Audit Report on the Compliance of Manhattan River Group, L.L.C. with Its License Agreements with the City

On June 25, 2009, the City of New York (the City) through its Department of Parks and Recreation (Parks) entered into two separate 15-year license agreements with Manhattan River Group, L.L.C. (MRG), one for the operation of a restaurant and lounge (the Restaurant), and a second for the operation of a marina (the Marina) at the Dyckman Marina, located at 348 Dyckman Street in Manhattan.  Pursuant to the license agreement for the Restaurant (the Restaurant Agreement), MRG was required to pay the City the higher of $78,604 (the minimum annual fee) or eight percent of the Restaurant’s gross receipts from the period of April 1, 2015 through March 31, 2016.  Under the Marina’s agreement (the Marina Agreement), MRG was required to pay the City the higher of $15,073 or five percent of the Marina’s gross receipts for the period of November 1, 2015 through October 31, 2016.  In addition, each of the two license agreements requires MRG to make and complete specific capital improvements by the end of the second operating year after the agreement was signed.

In this audit, we examined whether MRG accurately reported gross revenues; made the appropriate and timely payments to the City; and complied with other major requirements of the two license agreements, such as making capital improvements, maintaining insurance coverage, and keeping adequate books and records.

Audit Findings and Conclusions

Our audit found that although MRG’s payments to Parks under both agreements were timely, and capital improvements on the Restaurant were completed, MRG underreported its gross receipts from the Restaurant by at least $488,874 and consequently owes the City at least $39,110 in additional license fees and $17,842 in late charges.  We also found inadequate internal controls and inconsistent practices in MRG’s recordkeeping procedures, including a failure to maintain sufficient documentation related to its operation of the Marina.  Moreover, the records produced by MRG were insufficient to show that it completed 8 of the 18 capital improvement items that were required for the Marina.  Finally, we found that MRG failed to maintain certain required insurance coverage for both the Restaurant and the Marina for each business’s 2016 operating year.  That omission potentially exposed the public and the City to unwarranted financial risk in violation of MRG’s express obligations under its agreements.

Audit Recommendations

To address these issues, we make nine recommendations to MRG and seven recommendations to Parks, including:

To MRG:

• Remit to Parks $56,952 in additional license fees and late charges owed to the City due to MRG’s having underreported the Restaurant’s gross receipts;
• Accurately report all gross receipts to Parks by including:
  • All complimentary meals, beverages, and discounts provided by the Restaurant;
  • All catering service charges;
  • Advance deposit and gift cards sales when proceeds are received;
  • Overpayments received from patrons;

• Ensure that all gross receipts are recorded accurately and with consistency in and across all financial records, including but not limited to the income journal, general ledger, and certified statement of gross receipts reported to Parks;
• Ensure that all deposits and revenue from special events are recorded and reported in a separate, appropriately named revenue category for purposes of accountability and to enable reconciliation with contracts generated for special events;
• Provide all documentation for capital improvements to Parks for review; and
• Ensure the Restaurant and the Marina are properly insured at all times.

To Parks:

• Ensure that MRG remits all additional fees due with applicable late fee charges;
• Ensure that all promotional and complimentary management discounts utilized by MRG for customer relationships are recorded as gross receipts and included in the calculation for fees due to the City;
• Ensure that MRG provides documentation to show that capital improvements at the Marina are completed as required by the agreement;
• Enhance Parks oversight to enable it to ensure that MRG maintains all required insurance coverage for the Restaurant and Marina operations and all times; and
• Ensure MRG implements the recommendations in this report.

MRG’s Response

In its written response, MRG generally disputed the findings but agreed with seven of the nine recommendations.  MRG stated that “the Audit Team has not undertaken an adequate legal review of the License Agreements between Manhattan River Group, LLC (‘MRG’) and the City of New York (the ‘License Agreement’), and has failed to take into consideration best practices in the food and beverage industry.”  In particular, MRG contends that the audit report misinterprets the meaning of “gross receipts” as defined in the Restaurant Agreement.  MRG also claims that “[t]he Comptroller has also exaggerated minor lapses in record keeping and focused in on software issues that were corrected well before the commencement of this audit.

Despite MRG’s general and specific criticisms of the audit findings, the Restaurant Agreement clearly dictates that complimentary meals and drinks (comps) and discounts must be included in reportable gross receipts.  As discussed in the audit report, the Restaurant Agreement specifically provides that the definition of “gross receipts” includes all sales, whether payment is received or not.  Further, the Restaurant Agreement specifically provides that the only allowable deductions from gross receipts are sales tax, government grants, loans and supplemental funding, gratuities, and uncollected sales known as bad debts.  No exclusion exists for orders placed or made at the Restaurant for which MRG chooses to forgo collection or accept lesser payment in exchange for the promotional value, good will or whatever other benefit it seeks to obtain.  MRG’s decision to comp or discount Restaurant transactions does not relieve MRG of its obligation under the Restaurant Agreement to report all orders placed or made at the Restaurant as gross receipts.

Further, we disagree with MRG’s characterization of the problems the audit identified with data reliability as mere “minor” issues.  To the contrary, because of the problems found with MRG’s method of record keeping and software, we did not receive sufficient adequate and consistent information to determine that the revenue reported was reliable.

Parks Response

Parks agreed with five of the seven recommendations.  Parks neither agreed nor disagreed with the remaining two recommendations stating, “[w]ith regard to the potential fees owed on complimentary meals and beverages, and service charges, there is a difference in interpretation of the license agreement between the Comptroller’s Office and MRG.  Parks is reviewing this matter with our General Counsel and the City’s Law Department.”