View Audit

City Comptroller William C. Thompson, Jr. has issued an audit faulting the Brooklyn Navy Yard Development Corporation for shoddy recordkeeping, a flaw-riddled leasing system and failing to give the City more than $2.2 million in rental payments.

The audit – which covered Fiscal Year 2004 - examined whether the Corporation had adequate leasing and rent-collection practices. The audit determined that the Corporation has no written policies or procedures on leasing, no master list of Navy Yard properties, no list of occupied properties, and no list of spaces available for rent.

And, the audit notes, most documentation – leases, applications, memorandums to support occupancy terms – was “incomplete, inaccurate, or obsolete.”

In Fiscal Year 2004, the Corporation generated approximately $18 million in operating revenue and received approximately $15 million from the City for capital improvements.

The New York City Department of Small Business Services is charged with overseeing the Corporation’s activities but refused to discuss the audit, indicating during the summer through in email that the agency “will not be responding.”

“It’s extremely disconcerting when a City agency mandated to oversee an entity allows it to take advantage of taxpayers to the tune of $2.2 million and then refuses to respond,” Thompson said. “Never in my time as Comptroller has an agency tried to simply sweep a problem of this magnitude under the rug.”

Under its lease agreement with the City, the Corporation must pay the City an annual base rent equal to its net operating income. The Corporation generates most of its operating revenue from leasing portions of the Navy Yard to commercial and industrial businesses. But under a separate agreement secured in January 2003, the Corporation is not required to pay Fiscal Year 2004 base rent if it deposits net operating income for Fiscal Years 2002 and 2003 in a reserve fund and uses the reserves for capital improvements.

Auditors determined, however, that the Corporation did not calculate its net operating income properly and did not make the appropriate deposits into the reserve fund for capital improvements. Therefore the Corporation owes the City $2,208,351.

Thompson noted that in general the Corporation had adequate rent-collection controls to ensure that all billings were collected or appropriately pursued. But, “our review disclosed serious weaknesses in the way the Corporation issues and renews leases and maintains records.”

“A focus on such tenants should be a key objective since lease income directly affects the Corporation’s capacity to make capital improvements and develop the Navy Yard,” Thompson said. “Because the Corporation does not have an adequate leasing system in place to determine whether its process for leasing commercial and industrial space is effective in generating rental income, we believe that the Corporation’s stewardship over its leasing activities of the Navy Yard is seriously flawed.”

Thompson’s team of auditors further found that the Corporation often failed to impose required late fees for tenants, did not segregate accounting duties, and could not effectively monitor leasing activities because its computer databases were ineffective.

In addition to paying the City more than $2.2 million, Thompson encouraged the Corporation to: prepare and adopt formal written policies and procedures for an effective leasing system to generate the correct rent payments; immediately start a lease preparation, review and execution process for all tenants who don’t hold leases; impose late fees who owe more than $1,000 and don’t pay on time; ensure that all accounting functions are properly segregated; and, submit annual reports to the City properly detailing how it calculates net operating income, among other recommendations.

Thompson demanded that Small Business Services require the Corporation to comply with the audit’s recommendations and require the Corporation to submit information about prospective tenants so that background checks can be performed.

“Since DSBS did not provide a response to the audit’s findings and recommendations, we are concerned that the issues raised in this report will not be addressed,” Thompson said. “DSBS’s failure to provide a response points to a serious deficiency in its oversight of the Corporation’s activities and contradicts its responsibilities…It is incumbent upon DSBS to ensure that all issues discussed in this audit are addressed.”