ANJMERCONSULTING, LLC

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# Final Report
Third Exclusion Position Development

December2, 20II



### Executive Summary

"<<Organization>> 9632 DufferWay Montgomery Village, MD 20886 T 240 632 9870 F 240 842.1966 www.animerconsulting.com«Organization»

Background Animer Consulting, LLC was hired to assist the Federal Aviation Administration (FAA) Office ofCivil Rights in developing a position on whetherthe Department ofTransportation (DOT) and FAA should retain, delete, ormodifythe current exemption sometimes referred to as the third exclusion to the Personal Net Worth (PNW) calculation. Project Objectives The project's primary objectives areto seek opinions ofstakeholders, to determinethe affect of an increase in the PNWon access to capital forACDBEs and to collect data on the numberof requests, approvals and denialsforthe third exclusion. ProjectApproach Stakeholders including concessionaires, airport recipients and government officials were interviewed. Data was collected from certifying agencies. Findings Overall, ACDBEswantto retain the third exclusion with more guidance and training forACDBE certification analysts. Stakeholders charged with establishing guidelines, administering and monitoring the third exclusion are more likely to think it should be deleted. They are concerned that the third exclusion, with the addition ofthe proposed increase in the PNW cap, will increase the possibility that the ACDBE program will be considered to be over inclusive. Data collected from certifying agencies supports that requests forthethird exclusion have been relatively few overthe six year period it has been available to ACDBEs. Suggestions 

### I Recommendations A majority ofthe respondents recommended retaining the third exclusion, providing there is additional guidance, training for certification analysts and monitoring to ensure that it is properly applied. Suggestions were made to continue to collect data that supports both the third exclusion and the overall ACDBE program and reflects marketplace conditions. 

### Background

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Animer Consulting, LLC was hired to assistthe Federal Aviation Administration (FAA) Office ofCivil Rights in developing a position on whetherthe Department of Transportation (DOT) and FAA should retain, delete, or modify the current exemption sometimes referred to as the third exclusion to the Personal NetWorth (PNW) calculation. This exclusion pertains only to participants in the Airport Concessions Disadvantaged Business Enterprise (ACDBE) Program. The third exclusion refers to "other assets thatthe individual can document are necessary to obtain financing or afranchise agreementforthe initiation or expansion ofhis or herACDBE firm (or have in fact been encumbered to support existing financing for the individual's ACDBE business), to a maximum of$3 million. 

### Project Objectives The project had the following objectives: (1) Identify any additional benefits, shortfalls, or reason for each option being considered (retain, delete, modify) for the third exclusion; (2) Seek opinions from stakeholders on the following questions:

and Has this exemption been difficultto implement and why? Has there been inconsistent implementation regarding the required documentation to supportthe exemption? Is the definition ofthe exclusion adequate orcould it be improved? What role, ifany, does the proposed increase in the PNWfrom $750,000 to $1.32 million play in this analysis? (3) Collect data on the number ofrequests forthe third exclusion to exemptassets from PNW calculations and the documentation requested to supportthe purpose forthe exemption. 

### ProjectApproach

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To obtain information to assist in developing a position on the third exclusion, a cross section ofstakeholders were interviewed and data collected from certifying agencies to gatherthoughts about and use ofthe third exclusion. Stakeholders provided their opinions, experiences and suggestions for the third exclusion. Interviews were conducted both face to face and telephonically. Data from certification agencies was requested and received through email correspondence and by phone. A total oftwelve stakeholders were interviewed. The food 

### &beverage operators, news, giftand specialty retailers and duty free operators interviewed operate as subtenants and jointventure partners and or have directcontracts with a developer or airport recipient. All the ACD.BEs interviewed operate on multiple airports oroperate multiple units on a single airport. Interviews were conducted with stakeholders representing federal policy makers and regulators, industry associations, airport recipients and lenders. Twenty certifying agencies and orACDBE program administrators replied to the request to provideACDBE certification data including the number of requests received to exempt personal assets used to obtain financing for airport concession business and the documents used to make asset exemption determinations. 

