them. As a result, airports may wish to consider going a step further. They often charge more than 10% for water and alcohol, Waguespack said. In this model, the airport takes on two roles: landlord and partner in the operation. However, there is no relief of the obligation to withhold and remit the corresponding employee share. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. It is mandatory to procure user consent prior to running these cookies on your website. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses.