minimum annual guarantee airport

Airport Operations. If FAA does not receive emergency approval, the economic recovery of the nation's air That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. The big change at Los Angeles International Airport allows concessionaire partners, which include DFS Group, Hudson and HMSHost, among others, to pay percentage rent rather than a minimum annual guarantee (MAG) from April 1 through June 30 as a result of passenger traffic declines due to the coronavirus pandemic. Airport sponsors must certify compliance with the CARES Act employment requirements at the time of grant execution and report employment totals quarterly on June 30, Sept. 30, and Dec. 31, 2020. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. When passenger traffic does come back, airports should rethink how their concession contracts work. 84, Fiduciary Activities. While the bulk of the $10 billion appropriated for airport sponsors can be used, if necessary, to make bond principal and interest payments, airport sponsors may be faced with difficult decisions about how to prioritize needs during the financial stress. C. Concession Fee. The airport environment is complex and has become even more challenging due to COVID-19. Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. No one is sure how long recovery will take. Option 6: The airport as concession operator. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . 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. Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? The repayment will occur over time, with 50% of the deferral being due by Dec. 31, 3021, and the remaining due by Dec. 31, 2022. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. In either case, history has shown that MAGs are not supportable in the event of severe downturns. . - Suite 1 . Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. In North America, airports tend to look at MAGs as the least amount of acceptable rent. 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. 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). 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Airports would also have to establish supply lines for products that they have not procured in the past. View bio. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. Discover how we help clients achieve success. 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 April 4th FAA guidance permits this: In coordination with airport sponsors, airlines, the Transportation Security Administration (TSA), and other entities, closing gates or sections of terminals is likely to be acceptable if the closure is executed in response to reduced passenger volumes and operations, is not discriminatory, and does not provide an unfair competitive advantage to one operator. As a result, airports may wish to consider going a step further. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Supplemental Airport Grant-In-Aid Funding Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. As a result, the collectability of this revenue may need to be reviewed and an allowance for estimated uncollectable amounts may need to be recorded. 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. BADGES AND SECURITY: . Test. Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Alternatively, different percentages could be charged for varying levels of sales or by assigning either fixed or variable rates to different product categories (e.g., one percentage for food and non-alcoholic beverage and a separate percentage for alcoholic drinks only). 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). As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. 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. 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. Attention: Finance & Administration Division . These cookies will be stored in your browser only with your consent. Audit. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. San Francisco, CA Mayor London N. Breed has signed an ordinance authorizing the San Francisco International Airport (SFO) to launch a rent relief program for airport concession tenants, in which lease agreements will be modified to waive certain rent and fees.The value of the relief available to be granted under the COVID-19 Emergency Rent Relief Program is estimated at $21.3 million and . 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 There will still be passengers, and the concession industry needs to be ready to serve them. Concessions covers more than what you think of served at a traditional concession stand. Madang, Papua New Guinea - Madang (Airport Code) MAG: Mainzer Aufbaugesellschaft mbH: MAG: Mission Assurance Guidelines: MAG . The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). 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. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. "No. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. The key will be ensuring that airline charges remain fair and reasonable. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Examples of Minimum Annual Guaranteed Rent in a sentence. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Notably, the GASB has deferred the implementation date of GASB Statement No. Primarily, in residual agreements, the rates vary based on airport revenue. With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). 116-94). Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). See how we help fast-changing industries succeed. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. The airport environment is complex and has become even more challenging due to COVID-19. The cost of design and construction for your space is going to be much higher. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. This Minimum Annual Guarantee must exceed $100,000. The city may extend the action for an additional 30-day . A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. This website uses cookies to improve your experience while you navigate through the website. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Minimum Annual Guarantee means the minimum amount of money that is due annually and payable monthly to Authority from Concessionaire, as provided in Article 5 of this Agreement. 9. installments during the first year of the Term. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. Passengers have needs while at airports. If, at the end of any year during the Term, the total amount of monthly installments of MAG and Percentage Fees paid for such year is less than the total amount of annual MAG and Percentage . If you have questions. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. The future of airport concessions in a post-COVID-19 world, COVID-19's impact on commercial aviation: Customer survey findings, Why sustainable aviation is more than a flight of fancy, Sustainable aviation: A guide for aviation professionals. The Federal Aviation Administration (FAA) . As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. 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. In other parts of the world, MAGs are the airports exact expected rental payments. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Bid. 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. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. The single factor most tied to concession success is the footfall past the concession locations. In other parts of the world, MAGs are the airports exact expected rental payments. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 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, 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. The Airport has also experienced a reduction in passengers and operations as a result of . That will, in turn, harm the concession program. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. I certify that Airport Concessions Inc. has not received a second draw or assistance for a covered loan under section 7(a)(37) of the Small Business Act (15 U.S.C. The single factor most tied to concession success is the footfall past the concession locations. 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. Receive perspectives on the industries and issues that matter. This category only includes cookies that ensures basic functionalities and security features of the website. Nichols wrote to the County Board of Supervisors that $12.1 million of the money will be used to finalize airport agreements that waive contractual minimum annual guarantee rents for airport . What this option does do is change the distribution of risk. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. 2023 Plante & Moran, PLLC. Guarantee: $50,000. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. A master operator, or sometimes referred to as an institutional operator, serves as a master lessee and either provide or sublease concessionaires for the airport. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). However, this still may not be the most effective solution. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. 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 . Without this expertise, the concession will almost certainly fail to operate at an optimum level. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. 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. "We've already . . Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. 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. 49 CFR Part 23 requires airports to have a concessions-based DBE program. a minimum annual guarantee or MAG annually, which more or less translates to rent. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). In airports with residual airline agreements, the airlines will be required to make up the difference between revenue to the airport and required revenue to pay for airport development and other expenses. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. The FAAs Office of Airports will administer these grant funds to airport sponsors. 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 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. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. Minimum Annual Guarantee (MAG) of at least Eleven Million Dollars ($11,000,000) for each Contract Year and an annual escalation of at least three percent (3%) for the Contract Term. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. The actual process is the easiest for the airport sponsor since there are minimal contracts. 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. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . 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. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . 4.1.1 Minimum Annual Guaranteed Concession Fee. 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. Very hands off for the airport sponsor. From layoffs to business closings, social distancing to shopping only on days that correspond to the first letter of your last name, we have all seen and felt the impact. Through Dec. 31, 2020, the airport sponsor must continue to employ at least 90% of the number of individuals employed (after adjusting for retirements or voluntary employee separations) as of March 27, 2020. 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 Concessionaires are, in general, seeking some manner of rent relief from their airport partners. 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. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Normally, operating classification on the statement of revenues, expenses, and changes in net position will typically follow the classification of operating activities in the statement of cash flows. leasehold at Washington Dulles International Airport (IAD). While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. It varies based on the size, capacity, and operations of the airport. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. which guarantees that the tenant will pay the airport a minimum amount annually. Primarily, in residual agreements, the rates vary based on airport revenue. Lets consider six potential options. 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 . Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. If the airport sponsor determines that it is in its best interest to waive the MAG, then these clauses can be replaced with an alternative fee structure, such as a simple percentage of sales or some other agreed-upon metric of performance. . Some airports have had huge success in meeting ACDBE goals with the developer model. Match. 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 . Paid parking went into effect at . One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Find out how our purpose shapes our culture, people, and mission-driven work. FBO/SASO: NOTE: If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. However, MAGs in concession contracts still expect continued growth. Terminal Closure and Footprint Reductions. Match. February 2, 2021January 28, 2021 | AirportU. 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. By way of comparison, in the past two fiscal years (FY19 and FY20), the federal government has appropriated approximately $3.35 billion in regular Air Improvement Program (AIP) spending and an additional $400$500 million in discretionary AIP grants. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. The competitive landscape may beby necessityaltered. Terms in this set (15) What is MAG and what does it stand for? The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Most simply, the airport and vendor could agree to a fixed percentage rent. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Minimum Annual Guarantees. If an airport operator closes a concourse or a terminal, it would need to eliminate some concession spaces from its contracts, which may render some deals no longer viable. 1, their minimum annual guarantee was superior to anybody . HMS Host, the food and beverage concessionaire at Clinton National, is required to pay a minimum annual guarantee of $594,000, which works out to $49,500 monthly under the terms of its contract. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). 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. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. To help develop firms that can compete in the marketplace outside of the DBE program. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Please read our Privacy Policy for more information on the cookies we use. (1) On-Airport (% of Gross Receipts). SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. That is no longer possible. Regardless, this shifting of risk may not be acceptable to airports. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. The concept is not uncommon. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. A MAG, as currently developed, is unsustainable in anything but relatively normal times. In North America, airports tend to look at MAGs as the least amount of acceptable rent. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. Kona International Airport at Keahole is located on the western coast of the Island of Hawaii, approximately 10 miles from the town of Kailua Kona. There are means of counting passengers who pass a concession location, but few airports have installed such technology. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Discover our insights for a sustainable, low-emissions future. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. Concessionaires need to understand this new business reality when they ask for relief. Most simply, the airport and vendor could agree to a fixed percentage rent. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Tallahassee International Airport . Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%.