### Findings Eight ofthe twelve stakeholders interviewed thoughtthatthe third exclusion should be retained with additional guidance and training for those responsible for administering it. Four ofthe twelve interviewed were very concerned thatthe third exclusion contributes to the perception thatthe ACDBE program is over inclusive and would like to have more documentation to supportthe need for the third exclusion ifit is to be retained. The ACDBEs interviewed had not requested the third exclusion although they shared their knowledge ofthe experiences oftheir colleagues who had. They also indicated why they would be reluctantto seek the third exclusion. Some ofthe reasons given by the ACDBEswere: • Certification analysts do not understand business and accounting. • Iwould notwantto have the assets on my books arid then they not be exempted. • It is not clearwhatthe rules are. • I am unclear aboutthe rules like how long an asset can be exempted.
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Ofthe twenty airport certifiers that responded to the information. request, six have had one or more ACDBEs request exemption ofassets underthe third exclusion. Ofthe sixteen requests made, thirteen were approved, (three after appeal), and three were denied. According to an airport recipient, valuation ofassets and loan documents that identify specific assets have been a challenge for both ACDBEs and certification analysts. Findings specific to the three project objectives are presented below. Opinions, thoughts and ideas related to the first objective to identify any additional benefits, shortfalls or reason for each option being considered did not produce any significant new thinking and were consistentwith ideas and opinions received in response to previous requests for comments. 

### A. Identify any additional benefits, shortfalls, or reason for each option _being considered forthe third exclusion. • Retain A benefit of retaining the third exclusion is that it is already in place. The opportunity has created good will between the DOT, FAA and ACDBEs aspiring to grow in the airport concession business. The third exemption is valued and seen as a positive response to the marketplace conditions for ACDBEs. A shortfall is that guidance on implementation ofthe third exclusion is not as clear as it could be and to continue without further clarification rriight make requesting the asset exemption less attractive. 

### • Delete Because there are third exclusion requests that have been approved, an exit process would have to be developed. Deleting the third exclusion would diminish goodwill. It might suggestthat conditions limiting access to opportunities and capital in the market place no longerexist or are not ofconcern. ·



### • Modifythe Definition One modification suggested was to eliminate the $3M maximum on the third exclusion. The idea is thatto take advantage ofbusiness opportunities on airports, any cap creates a barrier ora glass ceiling. The activity ofresponding to the questions and issues Third ExclusionFinal Report 5«Organization»

raised by stakeholders might produce ideas forways to modify the definition so that concerns such as over inclusiveness and consistency in the application ofthe third exclusion are addressed. 

### B. Summary ofresponses to the "four questions" Four questionswere posed related to the definition and implementation ofthe third exclusion. One question reflects avery significant change in the ACDBE program operating environment. The third exclusion was conceived as a way to address the potential barriers created by the $750k PNW cap. The environment atthe time itwas added to the PNWdefinition was notfavorable to increasing the PNW cap. Nowthatthe PNW cap will likely be adjusted to $1.32 million, some non-ACDBE stakeholders do notsee the benefit of retaining the third exclusion. For some, in the new environment ofan increased PNW cap, the third exclusion represents a potential costto the ACBDE pro-. gram ratherthan a benefit. 

### • Has this exemption been difficultto implementand why? Most responders did not consider implementing the third exclusion to be difficult primarily because they had not received any requests. Others were somewhat concerned · about "doing it right" and wanted to be sure thatthe documents requested and reviE!W conducted was sufficient and orcompliant. Some stakeholders interviewed did think thatthe exemption has been difficultto implement. One reason given was thatthe requirements and process is not clearfor ACDBEs or certifiers. Another reason offered was that individuals responsible for certification are not adequately trained. Itwas suggested that individuals responsible for certification be given specific guidelines tofollow in calculating the exemption ofassets proposed or already pledged to obtain financing, what documents to request and howto reviewthem. To date, the DOT has rendered decisions on three appeals involving the third exclusion. Two were remanded to the recipient, while the third appeal was denied. These appeals were from established ACDBE firms, that is businesses thatwere not newto the ACDBE program. Additional guidance and training may increase the number ofrequests and reduce the numberofdenials that are appealed. 

