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					OFFICE OF THE AUDITOR




       DEPARTMENT OF AVIATION
        THE HERTZ CORPORATION
REVENUE AND CONTRACT COMPLIANCE AUDIT
              JULY 2008




                           Dennis J. Gallagher
                           Auditor
                      City and County of Denver
                      201 West Colfax Ave., Dept. 705 • Denver, Colorado 80202 • 720-913-5000, FAX 720-913-5247
                      www.denvergov.org/auditor
Dennis J. Gallagher
    Auditor
                                                           July 17, 2008

Ms. Kim Day, Manager                                    Ms. Jackie Agan, Director of Properties
Department of Aviation                                  The Hertz Corporation – West Central Region
City and County of Denver                               24890 East 78th Avenue
                                                        Denver, CO 80249

Dear Ms. Kim Day and Ms. Jackie Agan:

Attached is the Auditor’s Office Audit Services Division’s revenue and contract compliance
audit of the Hertz Corporation operations at Denver International Airport. The audit was for the
period January 1, 2005 through December 31, 2007. The purpose of the audit was to determine
whether Hertz and the City and County of Denver complied with the terms and conditions of the
contracts and whether internal controls were adequate.

The audit identified a reportable condition which is fully described in the accompanying report.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5029.

                                                           Sincerely,



                                                           Dennis J. Gallagher
                                                           Auditor
DJG/mm
cc:  Honorable John Hickenlooper, Mayor
     Honorable Members of City Council
     Members of Audit Committee
     Kelly Brough, Chief of Staff
     Claude Pumilia, Chief Financial Officer
     Chris Henderson, Chief Operating Officer
     David Fine, City Attorney
     Lauri Dannemiller, Executive Staff Director, City Council
     Beth Machann, Controller
     Stan Koniz, Deputy Manager of Aviation for Business and Technologies
     Pete Gingras, Assistant Deputy Manager of Aviation/Property Management
     Patrick Heck, Deputy Manager of Aviation for Revenue Management and Business
         Development



To promote open, accountable, efficient and effective government by performing impartial reviews and other
audit services that provide objective and useful information to improve decision making by management and the
people. We will monitor and report on recommendation and progress towards their implementation.
                                                          1
                                 TABLE OF CONTENTS




Transmittal Letter                                                      1


Table of Contents                                                       2


Auditor’s Report                                                        3


Executive Summary                                                       4


Background, Scope, Objective, and Methodology                           5


Finding, Recommendation, and Response                                   7


Schedule of Gross Revenue and Amounts Due and Paid and Related Notes   13


Exhibit A – Audit Alert: Rental Car Commercial Rebates Taken as an
     Inappropriate Deduction                                           17




                                             2
                      City and County of Denver
                      201 West Colfax Ave., Dept. 705 • Denver, Colorado 80202 • 720-913-5000, FAX 720-913-5247
                      www.denvergov.org/auditor
Dennis J. Gallagher
Auditor
                                         AUDITOR’S REPORT



We have completed an audit of the Hertz Corporation and the Department of Aviation (DIA),
examining the Concession Agreement and Terminal Building Premises Lease dated October 1,
1993; and the Special Facilities and Ground Lease dated September 1, 1999, as amended for the
period January 1, 2005 to December 31, 2007. The purpose of the audit was to determine
whether Hertz and the City complied with the terms and conditions of the contracts, complied
with City rules and regulations, and whether internal controls were adequate. This audit was
included in the Auditor’s Office Audit Services Division’s Annual Audit Plan and is authorized
pursuant to the City and County of Denver Charter, Article V, Section 1, General Powers and
Duties of the Auditor.
We conducted this audit in accordance with generally accepted government auditing standards.
Audit standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
As a result of our audit, we determined that Hertz had not reported all revenue as required and
did not make timely payments resulting in additional late fee amounts due to the City.

We extend our appreciation to DIA and Hertz personnel who assisted and cooperated with us
during the course of our examination.

                                                       Audit Services Division



                                                       Kip Memmott, CGAP, CICA
                                                       Director of Audit Services

Date: July 17, 2008

Staff: Dick Wibbens, CPA, Audit Manager
       Marcus Richardson, CICA, Internal Audit Supervisor
       Dr. Adeniyi Kelani, CICA, CAPPP, Lead Internal Auditor
       Kristin Donald, Senior Internal Auditor


To promote open, accountable, efficient and effective government by performing impartial reviews and other audit
services that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendation and progress towards their implementation.
.
                                                           3
                        THE HERTZ CORPORATION
                          EXECUTIVE SUMMARY
        FOR THE PERIOD JANUARY 1, 2005 THROUGH DECEMBER 31, 2007


This summary highlights the finding of this revenue and contract compliance audit, which is
more fully described in the Finding, Recommendation, and Response section beginning on page
7. The responses from the Department of Aviation and the Hertz Corporation are included in the
Finding, Recommendation, and Response section of the report.

1.     Concessionaire Underreported Revenue

Audit work determined Hertz underreported revenues earned during the audit period related to
unreported commercial rebates. As a result, the audit identified additional monies, including
interest payments, owed to the City by the Concessionaire for these underreported revenues. It
appears DIA did not provide adequate oversight of the agreement to ensure that the
Concessionaire reported revenue and paid fees as required. We recommend DIA implement
enhanced oversight and controls related to the agreement in addition to collecting the monies
owed by the Concessionaire.

Commercial Rebates Taken as an Inappropriate Deduction - Hertz inappropriately deducted
$1,037,962 for revenues they identified as “Commercial Discounts” from their gross revenues
during the three-year period, 2005-2007. According to Section 6.2 (e) of their concession
agreement and an informal opinion from the City Attorney’s Office, these “Commercial
Discounts” should not have been deducted from gross revenue. As a result of those invalid
deductions, Hertz owes the City $103,796 for underpaid concession fees and $42,121 for
applicable interest charges for this period. DIA should take immediate action to collect these
monies. Alternatively, DIA should amend the contract with Hertz to specifically allow for this
type of deduction from gross revenues. If this option is pursued, DIA should fully document
justification for doing so since this provision would decrease reportable revenues and most likely
apply to other rental car concessionaire agreements.




                                                4
                          THE HERTZ CORPORATION
          BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY
          FOR THE PERIOD JANUARY 1, 2005 THROUGH DECEMBER 31, 2007

Background

The Hertz Corporation, with its Regional Headquarters established at the Denver International
Airport (DIA) facility, operates a nonexclusive concession for the rental of motor vehicles to the
public at the DIA. Hertz is the world’s largest car rental organization in the US airport market
with operations in 1900 locations in the United States and 5100 international locations in more
than 150 countries. Hertz has a fleet of approximately 525,000 vehicles. Nearly 75 percent of
Hertz’ car rental revenue comes from cars rented at airports.

Hertz operates under the terms of a Concession Agreement and Terminal Building Premises
Lease dated October 1, 1993 and the Special Facilities and Ground Lease dated September 1,
1999 between the City and Hertz. The agreements require Hertz to pay Concession Fees to the
City an amount equal to 10% of their annual gross revenues derived from its operations or a
minimum annual guaranteed amount, whichever is greater. Hertz is also required to make rent
payments for all office, ticket counter, land, and storage space in compliance with the contract.
Payments are to be made timely or additional interest charges apply. Per the contracts, Hertz
must charge and collect usage fees for each rental car transaction day from all airport customers
entering into car rental agreements. Such fees are intended to cover the costs of the bonds issued
to construct the rental car facilities at DIA 1 and are paid to the trustee of the car rental revenue
fund monthly. The airport also charges additional fees for utilities, security screening and airport
badges.

Scope

Our audit of the Hertz Corporation (Fund/org 73800/6013000) covers the period January 1, 2005
through December 31, 2007 and is limited to determining compliance with the contract, dated
October 1, 1993. The procedures performed included a determination of compliance with the
contracts and rules and regulations and review of internal controls related to financial
information reported to the Department of Aviation for this audit period.

Objective

The objective of this audit was to determine whether Hertz properly reported gross revenue and
usage fees, and paid the proper amounts to the City for compensation fees and space rent in
accordance with contract requirements. Additionally, audit work assessed whether the
Department of Aviation and Hertz complied with other terms and conditions of the contracts and
applicable City rules and regulations.




1
 According to Section 5.01 of the Special Facilities and Ground Lease, usage fees are pledged for payment of the
1999 A-B Bonds.


                                                        5
BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY                      THE HERTZ CORPORATION


Methodology

To meet the audit objectives, we utilized several methodologies. These evidence gathering and
analysis techniques included, but were not limited to:

•   Verified and recalculated rentals, fees, and charges;
•   Recalculated percentage compensation;
•   Checked and determined timeliness of cash receipts;
•   Performed various tests of gross revenue;
•   Performed an analytical review of gross revenues;
•   Determined delinquent interest amount due;
•   Performed onsite physical observations;
•   Reviewed internal controls;
•   Verified evidence of insurance and performance bonds requirements;
•   Conducted interviews and discussed with management and staff of Hertz and DIA;
•   Obtained an opinion from the City Attorney related to agreement terms defining gross
    revenue; and
•   Reviewed contracts and City rules and regulations.




                                               6
                          THE HERTZ CORPORATION
                  FINDING, RECOMMENDATION, AND RESPONSE
          FOR THE PERIOD JANUARY 1, 2005 THROUGH DECEMBER 31, 2007

1.      Concessionaire Underreported Revenue

Audit work determined Hertz underreported revenues earned during the three-year period from
2005-2007 for unreported commercial rebates. As a result, the audit identified additional
monies, including interest payments, owed to the City by the Concessionaire for these
underreported revenues. It appears DIA did not provide adequate oversight of the agreement to
ensure that the Concessionaire reported revenue and paid fees as required. We recommend DIA
implement enhanced oversight and controls related to the agreement in addition to collecting the
monies owed by the Concessionaire. Alternatively, DIA should amend the contract with Hertz
to specifically allow for this type of deduction from gross revenues. If this option is pursued,
DIA should fully document justification for doing so since this provision would decrease
reportable revenues and most likely apply to other rental car concessionaire agreements. The
specific improper reporting issue is discussed below.

Commercial Rebates Taken as an Inappropriate Deduction - The agreements require Hertz to
pay Concession Fees to the City an amount equal to 10% of their annual gross revenues derived
from its operations or a minimum annual guaranteed amount, whichever is greater. As part of
reporting Gross Revenue and calculating the concession fee, Hertz submits a concession report
which outlines the company’s deduction from gross revenue. Allowable and unallowable
deductions are described in the agreement with the city.

As part of review of gross revenue, we observed that Hertz reported a deduction for “commercial
discounts.” Hertz has contracts with corporations to give incentives (commercial discounts)
based on the volume of rentals made during a period. This commercial discount is given after
the rental has taken place, making it a customer rebate. However, according to subsection (e) of
agreement provision 6.2, “Credits given to the company’s customers may not be deducted by the
Company from its gross revenues.” This was also the conclusion of an opinion received from
the City Attorney’s Office. 2

The following table identifies commercial discounts reported by Hertz during the three-year
period, which are considered unallowable according to the aforementioned contract language and
the City Attorney’s opinion, as well as interest owed 3 for these improperly reported revenues:




2
  See the Assistant City Attorney’s Opinion – Deduction from Gross Revenues for Annual Corporate Rebates in the
Notes to Schedule of Amounts Due and Paid beginning on page 13.
3
  According to Section 6.5c of the contract, any payment not made to the City when due shall accrue interest at 18%
per annum until fully paid to the City.



                                                         7
FINDING, RECOMMENDATION, AND RESPONSE                                THE HERTZ CORPORATION


                   Table 1: Unallowable Commercial Discounts (Rebates)

                                Unallowable                              Interest
                                Commercial           Percentage    Charges Due
                                   Discount                        City By Year
                    Year
                   2005           $ 570,140            $ 57,014         $ 7,291
                   2006              240,961             24,096          12,887
                   2007              226,861             22,686          21,943
                                  $1,037,962           $103,796         $42,121



Recommendations

We recommend the Department of Aviation bill and collect $103,796 for underpaid concession
fees related to corporate rebates and $42,121for the applicable interest charges. Alternatively,
DIA should amend the contract with Hertz to specifically allow for this type of deduction from
gross revenues. If this option is pursued, DIA should fully document justification for doing so
since this provision would decrease reportable revenues and most likely apply to other rental car
concessionaire agreements.

We also recommend the Department of Aviation periodically (at least annually) review
deductions taken on the monthly concession reports to determine if the rental car companies are
in compliance with the contract.


Department of Aviation Response

“The Department of Aviation is continuing ongoing research into this matter, including the
possibility of obtaining a City Attorney’s Opinion (not an informal Opinion) on the collection of
Commercial Discounts. The Department of Aviation also intends to gather information
regarding what categories of revenues are included in these discounts, such as time and mileage,
liability insurance, and other revenue sources. It is possible that the commercial discount is not
simply a discount from the rates charged for the rental of the vehicle, but discounts on other
revenue categories that are excluded from gross revenues. If some portion of the commercial
discount taken is attributable to revenues excluded from gross revenue reportable to the airport
(such as liability insurance), then these excludable sources need to be “unbundled” from
reportable revenue. Accordingly, the discount amounts due and noted in your audit may not
reflect the actual amount due to the airport.

“Since we are still researching this issue, we cannot agree or disagree with your Finding, as
section 20-276 of the Denver Revised Municipal Code (DRMC) requires for Audit Responses.
We are estimating a timetable of completion on receiving an Opinion and/or clarifying the
account issues noted above to be no later than August 1, 2008. The Department of Aviation will



                                                8
FINDING, RECOMMENDATION, AND RESPONSE                                  THE HERTZ CORPORATION


then set in motion plans to resolve this issue, and your office with be notified in writing of such
plans.”

“The Department of Aviation concurs that periodic reviews of the revenues and deductions
enhances administration of the contract. The Department of Aviation does monitor compliance
with these contracts and will take further steps to monitor discounts taken from reportable
revenues. The revenues will be reviewed at least annually and more frequently as circumstances
allow.”


The Hertz Corporation Response

The Hertz Corporation (“Hertz”) strongly disagrees with the finding and recommendation of the
Auditor’s Office Audit Services Division’s revenue and contract compliance audit dated July 17,
2008 of Hertz’s operations at Denver International Airport for the period January 1, 2005
through December 31, 2007. In particular, Hertz contends that Hertz did not inappropriately
deduct Commercial Discounts from its gross revenues during such a three-year period as alleged
by the Auditor’s Office. The basis for Hertz’s disagreement is summarized as follows:

“1. The reliance on Section 6.2(e) of the Concession Agreement and Terminal Building
Premises Lease dated October 1, 1993, as amended, (the “Concession Agreement”) by the
Auditor’s Office and Assistant City Attorney’s Informal Opinion is ill-founded.

“Section 6.2(e) of the Concession Agreement states that: ‘Credits given to the Company’s
customers, including without limitation credits for out-of pocket purchases of gas, oil, chains,
tires or emergency services, regardless of where made, may not be deducted by the Company
from its gross revenues.’ Both the Auditor’s Office and Assistant City Attorney base their
argument on this Subsection to justify their conclusion that Commercial Discounts may not be
excluded from concessionable revenue. The intrinsic and fatal flaw with their argument is that
the term ‘Commercial Discounts’ are uniformly and commonly understood by the car rental
industry and other airports as being separate and distinct from the term ‘credits’ as referenced by
Section 6.2(e). The Section 6.2(e) ‘credits’ relate to small monetary amounts of the sort
described in Section 6.2(e), such as ‘out-of-pocket purchases of gas, oil, chains, tires, or
emergency services.’ The term ‘Commercial Discounts’, on the other hand, by the definition
commonly used in the car rental industry (which is understood and accepted by airports
throughout the country), refers to monetary discounts negotiated between the car rental
concessionaires and their major corporate customers based upon the volume of business done by
the corporate customers with the car rental concessionaires. The fact that airports treat and
specifically define ‘credits’ differently from ‘commercial’ or volume discounts is evidenced by
the extracts from the airport concession agreements attached hereto as Exhibit A.

“The Assistant City Attorney’s Informal Opinion correctly states that because corporate
discounts are not specifically addressed in the Concession Agreement, ‘we will have to look at
the parties’ intent based on the language used in the agreements, (and) how the practices are
implemented in the ordinary course of business…’ By both tests, it is clear that the parties
intended to exclude Commercial Discounts from being concessionable. First, if the City


                                                 9
FINDING, RECOMMENDATION, AND RESPONSE                                THE HERTZ CORPORATION


intended to include Commercial Discounts, the City would have included Commercial Discounts
as specifically being concessionable. Listing Commercial Discounts as concessionable (or as not
concessionable, as the case may be) is the standard practice of many airports in this country, as
shown in the extracts from the airport concession agreements attached hereto as Exhibit B.
Second, if Commercial Discounts are not specifically referenced in the definition of gross
revenues of an airport concession agreement, the understood presumption in the ordinary course
of the car rental/airport concessionaire business is that Commercial Discounts are permitted to be
excluded from gross revenues.

“2. The Course of Conduct between the City and Hertz Evidences that the Intent of the
Parties was to Allow Hertz to Exclude Commercial Discounts.

“The Appellate Court case of Papa Gino’s of America, Inc. v. Broadmanor Associates, Ltd., 500
A. 2d 1341 (Conn.App.1985), which is cited by the Assistant City Attorney, favorably references
Marlton Operating Corporation v. Local Textile Mills, Inc. for the proposition that ‘The courts
do not favor constructions in derogation of the course of conduct of the parties.’ That
proposition is true. The course of conduct of the City and Hertz with respect to the treatment of
the concessionability of Commercial Discounts could not be more evident and, consequently,
should not be derogated by the Auditor’s Office.

“The Concession Agreement was entered into on October 1, 1993. Although the Concession
Agreement has been subsequently amended on three occasions, the definition of ‘gross revenues’
as to Section 6.2(e) ‘credits’ and the absence of a reference to ‘Commercial Discounts’ has not
been modified during the almost fifteen (15) year time period. In regard to understanding the
‘course of conduct of the parties’, it is vital to recognize the following facts that have existed
from the inception of the Concession Agreement to date:

       a. Hertz has always excluded Commercial Discounts from its monthly concession fee
       payments and neither the City nor Auditor’s Office ever notified Hertz that they objected
       to such exclusion;

       b. Hertz always disclosed in its concession fee payment monthly itemized reports that
       Hertz was excluding Commercial Discounts (please see Exhibit C attached hereto for a
       representative sample of copies of Hertz’s monthly statements. Please note that Hertz’s
       retention policy resulted in the destruction of such reports prior to 2000);

       c. Hertz’s independent outside Certified Public Accounts always certified as to the
       accuracy of the Hertz’s yearly payments of concessionable revenue as being in
       accordance with the definition of gross revenues (please See Exhibit D attached hereto
       for a representative sample of copies of the PriceWaterhouseCoopers Reports of
       Independent Auditors);

       d. the City has always accepted payment of Hertz’s monthly concession fee payments
       without objecting to Hertz’s exclusion of Commercial Discounts, and;




                                                10
FINDING, RECOMMENDATION, AND RESPONSE                                 THE HERTZ CORPORATION


       e. the City’s Auditor’s Office never questioned Hertz’s exclusion of Commercial
       Discounts from the concessionable revenue nor the course of conduct between the parties
       until this particular audit. To the contrary, please note as follows:

               (1) Mr. Donald J. Mares, Auditor for the City’s Auditor’s Office, wrote in his
       cover letter dated September 7, 2000 reporting the results of the City’s audit for the year
       ended December 31, 1998, as follows:

              ‘There are no reportable findings as a result of our review. Hertz is to be
       commended for complying with the contract in all material respects. The Department of
       Aviation is also to be commended for their monitoring of this contract.’ (emphasis
       added) The complete letter and audit report are attached hereto in Exhibit E.

              (2) The Auditor’s Office in its audits for the year ended December 31, 1997 and
       1998, specifically recognized – without comment – that Hertz was not including
       customer discounts from its gross revenue reports (please see Note 1 on p.3 of Exhibit E
       and Note 1 on p. 8 of the audit report attached hereto as Exhibit F).

“In further regard to interpreting the ‘course of dealing’ between Hertz and the City, it is also
important to note the wording of the third WHEREAS clause in the First Amendment dated
December 1995 to the Concession Agreement (a copy of which is attached hereto as Exhibit F)
which states, as follows:

       ‘WHEREAS, since the time of the signing of the Existing Agreement, audits of gross
       revenues have disclosed a need to clarify, for future audits, the original intent of the
       parties with respect to transactions to be included in gross revenues.’

“The First Amendment clarified the criteria relating to the 20 mile radius concessionability
clause of the 1993 Concession Agreement, but did not modify Section 6.2(e) nor classify
commercial discounts as being concessionable. Thus, the ‘original intent of the parties’ and
‘future audits’ was clarified by the drafters of the First Amendment by their not categorizing
commercial discounts as concessionable.

“3. Contractual Rules of Construction Hold that Any Ambiguity Should be Held Against
the Draftsmen of the Contract.

“Our attorneys advise us that it is well-settled contractual law that should an agreement contain a
clause that is ambiguous as to meaning, that clause should be strictly interpreted against the
draftsmen of that clause. Although Hertz strongly believes that the intent of the parties and
course of conduct is clear as to the agreement of the parties to exclude Commercial Discounts in
this particular Concession Agreement, should there be any doubt as to the intent of the parties
that doubt should be resolved against the drafters of the Concession Agreement: i.e., the City.

“4. The Court Cases Cited in the Assistant City Attorney’s Informal Opinion are Not
Persuasive to Find that Commercial Discounts are Concessionable at DIA.




                                                11
FINDING, RECOMMENDATION, AND RESPONSE                                THE HERTZ CORPORATION


“Our attorneys advise us that the legal justification for concluding that Commercial Discounts is
not decisive based on the ALR and two court cases cited by the Assistant City Attorney, for the
following reasons:

       a. Neither cited case was decided in Colorado. The Papa Gino’s case was a 1985
       Connecticut case. The Park Central Development case was a 1969 Arizona case. Neither
       of these rather old cases is controlling with respect to Colorado law.

       b. The reference to 58 A.L.R.3rd 384 does not conclude that Commercial Discounts are
       per se concessionable, but rather, that one must examine ‘the particular intent of each set
       of parties in each case.’ In light of the course of conduct of the City and Hertz, together
       with the car rental industry standards and practices as outlined above, Hertz’s position
       that Commercial Discounts in the Concession Agreement are not concessionable are
       actually supported by the cited A.L.R.’s section.

       c. Papa Gino’s of America, Inc. v. Broadmanor Associates, Ltd., specifically held that
       coupon discounts for meals were not concessionable. Hertz fails to understand how this
       judicial decision supports the Auditor’s position. In fact, it supports the contrary
       argument of Hertz.

       d. The Park Central Development Co. case involved the question as to whether S & H
       Green Stamps constituted ‘refunds, credits or allowances to customers within the
       meaning of the lease.’ Hertz respectfully submits that S & H Green Stamps promotions
       are not analogous or apropos to the subject of the Commercial Discounts in an airport
       rental car concession agreement. The court in that case, furthermore, placed heavy
       emphasis on course of dealing and the intent of the parties which again, supports Hertz’s
       arguments as to Commercial Discounts being excluded from gross revenues.”



Auditor’s Comment:

Exhibits referred to in the Hertz Corporation’s response are available upon request from the
Auditor’s Office.




                                                12
                        THE HERTZ CORPORATION
         SCHEDULE OF GROSS REVENUE AND AMOUNTS DUE AND PAID
        FOR THE PERIOD JANUARY 1, 2005 THROUGH DECEMBER 31, 2007




Gross Revenue (Note 1)                                                       $273,370,363


                                     Amount Due            Amount Paid      Balance Due City
                                      (Note 2)              (Note 3)

Concession Fees                      $27,336,736           $27,232,940          $103,796

Ground Rentals                         4,455,624                4,455,624             -

Additional Rentals                     3,749,464                3,749,464             -

Terminal Office Space Rentals               -                       -                 -

Terminal Ticket Counter Rentals           30,996                  30,996              -

Usage Fees                             7,953,738                7,953,738             -

Interest Charges                          43,771                   1,650          42,121

Total                                $43,570,329           $43,424,412          $145,917




The accompanying notes are an integral part of this schedule.




                                                13
NOTES TO SCHEDULE OF GROSS REVENUE AND
AMOUNTS DUE AND PAID                                               THE HERTZ CORPORATION

1.       Gross Revenue

Gross revenue in this schedule includes all charges for time and mileage and other authorized
charges or services for rentals of motor vehicles made by customers at DIA and within a 20-mile
driving distance of the Terminal Building. Other authorized charges or services include:

     •   Neverlost Fees for navigation equipment
     •   Child Seats
     •   Additional Driver Fees
     •   Insurance charges
     •   Tour Coupons
     •   Special Equipment
     •   Age differential
     •   FT Surcharge
     •   Drop off charges
     •   Airport recovery fees

     Allowable reductions to gross revenue include:
     • Loss/Collision Damage Waiver
     • Non-revenue rentals to company’s employees
     • Usage Fees
     • Gasoline
     • Insurance proceeds


2.       Amounts Due

Concession Fees - Section 6.2 (a) of the Concession Agreement states that Hertz agreed to pay
as Concession Fees to the City an amount equal to 10% of their annual gross revenues
(Percentage Compensation Fee) derived from its operations or a minimum annual guaranteed
amount, whichever is greater.

Ground Rentals – In accordance with Section 5.02 (a) and 5.02 (b) in conjunction with Section
5.02 (g) of the Special Facilities and Ground Lease and the Department of Aviation billing
invoices, and a Memo dated November 8, 2000, Hertz agreed to pay as Ground Rentals to the
City.

Additional Rentals – According to Section 5.02 (d) of the Special Facilities and Ground Lease,
the Special Facilities and Ground Lease Payment Schedule dated October 1, 2000 and the
Department of Aviation billing invoices, Hertz agreed to pay as Additional Rentals.




                                               14
NOTES TO SCHEDULE OF GROSS REVENUE AND
AMOUNTS DUE AND PAID                                                   THE HERTZ CORPORATION

Terminal Office Space Rent – Section 6.1 (a) of the Concession Agreement and Terminal
Building Premises Lease state that Hertz agreed to pay $55 per square feet. Hertz occupied
401.9 square feet during 2004. The Terminal Office Space was vacated after 2004.

Terminal Ticket Counter Rent – Section 6.1 (a) of the Concession Agreement and Terminal
Building Premises Lease state that Hertz agreed to pay to the City Terminal Premises Rentals.

Usage Fees – In Section 5.01 of the Special Facilities and Ground Lease, Hertz agreed to charge
and collect usage fees for each rental car transaction day from all airport customers entering into
car rental agreements. Such fees are intended to cover the costs of the bonds issued to construct
the rental car facilities at DIA. These fees are paid to the trustee of the car rental revenue fund
monthly.

Interest Charges – According to Section 6.5 (c) of the Concession Agreement and Terminal
Building Premises Lease and Section 2.21 of the Special Facilities and Ground Lease, interest at
18% per annum is due on any payment not made to the City when due. Interest charges were
computed through May 30, 2008 for unallowable “commercial discounts.”


3.     Amounts Paid

The amounts paid as noted in the accompanying schedule for Concession Fees, Ground Rentals,
Additional Rentals and Terminal Office and Ticket Counter Rentals were compiled from the
Department of Aviation’s cash receipt records and reports provided to us. The amounts paid also
include the credits from prior year’s overpayments and concession fees surplus.


City Attorney’s Opinion Regarding Deduction from Gross Revenues for Annual Corporate
Rebates

Certain credits are enumerated in Subsection (e) of Section 6.2 of the Concession Agreement, as
follows:

“Credits given to the Company’s customers, including without limitation credits for out-of-
pocket purchases of gas, oil, chains, tires or emergency services, regardless of where made, may
not be deducted by the Company from its gross revenues (emphasis added).”

Since corporate discounts or rebates are not specifically addressed in the car rental agreements,
we will have to look at the parties’ intent based on the language used in the agreements, how the
practices are implemented in the ordinary course of business, and how the matter has been
addressed by the courts.

Although the credits enumerated in subsection (e) above do not include “rebates”, they do
express the general intent that credits granted to customers after the vehicle is returned are not to
be deducted from gross revenues. One exception in Section 6.2 is that “amounts collected from
customers for replacement of fuel” may be deducted from gross revenues.


                                                 15
NOTES TO SCHEDULE OF GROSS REVENUE AND
AMOUNTS DUE AND PAID                                                 THE HERTZ CORPORATION


In Annotation, “Calculation of Rental Under Commercial Percentage Leases”, 58 A.L.R.3d 384,
396 it is stated that “an examination of the cases reveals no generally accepted or uniform legal
rules with regard to whether a particular cost or receipt should be included or excluded from the
calculation of rentals….No doubt this lack of a discrete body of legal principles with regard to
percentage leases is a function of ad hoc judicial concern with the particular working or each
lease and the particular intent of each set of parties in each case.”

In Papa Gino’s of America, Inc. v. Broadmanor Associates, Ltd., 500 A.2d 1341 (Conn. App.
1985), the trial court had held that the face value of discount coupons made available to the
public and redeemed at the plaintiff’s restaurant are not exempt from the gross sales calculations
under a lease requiring the payment of rent in the amount of five percent of annual gross sales.
The Appellate Court of Connecticut reversed, holding that the terms gross sales and receipts
indicate money or cash that is actually received, and therefore would not include the discount
coupons. The appellate court noted that under Connecticut sales tax laws, cash discounts are not
included as taxable income and are not considered as gross receipts. See also 7-4A Current
Leasing Law and Technique—Forms, §4A.07, “Percentage Rent, “(Matthew Bender 2007)

On the other hand, where promotional devices are an ordinary business expense incurred by a
tenant as part of a promotional program or merchandising strategy enabling the tenant to capture
a larger share of the market, the treatment by the courts may be different. In Park Cent.
Development Co. v. Roberts Dry Goods, Inc., 461 P.2d 702 (Ariz. App. 1962), the court held
such expenses do not qualify as a valid exclusion from gross sales in calculating percentage
rental payments because the tenant actually received the monies, and then paid a rebate or credit
to the corporate customer separately as an expense.

Based on the above analysis, if Budget Rent A Car actually receives as gross receipts certain
amounts, which amounts are later rebated to its corporate customers, and the rebates are in the
nature of an ordinary business expense which is part of Budget Rent A Car’s marketing or
pricing strategy, then they are in the category of credits or business expenses. Such expenses
should not be treated as an allowable deduction from gross revenues in performing your audits of
the car rental concession agreements.

On the other hand, if a car rental company offers a corporate discount program in which a
company and its employees receive a discount up front, at the time of rental, then no revenues
are received in gross receipts. The discount would be considered a price cut and not part of
gross revenues.




                                                16
EXHIBIT A AUDIT ALERT – RENTAL CAR COMMERCIAL
REBATES TAKEN AS AN INAPPROPRIATE DEDUCTION     THE HERTZ CORPORATION




                                     17
EXHIBIT A AUDIT ALERT – RENTAL CAR COMMERCIAL
REBATES TAKEN AS AN INAPPROPRIATE DEDUCTION     THE HERTZ CORPORATION




                                     18

				
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