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December 17_ 2007

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									December 17, 2007

CERTIFIED MAIL
RETURN RECEIPT REQUESTED

Reference No. 07–0185

Ms. Terri Baack
Management Assistant
City of Phoenix
Equal Opportunity Department
251 West Washington Street, 7th Floor
Phoenix, AZ 85003-2295

Dear Ms. Baack:

This is in reference to an appeal of the denial of an ineligibility complaint filed by Mr.
Elliott Threatt contesting the certification of [REDACTED] as an Airport Concession
Disadvantaged Business Enterprise (―ACDBE‖) certification. We have carefully
reviewed the material from the City of Phoenix (―COP‖) and have concluded that the
record supports COP’s determination regarding [REDACTED] status as a small business;
however, the issue of the firm’s owners’ personal net worth should be developed further
by COP. Accordingly, we are remanding the case to COP for further consideration on
this issue.

An explanation of the Department’s determination is as follows:

Size Standards Applicable to [REDACTED]

The record reveals that in August 2007, Mr. Threatt filed a third party complaint with
COP, alleging that [REDACTED], a firm operating [REDACTED] restaurants at Sky
Harbor International Airport and in Arizona, exceeded the annual gross receipts size
standard of $6.5 million set by the U.S. Small Business Administration, and also
exceeded the Department’s gross receipts standard set forth in the ―Disadvantaged
Business Enterprise‖ Regulation 49 CFR Part 26 (―the Regulation‖) §26.65.

In its August 24, 2007, response to Mr. Threatt, COP made the following determinations:
(1) the $6.5 million size standard applicable to full and limited service restaurants set by
the SBA is not the correct size standard to be applied to ACDBEs; (2) the applicable size
standard is specified under the ACDBE Regulation (49 CFR Part 23) §23.33 is $30
million average gross receipts over the firm’s previous three fiscal years; and (3) after
reviewing [REDACTED] gross receipts for all of its restaurant locations, the firm falls
under this size limitation and should remain an eligible ACDBE.

Substantial record evidence supports COP’s analysis that the $30 million gross receipts
standard is applicable to [REDACTED] and supports COP’s conclusion to deny Mr.
Threatt’s certification ineligibility complaint.

[REDACTED] OWNERS’ PERSONAL NET WORTH

The personal net worth of [REDACTED] owners, [REDACTED] is addressed in your
October 2, 2007, correspondence to the Department. You indicated that based on your
calculation, the [REDACTED] were under the $750,000.00, personal net worth limitation
after allowing for exclusions and division of assets in accordance with Arizona
community property laws.

The record contains a combined personal net worth statement for both individuals, which
describes the personal effects and the net business values for [REDACTED] and
[REDACTED]. In addition, the record contains a ―Statement of Financial Condition‖
prepared by the [REDACTED] accountant, who concluded that their personal net worth
was under $750,000.00. The record presents several issues relevant to the owners’
personal net worth which concern the Department and should be addressed by COP.

1. The [REDACTED] accountant’s statement of financial condition in the record is over
two years old, and the [REDACTED] personal net worth statement is nearly one year old.
Since the Department is remanding this matter, COP should request and the firm should
provide a more current personal net worth statement with supporting documentation for
each owner. The statements should be separate and not a combination between
[REDACTED], and notarized in accordance with §26.67.

2. If ―estimated taxes‖ are contained in any future personal net worth statements
submitted by the [REDACTED], COP should determine what comprises this amount and
consider including only actual taxes currently due, rather than estimated amounts.

3. In an August 24, 2005, letter to COP, [REDACTED] indicated that [REDACTED] ―is
the parent company for all of our [REDACTED] franchise operations, including the new
locations‖. According to the personal financial statement from the [REDACTED]
accountant, [REDACTED] is the restaurant operator while [REDACTED] owns the
related real property. As such, the accountant excluded the equity in [REDACTED]
(resulting in a final personal net worth under the $750,000.00 limitation) based on an
argument that §23.3 permits the exclusion of assets that have been encumbered to support
existing financing for an owner’s ACDBE business up to $3 million. More details
concerning this argument and the firms’ financing is contained in [REDACTED] October
3, 2005, letter to COP.

a. Since [REDACTED] is the certified ACDBE, pursuant to §23.3, this is the only
ownership interest that should be excluded from the [REDACTED] personal net worth
statement, not [REDACTED]. While [REDACTED] is clearly associated with
[REDACTED] and is the real estate holding company for the firm’s restaurant locations,
this should be treated as a separate business for purposes of the [REDACTED] personal
net worth and not excluded as suggested by their accountant.

b. As indicated above, [REDACTED] alleged in his October 3, 2005, letter that the
financing arrangement for both firms’ would qualify for the third exclusion. It is
important, however, to note that Part 23 excludes from a person’s net worth calculation
assets that the owner/applicant can demonstrate are necessary to obtain financing to enter
or expand a concessions business at an airport. The preamble emphasizes that recourse
assets are, for example, those that were encumbered or are ―to be encumbered‖ in order
to obtain financing, as in the case where the asset is used as collateral for a loan. Also
addressed is the need for documentation that these recourse assets were required before a
franchisor or financial institution took action. The applicable portion of the preamble, as
well as examples of how the exclusion provision is to be applied, is contained in the first
issuance of the revised Part 23 that was published in the Federal Register on March 22,
2005.

COP should examine whether information indicates that the [REDACTED] were required
or needed to pledge their personal assets in order to capitalize or expand [REDACTED].
Documents in COP’s record, do not give this indication; however, there may be
additional evidence that this is the case. The preamble section to Part 23 clearly
articulates the Department’s intent that the ACDBE owner needs to demonstrate that
certain assets were required or necessary to obtain financing.

The Department directs COP to reevaluate the [REDACTED] personal net worth with the
above considerations in mind. COP should carefully consider the fact that —along with
the [REDACTED], [REDACTED] may be jointly and severally liable for loan referenced
in the record; and as a practical matter is the entity likely to be pursued first by the
creditor in the event of default. COP should request and the firm should provide copies
of any loan documents it alleges are paid by [REDACTED], in addition to supporting
documentation so that COP can differentiate between loans paid by the [REDACTED]
and due to be paid by other entities.

If COP determines that the [REDACTED] have exceeded the $750,000.00, personal net
worth limitation, COC should institute decertification proceedings consistent with
§26.87. COP should afford the firm an opportunity to rebut and present evidence, and
consider any additional material the firm may submit. If COP determines that
[REDACTED] is eligible for the program, this would resolve the matter. However, if
you conclude that the firm does not meet the eligibility requirements of the Regulation,
the firm will, of course, have the opportunity to appeal COP’s decision to this office.

This appeal is being closed in our files. Thank you for your continued cooperation.

Sincerely,
Joseph E. Austin, Associate Director
External Civil Rights Programs Division
Departmental Office of Civil Rights

cc: Elliott Threatt
    [REDACTED]

								
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