minimum annual guarantee airport minimum annual guarantee airport

This website uses cookies to improve your experience while you navigate through the website. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. COVID-19 has sent shockwaves throughout the world. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. 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. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. Where do we go from here? 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. 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 North America, airports tend to look at MAGs as the least amount of acceptable rent. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). In either case, history has shown that MAGs are not supportable in the event of severe downturns. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. 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. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. 87, Leases by a full 18 months, resulting in June 30, 2022 year-ends to be the first to implement the significant new leasing standard. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. Examples of Minimum Annual Guaranteed Rent in a sentence. 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. Products and services both fall into the concessions category. Meet the Woman Stockpiling Cash to Sue San Francisco Over Housing Deadlock, Loeb Secures Defense Victory for the State of California and the California State Lands Commission, Loeb Lawyers Recognized in 2023 Edition of Best Lawyers in America, American Conference Institutes (ACI) 37th International Conference on the Foreign Corrupt Practices Act, $500 million, which can be used to fund any grant made under the FY20 Appropriations Act (P.L. 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. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. No one is sure how long recovery will take. Project. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. 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. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The concept is not uncommon. 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. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. There will still be passengers, and the concession industry needs to be ready to serve them. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. There are means of counting passengers who pass a concession location, but few airports have installed such technology. These MAGs are usually based on some percentage of the prior year's revenue and are intended to provide the airport sponsor with a revenue floor from these . Learn. 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. 47114 (as modified by the CARES Act), then the remainder is distributed in the same manner as the $7.4 billionbased on a mixture of enplanements and debt service. The Trinity model can be considered an extension of the joint venture model. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. There are a few limitations, however, that make this a less than optimal solution. The Trinity model can be considered an extension of the joint venture model. There are numerous ways to frame a contract without a MAG. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Some airports have had huge success in meeting ACDBE goals with the developer model. Lets consider six potential options. Very hands off for the airport sponsor. Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. Option 5: The Trinity (or Trinity Plus) model. (1) On-Airport (% of Gross Receipts). However, this still may not be the most effective solution. 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. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. The price tag is a whopping $440 per square foot. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. February 2, 2021January 28, 2021 | AirportU. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. In times of continued and prolonged growth, airports have learned to depend upon MAGs. . Audit. Learn how your comment data is processed. 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. There are means of counting passengers who pass a concession location, but few airports have installed such technology. The funds are coming directly from the U.S. Treasurys General Fund to prevent, prepare for, and respond to the impacts of the COVID-19 public health emergency. To help develop firms that can compete in the marketplace outside of the DBE program. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. ); that is, airport sponsors meeting statutory and policy requirements under this section, as well as those identified in the FAAs current National Plan of Integrated Airports System (NPIAS). Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. The airport environment is complex and has become even more challenging due to COVID-19. Terminal Closure and Footprint Reductions. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. Option 6: The airport as concession operator. In other parts of the world, MAGs are the airport's exact expected rental payments. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. However, MAGs in concession contracts still expect continued growth. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. The company, which . Both were selected based on a global tender, and need to pay the Minimum Annual Guarantee of 31 crore each to the Airports Authority of India. Flashcards. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. 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. It varies based on the size, capacity, and operations of the airport. 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. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Guarantee: $50,000. Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. There are numerous ways to frame a contract without a MAG. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. However, there is no relief of the obligation to withhold and remit the corresponding employee share. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. Land . A. To level the playing field so that DBEs can compete . Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). 4.1.1 Minimum Annual Guaranteed Concession Fee. The policies and procedures are available for review here. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. 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. Elsewhere, airports do not expect vendors to exceed their MAGs. Manchester Airport Group in the U.K. had started to operate a restaurant in their home airport before the pandemic, so there is precedent for this strategy. 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. A concessionaire's rent structure in an airport may differ from the traditional model. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. These three options do not change the underlying airport-concessionaire relationship. 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. In this model, the airport takes on two roles: landlord and partner in the operation. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. However, it does reduce the potential benefit to the airport by splitting the proceeds generated. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. This financial shock has created a number of legal and financial issues. With the new economic and industry realities, capital access may be an even greater hurdle. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . Minimum Annual Guarantee (MAG) waived for concessionaires and rental cars -Targeted Operations & Maintenance reductions Implemented a hiring freeze and 8 furlough days Offered early retirement Focused on essential expenditures Airlines, while they may be able to reduce some operating costs associated with vacated premises, must still cover all their fixed and operating costs associated with the vacated space. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. That is no longer possible. Please read our Privacy Policy for more information on the cookies we use. Minimum Annual Guarantee Process Up to 3 years Or Up to $100,000 per year Direct negotiation with potential concessionaire Over 3 years and up to 5 Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. The airport environment is complex and has become even more challenging due to COVID-19. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. Primarily, in residual agreements, the rates vary based on airport revenue. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. 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. The key will be ensuring that airline charges remain fair and reasonable. We did not review solicitation or award of concession agreements in this audit. Consulting. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. 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. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). The actual process is the easiest for the airport sponsor since there are minimal contracts. To remove barriers in participation of DBEs. 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. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. 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. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. The workforce retention requirement doesnt apply to nonhub or nonprimary airports. Bid. Additionally, airports required to pay sick leave wages or family leave wages under Section 7001(e)(4) and 7003(e)(4) of the Families First Coronavirus Response Act are relieved of paying the employers 6.2% portion of FICA taxes associated with those wages. As a result, airports may wish to consider going a step further. First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through Grants-In-Aid for Airports. That $10 billion is divided into the following categories: Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . A MAG, as currently developed, is unsustainable in anything but relatively normal times. 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. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. By clicking Accept, you consent to the use of ALL the cookies. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. All rights reserved. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. However, this still may not be the most effective solution. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. It is mandatory to procure user consent prior to running these cookies on your website. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. The CFC is a charge based on either the contract value, gross receipts, or per car per day. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. 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. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. 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. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. This . Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. 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. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. Car rental companies are concessionaires at the airport. 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. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Concessions covers more than what you think of served at a traditional concession stand. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. . CARES Act grant recipients should follow the FAAs Policy and Procedures Concerning the Use of Airport Revenues (Revenue Use Policy), 64 Federal Register 7696 (64 FR 7696), as amended by 78 Federal Register 55330 (78 FR 55330). 3300 Capital Circle, S.W. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . 2023 Plante & Moran, PLLC. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Madang, Papua New Guinea - Madang (Airport Code) MAG: Mainzer Aufbaugesellschaft mbH: MAG: Mission Assurance Guidelines: MAG . The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. 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. We also use third-party cookies that help us analyze and understand how you use this website. An amount of $7.4 billion, which can be distributed to airport sponsors for any purpose for which airport revenues may lawfully be used. The purpose for which airport revenues may lawfully be used is widely viewed as a reference to the FAAs Policy on Permitted and Prohibited Uses of Airport Revenue (Revenue Diversion Policy). Regardless, this shifting of risk may not be acceptable to airports. At least for the immediate future, there will be reduced demand for concession services. . This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). The airport operator is always present and has a wealth of knowledge about the airport. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. minimum annual guarantee (MAG) obligations to eligible airport concessions. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. While the bulk of the $10 billion appropriated for airport sponsors can be used to make bond principal and interest payments if necessary, airport sponsors may be faced with difficult decisions about how to prioritize needs while under financial stress. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. If, on the other hand, the airport sponsor decides to enforce the terms of a MAG, then it should carefully review the concession contract to determine the terms of enforcement and whether the concessionaire has any basis to refuse to pay the MAG. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement.