Audit Report on Carnegie Hall Corporation’s Compliance with Its City Lease Agreement

Audit Report In Brief

On June 30, 1960, the City and the Carnegie Hall Corporation (the Corporation) entered into a Master Lease agreement covering the Carnegie Hall building and the adjacent land located on Seventh Avenue at 57th Street in Manhattan. In 1987, the City allowed the Corporation to develop the Carnegie Hall Tower on the adjacent land (the Tower Property). Consequently, the City and the Corporation entered into a “restated” Master Lease, which covers the Carnegie Hall building and the Tower Property. The Corporation then subleased the Tower Property to Carnegie Hall Tower Limited Partnership—now known as Carnegie Hall Tower II Limited Liability Company (CHTL)—to manage and construct a 60-story office building with 548,904 square feet of commercial space.

Under the terms of the Sublease, CHTL must pay the Corporation a Base Rent equal to the greater of (a) full real estate taxes for the Carnegie Hall Tower or (b) $3,010,350. CHTL is also required to pay the Corporation a Percentage Rent, which is 4 percent of Gross Commercial Rents less certain allowable Actual Expenses exclusions. In turn, the Corporation must pay the City 70 percent of the total rents (i.e., Base and Percentage Rents) received from CHTL. The Corporation is also required to submit an annual detailed written statement setting forth all Sublease Income during the preceding fiscal year together with a copy of any audited financial statements received from the Subtenant to the City. The New York City Department of Citywide Administrative Services (DCAS) is responsible for monitoring the Master Lease and ensuring that the Corporation complies with its contractual obligations with the City.

The Corporation must also pay the City a fixed annual rent of $183,600 for the Carnegie Hall building. The City has, in lieu of rent payments, allowed the Corporation to make such payments available through its Special Program Fund (the Fund). The Fund is designated to provide special musical and cultural programs throughout the City and is monitored by the New York City Department of Cultural Affairs. Payments to the Fund are covered in a separate audit.

Audit Findings and Conclusions

Our review found that the Corporation did not report $8,919,430 in Gross Commercial Rents of which Percentage Rent and interest totaling $363,521 for Fiscal Year 2010 is due the City. Specifically, the Corporation allowed the Subtenant, CHTL, to deduct a total of $8,695,344 in expenses from its Gross Commercial Rents in excess of the amount previously approved by the City and did not report rent receipts totaling $224,086. We also found that the Corporation did not ensure the Subtenant submitted the quarterly Percentage Rent statements for True-Up Payments.

Further, our review found that DCAS did not adequately administer the lease to ensure that all the deductions from Gross Commercial Rents were properly reviewed and authorized by the City and that all revenue was properly collected and reported to the City in a timely manner.

Audit Recommendations

To address these issues, the audit recommends that the Corporation should:

• Pay the City additional 2009 Percentage Rent and interest of $363,521 resulting from improperly deducted Actual Expenses and unreported Gross Commercial Rents.
• Ensure it submits all proposed Sublease modifications or clarifications to the City for its review and approval prior to implementation.
• Ensure CHTL accurately reports its Percentage Rent and submits detailed quarterly Percentage Rent statements.

To address these issues, the audit recommends that DCAS should:

• Ensure that the Corporation pays the Percentage Rent and interest of $363,521 and implements all the other audit recommendations.
• Conduct a comprehensive review of claimed Actual Expenses for periods prior to our audit scope and quantify underpaid Percentage Rents and assess interest accordingly.
• Ensure that the Corporation submits all proposed Lease modifications or clarifications to the City for its review and approval prior to implementation and exercise due care and diligence to determine and document whether Lease modifications or clarifications are fair, equitable, and in the City’s best interests.
• Periodically review the Corporation’s financial submissions and conduct reviews or audits to ensure that the Corporation accurately reports revenues and pays the City all money due it.
• Properly bill the Corporation Base and Percentage Rents and collect any amounts due.

Agency Response

While the Corporation disagreed that it should pay the City $363,521, the Corporation did not offer a basis for its position. Moreover, the Corporation tacitly acknowledged that the City was short-changed by stating that it “will work with the New York City Department of Citywide Administrative Services (DCAS) to achieve a fair and equitable resolution of this matter.”

In its response, CHTL contends that the third Clarification Letter provided for certain extensions and expansions of Gross Commercial Rent exclusions and that “the City’s consent to this change was not required and, accordingly, these items have been excluded.” However, this letter was not expressly approved by the Corporation, i.e., it was never signed by the Corporation. More importantly, as noted, this letter was not submitted to or approved by the City. Article 34(a) of the Master Lease—which governs the Sublease—explicitly states that “Tenant may not alter or amend the Sublease without Landlord’s consent.” Because the proposed exclusions represented a material change in lease terms and rental payments due the City, the Corporation and CHTL should have formally sought and obtained the City’s approval. As noted, the Corporation and CHTL previously adhered to this requirement when modifying the Actual Expenses definition and reporting requirements in the first and second Clarification Letters, respectively.

DCAS characterized the Corporation’s and CHTL’s failure to seek and obtain the City’s approval of the third Clarification Letter as a “technical oversight” and deemed the resulting changes in lease terms and rental payments as “reasonable and customary.” Further, DCAS maintained that these changes “would most likely have been approved by DCAS had they been presented.” However, DCAS also tacitly acknowledged that the Corporation and CHTL bypassed the required approval process and, by doing so, short-changed the City. In its response, DCAS stated, “DCAS will insist that any further changes that affect revenue calculations be subject to DCAS approval in advance in accordance with the lease. Indeed, we will also work with Carnegie Hall to achieve an equitable outcome for the technical lease violation.”