OFFICE OF THE CITY ADMINISTRATIVE OFFICER

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2 REPORT FROM OFFICE OF THE CITY ADMINISTRATIVE OFFICER Date: To: From: Reference: Subject: June 10, GAO File No Council File No. Council District 11 The Mayor IJ( / Miguel A. Santana, City Adrriinistrative Office'(j(qu Communication from the Department of Airports dated April 28, 2015; referred by the Mayor for a report on April 29, 2015 APPROVAL TO AWARD A LEASE TO NIPPON CARGO AIRLINES CO., LTD., AND APPROVE BUILDING RENTAL RATES FOR A CARGO FACILITY, AT 6501 WEST IMPERIAL HIGHWAY, AT LOS ANGELES INTERNATIONAL AIRPORT r SUMMARY The Executive Director of the Department of Airports (Department) requests approval to award and execute a lease (Lease) with Nippon Cargo Airlines Co., Ltd. (NCA) and to approve the building rental rates for a cargo facility located at 6501 West Imperial Highway, at Los Angeles International Airport (LAX). Approval of the proposed five-year Lease will allow NCA to continue air cargo operations at LAX and is anticipated to generate $10,004,000 in revenue for the Department over the Lease term. Department staff reports that although the original NCA lease expired May 11, 2015, its cargo business is operating in a holdover status until the proposed Lease is considered and approved by City Council, then signed by the Executive Director. The proposed Lease was approved by the Board of Airport Commissioners (BOAC} on May 7, The above-referenced aspects of the Amendment, and this report, incorporate revised information received from the Department subsequent to the initial request submittal. Pursuant to Charter Section 606, Council approval of the Amendment is required because the cumulative term exceeds five years. Background On March 7, 1995, the BOAC approved a lease with NCA for approximately five acres of land and a 60,000 square foot Hangar No. 8 at 6501 West Imperial Highway, LAX. The term of the lease was 20 years, from May 12, 1995 through May 11, This original lease resulted from a negotiation process between Department staff and NCA personnel; these talks were authorized by the BOAC in December Prior to March 1995, NCA subleased space in an air cargo building in the vicinity of LAX. During the first year of the lease, NCA expended $3.8 million for capital improvements. Hangar No. 8 was refurbished and expanded into an air cargo facility building by adding additional warehouse and office space. The Department received

3 CAO FUe No approximately $10,635,000 in revenue from the NCA operations during the 20-year lease. Proposed Award for a Lease with Nippon Cargo Airlines Co., Ltd. Approval of the proposed Lease will implement revised rental rates applicable to the air cargo facility located at 6501 West Imperial Highway in LAX as well as allow NCA to continue operating its air cargo business. Department staff anticipates an increase in annual revenue stemming from the rental rate changes and premises square footage changes included in the proposed Lease. The proposed Lease contains language whereby either party may initiate a Lease cancellation process. A summary of key provisions of the proposed Lease is presented in the following table: Provision Description Holdover, Current Proposed New Lease Lease Term 20 years, ground Five years lease Date - May 12, 1995 to May 12, 2015 to Commencement, May 11,2015 May 11,2020 Date - Expiration Cancellation Provision Not Applicable Airports may cancel for safety or security reasons and (N/A). NCA may cancel if it no longer operates at LAX Demised Premises : Land - Cargo, 212,625 square 212,625 SF Maintenance feet (SF) Building 48,872 SF SF* Auto Paving N/A 133,092 SF* Rental Rates: Land - Cargo, $3.17/SF/year (YR) $3.17/SF/year (YR) ** Maintenance Building $3.00/SF/YR $17.00/SF/YR, first year~ $17.80/SF/YR, second year*** Consumer Price Index (CPI) adjusted, third to fifth years*** Auto Paving N/A $ 0.37/SF/YR *** Annual Rent $811,850 $1,954,507 Annual Adjustment N/A Based on CPI, with a minimum 2 percent increase.. Notes: *As required pnor to lease, NCA refurbished the ex1stmg building and charged a nominal rate of $3.00/SF/YR. Now in the proposed Lease. all improvements have reverted to the Department and NCA is required to pay market rent for the building area. "" As required prior to lease, NCA repaved most of leased area and not charged paving. Now in the proposed Lease, NCA is required to pay BOAC-approved paving rate. *** BOAC-approved rates are reflected and the first and second-year amounts reflect market rates for comparable facilities.

