The Cliff House: Concessions, confusion, and government shutdowns

As much as I love writing this newsletter every week, I am going to just put this out there: if you want to team with me to operate a snorkeling-equipment rental business at the Virgin Islands National Park, feel free to slide into my DMs. Running a business at a National Park sounds like the best kind of a dream job, right?

As it turns out, though, running a business at a National Park is especially exciting because it involves government contracting! More specifically, it involves a category of government contracts known as a "concessions contract."

The government enters into concessions contracts when "fees are charged to the public and the government obtains the services or provides the services to recipients at no cost to the government."[1] And even though you might not think of a snorkeling-equipment rental business as being a government contractor, that's what's going on.[2]

In fact, according to the National Park Service, it "administers nearly 500 concession contracts that, in total, gross over $1 billion annually. NPS concessioners employ more than 25,000 people in a variety of jobs during peak seasons, providing services ranging from food and lodging, to whitewater rafting adventures, motor coach tours and others."

Today, though, we're going to talk about a specific concessions contract — the Golden Gate National Recreation Area's "Cliff House" contract—which teaches us two lessons about some of the promise and peril that comes with these types of contracts.

For those who are unfamiliar with the Cliff House, here's how the National Park Service described it:

The former Cliff House restaurant is situated on a hillside above the Pacific Ocean in the north westernmost corner of San Francisco, California in an area known as Lands End with spectacular views and has extensive history and importance to the citizens and visitors of San Francisco.

But that sort of undersells it. It turns out that the Cliff House housed "one of the top 100 grossing restaurants in the country, with annual sales exceeding $14 million." And it's an iconic venue, operating since the 1860s and surviving numerous fires and earthquakes and explosions. At the end of 2020, though, the Cliff House shuttered as a result of the pandemic.

It's gone through a lot. Now, as of a few weeks ago, it's under new management.

An interesting complication associated with concession contracts is that the government is hiring a company to run a business, but only temporarily. The new contract, for example, is a 20-year contract. Even though that feels like a long time, it's still time bound. And that creates a problem for the government and the concessioners: who should cover the cost of capital improvements?

After all, we know that the first order of business for the new operators will be "to institute building improvements and decor that will create a warm welcome for arriving visitors, connecting them to the rich history of the building and its site, and encouraging engagement with the natural environment through activation of the building’s outdoor decks, terraces and street frontages."

As the owner of the property, the government obviously wants capital improvements to happen. But the whole point of a concession contract is normally to have the concessioner pick up the tab, not the government. Meanwhile, at the middle or end of a concessions contract, the concessioner might be inclined to think twice about putting a bunch of money into capital improvements only to have a future competitor benefit from those improvements. So, how does the government create an incentive for those capital investments to happen while still promoting competition?

To address this, Congress passed a law—the Concessions Policy Act of 1965—which gave concessioners a legal right to compensation for approved capital investments. Accordingly, in 1997, when the National Park Service first awarded a concessions contract to the previous operators of the Cliff House—a company amusingly called Peanut Wagon, Inc.—the 1965 law applied.[2] And the primary method of encouraging capital investments at that time was to give incumbents (like Peanut Wagon) a formal preference in future procurements (i.e., reduce competition) and provide a "possessory interest" in those capital improvements.

But in 1998, the year after Peanut Wagon won the Cliff House contract, Congress changed the law to encourage more competition and providing more favorable terms to concessioners to make capital investments. According to a fascinating testimony from 2005:

By the early 1990s, Congress began to recognize that the concession system required substantial reform. In many cases, visitor services were lacking in quality, facilities were not being well-maintained, prices were higher than they would be for comparable goods and services outside the parks, and some concessioners were making much larger profits than would be expected from a competitive private-sector market. Most observers attributed these problems to the fact that competition for concession contracts was virtually non-existent. The desire to transform the concessions program into a more competitive, business-like operation was the driving force behind passage of the NPS Concessions Management Improvement Act of 1998. To accomplish that goal, Congress repealed the preference in renewal provided by the 1965 law, providing instead a preference primarily for small concession operations, shortened the maximum contract term to 20 years, and replaced [possessory interest] and its valuation formula with leasehold surrender interest (LSI) and a new valuation formula.

Still, NPS and Peanut Wagon entered into a 20-year concession contract in 1997, before that new law was enacted. In 2016, shortly before the concession contract would have expired, the Cliff House’s heating, ventilation, and air conditioning system system "began to fail, and NPS agreed to provide [Peanut Wagon] with a possessory interest related to its cost of replacement, 'with the condition that the total HVAC Project cost will not exceed $600,000 and will be depreciated over an estimated useful life of 15 years.'" Despite that $600,000 ceiling, the HVAC repairs ended up costing Peanut Wagon more than $960,000.

Then, suddenly, in 2020, the pandemic happened and Cliff House closed.

And then, Cliff House sued the government, arguing that it should benefit from the more favorable terms of the 1998 law and it should receive an extra $374,925.

Last week, the Court of Federal Claims ruled that Peanut Wagon might be entitled to that extra amount, but rejected the argument that Peanut Wagon was entitled to the more favorable 1998 law. In doing so, the court found that from 2018 through 2020, NPS and Peanut Wagon legally extended the concession contract and the 1965 law applied. And even though the court concluded that most of Peanut Wagon's legal theories were incorrect, the court effectively found that Peanut Wagon was entitled to some addition compensation.

Still, the first lesson here is that Peanut Wagon was running a business, but it's running a business where the vagaries of the United States procurement laws can dramatically affect the bottom line.

Which brings us to the second lesson: ten years ago, in 2013, the United States government shut down due to a lapse in annual appropriations. And one of the consequences of that shut down was that concession contract operators also had to shut down!

Here's a story from 2013 about, what else, the Cliff House?

National Park Service spokeswoman Alexandra Picavet said the Cliff House had to close because it is a concessionaire with the park service.

Officials sought to get an exception to keep the restaurant  operating, but were denied and the business joined other local  concessionaires that are closed, including Alcatraz Cruises, which transports  people to the famous penitentiary, and the Warming Hut at Crissy Field, Picavet said.

Does that mean concessioners will need to shut down next week if Congress is unable to pass a continuing resolution? Here's the thing: as of the morning on Wednesday, September 27, 2023, no one knows!

That's because according to the Congressional Research Service, unlike the 2013 shutdown, during the 2019 shutdown, NPS allowed concessioners to "continue operations at the discretion of park superintendents." But some of the legal authorities that the NPS relied upon as part of that shutdown's contingency plan in 2019 have been deemed illegal by the Government Accountability Office. And, according to the Washington Post as of this morning, members of Congress disagree about what the NPS should do and the administration hasn't announced its plan.

All of which is to say that there is a second lesson in all of this. Running a business inside of a national park may sound like a great idea, but it also means that you're going to have to deal with some of the more-traditionally ridiculous features of government contracting, including esoteric readings of appropriations laws, and the all-too-common failure of Congress to get its act together.

Them's the breaks. Still, if you are reading this and are planning to bid that snorkeling-equipment-rental business in the Virgin Islands National Park, I'm willing to take one for the team and suffer through the absurdity that government contracting sometimes brings. Call me!

[1] John Cibinic, Jr. et al., Formation of Government Contracts (4th ed.).

[2] I am honestly not sure whether the business is a "concessioner" or a "concessionaire." I think the proper term is concessionaire, but NPS seems to caall them concessioners. I'm going to defer to NPS on this one even though I think they're probably wrong.

[3] It's not really relevant for the main text, but it's worth noting for completeness that Peanut Wagon, Inc., actually operated the Cliff House before the 1997 concession award. Peanut Wagon operated Cliff House from 1973 through 2020, and the NPS didn't acquire the property until 1977. It wasn't until 20 years later that NPS actually competed the concession contract.

Subscribe to GovContrActually

Don’t miss out on the latest issues. Sign up now to get access to the library of members-only issues.