### • Hasthere been inconsistent implementation regarding the required documentation tosupportthe exemption?
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All stakeholders interviewed had personal experience or knowledge ofinconsistencies in the implementation ofthe certification process including the third exclusion. One example given was that certifiers do notseem to understand thatthe exemption of assets can be less than $3 million dollars. Another example was that some certifiers are already using a $1.32 million networth cap forACDBEs·while others are automatically adding $3 mil to 750k as the networth cap with no documentation to support it. 

### • Is the definition ofthe exclusion adequate or could it be improved?
. The definition ofthe third exclusion, what it is, seems to be clear to the stakeholders interviewed. Everyone interviewed said that implementation ofthe exclusion can be improved. Questions raised by the stakeholders provide excellent insights into howthe definition of the third exclusion might be modified and what information might be beneficial to include in guidance ortraining that may be developed in the future. Examples ofthe questions raised are listed below. • Whatcan be done to preventfraud and abuse ofthe third exclusion? • How can we ensure thatthe ACDBE program is not perceived as over inclusive? • How can we get information and data to supportthe ACDBE program ifit is challenged?

. . • What are ways otherthan the third exclusion thatthe glass ceiling can be avoided? • How can airport recipients increase competition in the airport concessions business? • Whatare some ofthe assets that might be exempted in the third exclusion? • How could a sliding scale for PNW relative to projected gross sales ofthe business be

established and monitored? • What kind ofsystem could reflectthe individual situations ofbusinesses and owners? • Howwill assets encumbered (e.g. as collateral for a loan) for business purposes be

excluded from the PNWcalculation?

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• Howdo existing ACDBEs benefitfrom the up to $3 million exclusion? • What is the process for approving the third exclusion? • Howfrequently is an ACDBE's PNW reviewed? • Atwhat point in the business development process can assets become exempt? • When does the ACDBE requestthe third exclusion? • What is the total allowable exemption? • Whatdocuments mustan ACDBE provide the airport recipient to exempt assets that

are collateral for loans for airport concession business? • Ifan ACDBE company has two disadvantaged owners, can both owners be approved

for the exclusion ofassets pledged for a loan? • Can an ACDBE requestthat assets be excluded as part of PNWcalculations atdifferent airport locations? • What is a recipient's responsibility for sharing information regarding the PNWwith

other recipients? • What role, ifany, does the proposed increase in the PNW from $750,000 to $1.32 million play in this analysis? The ACDBEs interviewed think thatthe increase proposed is good news. An ACDBE Program Managerthinks the PNW should be higher. One commenterthat certifies ACDBEs suggested thatthe PNW should be 3 million dollars. The same commenter recommended thatthere not be a third exclusion. Several established ACDBEs thoughtthat it is especially good for newentrants as it may provide access to more capital and reduce the probability offailure due to insufficient start up capital. Otherstakeholders think that it may bring more attention to what has been said in the past, thatthe program is over inclusive and a program for millionaires.

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### C. Collect data on the numberofrequests forthe third exclusion to exempt assets from PNW calculations and the documentation requested to supportthe purpose forthe exemption. An email was sentto a representative ofeach state UCP requesting the numberof ACDBEs certified, the number ofACDBEs requesting the third exclusion, the numberof requests approved and denied and the number ofrequests seeking the maximum of3 million dollars. Ofthe twenty respondents, six have reviewed requests for the third exclusion. There were eleven requests by ACDBEs. In addition to the information above, certifiers were asked what documents were requested to evaluate the ACDBE's request for assests to be excluded in the PNW calculation, what challenges the recipient encountered in administering the third exclusion and other comments they might provide. Responses are listed below. 

### Whatdocuments doyou require ACDBEs to provide? • Personal Financial Statement (PFS), 3 years personal and business tax returns, 3

years corporate financials, 3 years affilitate business returns, concession agreements, bank loan agreements (as well as collaterization requirements). • Copy offinancing agreement, payment documentation, etc. • Letterfrom bank orairportto showthe need forfinancing a loan extending to $3M. • We require them to show us where the funds are held, documentation on howthe

funds were acquired and proofas to whatthe funds will be used for in their expansion ofservices as an ACDBE. • Ifand when applicable, firms will be required to submitsupporting financial documents

. and orcontractual agreements initiating

### servd~s internally orexternally forthe required expansion. • ACDBEs provide the same documentation as Part 26 applicants butwe would require

additional documentation ifapplicants requested the PNWexclusion. • Loan documents and documentation from airportverifying concession space (ie

contract award). • Copies ofloan/documents/letters supporting collateral used to obtain financing to open

orexpand a concession business at an airport.
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What, ifany, have been the challenges in implementing the third exclusion? • The challenge in implementing the exclusion is the difference in interpretation from

agency to agency and howeach chooses to implementthe requirement. In several of the reviews and challenges, the agency representative did not understand first ofall howto correctly compute the PNWwhich was the cause for appeal in three cases. Secondly, the USDOT has not provided sufficient guidelines in implementing this rule. Thirdly, training is very necessary forALL agency certifiers and mandate consistency.

, • In application ofthe regulation, especiallywhen state DOTs and transit are the certifying agencies. • No challenges were experienced. • Using the exemption to get around the PNWvalue. • What I see that might be a challenge is verifying or getting the documentation that

exclusion monies were used in applicant's concession business. • Confusion from the applicants on what can be applied asthe third exclusion. • Ability to verify assetvalues and documentation for accuracy and credibility. Othercomments from certifiers: • Recommendations: 1) Remove the $3M exemption; 2) Increase the PNWto $3M; 3)

For concessions, no PNWdue to the dollarvolume ofbusiness generated at airports and the networth required to sustain business operations atairports. • By only having one firm, I do notthink there was a challenge since they were willing to

show and provewhatthe funds were being held for. · 

### Suggestions 

### I RecommendaUons • Retain the Third Exclusion The third exclusion can create opportunity for business growth and represents responsiveness to the capital needs ofACDBEs and the realities ofthe airport concession business environment. • Develop Guidance Third ExclusionFinal Report 10«Organization>>

Consistency regarding the evaluation or assessment ofrequests forthe third exclusion is crucial to its success. The documents requested to determine whetherto approve a request should be consistent from airport recipient to airport recipient. Determining what is acceptable for documentation to establish the source ofthe assets to be excluded, howthey will be used and determining the length oftime thatthe assets will be exempted and when must be communicated and consistent. · Forexample, before proposing on an opportunity, the recipient might require verification ofa franchise. A recipient may also request some verification ofability to buildout units proposed forthe concession program. • Train Certification Professionals · Forthe full benefit ofthe third exclusion to be accrued by eligible ACDBEs, certification professionals must understand the information needed to evaluate requests for excluding assets from the PNW calculation ofACDBEs seeking the third exemption.· Training should be ongoing. • MonitorCompliance Just as all other aspects ofthe ACDBE Program are auditedforcompliance, so should this aspect ofdetermining certification eligibility. • Collect Data to Counter Challenges to the ACDBE Program TheACDBE Program is and has been the vehicle for access to concession opportunities for disadvantaged individuals. There have been questions raised overthe years regarding the need forthe DBE and similar programs. Advocates forthe program have been vocal proponents. Opponents have made claims thatthe program is over inclusive. Information that supports the continuation ofthe program is useful in every market and collecting and maintaining that information is useful and important to respond to opponents ofthe program and those thatwould considerthatthe program, or aspects of it, are no longer necessary. Franchise networth requirements for some ofthe most popular brands being operated on airports are useful for developing a position on the third exclusion. Mostfranchisors will provide information such as minimum networth requirements for prospective franchisees, the initial franchise fee, the cash investment and the total investment. This information was secured for twelve franchises. Only one had a networth requirement under 1M and that one gave a range of250kto 2M. Six ofthe franchises had minimum Third Exclusion Final Report II«Organization»

networth requirements of 1.5M orabove and three require a networth above 2M. Total investmentfor these franchises was as high as 500k to 6M. The National Minority Franchise Initiative was the source ofthis information. Going forward, conducting listening sessions to gatherthoughts, opinions, experiences and ideas on such matters such asjointventures, the third exclusion, elimination of**re~** tirement assets in calculating PNW, and small business programswill ensure thatthe ACDBE Program addresses regulatory requirements and marketplace conditions.

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