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1 L osa ngelis W orld A irports is. : e 4 rt to the BOARD 0 F A RP o RT COMMISSIONERS / i i n)i Allsrin Approved Dave Jones, Dire re tnals Busi -ss Management Ite Meetino Date: August 20, 2013 ; À _I tedi --A!41'Ì S I Reviewed by: Deb Gie L. Bowers, DepuY Executive Director, Commercial Developme Group (----, ).- _IS y Attor -sr /.00 se -- ' na Marie Lindsey - Executive Directo CAO Review: I a! I D I Completed Pending N/A Reviewed for Date I Aoaroval Status Capital Budget Operating Budget CEQA Procurement i 08/07113 : Y N NA 08/08/13 i 2 Y N Ej NA 08/02113 I 08/05/13 L2 i Y 11 Y N N D Cod r-- By DS RY ES MT SUBJECT' First Amendment to Airline Terminal Facilities Lease and License Agreement (LAA-3088) with United Airlines Inc. for Space in Terminals 6, 7 and 8 at Los Angeles International Airport Approve First Amendment to the Amended and Restated Terminals Facilities Lease and License Agreement (LAA-3088) with United Airlines Inc. for space in Terminals 6, 7, and 8 at Los Angeles International Airport, which will generate approximately $43,750,000 in revenue in the first year and $654,000,000 in revenue over the term to Los Angeles World Airports. RECOMMENDATIONS' Management RECOMMENDS that the Board of Airport Commissioners: 1) ADOPT the Staff Report. 2) CERTIFY that the Initial Study/Negative Declaration has been prepared in accordance to the requirements of the California Environmental Quality Act (CEQA) and City of Los Angeles CEQA Guidelines; 3) FIND: a) that the Board of Airport Commissioners (BOAC), as the decision making body of the lead agency, considered the information contained in the Negative Declaration prior to approving the project including the Initial Study and any comments received; b) that there is no substantial evidence that the project will have a significant effect on the environment on the basis of the whole record before it; Page 1 Terminal Facilities Lease ( doc

2 c) that the Negative Declaration reflects the independent judgment and analysis of the lead agency; 4) ADOPT the Negative Declaration 5) APPROVE the proposed First Amendment to the Amended and Restated Terminal Facilities Lease and License Agreement with United Airlines Inc., for space in Terminals 6, 7 and 8 at Los Angeles International Airport that will generate approximately $43,750,000 in revenue in the first year to Los Angeles World Airports. 6) AUTHORIZE the Executive Director or his/her designee to execute the First Amendment to the Amended and Restated Terminal Facilities Lease and License Agreement with United Airlines Inc., for space in Terminals 6, 7 and 8 at Los Angeles International Airport subject to approval as to form by City Attorney and upon approval by the Los Angeles City Council. DISCUSSION. 1. Executive Summary Los Angeles World Airports (LAWA) has executed multiple terminal leases including amendments with United Air Lines Inc. and Continental Airlines Inc. (Continental) for use of space in the terminal facilities at Los Angeles International Airport (LAX). United Air Lines Inc.'s holding company acquired Continental in 2010, and renamed the new merged airline "United Airlines Inc." For simplicity, United Air Lines Inc. and United Airlines Inc. will be referred to as "United" in this report. Staff requests the Board of Airport Commissioners (Board) approve the proposed First Amendment (Amendment) to the Amended and Restated Terminal Facilities Lease and License Agreement (Agreement) for space in Terminals 6, 7 and 8 with United at LAX. Among other things, the Amendment would incorporate into the Agreement the Terminal 6 premises currently under lease to Continental through a separate agreement and do so with a shorter term than the Agreement's premises in Terminals 7 and 8. Also, United seeks to invest approximately $412,520,000 in needed renovations and improvements to Terminal 7 at LAX. LAWA had determined (1) to provide United with a lease term commensurate with this level of investment (e.g., 30 years) is undesirable and (2) to have United manage the renovations and improvements will materially reduce operational and business impact risk for LAWA. Therefore, pursuant to the terms of the Amendment, LAWA will acquire certain of the improvements upon completion at United's cost to deliver the acquired improvements. LAWA's cost to acquire the improvements will be fully recovered from rates and charges defined in the Rate Agreement between LAWA and airlines using LAX, including United. 2. Prior Related Actions Three distinct series of prior related actions are relevant to this request as follows: Rate Agreement: On September 17, 2012 the Board approved the following three items related to Rental Rates in the terminals at LAX: (i) a new rates and charges methodology applicable to airlines and other Page 2

3 aeronautical users of passenger terminals at LAX (Board Resolution No ); (ii) Revision No. 5 to the Tariff (Board Resolution No ); and, (iii) a Blanket Resolution authorizing the Executive Director to enter into rate agreements with airlines and approved airline consortiums using Terminals at LAX (Board Resolution No ). United and LAWA executed United's rate agreement on December 17, TSA Funding: As part of the proposed Amendment, United will design and construct a new inline Checked Baggage Inspection System (CBIS) in Terminal 7 and 8 at LAX. A portion of the CBIS design and construction costs may be eligible for TSA funding. In response to new security directives issued after September 11, 2001, LAWA implemented multiple inline CBIS projects at LAX and Los Angeles/Ontario International Airport (ONT). To support the costs to implement these projects, the TSA transmitted a Letter of Intent to LAWA to partially reimburse implementation costs. On September 2, 2003, the Board authorized a Memorandum of Agreement (MOA) between LAWA and the TSA to reimburse up to 75% of costs related to design, management, and construction of inline CBIS projects at LAX and LNONT in an amount not to exceed $256,467,000 (Board Resolution No ). To address the continued need for inline CBIS at LAX, LAWA and TSA entered into two additional funding agreements. On January 12, 2009, the Board approved OTA "HSTS04-09-H-CT1249" for the partial funding of architecture and engineering services to produce designs for the inline CBIS solutions for Terminals 1, 2, 4, 6, 7 and 8 in an amount not to exceed $50 million (Board Resolution No ). On December 21, 2009, the Board approved MOA "HTSS04-10-H- CT1022" for the partial funding of the design, engineering and construction related services for the inline CBIS solutions in Terminals 1, 2, 4, 6, 7 and 8 in an amount not to exceed $150 million (Board Resolution No ). On July 11, 2011, the Board approved a Reimbursement Agreement with United for pass through of TSA funds for design and construction of an inline CBIS in Terminals 7 and 8 at LAX (Board Resolution No ). To date, LAWA has received receipts and obligations for the two TSA funding agreements totaling $23,912,730, leaving a balance of $176,087,270 for future projects. Terminal Facilities Leases: LAWA entered into the Terminal Facilities Lease (LAA-3088) with United on June 4, 1981 (Board Order No. AO-3298) for passenger terminal space in Terminals 7 and 8. This Lease was amended by the First Amendment (Board Order No. AO-3368), the Second Amendment (Board Order No.A0-3404), the Third Amendment (Board Order No. AO-3445) and the Fourth Amendment (Board Order No. AO-3688). On February 21, 2008, LAWA and United entered into a Settlement Agreement approved by the Board on January 29, 2008 (Board Resolution No ) that was subsequently amended by the First Amendment dated January 12, 2009 (Board Resolution No ). The amended Settlement Agreement settled, among other things, the reimbursement of costs relating to maintenance and operation of the facilities occupied by United pursuant to the Terminals 7 and 8 Lease. Page 3

4 On February 18, 2009, LAWA and United entered into a Settlement Agreement which settled, among other things, certain matters related to the Tenant's occupancy of space in Terminals 7 and 8 (Board Resolution No ) and provided for United to lease certain space in Terminal 6. Subsequently, as stipulated in the Settlement Agreement, on March 2, 2009 the Board approved the Airline Terminal Space Lease and License Agreement with United for Space in Terminal 6 (Lease LAA 8474) and the First Amendment thereto (Board Order No. AO-5116). On October 5, 2009 the Board approved the Global Settlement Agreement whereby LAWA, United, and the trustee to the holders of the Regional Airport Improvement Corporation (RAIC) Bonds, UMB Bank, N.A., settled certain claims and matters. As a closing condition of the Global Settlement Agreement, LAWA and United agreed to amend and restate the Terminals 7 and 8 Lease. On October 28, 2009, the Board approved an Amended and Restated Terminal Facilities Lease and License Agreement with United for space in Terminals 7 and 8 (Board Order No. AO- 5159) On October 1, 2010 United Air Lines Corporation, the parent company of United completed its acquisition