Audit Report on the Compliance of New York Skyports, Inc., with Its Lease Agreement

AUDIT REPORT IN BRIEF

Since 1959, the City of New York has leased the use of approximately two acres of land along the East River between East 18th Street and East 23rd Street in Manhattan. The property is to be used as a marina, a seaplane base, parking, mooring, fueling, and otherwise servicing motor vehicles, seaplanes, and watercraft; and for the sale of merchandise usually sold in connection with those services. On May 18, 1998, the lease was amended to assign all rights, title, and interest in the premises to New York Skyports, Inc. (Skyports). The amendment required Skyports to pay the City base rent, supplemental rent, and a one-time lump sum payment of $666,666. During calendar year 2006 and 2007, Skyports paid the City a total of $870,920 in base and supplemental rent. On April 12, 2008, Skyports’s supplemental rent increased to $275,000, increasing total annual rent to $456,139.

On November 30, 1998, Skyports entered into a sublease with Gulf Oil Limited Partnership to use part of the premises as gas station without a convenience store. Subsequently, Gulf Oil Limited Partnership entered into a lease and franchise agreement with Kalish & Kerner Petroleum LLC (Kalish and Kerner) to operate the gas station.

Effective July 1, 2001, the Department of Small Business Services (DSBS) assumed the management of the property on the City’s behalf and the Economic Development Corporation (EDC) administers the terms of the agreement with the lessee, Skyports, on behalf of DSBS.

This audit determined whether Skyports complied with certain terms of its lease with the City (i.e., rental payments, repair and maintenance of the facility, payment of revenue derived from the sale of goods, merchandise, and advertising on the premises, payment of utilities, and maintenance of insurance policies and a surety bond).

Audit Findings and Conclusions

Skyports violated the terms of several major provisions in its lease with the City and may owe the City nearly $6.1 million. Its general disregard for maintaining the premises endangered public safety and may cost the City in excess of $5.5 million of the $6.1 million to rectify conditions. Skyports’s lack of a maintenance program led to deterioration of the parking garage to the point that, according to a seven-day Notice to Cure filed by the Department of Small Business Services against Skyports, “catastrophic failure was a present danger.” As a result, emergency temporary shoring was installed by EDC to prevent the collapse of the garage. In addition, Skyports violated the lease by not reporting 50 percent of all gross revenue derived from the sale of goods, merchandise, and advertising on the premises, and by not obtaining the City’s permission to allow Kalish and Kerner the right to make those sales. Moreover, Skyports did not pay water and sewer charges and did not increase its surety bond in accordance with increases in rent. Consequently, Skyports owes the City $548,135—$464,000 for emergency repairs performed by EDC, a minimum of $46,614 for not paying 50 percent of the revenue derived from the sale of goods, merchandise, and advertising on the premises, and $37,521 in water and sewer charges.

In addition, EDC did not fully exercise its responsibility to ensure that Skyports complied with the terms and conditions of the lease. EDC’s insufficient monitoring of the lease has contributed to the findings disclosed in this report.

Audit Recommendations

The audit recommends that EDC should consider terminating its lease with Skyports and continue to fully pursue legal action against Skyports to collect the $6,056,653. However, if EDC decides not to terminate the lease, the audit makes 13 recommendations—8 to EDC and 5 to Skyports. Among those recommendations,

EDC should:

• Coordinate with Skyports to develop a written plan to complete the necessary repairs of the garage structure, as recommended by the engineers in the April 7, 2008 report, and any other needed structural improvements to the premises.

• Ensure timely follow-up on all recommendations cited in independent contractors’ and internal inspection reports and ensure that proper corrective action is taken.

Skyports should:

• Pay the $548,135 due the City.

• Present EDC with a plan to make all necessary repairs to the premises as recommended by the engineers of the April 7, 2008 report and any other needed structural improvements to the premises. This plan should include project start dates, completion dates, and critical construction milestones (i.e., dredging, excavation, foundation, construction, etc.).

Ensure that it obtains, on behalf of any sublessee, the City’s written consent authorizing the sale of any goods, merchandise, and advertising on the premises and ensure that it or its sublessee submits complete documentation to EDC supporting such sales.