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Growing Trend of Long-Term Service Plaza Concessions

Service plazas represent a uniquely important component of a toll road’s operation. On one hand, they contribute a very small percentage of total operating revenues (typically two to fi ve percent). On the other hand, they play a critical role in the customer’s experience and overall satisfaction. In light of this combination, as well as the fact that restaurants, fuel, and other retail operations and capital improvements are far from an operator’s core competency, service plaza operations represent ideal candidates for public-private concessions.

As many existing service plazas are reaching the end of their useful lives, numerous state departments of transportation and tolling authorities have explored new ways to operate, maintain, and improve service plazas, including engaging in longer-term master concessions. When properly executed, these agreements can effectively deliver new service plazas; transfer construction, operating, economic, environmental, and maintenance risks to the concessionaire; and guarantee a reliable revenue stream to the authority. This article highlights a selection of long-term service plaza concessions in four states.

Pennsylvania Turnpike

In 2004, the Pennsylvania Turnpike Commission (PTC) issued an RFP to redevelop and modernize all of its 21 service plazas, calling for a long-term agreement with a private partner structured with the overall goal of improving the service plazas without using toll revenue. At that time service plaza revenue represented just two percent of total turnpike revenue, and the plazas were antiquated, with most in need of complete reconstruction. PTC signed a 30- year deal with HMS Host and Sunoco that called for the commitment of $170 million in private investment, which included $100 million from HMS Host for the restaurant/retail components of the service plazas and $70 million from Sunoco for fuel station reconstruction. 

Prior to the long-term agreement, PTC engaged in a more conventional short-term concession with HMS Host, and received nine percent of gross sales revenue. In exchange for the commitment to rebuild all of the service plazas, HMS Host will only pay 4.5 percent of gross sales to PTC until all plazas are renovated, then four percent over the remaining 30-year lease period (a built-in incentive to speed construction). Under the old contract, PTC handled most maintenance such as plowing and surface lot repair, but HMS Host will handle the majority of his type of expense under the long-term concession.

Although PTC receives a smaller share of gross sales, because of the improvements to the facilities, total sales are forecast to increase to the point that PTC will receive revenues on par with what it was receiving under the previous short-term concession. Total sales are estimated to be $3.5 billion over the 30-year period. Because the service plazas have differing traffic volumes yielding a variety of retail and fuel demand potential, HMS Host proposed three different service plaza design formats, which varied by square footage to best match this demand potential.

Due to the long-term nature of the concession, fluctuations in the economy have had an impact on the timing of service plaza project delivery. Although the concession included a specific timeline for service plaza reconstruction, HMS Host requested the postponement of the construction of four service plazas during the recent recession. PTC was unwilling to allow no reconstruction that year, but did concede to the postponement of two of the four service plaza reconstructions. This scenario suggests that although the concession was designed to transfer economic and construction risk to the private partner, in a period of particularly weak economic conditions, PTC was still somewhat exposed in the form of delayed service plaza project delivery. 

Florida’s Turnpike Enterprise

In 2009, Florida’s Turnpike Enterprise (FTE) entered into a 30-year concession with Areas USA to renovate, rebuild, and operate the eight service plazas on its 300-mile toll road. These plazas were originally built in the 1950s and 60s and then renovated in the 80s. FTE had numerous goals and objectives for the agreement, including:

An agreement with a single source vendor to simplify the process. Prior agreements involved multiple contracts for fuel, food, and beverage, as well as other retail categories.

• Limited maintenance obligation from FTE, to allow focus of toll revenue on road improvements.

• Guaranteed revenue stream to ensure ongoing and predictable future revenue from service plaza operations.

• Upgraded architecture and landscaping to improve the customer experience.

• Performance standards and Leadership in Energy and Environmental Design (LEED) certification.

The resulting Design-Build-Finance concessionaire agreement included a $100 million capital commitment to rebuild some of the service plazas and renovate others. In addition to the capital commitment, FTE will be guaranteed $180 million over the life of the contract, and plaza refurbishments every five years. As part of the agreement, FTE participated in the capital investment by contributing $62 million to deliver the fuel and convenience store components at each plaza, while Areas USA handled food and beverage and other retail.

Service plazas are now tailored to the different types of customers that frequent the different locations. The original service plazas were all the same size and format, but two of the most visited service plazas were experiencing up to three times the demand as the others. Restaurant brands and amenities are planned to be different for service plazas more commonly visited by commuters versus those that experience more tourist-oriented demand. Brand selection also factors into local surveys of consumer preferences conducted by FTE, which resulted in a switch from Starbucks to Dunkin’ Donuts and healthier and more diverse food options.

Maryland I-95

The state of Maryland recently announced a long-term concession to rebuild, operate, and maintain two large service plazas located on Interstate 95. Although the highway is not tolled in Maryland, the

Chesapeake House and the Maryland House are state-operated service plazas that were “grandfathered,” meaning they were in existence prior to the federal law prohibiting states from operating commercial services on federally funded highways.

The agreement included a 35-year concession in which the private partner, Areas USA, will completely rebuild and enlarge both service plazas at an estimated cost to Areas of $56 million. Payments to the state will range from $442 to $488 million over the term, refl ecting the sizable retail and fuel sales potential of the two service plazas.

Payments to the state will be based on a sliding scale linked to gross food, fuel, and convenience store sales. The state will receive 10 percent for annual sales up to $45 million, increasing up to 15 percent for sales greater than $75 million. For fuel, the state will receive a share ranging from five to nine cents per gallon for gasoline and seven to eleven cents for diesel. The state’s share of convenience store sales will range from nine to 11 percent depending on total sales. The agreement transferred the majority of the risk associated with developing, financing, operating

and maintaining the service plazas from the state of Maryland to Areas USA. Important issues such as environmental remediation and concerns over jobs were also addressed. The concession requires Areas to remediate existing soil contamination and completely replace all underground fuel storage tanks. The state will contribute funds if the necessary remediation exceeds a certain threshold, but Areas accepted responsibility for all future environmental compliance. Areas will address job concerns by att empting to hire as many of the existing service plaza employees as possible. Areas will also explore ways to mitigate displaced workers during temporary closures, including private job fairs, outreach, and arranging for on-site visits to the service plazas from local workforce assistance programs.

Illinois Tollway

The Illinois Tollway’s service plaza concession represents a potential cautionary tale due to the inability of the private partner to meet certain commitments during the life of the concession. In 2002, the Tollway engaged in a 25-year concession with Wilton Partners, a California-based real estate developer, and Exxon Mobil to rebuild and operate its seven service plazas, known as “Oases.” The agreement called for Wilton Partners to invest $94 million to rebuild each Oasis. Upon completion of the reconstruction, the agreement required a minimum annual payment of $750,000 from gross sales to the Tollway, but the developer began missing payments in 2008 and owed the Tollway as much as $1.3 million at one point. Wilton Partners eventually defaulted on their original construction loan, and the lender, who assumed control of the long-term lease, reimbursed the authority the amount owed, while a court-appointed commercial real estate fi rm assumed management responsibility.

Although the Tollway was eventually made whole and did receive a set of new service plazas, the key lessons learned are to conduct the proper amount of due diligence and partner with a private entity with a strong balance sheet that allows it to better weather economic downturns, construction delays, and other potential pitfalls. Another key conclusion is to maintain better oversight of third party capital improvements and operations to avoid surprises and resolve potential issues in the early stages before they escalate.

Conclusions

The case studies indicate that long-term service plaza concessions can be an effective and financially feasible way to improve the customer’s experience, transfer numerous risks from the authority to the concessionaire, and deliver significant capital improvements with minimal use of toll revenues, which are needed for ongoing road maintenance and investment.Lessons learned include selecting the right private sector partner, structuring agreements that address the potential impact of an economic downturn, and avoiding a one-size-fi ts-all approach to new service plazas in favor of one that can eff ectively meet the specifi c demand potential and consumer preferences unique to each plaza.

 

 

 

Image Header Source: Zyscovich Architects


Geographies: United States
Sectors: Roads
Topics: Funding & Finance, Other