4 CAO File No Department staff and NCA personnel had their first negotiation meeting for the proposed Lease on April14, Department staff explained the decision to opt for a new lease, rather than an amendment, was because of the following: Numerous changes in administrative and lease requirements, standard terms and provisions have been instituted since the original lease was awarded in 1995, No additional property improvement or capital development upgrades are required at the site and therefore a standard five-year lease term was considered instead of a 20-year term, which is useful to accommodate capital investment recuperation criteria or needs, and NCA did not request a lease longer than five years In the case of an airline, the Airports is permitted to engage in a sole source negotiation. In addition, Department staff noted NCA is a tenant in good standing and requests to remain in that cargo building. It is reported that NCA processed over 69,000 tons of cargo through the facility in 2014, had a 16 percent increase in tonnage over last year and operates seven to nine flights a week from Asia. Airports staff believed it was in the best interest of the Department to develop a new, proposed Lease through direct negotiation meetings, not a bid process. Alternatives Considered by Staff Taking no action after the May 11, 2015 lease expiration date is not recommended because the NAG cargo activity will cease. Approving a proposed lease will allow NCA to continue their LAX cargo operations and will provide revenue to the Department. City Contract Compliance The proposed Lease is subject to approval as to form by the City Attorney. In addition, NCA must fulfill the following three requirements prior to the execution of the Lease: submit a Business Tax Registration Certificate number; have on file with the Department approved insurance documents in the terms and amounts required; and, have the Department of Public Works, Office of Contract Compliance, determine that NCA is in compliance with the provisions of the Equal Benefits Ordinance. Staff reports that NCA has submitted the Contractor Responsibility Program Pledge of Compliance and will comply with the provisions of the Contractor Responsibility Program. Also, NCA is required to comply with the provisions of the following City contract standard documents: Affirmative Action Program, Child Support Obligations Ordinance, First Source Hiring Program for all non-trade Airport jobs; Living Wage Ordinance; and, Service Contractor Worker Retention Ordinance. Furthermore, the proposed action is not subject to provisions of the Bidder Contributions City Ethics Commission Form 55 or to provisions of City Charter Section 1022, Use

5 CAO File No of Independent Contractors. Staff also reports the Small Business f=nterprise Program does not apply to leases. The issuance of permits, leases, agreements, gate and space assignments and renewals, amendments or extensions thereof, or other entitlements granting use of existing airport facilities or its operations is exempt from the requirements of the California Environmental Quality Act (CEQA) pursuant to Article Ill, Class 1 (18)(c) of the Los Angeles City CEQA Guidelines. Pursuant to Charter Section 606, actions taken on this item by the BOAC will become final upon approval by the Council. RECOMMENDATIONS That the Mayor: 1. Approve the Department of Airports (Department) request to award and execute a fiveyear lease (Lease) with Nippon Cargo Airlines Co., Ltd., (NCA), for air cargo operations, from May 12, to May 11, , and to approve the building rental rates for a cargo facility located at 6501 West Imperial Highway, at Los Angeles International Airport (LAX), subject to City Attorney approval as to form, and to a requirement that prior to the execution of the Lease, NCA has fulfilled the following three requirements: (1) submit a Business Tax Registration Certificate number; (2) have on file with the Department approved insurance documents in the terms and amounts required; and, (3) be in compliance with the provisions of the Equal Benefits Ordinance as determined by the Department of Public Works, Office of Contract Compliance, and 2. Return the request to the Board of Airport Commissioners for further processing, including Council consideration. FISCAL IMPACT STATEMENT Approval of the proposed five-year Lease between NCA and the Department of Airports will have no impact on the General Fund. Approval of the proposed Lease will implement changes in the building rental rates and will generate annual revenue of approximately $1,954,507, for an estimated total revenue of $10,004,000 over the five-year Lease term. This project complies with the Department of Airports adopted Financial Policies. TIME LIMIT FOR COUNCIL ACTION Pursuant to Charter Section 606, "Process for Granting Franchises, Permits, Licenses and Entering Into Leases," and the Los Angeles Administrative Code Section 1 0.5, "Limitation and Power to Make Contracts, " unless the Council takes action disapproving a contract that is longer than five years within 30 days after submission to Council, the contract shall be deemed approved. MAS:A VM: