[Federal Register Volume 75, Number 171 (Friday, September 3, 2010)]
[Notices]
[Pages 54179-54183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22127]


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DEPARTMENT OF THE INTERIOR


National Park Service Concession Contracts; Implementation of 
Alternative Valuation Formula for Leasehold Surrender Interest Under 
the Signal Mountain Lodge and Leek's Marina Proposed Concession 
Contract, Grand Teton National Park

AGENCY: National Park Service, Interior.

ACTION: Notice.

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SUMMARY: The National Park Service (NPS), by notice in the Federal 
Register dated February 1, 2010, invited public comments on a proposed 
alternative formula for the valuation of leasehold surrender interest 
(LSI) to be included in its proposed concession contract GRTE003-11 for 
operation of the Signal Mountain Lodge and Leeks Marina at Grand Teton 
National Park (new contract). LSI, established in 1998 by the terms of 
Public Law 105-391 (1998 Act), is the compensable interest in 
applicable real property improvements on park area lands made by a 
concessioner pursuant to the terms of a NPS concession contract. 
Additional public comment was sought by a May 26, 2010, Federal 
Register notice. NPS, after consideration of the public comments 
received in response to both notices, has adopted a final LSI 
alternative for the new contract.

FOR FURTHER INFORMATION CONTACT: Jo Pendry, Chief Commercial Services 
Program, 1201 Eye Street, NW., Washington, DC 20005.

SUPPLEMENTARY INFORMATION: Under Section 405(a)(3) of the 1998 Act, the 
standard formula for LSI value (standard LSI formula) for applicable 
capital improvements provided by a concessioner under a NPS concession 
contract is summarized as the initial construction cost of the related 
capital improvement, adjusted by the percentage increase or decrease in 
the Consumer Price Index (CPI) from the date of the approval of the 
substantial completion of the construction of the related capital 
improvement to the date of payment, less physical depreciation of the 
related capital improvement.
    However, Section 405(a)(4) of the 1998 Act, starting in 2009, 
authorizes the inclusion of alternative LSI value formulas in NPS 
concession contracts estimated to have an LSI value in excess of 
$10,000,000 (such as the new contract).
    Under this authority, NPS, in the February 1, 2010, Federal 
Register notice, proposed an alternative LSI formula that in general 
called for the straight-line depreciation of LSI value on a 40-year 
basis. However, the alternative also provided that the installation (or 
replacement) of fixtures would not result in increased LSI value. Two 
public comments were received in response to this notice.
    By notice in the Federal Register dated May 26, 2010, NPS sought 
additional public comment on the proposal. Two comments were received 
in response to this notice.
    NPS, in consideration of the public comments made in response to 
both public notices, has re-examined the financial and other 
circumstances of the new contract and the proposed LSI alternative. 
This re-examination 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 regardless of asset class.
    (b) The reduction of the leasehold surrender interest 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.

Determinations

    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 this final LSI alternative is based on 
the

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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. With regard to a 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 rate 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 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 were 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, 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 
provides 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 rather than 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

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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 it 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.
    Public Comments in Response to the February 1, 2010, Federal 
Register Notice. The two public comments that were received in response 
to the February 1, 2010, Federal Register notice overlapped each other 
to a large extent. The comments are summarized and responded to as 
follows:
    1. Comment: The proposed LSI alternative formula constitutes a 
``taking.'' The comment specifically bases this position on the fact 
that the alternative does not provide for a CPI increase in LSI value.
    Response: The proposed (or final) LSI alternative would not 
constitute a taking of property because of its lack of a CPI adjustment 
(or otherwise). The new contract will provide for compensation (LSI) 
for capital improvements to be determined by mutual agreement (or 
binding arbitration if agreement cannot be reached). NPS also notes 
that the amortization of value in real property improvements provided 
by the final LSI alternative is a customary provision of private sector 
commercial leases (which generally do not call for CPI adjustments). In 
addition, a number of NPS concession contracts involving possessory 
interest provided for straight-line amortization of possessory interest 
value without providing a CPI adjustment to the base value. Straight-
line depreciation of compensable interests in real property 
improvements is not a new concept in NPS concession contracts.
    2. Comment: NPS has not provided evidence that use of the proposed 
LSI alternative is necessary to provide a fair return to the Government 
and to foster competition for the new contract as required by the 1998 
Act.
    Response: NPS determined that use of the proposed LSI alternative 
was necessary to provide a fair return to the Government and to foster 
competition for the new contract as discussed in the February 1, 2010, 
and May 26, 2010, Federal Register notices. See the discussion above of 
the final LSI alternative for further information regarding these 
determinations.
    3. Comment: Elimination of LSI for new and replaced fixtures under 
the proposed LSI alternative will have a chilling effect on the 
concessioner's willingness to make investments in fixtures.
    Response: This issue is resolved by the final LSI alternative. In 
any event, NPS notes that the new contract requires the concessioner to 
maintain concession facilities to the satisfaction of NPS. More 
importantly, NPS 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 obligation to maintain concession facilities properly.
    4. Comment: Lower franchise fee revenue to NPS resulting from the 
proposed LSI alternative will make less money available for improvement 
of visitor infrastructure.
    Response: Use of the final LSI alternative results in a lower 
franchise fee for the proposed contract as discussed above. However, it 
also provides for a lower LSI value payment at the end of the contract. 
NPS considers that the lower ending LSI value payment provides 
financial and other benefits to the Government, including enhancement 
of its overall ability to make improvements to visitor infrastructure. 
In particular, the reduced LSI liability under the final LSI 
alternative provides greater flexibility to NPS in developing the terms 
of subsequent concession contracts, as the initial capital investment 
required of the new concessioner will be significantly lower. This 
lower required capital investment will make more concessioner funds 
available to undertake needed concessioner improvements and/or to 
provide higher franchise fees to NPS which would be available to make 
needed visitor improvements.
    5. Comment: The proposed LSI alternative fails to address the legal 
authority to continue LSI depreciation once LSI value falls below $10 
million.
    Response: The 1998 Act authorizes use of an alternative LSI value 
formula with respect to proposed concession contracts that are 
estimated to have a leasehold surrender interest of more than $10 
million. The proposed new contract has a leasehold surrender interest 
of more than $11 million. The 1998 Act does not provide that an 
alternative LSI formula must be discontinued if its application results 
in an LSI value of less than $10 million during the term of the 
contract.
    6. Comment: Use of an alternative LSI formula is unfair to the 
incumbent concessioner because of circumstances relating to its 2005 
negotiation of possessory interest value, and, in particular, the 
length of time between the date of the possessory interest value 
agreement and the issuance of the prospectus for the new contract.
    Response: NPS has fully considered this comment. However, although 
NPS appreciates why the circumstances of this matter, including the 
timeline of the prospectus development process, are of concern to the 
commenter, NPS considers that the actions of NPS regarding the 
negotiation and agreement of possessory interest value, the development 
of the new prospectus, and the use of an alternative LSI formula, were 
all in the public interest and consistent with applicable law and 
policy.
    7. Comment: The imposition of an alternative LSI formula to a 
specific class of concessions [contracts with LSI

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value in excess of $10 million] will chill efforts to determine 
possessory interest and LSI values by mutual agreement of NPS and 
incumbent concessioners without costly, time consuming and otherwise 
undesirable arbitration.
    Response: Incumbent NPS concessioners are under no obligation to 
agree to a determination of the value of possessory interest during the 
term of their contracts. Many, however, have chosen to do so in 
furtherance of their own business interests. NPS does not consider that 
the possible use of an LSI alterative in a subsequent contract will 
deter most, if any, incumbent concessioners from negotiating possessory 
interest during the existing contract term. However, if a particular 
concessioner chooses not to negotiate possessory interest value prior 
to contract expiration, applicable terms of the existing contract would 
require the negotiation of possessory interest value between the new 
concessioner and the prior concessioner after award of the new 
contract. Arbitration between the new concessioner and the prior 
concessioner is a last resort that rarely occurs. Such an arbitration 
has occurred only once in the 12 years since the passage of the 1998 
Act.
    8. Comment: The issuance of the prospectus by NPS prior to 
undertaking an informed scrutiny of the relevant circumstances based 
upon public comment is inconsistent with the 1998 Act.
    Response: The February 1, 2010, Federal Register notice stated 
that, in the interest of time, NPS may issue a prospectus for the new 
contract that incorporates the proposed LSI alternative prior to 
receipt of comments on the notice. The notice also stated that, if 
consideration of public comments in response to the notice causes NPS 
to alter the proposed LSI alternative, it will amend the prospectus 
accordingly prior to the date for submission of proposals. This 
procedure is consistent with the requirements of the 1998 Act. After 
careful consideration of the public comments received in response to 
both the February 1, 2010, and May 26, 2010, Federal Register notices, 
NPS in fact has made appropriate modifications to the proposed LSI 
alternative and is amending the prospectus for the new contract 
accordingly.
    9. Comment: The NPS must address LSI for all concession contracts 
in a consistent manner.
    Response: The comment argues that if LSI value is speculative under 
the standard LSI formula, this must also be true with respect to 
contracts with less than $10 million of LSI value.
    Accordingly, the comment states that NPS should address LSI for all 
contracts in the same manner, regardless of LSI value. However, the 
magnitude of the LSI value is relevant to the impact of the speculative 
nature of LSI value under the standard LSI formula, as evidenced by the 
special authority provided by Section 405(a)(4) of the 1998 Act. This 
authority is not applicable to contracts with LSI value of less than 
$10 million.
    10. Comment: The proposed elimination of adjustments to the initial 
LSI value as a result of the installation of fixtures or replacement of 
fixtures during the contract term is unlawful.
    Response: The comment states that the elimination of LSI value in 
new fixtures under the proposed LSI alternative is in violation of 36 
CFR Part 51, which requires LSI value to be provided in fixtures 
installed during the term of a contract. This concern is made moot by 
the final LSI alternative. In any event, however, NPS considers that 
the LSI alternative as proposed was lawful in all respects under 
applicable provisions of the 1998 Act and 36 CFR Part 51.
    11. Comment: The proposed LSI alternative does not clearly address 
whether it includes a CPI adjustment.
    Response. The proposed LSI alternative did not provide for a CPI 
adjustment to LSI value; neither does the final LSI alternative.
    12. Comment: Withdraw the notice and amend the prospectus to 
utilize the standard LSI formula. If it does not choose to do so, NPS 
should initiate a public discussion of the issue and initiate formal 
notice and comment process (through a rule-making) to seek public 
comment on the general application of an alternative LSI formula.
    Response: NPS has fully considered the public comments reviewed in 
response to the February 1, 2010, and May 26, 2010, Federal Register 
notices and is proceeding to implement the final LSI alternative after 
scrutiny of the financial and other circumstances involved in the new 
contract, taking into account the public comments. Further public 
comment in response to a Federal Register notice is not considered to 
be necessary or in the public interest.
    NPS notes that the final LSI alternative (as with the proposed LSI 
alternative) is applicable only to the new contract. NPS has made no 
decision to apply the final LSI alternative (or any other LSI 
alternative) to future concession contracts. If the same or other 
alternative LSI formulas are considered for utilization in subsequent 
concession contracts pursuant to the 1998 Act, opportunities for public 
comment will be provided as required. A rule-making is not required or 
in the public interest.
    Public Comments in Response to the May 26, 2010, Federal Register 
Notice. Two public comments were received in response to the May 26, 
2010, public notice. They are summarized and responded to as follows.
    1. Comment: A commenter reiterated its objections to use of an 
alternative LSI formula as being unfair to the incumbent concessioner 
as expressed in response to the initial Federal Register notice. In 
addition, it suggested that, if NPS still intends to include an LSI 
alternative formula in the new concession contract, the reduction in 
LSI value under the formula should end at such point during the term of 
the new contract as the reduced LSI value falls below $10 million. The 
comment suggests that this approach would achieve the NPS objective of 
providing certainty as to the amount of LSI a prospective new 
concessioner would be entitled to under the terms of the new contract 
and would help eliminate the concern, as previously expressed by the 
commenter, that use of the proposed alternative LSI formula would 
discourage incumbent concessioners from agreeing to the determination 
of possessory interest and LSI values.
    Response: NPS has given due consideration to this suggestion. 
However, NPS does not consider that its adoption would be in the public 
interest or consistent with the purposes of the 1998 Act for two 
primary reasons. These reasons outweigh any benefits that may result 
from the higher ending LSI value as suggested by the commenter.
    First, a lower LSI ending value provides greater flexibility to NPS 
in developing the terms of subsequent concession contracts, as the 
initial capital investment required of the new concessioner will be 
significantly lower. This lower required capital investment will make 
more concessioner funds available to undertake needed concessioner 
operational and capital investment priorities, including necessary 
actions for protection of park area resources and the general 
environment. NPS notes in this regard that an objective of the 1998 Act 
is to provide accommodations, facilities and services that are 
consistent to the highest degree practicable with the preservation and 
conservation of the resources and values of the applicable park area.
    Secondly, the final LSI alternative should result in increased 
competition for the future concession contract that will be awarded 
upon expiration of the

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new contract. Prospective new concessioners for this contract will be 
required to pay the previous concessioner its ending LSI value. 
Accordingly, the significantly lower ending LSI value under the final 
LSI alternative, in contrast to the significantly higher ending LSI 
value as proposed by the commenter, lowers the entry cost to 
prospective new concessioners and thereby encourages the submission of 
competitive proposals in future solicitations.
    2. Comment: A concerned citizen commented to the effect that the 
new contract should not be trusted and that Government contracts should 
be shut down because they always prove detrimental to the public.
    Response: NPS considers the new contract to be in the public 
interest and in furtherance of the NPS mission to preserve and protect 
areas of the national park system while making them available for 
public enjoyment.

Public Availability of Further Information

    Complete details and further explanation of the final LSI 
alternative are publically available at http://www.nps.gov/commercialservices/. NPS will amend the prospectus by public notice in 
FedBizOpp.gov in order to implement the final LSI alternative. This 
Federal Register notice regarding the LSI alternative, although not 
required, was issued in order to provide the public a complete 
understanding of the NPS alternative LSI authority (exercised for the 
first time in this transaction).

Daniel N. Wenk,
Deputy Director, Operations.
[FR Doc. 2010-22127 Filed 9-2-10; 8:45 am]
BILLING CODE 4312-53-P