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HomeMy WebLinkAbout5D OCRCITY COUNCIL STAFF REPORT Date: October 8, 2020 NEW BUSINESS Subject: AMENDMENT TO THE PALM SPRINGS INTERNATIONAL AIRPORT CONCESSION LEASE AGREEMENTS FOR PARADIES SHOPS, LLC. From: David H. Ready, City Manager Initiated by: Aviation Department SUMMARY The COVID-19 pandemic has significantly decreased air travel nationally and at Palm Springs International Airport (PSP). Due to the reduced volume of air travel and passenger traffic, concession sales have diminished and airports throughout the country are faced with concessionaires withdrawing services and closing retail and food and bar spaces. At PSP, the City had two concessionaires, and on July 31, 2020, the food and beverage concessionaire terminated operations leaving only the retail (news and gift) concessionaire. This action would provide for an extension to the current concession lease agreement with the Paradies Shops, LLC, (Paradies) through April 30, 2023 to allow air travel and passenger traffic to gradually increase at PSP as the COVID-19 pandemic is controlled, while also providing for investment of $512,000 by Paradies to improve food and bar spaces previously operated by the City's other airport concessionaire to begin offering food and beverage concessions. Extending the concession lease agreement is important to ensure PSP can continue to offer high quality options in the news and gift concessions and restart food and beverage concessions to airport passengers given the recent news of expanding air service at PSP this year by multiple airlines. RECOMMENDATION: 1. Approve Amendment No. 5 to the Lease Agreement for Concessions at Palm Springs International Airport, Agreement No. A4159, with Paradies Shops, LLC, an Arizona limited liability company in a final form acceptable to the City Attorney; and 2. Authorize the City Manager to execute all necessary documents. BUSINESS INTEREST DISCLOSURE: Paradies Shops, LLC, is an Arizona limited liability company. The Public Integrity Disclosure Form from Paradies Shops, LLC is included as Attachment 1. rret~ N<). --·-· _~_D ____ _ City Council Staff Report October 8, 2020 -Page 2 Amendment to Airport Concession Agreements, for Paradies Shops LLC BACKGROUND: The current airport food and retail concession agreements were approved by City Council in 1999. Two agreements were approved with one awarded to Paradies for retail news and gift concessions (e.g., packaged snacks, bottled beverages, souvenirs, magazines, clothing), and the other awarded to HMS Host (HMS) for food and beverage sales. Over time the agreements were amended and extended, with the most recent extension scheduled to expire December 31, 2020. During this period, Paradies and HMS regularly invested in refreshing and improving both their concepts and locations at PSP. The steady expansion of the concessions program in terms of products offerings and additional square footage, coupled with record passenger traffic increased overall gross concession sales, with the increase in food and beverage alone at over forty percent. Given the length of the incumbent concession agreements and with record volume of airport traffic at PSP in 2019, the City proceeded to develop a solicitation for new airport concessions to attract high quality and new concession venues at PSP. However, the City's solicitation was completed and advertised on March 12, 2020 coinciding directly with the COVID-19 pandemic and the immediate shutdown of all national air travel. Due to this fact, the City's effort to solicit new concessionaires was suspended. The dramatic decline of passenger traffic in April 2020 resulted in concession sales dropping by 96% as compared to the same month in 2019. Both airport concessionaires significantly reduced their hours of operations to minimize financial losses. Additionally, PSP provided financial relief to both Paradies and HMS to further assist their efforts to sustain operations and reduce operational costs. Notwithstanding the reduction in operating hours and the financial relief it received, HMS determined to terminate its operations at PSP effective July 31, 2020. HMS's termination of operations eliminated food service, bar service, and the two licensed Starbucks operations at PSP. Similar situations occurred at Oklahoma City Airport, where the airport completed a Request For Proposal (RFP) process and HMS was awarded the food and beverage operations. Before the contracts were signed COVID-19 events occurred and HMS Host declined to enter into a new agreement. Paradies was asked to provide food and beverage service, with no minimum annual rent guarantee, rents were reduced by half, and the gross revenue was reduced to 3% for the first six months and then going to 7%, with regular rents not increasing until passenger traffic return to 110% of 2018 levels. At Myrtle Beach Airport HMS Host had entered into a new agreement to operate the Starbucks. Construction was approximately 80% complete when COVID-19 occurred. HMS Host walked away from that commitment leaving the project partially completed. 2 City Council Staff Report October 8, 2020 -Page 3 Amendment to Airport Concession Agreements, for Paradies Shops LLC The Airport approached Paradies, offering to complete the construction, modify the lease terms with no minimum rental guarantee, a tiered rent structure staring at zero and increasing with the percentage of passenger growth, and a term of five years with a five year option. The Airport agreed to pay the Starbucks licensing and royalty fees for the entire term. As a result of HMS Host leaving PSP, Staff approached Paradies on an opportunity to expand its current concessions operations at PSP to provide limited food and beverage options to passengers to include pre-packaged sandwiches, salads, beverages, and healthy snacks in their existing locations at PSP. Paradies agreed to the City's proposal on a month-to-month basis through December 31, 2020 and invested in new coolers and expanded their inventory to include a variety of items, at a time when PSP was averaging 200 enplaned passengers per day, down from an average of 1,846 per day for the same month in 2019. STAFF ANALYSIS: Staff is aware of other airports that have experienced similar issues with concessionaires vacating locations, and or completely abandoning an airport, forcing airports to close locations and resulting in limited selections for traveling passengers. Most airports have approached other concessionaires operating at their airport to fill the void. The terms and conditions of these agreements differ between airports and are based on the unique circumstances of each airport (e.g., time remaining on the agreement, required investment to improve retail spaces, number of retail locations, passenger volume, etc.). Staff also determined that issuing the solicitation for new concessionaires at this time while air travel and passenger traffic is significantly reduced during the COVID-19 pandemic will not likely produce viable concessionaires for the long-term given the total uncertainty of the current market condition. Further discussions with other airports, Paradies, HMS, as well industry reports, indicated a high probability that PSP would not likely receive any viable proposals at this time. Given this fact, it is important to consider how PSP can benefit with expanded concession services from its remaining concessionaire, Paradies. Paradies has accepted the opportunity to continue and expand its concession services at PSP, however, after inspecting the food and bar spaces vacated by HMS, Paradies has determined that an initial capital investment of $512,000 will be required to appropriately prepare these spaces for their operations. Paradies has offered and will invest its own capital funds for this purpose, however, a longer-term extension of its existing agreement is required for Paradies to sufficiently recover its investment. What is proposed is an extension through April 30, 2023 and a tier rate structure (as described below in the Fiscal Impact section), allowing for Paradies to operate over three "peak" seasons of Winter/Spring 2020/2021, 2021 /2022, and 2022/2023. The April 30, 2023 date would 3 City Council Staff Report October 8, 2020 -Page 4 Amendment to Airport Concession Agreements, for Paradies Shops LLC ensure passengers continue to have a good dining experience throughout peak season of 2023. Staff agrees with this extension as it is widely believed that a return to "normal" pre-COVID air travel will not occur until 2023 or 2024. Ensuring Paradies can quickly complete the required renovations and begin food and beverage/bar operations is also essential given the exciting news recently of major airline beginning service at PSP, including expanded services by our current airlines. Approval of the amendment allows Paradies to immediately initiate developing design plans, hire contractors to complete the required renovations, acquire equipment and furnishings, and to hire and train the necessary staff in order to start opening some of the locations by mid-November. Paradies is a major airport concessionaire and has agreements in over 100 airports, 1,020 stores and restaurants, and $1.2 billion in sales. More information is available on its website at: https://www.paradieslagardere.com/about-us They currently operate restaurants at the following California airports: John Wayne Airport, Long Beach Airport, Los Angeles International Airport, Oakland International, and San Francisco International Airport. At PSP, Paradies is proposing opening the following concepts by end of year with its initial capital investment of $512,000: • Santa Rosa Kitchen and Sprits 1 (formally the 12th Fairway) / Bono Concourse • PSP Coffee House 1 ·2 (formally the Starbucks -post security) / Courtyard • The Wine Bar at PSP 1 (formally the California Vintage) / Courtyard • Concept Underdevelopment (formally the Tap Room)/ Regional Concourse 1See Attachments #3 and #4 for concept descriptions 2 Partnering with Coachella Valley Coffee, Coachella, CA If the amendment is approved, Paradies will continuously monitor enplanements with the intent of making an additional capital investment to open the following two locations when passenger traffic reaches approximately 75% of 2019 levels. However, final determination will consider the length of term remaining, time of year, and number of peak seasons remaining in the agreement. • Patio Concept -Food & Full-Service Bar (formally the Celebrity Bistro Restaurant) • Retail Hybrid (e.g., fresh Grab & Go Food, coffee) I Pre-Screening In addition to re-opening the currently closed food and beverage concessions in the shortest time possible, approving the amendment to the agreement with Paradies will also 4 City Council Staff Report October 8, 2020 -Page 5 Amendment to Airport Concession Agreements, for Paradies Shops LLC ensure that the current news and gifts locations remain open until May 31, 2023, places management of both concession agreeme~ts with a top-tier airport concession company, provides additional time for the airline industry to recover from the recent market changes, and allows Airport staff to coordinate opening additional locations as passenger traffic increases. Extension of the concession agreement will provide time for Staff to reevaluate the future capacity needs for the PSP's concessions for a future solicitation of new long-term concessions agreements. The future solicitation is now proposed to be issued in mid- 2022 with new concessions agreements to be approved effective June 1, 2023. Staff recommends that in the City's future solicitation that important elements including payment of higher wages ( or living wages) to concession staff be incorporated to allow the City to understand the resulting impact on proposed financial proforma and resulting concession payments to PSP. At this time, however, given the urgent need to allow Paradies to invest and renovate in the food and beverage/bar locations at PSP in advance of expanded air service to commence at PSP, Staff recommends the City Council approve the proposed amendment to the concessions agreement with Paradies. Staff also notes that the concession agreements are subject to certain federal regulations and restrictions, including a restriction requiring local business participation. However, encouraging local participation by sub-concessionaires is common and was included in the City's solicitation issued earlier this year. To that end, Paradies has incorporated a local offer in its proposal by including Coachella Valley Coffee products in its coffee shop location (the prior Starbucks site in the post-security area). FISCAL IMPACT: The proposed amendment revises the percentage of gross revenue on food and beverage paid to PSP. Prior to November 2019, the concession agreement with HMS required the operator to pay PSP 8% of gross revenues. In November 2019 the City approved an amendment that increased the payment to PSP to 12% of gross revenue - particularly considering the record air travel and passenger traffic (and resulting concession sales) at PSP occurring pre-COVID. For calendar year 2019, the gross revenue for food and beverage was $8,909,970.04 and the Airport received $778,346 in revenue, which was comprised of ten months (Jan -Oct) at 8%, and two months at 12%. No change is proposed to the 12% gross revenue payment for retail (news and concessions). However, a modification of the payment to PSP is recommended for food and beverage concessions given the capital investment required by Paradies to reopen the four locations ( as stated above) and the uncertainty in future passenger traffic. 