Audit Report On The Brooklyn Navy Yard Development Corporation’s Leasing And Rent Collection Practices

This audit determined whether the Brooklyn Navy Yard Development Corporation (Corporation) had adequate leasing and rent-collection practices.

The City of New York purchased the Brooklyn Navy Yard (Navy Yard) from the federal government in 1970 to create a modern industrial complex that could increase employment opportunities and provide job training for residents of the surrounding communities. The City subsequently leased the property to the Commerce and Labor Industry Council of Kings County (CLICK), which was to develop the Navy Yard. Until its dissolution in 1981, CLICK operated and managed the Navy Yard. After CLICK’s dissolution, the Corporation assumed the lease.

Under the lease agreement, the Corporation is required to 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. However, under a separate contract agreement dated January 9, 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.

In Fiscal Year 2004, the Corporation generated approximately $18 million in operating revenue and received approximately $15 million for capital improvements from the City. The City’s Department of Small Business Services (DSBS) is responsible for overseeing the Corporation’s activities.

Audit Findings and Conclusions

In general, the Corporation has adequate rent-collection controls to ensure that all billings were collected or appropriately pursued. However, our review disclosed serious weaknesses in the way that the Corporation issues and renews leases and maintains records. Specifically, 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. Although the Corporation maintained some underlying documentation, such as, leases, applications, memorandums of understanding to support occupancy terms, most of the documentation was incomplete, inaccurate, or obsolete. Consequently, 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.

We also found that the Corporation failed to impose required late fees for 17 of 71 tenants; does not segregate accounting duties; and cannot effectively monitor leasing activities because its computer databases, maintained in Maconomy and FileMaker Pro, are not effective. Finally, the Corporation did not calculate its net operating income in accordance with the lease agreement, nor did it deposit net operating income for Fiscal Years 2002 and 2003 in a reserve fund for capital improvements. Therefore, the Corporation owes the City $2,208,351 in annual base rent for Fiscal Year 2004.

Audit Recommendations

The audit recommended that the Corporation should:

• Prepare and adopt formal written policies and procedures for an effective leasing system that will generate the rental income required by the agreement. An effective leasing system would include:
• submitting appropriate tenant information to DSBS to perform background investigations.
• maintaining lease applications and current leases in Corporation files.
• renewing leases prior to their expiration.
• requiring that the Corporation’s Internal Leasing Committee review all lease applications and that the Board of Directors approve all leases.
• requiring that the Corporation’s Board of Directors approve revisions to major lease terms (e.g., change of location, term, and rent amount).
• maintaining a central database of occupied and available properties.
• Immediately commence the lease preparation, review, and execution process for all tenants who do not hold leases.
• Impose late fees as required for all tenants whose balance is greater than $1,000 and who do not pay rent on time.
• Ensure that accounting functions are properly segregated.
• Determine the feasibility of either upgrading its current systems or seek to acquire a new system that will interface and reconcile its leasing and financial activities. Once the Corporation makes its decision, it should ensure that all required information regarding tenant leases are inputted accurately into its electronic system.
• Submit an annual report to the City detailing a separate calculation of net operating income as prescribed by the lease agreement.
• Either remit $2,208,351 to the City for Fiscal Year 2004 annual base rent, or establish a reserve fund account for capital improvements and deposit an amount equal to the net operating income for Fiscal Years 2002 and 2003.

DSBS should:

• Require the Corporation to submit information about prospective tenants so that background checks can be performed.
• Ensure that the Corporation complies with the recommendations in this report.

Discussion of Audit Results

Corporation officials generally agreed with certain aspects of our findings and recommendations; however, they did not agree with the audit’s conclusion that 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. DSBS officials sent an e-mail stating that they “will not be responding to the comptroller’s audit of the Brooklyn Navy Yard Development Corporation.”