of Continental. On March 18, 2013, the Board approved United's request that LAWA consent to the United/Continental merger that resulted in the vesting of lease agreements, including Continental's Lease for Space in Terminal 6 with United (Board Resolution No ). United and Continental were merged into one legal entity on or about March 31, 2013 and the airline's name was changed from United Air Lines, Inc. to United Airlines Inc. 3. Current Action Staff requests that the Board approve the proposed Amendment and authorize the Executive Director or his/her designee to execute the Amendment subject to approval as to form by City Attorney and upon approval by the Los Angeles City Council. Key components of the Amendment include: Premises: Upon execution of the proposed Amendment, all space in Terminal 6 that is occupied by United pursuant to the Continental Terminal 6 Lease, which vested with United as part of the United/Continental merger, and United's Terminal 6 lease will be incorporated into the Agreement. At that point, the Continental Terminal 6 Lease and the United Terminal 6 lease will terminate. Separately, at defined event dates the premises in the Agreement will be adjusted to reflect changes to terminal space and occupied areas resulting from the planned terminal renovations and related space use needs. In addition, the premium passenger lounge located in Terminal 6 which area LAWA expects to incorporate into its concessions plans for Terminal 6, will be deleted from the demised premises upon the earlier of (i) completion of United's new premium passenger lounge in Terminal 7, (ii) November 1, 2015, or (iii) an earlier date if United and LAWA agree on a fee to be paid by LAWA, which payment will be subject to Board approval once established. Upon execution of the Amendment, the premises will consist of approximately 425,000 square feet of space in Terminals 6, 7 and 8. Following completion of the renovations, to reflect as-built conditions, the demised premises may be revised by the Executive Director through revision to Exhibit A3 of the proposed Amendment to correct any deficiencies in the description of the constructed premises, subject to City Attorney approval as to form, so long as the revision does not cause rent to change in an amount greater than the Executive Director's authority. If the demised premises need to be adjusted by an amount that causes rent to exceed the Executive Director's authority but less than 10% of the total demised premises shown in Exhibit A3 to the Page 4

5 First Amendment, then the adjustment to the demised premises will need Board approval. Any adjustment in excess of 10% of the demised premises shown in Exhibit A3 will require Board and City Council approval. Term: The Agreement will, pursuant to the Amendment, terminate on November 1, 2025, except for the Terminal 6 space which will be deleted on August 17, 2017, unless LAWA begins construction on the Midfield Satellite Concourse, in which case the Terminal 6 premises will be deleted on May 31, However, should United decide not to proceed with all five components of the Terminal 7 and 8 renovations within 90 days after the execution of the proposed First Amendment, the termination date for the Lease Agreement will revert to May 31, Rent' United has entered into a Rate Agreement with LAWA. United's rent will be adjusted pursuant to the terms and conditions of the Rate Agreement while the Rate Agreement is in effect. The Continental T6 Lease, which vested with United after the United/Continental merger was issued in connection with a settlement agreement between LAWA and Continental, and provided a rate structure that is lower than the new Rate Methodology covered by the Rate Agreement. In consideration of United agreeing to terminate the Continental T6 Lease and be subject to the Rate Methodology for the use of space that was under the Continental T6 Lease, on the execution of the Amendment, LAWA will issue a termination payment of in an amount not to exceed $3,650,000 to United that is equal to the difference between the rent pursuant to the Continental T6 Lease and the Rate Methodology from the date of execution of the Amendment to August 17, 2017, as shown in Exhibit N to the Amendment. United will use the T6 Termination Payment for construction of the United Renovations Terminal 7 Base Renovations: United has indicated that it will be making renovations in Terminal 7, the "T7 Base Building Improvements", include but are not limited to (i) improving the passenger security screening checkpoint; (ii) designing