MOD | 99 | Modification #6 of a solicitation for a Concession Contract to provide overnight lodging, food and beverage, retail, marinas, and camping at Signal Mountain Lodge Area in Grand Teton National Park, Wyoming.

FBO DAILY ISSUE OF SEPTEMBER 05, 2010 FBO #3207
MODIFICATION

99 -- Modification #6 of a solicitation for a Concession Contract to provide overnight lodging, food and beverage, retail, marinas, and camping at Signal Mountain Lodge Area in Grand Teton National Park, Wyoming.

Notice Date: 9/3/2010
Notice Type: Modification/Amendment
Contracting Office: IMDE - CM - Business Resources Division 12795 W Alameda Pkwy Lakewood CO 80228
ZIP Code: 80228
Solicitation Number: CC-GRTE003-11
Response Due: 12/13/2010
Archive Date: 9/3/2011
Point of Contact: Jacque Lavelle Chief of Concessions 3039692661 Jacque_Lavelle@nps.gov;
E-Mail Address: Point of Contact above, or if none listed, contact the IDEAS EC HELP DESK for assistance
(EC_helpdesk@NBC.GOV)
Small Business Set-Aside: N/A
Description: In the prospectus issued February 9, 2010, the National Park Service ("Service") advised it would respond to questions about the prospectus if submitted in writing and received by March 12, 2010. The Service later extended that date to March 26, 2010. On April 20, 2010, the Service posted answers to some questions received. This notice serves to respond to the remaining questions pertaining to Leasehold Surrender Interest as well as comments received regarding Federal Register notices. 1. The prospectus stipulates that no projects under the new contract will be eligible for LSI. How does NPS plan to handle/fund needed repair of, improvements to, and replacement of fixtures and non-removable equipment beyond the 3.5 percent maintenance reserve during the 15years of the next contract? Response: The only events that result in LSI under the terms of the Draft Contract and applicable law are the construction of a new structure, a major rehabilitation and the installation of new fixtures (including fixture replacement). The Draft Contract does not require the concessioner to construct any new structures or major rehabilitations. The Draft Contract, as revised (see the response to Question 2 below) provides LSI related to the installation of new fixtures (including fixture replacements), should such installation occur in accordance with the terms of the Draft Contract. The maintenance reserve requirement of 3.5% is a minimum the concessioner will be required to expend on eligible maintenance reserve activities. The installation of fixtures is not eligible maintenance reserve expenditure. 2. In regard to determination of Leasehold Surrender Interest ("LSI") under the new concession contract, will the new LSI value fall under the existing regulations regarding LSI and again increase in value by CPI over the contract term, or will the concessioner be required to continue with the remaining 40 year write-off and take the value to zero over the contract term? Response: Please note that an errata to the prospectus issued concurrently to the date of the posting of these questions and answers changed the LSI value formula as contained in the original prospectus. The changes were made after consideration of public comments to related Service public notices in the February 1, 2010, and May 10, 2010, Federal Register. The revised LSI alternative (as did the initial proposed alternative), provides for long term amortization of LSI value, not for complete amortization over the term of the new contract. A CPI adjustment is not applied to the amortized LSI value. NPS, in consideration of the public comments made in response to both public notices, has reexamined the financial and other circumstances of the new contract and the proposed LSI alternative. This reexamination led to consideration and adoption of a final LSI alternative. The final LSI alternative continues the 40-year depreciation of the LSI value of eligible capital improvements but eliminates the exclusion of additional LSI value for new fixtures called for by the proposed LSI alternative. This change addresses a primary concern expressed by commenters, the elimination of LSI value in new fixtures. Under the final LSI alternative, the LSI value of all eligible capital improvements, including new fixtures, will be depreciated on a straight-line basis over a 40-year period. In addition, the monthly depreciation schedule called for by the proposed LSI alternative has been changed to an annual basis in the interest of simplicity. The final LSI alternative for the new contract is generally described as follows: (a)The reduction of the initial LSI value under the new contract on an annual straight-line depreciation basis applying a 40-year recovery period (on an annual basis) regardless of asset class. (b)The reduction of the LSI value in capital improvements (as defined in the new contract) constructed or installed during the term of the new contract based on straight line depreciation and also applying a 40-year recovery period (on an annual basis) with no asset class distinctions. 3. The Prospectus proposes to eliminate adjustments to the initial leasehold surrender interest ("LSI") value as a result of the installation or replacement of fixtures in the related capital improvements during the term of the proposed contract. Specifically, Contract Exhibit A, Section 15(a), Page A-6, states that, with respect to initial LSI value, the "initial leasehold surrender interest value and depreciation formula shall not be affected by the installation of fixtures (including the replacement of existing fixtures) in the capital improvements related to the initial leasehold surrender interest value. The leasehold interest surrender value in such installed fixtures shall be $0 for all purposes of this CONTRACT." Similarly, Contract Exhibit A, Section 15(b), Page A-6, states that, with respect to LSI in structures or major rehabilitations constructed during the contract term, the "initial leasehold surrender interest value and depreciation formula shall not be affected by the installation of fixtures (including the replacement of existing fixtures) in the related capital improvements after they are placed in service. The leasehold interest value in such installed fixtures shall be $0 for all purposes of this CONTRACT." Section 405(a)(5) of the Concessions Management Improvement Act ("CMIA"), 16 U.S.C. 5954(a)(5), requires that, "Where a concessioner, pursuant to the terms of a concessions contract, makes a capital improvement to an existing capital improvement in which the concessioner has a leasehold surrender interest, the cost of such additional capital improvement shall be added to the then current value of the concessioner's leasehold surrender interest." The Act specifically defines "capital improvement" to include fixtures. 16 U.S.C. 5954(e)(2). The NPS's regulations reflect this requirement by stating that "[a] concessioner that replaces an existing fixture in which the concessioner has a leasehold surrender interest with a new fixture will increase its leasehold surrender interest by the amount of the construction cost of the replacement fixture less the construction cost of the replaced fixture." 36 C.F.R. 51.65. Please reconcile the Prospectus's proposed treatment of LSI for fixture installation and replacement with section 405(a)(5) of the CMIA and section 51.65 of the NPS's regulations. Response: Please note that an errata to the prospectus issued concurrently to the date of the posting of these questions and answers changed the LSI value formula as contained in the original prospectus. The changes were made after consideration of public comments to related Service public notices in the February 1, 2010, and May 10, 2010, Federal Register. The public comments, among other matters, expressed concerns about not providing LSI value in new or replacement fixtures. Although the Service considers that it is authorized by the CMIA to treat LSI value in fixtures as provided in the original LSI alternative, it has determined in light of the particular facility condition and financial circumstances of the new contract that it would be appropriate to provide LSI value in new or replacement fixtures under the terms of the new contract. The revised LSI value formula provides LSI in fixtures, as well as all other capital improvements as discussed above. Please note that, in accordance with 36 CFR Part 51, the initial LSI value in new fixtures installed during the term of the Draft Contract is their construction cost and the LSI value in replacement fixtures installed during the term of the Draft Contract is their construction cost less the construction cost of the replaced fixture. 4. The prospectus proposes to utilize an alternative formula for determining LSI, under the authority of section 405(a)(4) of the CMIA, 16 U.S.C. 5954(a)(4). Specifically, Contract Exhibit A, Section 15(a), Page A-6, states that, the LSI in capital improvements in existence as of the effective date of the contract "shall be reduced during the term of this CONTRACT on a monthly basis by $23,850 (monthly straight line depreciation based on a 40 year recovery period) such that, upon the termination or expiration of this CONTRACT, as applicable, the initial leasehold surrender interest value in capital improvements in existence as of the effective date of this CONTRACT as reduced in accordance with the above described depreciation formula shall be the leasehold surrender interest value as of the termination or expiration of this CONTRACT, as applicable." Similarly, Contract Exhibit A, Section 15(b), Page A -6, states that the initial LSI value in structures or major rehabilitations constructed during the term of the contract "shall be reduced, commencing on the date of substantial completion of the related capital improvement and ending as of the date of termination or expiration of this CONTRACT, on a monthly basis by 0.208% (monthly straight line depreciation based on a 40 year recovery period), such that, as of the date of termination or expiration of this CONTRACT, the leasehold surrender interest value in structures and major rehabilitations constructed during the term of this CONTRACT shall be their construction cost as reduced in accordance with the above described depreciation formula." Under section 405(a)(4) of the CMIA, the NPS "may only use such an alternative formula if the Secretary determines, after scrutiny of the financial and other circumstances involved in this particular concession contract (including providing notice in the Federal Register and opportunity for comment), that such alternative formula is, compared to the standard method of determining value provided for in [section 405(a)(3) 2 of the Act], necessary in order to provide a fair return to the Government and to foster competition for the new contract by providing a reasonable opportunity to make a profit under the new contract." 16 U.S.C. 5954(a)(4). Please justify how the alternative formula is, when compared to the standard method for determining LSI, "necessary in order to provide a fair return to the Government." Also, please justify how the alternative formula is, when compared to the standard method for determining LSI, necessary "to foster competition for the new contract by providing a reasonable opportunity to make a profit under the new contract," recognizing that "new contract" refers to the contract that is being offered by this Prospectus and not any future contract to be issued after the expiration or termination of that contract. Response: NPS has determined, after review of the particular financial and other circumstances of the new contract and consideration of public comments, that use of the final LSI alternative, in comparison to the standard LSI formula, is necessary in order to provide a fair return to the Government and to foster competition for the new contract by providing a reasonable opportunity for profit to the new concessioner. NPS also considers that the final LSI alternative is consistent with the objectives of the 1998 Act, particularly, as discussed below, with respect to the fair return it will provide to the Government and the new concessioner and the enhanced competition for the new contract that it will foster. These determinations are required by the 1998 Act with respect to alternative LSI formulas that are not based on the depreciation rules of the Federal income tax laws and regulations that were in effect in 1998. Although the final LSI alternative is based on the Federal income tax laws and regulations that were in effect immediately before the enactment of the 1998 Act, NPS nonetheless made these determinations regarding the final LSI alternative as a good means to assess the relative merits of alternative methodologies. Fair Return to the Government. NPS has determined that the final LSI alternative is necessary to provide a fair return to the Government (as well as helping to provide a fair return to the new concessioner) under the terms of the new contract. NPS considers that the "fair return" to the Government reflects in part the requirement of the 1998 Act that NPS include in concession contracts a franchise fee payable to the Government that is based upon consideration of the probable value to the concessioner of the privileges granted by the contract. However, under the standard LSI formula, the amount of money that would be paid by the Government (directly or indirectly) for LSI as of the expiration of the new contract is inevitably speculative at the time of contract solicitation, contract award, and during the contract term. This is because the future CPI rate, the amount of future physical depreciation that will occur over the term of the new contract, and the cost to cure such future physical depreciation, must all be estimated in advance of the new contract by both NPS and prospective concessioners. As a consequence, if the NPS were to establish the required minimum franchise fee for the new contract under the terms of the standard LSI formula, that minimum fee necessarily would reflect a speculative estimate of the amount of and cost to cure the physical depreciation that will occur during the contract term as well as speculative estimates of the annual CPI rates over the term of the new contract. Likewise, when a prospective concessioner offers to meet or exceed the minimum franchise fee established by NPS under the standard LSI formula, this business decision is necessarily made in reliance on speculative estimates of future CPI and future physical depreciation of LSI improvements. For a simplified example, assuming an initial LSI value of $10 million dollars at contract commencement, NPS may estimate that the related capital improvements will depreciate physically 30 percent over the term of the contract whereas a prospective concessioner may estimate that the same capital improvements will depreciate only 10 percent during the term of the contract. If the NPS estimate proves to be correct, the LSI value at contract expiration will be reduced by 30 percent, to $7 million (before CPI adjustment). If the concessioner's estimate proves to be right, the depreciation reduction will only be $1 million (before CPI adjustment). Such a difference in LSI value ($7 million v. $9 million) will have a severe impact on the respective returns to the Government and the concessioner. The likelihood of a significant difference in physical deprecation estimates is very high. In a number of negotiated settlements of possessory interest values (a possessory interest is a compensable interest in real property improvements similar to LSI) between NPS and incumbent concessioners in which the existing physical depreciation of the related capital improvements was estimated by both parties, the NPS estimate of existing physical depreciation exceeded that of the concessioner by very significant percentages. In this regard, the parties to these negotiations were estimating the amount of existing depreciation, a far less problematic task than estimating the amount of future depreciation of capital improvements that is required for the standard LSI formula. The speculative nature of estimating LSI value under the standard LSI formula is also driven by its requirement that ending LSI value is subject to CPI adjustment. Future CPI rates, of course, may only be estimated. Further, the standard LSI formula requires the CPI adjustment to be made on the basis of the All Urban Consumers CPI. However, there is no assurance that the cost to cure depreciation at the expiration of the new contract will reflect the All Urban Consumers CPI. The inflation that may occur in the construction industry over the term of the new contract may be expected to differ significantly (higher or lower) from the All Urban Consumers CPI. In these circumstances, the NPS estimate of ending LSI value made at the time of contract solicitation, if proven after contract expiration to have been overstated, would have resulted in a less than fair return to the Government (as a result of an unduly low minimum franchise fee that was based on depreciation and CPI assumptions which proved to be inaccurate). For these reasons, NPS considers that the final LSI alternative is necessary to include in the new contract in order to provide a fair return to the Government under the new contract. Fostering Competition. Elimination of the speculative nature of LSI value by using the final LSI alternative is also considered necessary to foster competition for the new contract by providing a reasonable opportunity for the concessioner to make a profit under the new contract. This is because prospective concessioners will know with a high degree of certainty (subject only to estimates of the value of any new capital improvements constructed or installed during the term of the contract) how much money they will be paid for LSI upon the expiration of the new contract. The final LSI alternative greatly reduces the speculation regarding CPI and physical depreciation required for proposed contracts by the standard LSI formula. The resulting lower risk and greater certainty in the business opportunity provide a reasonable opportunity for profit under the terms of the new contract. It should also encourage the private sector to apply for the new contract, thereby fostering competition. NPS points out that the final LSI alternative for the new contract is projected to provide approximately the same rate of financial return for the new concessioner as would be provided under the standard LSI formula. This is because, in developing the minimum franchise fee for the new contract, NPS estimated that the proposed contract would provide the new concessioner with a reasonable opportunity to make a net profit in relation to capital invested and the obligations of the contract. This estimate took into consideration, among other matters, applicable industry rate of return expectations, the purchase price of the existing LSI improvements, and the expected LSI value that will be payable to the concessioner after contract expiration. If the standard LSI formula were utilized, the projected LSI value payment to the new concessioner would necessarily be considerably higher in order to avoid a windfall to the concessioner, resulting in a higher minimum franchise fee for the new contract. The lower LSI value payment upon contract expiration provided by the final LSI alternative (as opposed to the significantly higher value provided by the standard LSI formula) results in a lower minimum franchise fee during the term of the new contract in order to achieve the same approximate projected rate of return to the concessioner over the term of the new contract. Thus, the final LSI alternative results in increased cash flows to the concessioner during the entire term of the contract (with a lower LSI payment upon contract expiration) rather than decreased