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minimum annual guarantee airport

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Airport Operations. If FAA does not receive emergency approval, the economic recovery of the nation's air That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. The big change at Los Angeles International Airport allows concessionaire partners, which include DFS Group, Hudson and HMSHost, among others, to pay percentage rent rather than a minimum annual guarantee (MAG) from April 1 through June 30 as a result of passenger traffic declines due to the coronavirus pandemic. Airport sponsors must certify compliance with the CARES Act employment requirements at the time of grant execution and report employment totals quarterly on June 30, Sept. 30, and Dec. 31, 2020. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. When passenger traffic does come back, airports should rethink how their concession contracts work. 84, Fiduciary Activities. While the bulk of the $10 billion appropriated for airport sponsors can be used, if necessary, to make bond principal and interest payments, airport sponsors may be faced with difficult decisions about how to prioritize needs during the financial stress. C. Concession Fee. The airport environment is complex and has become even more challenging due to COVID-19. Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. No one is sure how long recovery will take. Option 6: The airport as concession operator. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . 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. Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? The repayment will occur over time, with 50% of the deferral being due by Dec. 31, 3021, and the remaining due by Dec. 31, 2022. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. In either case, history has shown that MAGs are not supportable in the event of severe downturns. . - Suite 1 . Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. In North America, airports tend to look at MAGs as the least amount of acceptable rent. 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. 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). 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Airports would also have to establish supply lines for products that they have not procured in the past. View bio. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. Discover how we help clients achieve success. 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 April 4th FAA guidance permits this: In coordination with airport sponsors, airlines, the Transportation Security Administration (TSA), and other entities, closing gates or sections of terminals is likely to be acceptable if the closure is executed in response to reduced passenger volumes and operations, is not discriminatory, and does not provide an unfair competitive advantage to one operator. As a result, airports may wish to consider going a step further. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Supplemental Airport Grant-In-Aid Funding Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. As a result, the collectability of this revenue may need to be reviewed and an allowance for estimated uncollectable amounts may need to be recorded. 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. BADGES AND SECURITY: . Test. Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Alternatively, different percentages could be charged for varying levels of sales or by assigning either fixed or variable rates to different product categories (e.g., one percentage for food and non-alcoholic beverage and a separate percentage for alcoholic drinks only). 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). As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. 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. 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. Attention: Finance & Administration Division . These cookies will be stored in your browser only with your consent. Audit. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. San Francisco, CA Mayor London N. Breed has signed an ordinance authorizing the San Francisco International Airport (SFO) to launch a rent relief program for airport concession tenants, in which lease agreements will be modified to waive certain rent and fees.The value of the relief available to be granted under the COVID-19 Emergency Rent Relief Program is estimated at $21.3 million and . 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 There will still be passengers, and the concession industry needs to be ready to serve them. Concessions covers more than what you think of served at a traditional concession stand. Madang, Papua New Guinea - Madang (Airport Code) MAG: Mainzer Aufbaugesellschaft mbH: MAG: Mission Assurance Guidelines: MAG . The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). 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. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. "No. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. The key will be ensuring that airline charges remain fair and reasonable. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Examples of Minimum Annual Guaranteed Rent in a sentence. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Notably, the GASB has deferred the implementation date of GASB Statement No. Primarily, in residual agreements, the rates vary based on airport revenue. With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). 116-94). Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). See how we help fast-changing industries succeed. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. The airport environment is complex and has become even more challenging due to COVID-19. The cost of design and construction for your space is going to be much higher. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. This Minimum Annual Guarantee must exceed $100,000. The city may extend the action for an additional 30-day . A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. This website uses cookies to improve your experience while you navigate through the website. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Minimum Annual Guarantee means the minimum amount of money that is due annually and payable monthly to Authority from Concessionaire, as provided in Article 5 of this Agreement. 9. installments during the first year of the Term. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. Passengers have needs while at airports. If, at the end of any year during the Term, the total amount of monthly installments of MAG and Percentage Fees paid for such year is less than the total amount of annual MAG and Percentage . If you have questions. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. The future of airport concessions in a post-COVID-19 world, COVID-19's impact on commercial aviation: Customer survey findings, Why sustainable aviation is more than a flight of fancy, Sustainable aviation: A guide for aviation professionals. The Federal Aviation Administration (FAA) . As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. 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. In other parts of the world, MAGs are the airports exact expected rental payments. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Bid. 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. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. The single factor most tied to concession success is the footfall past the concession locations. In other parts of the world, MAGs are the airports exact expected rental payments. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 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, 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. The Airport has also experienced a reduction in passengers and operations as a result of . That will, in turn, harm the concession program. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. I certify that Airport Concessions Inc. has not received a second draw or assistance for a covered loan under section 7(a)(37) of the Small Business Act (15 U.S.C. The single factor most tied to concession success is the footfall past the concession locations. 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. Receive perspectives on the industries and issues that matter. This category only includes cookies that ensures basic functionalities and security features of the website. Nichols wrote to the County Board of Supervisors that $12.1 million of the money will be used to finalize airport agreements that waive contractual minimum annual guarantee rents for airport . What this option does do is change the distribution of risk. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. 2023 Plante & Moran, PLLC. Guarantee: $50,000. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. A master operator, or sometimes referred to as an institutional operator, serves as a master lessee and either provide or sublease concessionaires for the airport. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). However, this still may not be the most effective solution. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. 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 . Without this expertise, the concession will almost certainly fail to operate at an optimum level. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. 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. "We've already . . Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. 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. 49 CFR Part 23 requires airports to have a concessions-based DBE program. a minimum annual guarantee or MAG annually, which more or less translates to rent. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). In airports with residual airline agreements, the airlines will be required to make up the difference between revenue to the airport and required revenue to pay for airport development and other expenses. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. The FAAs Office of Airports will administer these grant funds to airport sponsors. 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 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. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. Minimum Annual Guarantee (MAG) of at least Eleven Million Dollars ($11,000,000) for each Contract Year and an annual escalation of at least three percent (3%) for the Contract Term. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. The actual process is the easiest for the airport sponsor since there are minimal contracts. 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. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . 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. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . 4.1.1 Minimum Annual Guaranteed Concession Fee. 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. Very hands off for the airport sponsor. From layoffs to business closings, social distancing to shopping only on days that correspond to the first letter of your last name, we have all seen and felt the impact. Through Dec. 31, 2020, the airport sponsor must continue to employ at least 90% of the number of individuals employed (after adjusting for retirements or voluntary employee separations) as of March 27, 2020. 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 Concessionaires are, in general, seeking some manner of rent relief from their airport partners. 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. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Normally, operating classification on the statement of revenues, expenses, and changes in net position will typically follow the classification of operating activities in the statement of cash flows. leasehold at Washington Dulles International Airport (IAD). While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. It varies based on the size, capacity, and operations of the airport. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. which guarantees that the tenant will pay the airport a minimum amount annually. Primarily, in residual agreements, the rates vary based on airport revenue. Lets consider six potential options. 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 . Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. If the airport sponsor determines that it is in its best interest to waive the MAG, then these clauses can be replaced with an alternative fee structure, such as a simple percentage of sales or some other agreed-upon metric of performance. . Some airports have had huge success in meeting ACDBE goals with the developer model. Match. 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 . Paid parking went into effect at . One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Find out how our purpose shapes our culture, people, and mission-driven work. FBO/SASO: NOTE: If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. However, MAGs in concession contracts still expect continued growth. Terminal Closure and Footprint Reductions. Match. February 2, 2021January 28, 2021 | AirportU. 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. By way of comparison, in the past two fiscal years (FY19 and FY20), the federal government has appropriated approximately $3.35 billion in regular Air Improvement Program (AIP) spending and an additional $400$500 million in discretionary AIP grants. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. The competitive landscape may beby necessityaltered. Terms in this set (15) What is MAG and what does it stand for? The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Most simply, the airport and vendor could agree to a fixed percentage rent. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Minimum Annual Guarantees. If an airport operator closes a concourse or a terminal, it would need to eliminate some concession spaces from its contracts, which may render some deals no longer viable. 1, their minimum annual guarantee was superior to anybody . HMS Host, the food and beverage concessionaire at Clinton National, is required to pay a minimum annual guarantee of $594,000, which works out to $49,500 monthly under the terms of its contract. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). 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. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. To help develop firms that can compete in the marketplace outside of the DBE program. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Please read our Privacy Policy for more information on the cookies we use. (1) On-Airport (% of Gross Receipts). SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. That is no longer possible. Regardless, this shifting of risk may not be acceptable to airports. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. The concept is not uncommon. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. A MAG, as currently developed, is unsustainable in anything but relatively normal times. In North America, airports tend to look at MAGs as the least amount of acceptable rent. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. Kona International Airport at Keahole is located on the western coast of the Island of Hawaii, approximately 10 miles from the town of Kailua Kona. There are means of counting passengers who pass a concession location, but few airports have installed such technology. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Discover our insights for a sustainable, low-emissions future. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. Concessionaires need to understand this new business reality when they ask for relief. Most simply, the airport and vendor could agree to a fixed percentage rent. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Tallahassee International Airport . Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Citizen Corps Gangstalking, Articles M

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