and implementing a new inline CBIS and baggage sorting system for Terminals 7 and 8; (iii) upgrading holdrooms and associated building infrastructure; (iv) refurbishing the arrival/baggage claim area; (v) replacing passenger boarding bridges; and (vi) constructing a new premium passenger lounge and support office space. These renovations, which are estimated to cost United approximately $412,520,000, are categorized as follows: United Proprietary Improvements include branded improvements, unique to United's operational needs, specialty lighting, finishes or other architectural elements specifically selected by United. Terminal Airline Renovations include non-proprietary improvements to Terminal 7 that are usable by any airline operating in Terminal 7 and located in parts of Terminal 7 classified as "airline areas", including a proportionate share of building improvements allocated to "airline areas" of the terminal. Terminal Renovations include improvements that are allocated to the "public areas" of Terminal 7 that are being implemented during the course of the overall project. Page 5

6 Terminal 6 and Terminal 8 Optional Scope: United has indicated that it may wish to make improvements to the concourse and connector areas of Terminals 6 and 8 including the Public Areas of the connector areas in Terminals 6 and 8. If United intends to do so, within 120 days of the execution of the Amendment, United at its sole cost and expense, will prepare and deliver to the Executive Director for review and approval definitive and comprehensive plans for the development and implementation of the T6 Optional Scope and T8 Optional Scope. Upon LAWA's Executive Director approval the proposed Optional Scope, staff will return to the Board to request approval to acquire the T6 Optional Scope and/or 18 Optional Scope improvements upon completion. In the event the Board does not approve the acquisition of the T6 Optional Scope and/or 18 Optional Scope, LAWA will issue to United a rental credit in the amount of ninety percent (90%) of United's documented actual out-of-pocket expenses incurred for the development of the Optional Scope in an amount not to exceed $4,750,000 and will take ownership of such development plans. Credits and Purchase Obligation and Purchase Option: LAWA's total obligation to purchase Terminal 7 Base Renovations through cash and rent credits are capped at $425,464,000 as follows: $234,605,000 in cash for Terminal 7 Airline Renovations, and $190,859,000 in rent credits for Terminal Renovation, which includes United's costs of $143,791,000 plus $47,068,000 in interest costs that will be incurred over the term as the outstanding balance on the Terminal Renovations is reduced annually in equal rent credit installments. LAWA expects to receive funding of approximately $25,000,000 from TSA for the inline CBIS project, which will be used to offset the cost to LAWA of acquisitions. If LAWA exercises the option to acquire the Terminal Renovations instead of providing rent credits to United, staff will request funding authority to do so. Preferential Gates and Gate Use: Upon execution of the amendment, all holdrooms and gates will be subject to one set of accommodation and utilization requirements, which are defined in the Agreement. The following is a summary in table format of the proposed First Amendment: Description Term: Commencement of Amendment Expiration Proposed Terms Execution November 1, 2025 unless United opts out of Required Renovations, at which point the Amended Lease will terminate May 31, 2022 Estimated Demised Premises upon Execution: 425,000 square feet First Year Estimated Rent: $43,750,000 Staff requests the Board approve and authorize the Executive Director to execute the proposed Amendment, subject to approval as to form by the City Attorney and upon approval by the Los Angeles City Council. Page 6 Terminal Facilities Lease ( doc

7 Environmental Review: The Notice of Intent to Adopt an Initial Study and a Proposed Negative Declaration for the Project was posted at the office of the City Clerk on March 26, 2013 and the office of the County Clerk on March 27, In addition, in accordance with CEQA Guidelines Section 15072, the Notice of Intent to Adopt an Initial Study and a Proposed Negative Declaration for the Project was mailed to approximately 400 organizations and individuals potentially affected by or interested in the proposed project. A notice regarding the project was published in the Los Angeles Times on March 28, Copies of the Initial Study/Proposed Negative Declaration were available for review at the following libraries: (1) Westchester-Loyola Village Branch: 7114 W. Manchester Avenue, Los Angeles, CA 90045; (2) El Segundo Library: 111 N. Mariposa Avenue, El Segundo, CA 90245; (3) Inglewood Library: 101 W. Manchester Boulevard, Inglewood, CA 90301; and (4) Los Angeles World Airports: 1 World Way, Room 218, Los Angeles, CA In addition, the document was also available online at LAWA's website [ under "Current Projects - Publications." In accordance with CEQA Guidelines Section 15073, a 20-day comment period for the Initial Study and Proposed Negative Declaration (IS/ND) began on March 28, 2013 and ended on April 16, No comments were received on the IS/ND and no revisions were made to the IS/ND. 4. Alternatives Considered Do Not Approve the Amendment- Not approving the Amendment would delay for years needed improvements in Terminals 6, 7 and 8 that United is positioned to undertake and hinder United's ability to accommodate its passengers in a fashion competitive with other airlines at LAX that already have access to or commitments for improved terminal facilities. FISCAL & ECONOMIC IMPACT STATEMENT: Approval of the proposed First Amendment will provide approximately $43,750,000 in revenue in the first full year from execution. United intends to invest approximately $412,520,000 renovating Terminal 7 at LAX. United intends to fund an estimated $34,124,000 for proprietary renovations and the remaining balance of $378,396,000 is subject to rental credits and/or acquisition by LAWA. In addition to the acquisition costs of $378,396,000, LAWA will incur $47,068,000 in interest costs over the term as the outstanding balance on the Terminal Renovations will be reduced annually in equal rent credit installments. Staff requests that the Board allocate funds in a not-to-exceed amount of $425,464,000 from the LAX Revenue Fund to WBS Element (Terminal 7 United Renovations) as needed to reimburse United and/or provide rental credits for Terminal 7 renovations as identified in the Current Action section and further delineated in the proposed Amendment. This item will not have an impact on the LAWA Operating Budget STANDARD PROVISIONS' 1. An Initial Study/Negative Declaration has been prepared for the United Airlines Terminal 7 improvement project in compliance with the requirements of the California Environmental Page 7

8 Quality Act (CEQA) and the Los Angeles City CEQA Guidelines. As described in the Initial Study/Negative Declaration, implementation of the project would have a less than significant environmental impact. Pursuant to CEQA Guidelines Section 15074(c), the location and custodian of documents and materials for the Initial Study/Negative Declaration is the Los Angeles World Airports, Capital Programming and Planning Group, 1 World Way, Los Angeles, California The First Amendment is subject to approval as to form by the City Attorney 3. Actions taken on this item by the Board of Airport Commissioners will become final pursuant to the provisions of Los Angeles City Charter Section pursuant to the provisions of the Los Angeles City Charter, Section United Airlines will comply with the provisions of the Living Wage/Service Contract Worker Retention Ordinances. 5. This action is not subject to the Small Business Enterprise Program. 6. United Airlines has submitted an Affirmative Action Plan and will comply with the provisions of the Affirmative Action Program. 7. United Airlines has been assigned Business Tax Registration Certificate No United Airlines has submitted the Certification of Compliance with Child Support Obligations and will comply with the provisions of the Child Support Obligations Ordinance. 9. United Airlines will have approved insurance documents, in the terms and amounts required, on file with Los Angeles World Airports prior to execution of Lease Amendment. 10. This action is not subject to the provisions of Charter Section 1022 (Use of Independent Contractors). 11. United Airlines has submitted the Contractor Responsibility Program Pledge of Compliance and will comply with the provisions of the Contractor Responsibility Program. 12. United Airlines has been determined by Public Works, Office of Contract Compliance, to be in full compliance with the provisions of the Equal Benefits Ordinance. 13. United Airlines will be required to comply with the provisions of the First Source Hiring Program for all non-trade LAX Airport jobs. 14. United Airlines must submit the Bidders Contributions CEC Form 55 and comply with its provisions. Page 8 Terminal Facifities Lease (T6-7-8.doc