Audit Report on the Compliance of East Broadway Mall Inc., with Its Lease Agreement and Its Payment of Fees Owed the City
EXECUTIVE SUMMARY
On March 1, 1985, the New York City Department of General Services, now renamed the Department of Citywide Administrative Services (DCAS), entered into a 50-year lease agreement with the East Broadway Mall, Inc. (EBM), to develop and operate a retail shopping mall at 88 East Broadway in Manhattan. The lease requires that EBM pay an escalating annual base rent ranging from $50,000 in the first year increasing to $895,795 in the final year of the lease, as well as pay "percentage rent" ranging from 3 percent to 9 percent of gross operating revenue. EBM is also required to make additional rent payments to the City in lieu of real property taxes. In addition, EBM is required to carry certain insurance coverage, including personnel liability insurance, naming the City as an additional insured; remit a $72,000 security deposit to the City; and pay all required taxes and utility charges related to the facility.
This audit determined whether EBM maintained adequate internal controls over the recording and reporting of gross receipts; calculated and properly paid its rent on time; complied with other major requirements of its lease agreement (e.g., carried the required liability insurance, remitted the appropriate security deposit, and paid its utility charges). For the fiscal years ending August 31, 2000, and August 31, 2001, EBM reported $2,390,175 and $2,408,789, respectively, in gross operating revenue, and paid rent to the City totaling $820,297 and $992,339.
EBM had adequate internal controls over the recording and reporting of revenue, and it generally complied with the terms of its agreement with regard to paying its base rent, carrying the appropriate insurance coverage, and remitting the required $72,000 security deposit to the City. However, EBM did not accurately report its gross operating revenue and common area maintenance charges to the City, and did not pay all percentage rent due the City. Consequently, EBM owes the City In addition, we determined that there was a problem with the water bills for EBM. Specifically, the City’s Department of Transportation was mistakenly billed for the water and sewer charges for the mall. After we mentioned this to Department of Environmental Protection (DEP) officials, they had the name on the account changed and billed EBM for for the period December 1, 1999, to December 31, 2001.
Among the report’s recommendations are that EBM pay DCAS $120,965 in additional rent and interest due, and pay DEP $100,718 in outstanding water and sewer charges. The report also recommends that DCAS ensure that EBM complies with the report’s recommendations.
The matters covered in this report were discussed with EBM and DCAS officials during and at the conclusion of this audit. A preliminary draft report was sent to EBM and DCAS officials and was discussed at an exit conference on March 26, 2002. On March 27, 2002, we sent a draft report to EBM and DCAS officials with a request for comments. On April 11, 2002, we received a response from DCAS officials stating that they generally agreed with the audit’s findings and recommendations. On April 15, 2002, we received a response from EBM officials stating that Mui & Co., their Certified Public Accountant, is their representative for this audit. On April 16, 2002, we received a response from Miu & Co. that did not address any of the audit’s findings and recommendations. Consequently, we contacted officials from EBM and Miu & Co. to discuss their responses. Officials of both entities stated that they generally agreed with the audit’s findings and recommendations and will make arrangements to pay the amount due. On April 23, 2002, we received a letter from Miu & Co. officials stating that they agreed with the percentage rent calculation outlined in the report.
On April 12, 2002, we also received a letter from Gartner, Bloom & Greiper, P.C., Attorneys at Law, also in response to the audit. That letter did not address the report’s findings and recommendations; rather, it criticized the Comptroller’s Office for expanding audit testing beyond the initial two-year scope period, and for covering certain aspects of the lease that the firm contended were beyond the authority of the Comptroller’s Office. Officials from both EBM and Miu & Co. instructed us to disregard the law firm’s letter since, for the purpose of this audit, the firm was not EBM’s representative. However, because of the serious accusations made against the Comptroller’s Office and because EBM and Miu & Co. refused to instruct us in writing to disregard the law firm’s response, we decided to formally address the issues raised in that response. (See pages seven through nine in the body of this report for a discussion of the Gartner, Bloom & Greiper response.)