Aug 25, 2017
On Monday, August 14th the $1.8 billion DEN Great Hall Development Agreement was approved by City Council. I supported the bill and want to give you the key facts and financial data on this agreement and development. Financial data was provided by the DEN Finance Chief Financial Officer, and I helped develop the analysis.
1. Essential Reasons for Supporting the Great Hall Project
2. Project Components – The four parts of the development are: (1) 6th Floor TSA Security; (2) 6th floor airline check-in and baggage; (3) 5th floor Great Hall concessions and visitor waiting area; and (4) Terminal infrastructure improvements.
3. Length of Contract – 34-year length of contract (4 years of construction and 30 years of bond repayment and Great Hall concession operations).
4. DEN Great Hall Project Cost – This cost represents the total cost of all four project components.
|DEN Construction Contribution||480,000,000|
|Partnership Construction Contribution||170,000,000|
|Partnership Concession Contribution (*)||481,000,000|
|DEN Major Maintenance & Reserve Account||94,000,000|
|DEN Concessions O&M Cost||428,000,000|
|Total Cost||$ 1,653,000,000|
|DEN Construction Contingency||120,000,000|
|Total Cost + Contingency Use||$ 1,773,000,000|
(*) Includes financing cost
5. DEN Proposed Project Funding Sources (34 Years) – This projected revenue represents the total revenue to pay for all construction and concession development costs for the project listed in #3.
|Airline Ticket Revenue (*)||654,000,000||900,000,000|
|Concession Revenue Share||519,000,000||519,000,000|
|DEN Cash and Bond||480,000,000||480,000,000|
|Total Revenue||$ 1,653,000,000||$ 1,899,000,000|
|Total Revenue + Contingency||$ 1,773,000,000||$ 2,019,000,000|
(*) $1 per departure will conservatively generate $246 million in excess revenue as illustrated in the proposed arrangement, which will likely be utilized for other expense reserve and future development.
6. Cost Contributions for Construction and Concessions O&M ($1,773,000,000) – Since the Great Hall Project is primarily one construction contract with a concessions agreement, the cost of construction follows the normal City construction process with any profit being produced from construction being associated with the Partnership’s construction management. The concessions operations, which is being financed by a bond and equity contribution, is a joint project making venture between DEN and the Partnership with a 80% (City) and 20% (Partnership) sharing of retail rental space revenue.
Contributions to $770 Million Construction Cost (Includes Contingency)
DEN: Construction ($480 million) + Contingency ($120 million) = $600 Million (78%)
Partnership: Construction Cost ($170) = $170 Million (22%)
Contributions to $ 1.003 Billion Concessions Cost
DEN: O&M ($428 million) + Major Maintenance & Reserve Acct ($94 million) = $522 Million (52%)
Partnership: Concessions Contribution ($481) = $481 Million (48%)
$1.773 Billion Great Hall Project Total Cost Contributions
DEN: $600 million construction cost + $522 million concessions cost = $1.122 Billion (63%)
Partnership: $170 million construction cost + $481 million concessions cost = $651 Million (37%)
7. Concessions Project Profitability – DEN share of profits will be generated through Great Hall concessions agreement.
|Airline Ticket (b)||246,000,000||0|
|Concession Bond (c)||0||425,000,000|
(a) Total concessions rental space revenue forecasted to be $649 million.
(b) $900 million in ticket revenue - $654 million in construction cost = $246 million for major maintenance & reserve and future development funds.
(c) Assumes cash and bond generates $425 million of revenue out of $481 million cost.
(d) Does not include any other profits generated from concessions or profits from construction.
8. Financial Metric - The Partnership was selected due to its ability to generate greater concession revenue per square foot than the present concession operation and per their other airport experience. The following is a financial revenue per square foot comparison of the forecasted Great Hall concessions with the existing terminal (non-concourse) concessions.
|Concession Metrics||Great Hall||Existing|
|Revenue / Square Foot||$3.35||$1.41|
9. Existing Employee Consideration – DEN and Ferrovial will work to ensure that all current employees in the present terminal concessions will have jobs in current concourse concessions or in the new Great Hall concessions.
10. Concessionaire Agreement – 10-year maximum length with retailers; City Council will have limited approval responsibility for concession retail decisions
11. Great Hall Operational and Maintenance Cost - Does DEN pay for all operations and maintenance costs on concessions on every concourse as it is planning to do for the Great Hall?
DEN Response: No. DEN is responsible for all operational expense outside of retail operations on the concourses but would be paying the Partnership to perform operations and maintenance in the Commercial Space of the Great Hall. Is paying this cost through a bond the best financial arrangement for DEN? Yes, it allows DEN to leverage the private sector expertise in generating concessions revenue in the Great Hall.
12. Concession Revenue Sharing - Since concession revenue sharing is the primary source of profits for DEN, how is the sharing of revenue determined? Is it based off gross revenue, determined profits, and / or the minimum annual privilege fee?
DEN Response: A percentage of gross concession space rental revenue is determined according to the financial model for revenue sharing. The revenue is shared with 80% to DEN and 20% to the Partnership.
13. Financial Audits – Will the City CFO and the City Auditor have access to all financial data and reports related to the construction and concession operations? Has the CFO reviewed the financial model, agreed with its present use, and had any comments? Will the City Auditor have access to the financial model prior to signing the contract?
DEN Response: DEN has stated that the City Finance Department has reviewed, and is conducting analysis of the financial model and its results. Written confirmation has been requested from the City CFO to verify their review and comments on the financial arrangement as determined by the financial model. The City Auditor will have the opportunity to review the financial model prior to contract signing.
14. Long Range DEN Planning – How does this Great Hall project fit into the long range strategic planning for DEN growth and development? What are the other significant improvements and investments in this future plan that will affect airline operations?
DEN Response: Even though DEN’s long range strategic plan addresses the addition of gates and facilities to support its forecasted growth, due to the fluid nature of airline service to DEN long range financial information is not available to place the Great Hall Project in context with future development. The Great Hall balances the capacity of the airport with the planned expansion in the concourses to ensure that the entire facility is prepared to handle the forecasted growth in passenger traffic.
Public safety, project profitability, and DEN capital improvements were the critical considerations for my support. The project will help DEN develop and fund future needed gate expansions and an additional runway. The P3 arrangement will reduce the cost that DEN would incur without this arrangement.