cash flow to the concessioner during the contract term (with a higher payment of LSI at the expiration of the contract) under the standard LSI formula. It is likely that many prospective concessioners would consider the higher cash flows provided by the LSI alternative throughout the contract term to be to their business advantage. Fostering competition for concession contracts is a serious concern to NPS. Since the passage of the 1998 Act on November 22, 1998, four concession contract opportunities involving LSI in excess of $10 million have been solicited. NPS did not receive proposals under these solicitations from any entity that was not a current NPS concessioner. In fact, the last time NPS received a proposal from a non-current NPS concessioner for a concession contract with an LSI or possessory interest value (a right of compensation similar to LSI) in excess of $10 million was in 1992 (the Yosemite contract). Tellingly, the Yosemite contract provided for straight-line amortization of its required possessory interest investment in a manner very much like the final LSI alternative for the new contract. NPS considers that a major reason for this record is the generally required utilization of the standard LSI formula. The standard formula is unlike usual private sector transactions of a similar nature (in addition to containing the speculative depreciation and CPI elements discussed above). Private firms that are not familiar with the NPS concession program have indicated that the complexities and uncertainty associated with the standard LSI formula have deterred them from submitting offers for concession opportunities. The NPS believes use of the final LSI alternative in the new contract will foster competition for contracts by providing interested offerors with a reasonable opportunity for profit that, with respect to LSI, is assured, understandable and more comparable to practices in the private sector. The final LSI alternative will also enhance competition for the concession contract that will succeed the new contract. This is because the LSI value at the end of the new contract will be significantly lower than it would be under the standard LSI formula, thereby lowering the amount of LSI purchase money needed by a prospective new concessioner. This lower entry cost should encourage the submission of competitive proposals from prospective concessioners. 5. The NPS has stated that concessioners "will be compensated for [their] expenditures for repair and maintenance of existing structures" because such expenditures "will necessarily be reflected in a lower depreciation deduction when the final leasehold surrender interest value for the structure is calculated." Concession Contracts; Final Rule, 65 Fed. Reg. 20630, 20656 (Apr. 17, 2000). Depreciation under the alternative LSI formula described in Contract Exhibit A, Section 15(b), Page A-6, is calculated on a straight-line basis rather than upon the basis of condition and prospective serviceability as under the standard formula. Accordingly, the extent to which the concessioner maintains the condition of the facilities over the term of the new contract will have no impact on the concessioner's depreciation deduction and the concessioner's LSI. Please confirm that the statement quoted above would not be the case under the alternative LSI formula described in Contract Exhibit A, Section 15(b), Page A-6, and explain how the NPS considered the impact of this change on the overall projected return to the concessioner under the new contract. Please explain how the NPS considered the potential impacts of this change on the concessioner's incentives to invest in the maintenance and improvement of Park facilities over the term of the new contract, and on the long-term viability of Park infrastructure. Response: As discussed above, the revised LSI value formula provides for straight line depreciation of LSI value in accordance with Section 405(a)(4) of the CMIA. The Service considers that the provisions of the draft contract provide adequate measures to assure compliance with the contract's maintenance and improvement requirements. In addition, the Service anticipates that the evaluation process for proposals for the new contract will result in the selection of a new concessioner with a proven track record of meeting its contractual obligations, including the obligations to maintain the Concession Facilities to the satisfaction of the Service.
Web Link: FBO.gov Permalink
(https://www.fbo.gov/spg/DOI/NPS/APC-IS/CC-GRTE003-11/listing.html)
Place of Performance: Address: Grand Teton National Park, Wyoming; Zip Code: 83012
Record: SN02268127-W 20100905/100903235549-e60e903f0224dd2a1c61d38742d86d50 (fbodaily.com)
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99 -- Modification #6 of a solicitation for a Concession Contract to provide overnight lodging, food and beverage, retail, marinas, and camping at Signal Mountain Lodge Area in Grand Teton National Park, Wyoming.