5 City Council Staff Report October 8, 2020 -Page 6 Amendment to Airport Concession Agreements, for Paradies Shops LLC The proposed amendment includes a revised, tiered scale for revenue to be paid to PSP based the percentage of gross revenue for food and beverage sales as follows: Food & Beverage Sales Tier, based on annual revenue, January 1 to December 31 : < less than $1,500,000 @ 4% $1,500,000 -<$3,000,000 at 6% of gross revenue $3,000,000 -<$5,000,000 at 8% of gross revenue $5,000,000 -<$7,000,000 at 10% of gross revenue $7,000,000 and greater at 12% of gross revenue Under the recommended tier structure, the Airport would receive $738,000 if gross revenue reached $8,900,000; which is $40,000 less than the payment received in 2019 but reflects the $512,000 Capital Investment to be made by Paradies over the limited term extension. SUBMITTED: Ulises AQUirr Interim Airport Executive Director -David H. Ready, Es City Manager Attachments: Marcus L. Fuller Assistant City Manager 1) Public Integrity Disclosure Form from Paradies Shops, LLC 2) Proposed Restaurant Improvements 3) Proposed Coffee and Wine Bar Improvements 6 ATTACHMENT 1 7 1. 2. a. 4. 6. PUBLIC INTEGRITY DISCLOSURE APPLICANT DISCLOSURE FORM Name of EnUty 'P4v,, J. ,.;4 Skop5 1 L. L. C.. Addreaa of Entity (Prlnclple Place of Bueln•a) ~'-10, l>G~-5 ~""'1 12~, :1t-'foo I A+,~ •. .,-.__ Local or Callfornla Addreu (If different than #2) ~~ ' 3'f o~ IA k1 c."', h-Cec."'f O~ Wo1, .., I 1 1 ll,\114 -s"p .. ,,.._, .s. State where EnUly la Regl•terecl with Seoretary of State Av '-i...o V\o.. 3o"3:J<} C Ir 412,-a.. '=-'2- If other than Calilomla la the Enlllv also f80islered In Cellfom/a?lRf Ye, n No Type of Entity 0CorporaUon lSLlffllted Uablllty Company D Partnerahlp D Trust O Olher (plea•• specify) •• Offloera, Dlreotora, Memben, M•naaen, T,-tee,, Other Flduolarlea (pl•-epeolfy) Not.: If 1111y re.,,on•• I• not • natural person, p/aae ldtmtlfy all ofll_,.., dlreotora, mt1mlHlt'll, managel'tl anti other 1/duolarl•• for the,,,.,,,,,_,. nu,nager. lnl•I or other MIity letf"c..~ ,S • 1>.,.,. n ~ ,~..s. llJOfflcer D Director O Member JKManager [name) D General Partner D Limited Partner •Other C,.ho.,-\ .... t:. -r. ~ C: y,s,,, ~Officer •Director D Member '1)Manager ~9W'""'"' [name) D General Partner D Umlted Partner •Other ~-:2w. ... ~Cc.. D(Offloer O Director D Member Jg Manager (name) O General Partner D Umlted Partner •other aTY OF PALM SPRINGS-PUBLIC INTEGRITY DISCLOSURE APPLICANT DISO.OSURE FORM Paae1of2 (Revised 07 05 18) 8 7. Ownerlllnveatora with• 6% beneflolal lnterett In the Applloant EnUty or a related entity A. ~t. .. ,..cl ,;.s • l-1-o IJ IM .3'f I L.L..C.. tv,,.,e..- (name of ownerllnveator] (name of offlolal with whom owner/Investor (_Joo 0 /o M.~~\,,.e~) haa naaterlal flnanolal relatlonthlp) FOR RELATIONSHIP A, EXPLANATION OF THE RELATIONSHIP: 8. [name of ownernnveator) (name of offlclal with whom ownerllnveator hu material flnanclal relaUonahlpJ FOR RELATIONSHIP B, EXPLANATION OF THE RELATIONSHIP: c. [name of ownerllnveator] (name of offlolal with whom ownerllnve1tor ha• material flnanolal relaUonahlpJ FOR RELATIONSHIP C, EXPLANATION OF THE RELATIONSHIP: I DECLARE UNDER PENALTY OF PERJURY UNDER THE LAWS OF THE STATE OF CALIFORNIA THAT THE FOREGOING 18 TRUE AND CORRECT. (Revised 0913 18) an OF PALM SPRINGS-PUBLIC INTEGRITY DISCLOSURE APPUCANTDISCI.OSUREFORM Page2of2 9 ATTACHMENT 2 10 PALM SPRINGS INTERNATIONAL AIRPORT SANTA ROSA KITCHEN Ei SPIRITS 11 0 !~~~~~<!~ i ~ l' ~ B SANTA ROSA KITCHEN Ei SPIRITS FLOORPLAN ,------, / Q /Y ~ ',-~ z 5 a.. •• IJ. ~•~c ~~~- ~~~ ~ ~ KEY D MAIN ENTRANCE f.l GRAB 'N GO ENTRANCE B GRAB 'N GO CASE II ORDER COUNTER El SERVICE Iii BACK OF HOUSE fJ BAR I.ii INDOOR DINING El OUTDOOR DINING 1111111• QUEUING Q POWER C) PURSE HOOKS C) ACCESSIBLE SEATING 8 P.O.S. SEAT COUNT DINING SEATING BAR SEATING OUTDOOR SEATING TOTAL 31 18 50 99 J ___ #_~ KfTC ~ PIil M SPRINGS 111 • .'lS. 20n 12 BEFORE 0 !~:~~~~~ ._, SANTA ROSA KITCHEN 6 SPIRITS EXTERIOR RENDERING AFTER t __ #_~. KITC ~ PAW SPRIN3S IN £\1~;, 20. 13 BEFORE 0 !~~~~~~~ SANTA ROSA KITCHEN 6 SPIRITS EXTERIOR RENDERING AFTER ~3~ -:=--- ,W. -:,.a.r ~-~-i f:;~ if:~ -T~- -KITCHEN + SPIRITS PAL~ spq1NGS INl MRfR ""'" 14 C: ~ Qo •-"' ....., C) m~ -c:: ·-0 15 0 !~~~~~~~ SANTA ROSA KITCHEN 6 SPIRITS INTERIOR RENDERING -~ MSPWms·· t _ # -J.utuU KJTC~ .H1 'E 1: ;>U 16 0 !~!~~~~~ SANTA ROSA KITCHEN 6 SPIRITS INTERIOR RENDERING Ml.M ~,:;1lNt1~ I 17 EXISTING TABLE TOP ~. ' .; ... _ -···-_ ... EXISTING DINING CHAIR 0 !~~~~~~~ EXISTING WALLCDVERING SANTA ROSA KITCHEN 6 SPIRITS MATERIAL BOARD ,; ;~' '~ ...... ..::...., {, t __ #_~. KrrC ~ ,· •n ';PRINGS ,., , 18 ATTACHMENT 3 19 psp I mw ~W.NEBARl..t-~r PALM SPRINGS INTERNATIONAL AIRPORT PSP COFFEE HOUSE 6 PSPWINE BAR 20 0 !~~~~~<!~ N .I.C. I 1•1 I I A 11 I II L/ '---J"-._J II FOOD PRfP. II S A I E S ~ ................. .. ....:: .................... ! 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