Audit Report on the Compliance of Shellbank Restaurant Corp. with Certain Provisions of Its License Agreement And on License Fees It Owes the City
EXECUTIVE SUMMARY
On December 23, 1994, the City, through the Department of Parks and Recreation (Parks) entered into a 20-year license agreement with Shellbank Restaurant Corp. (Shellbank) to operate and maintain a restaurant (American Park Restaurant), snack bar, and public bathrooms at Battery Park, in the Borough of Manhattan. Shellbank was required to pay the City $50,000 or six percent of the gross receipts derived from its operation of the restaurant facility and snack bar for its first year of operation. The percentage of gross receipts increased to seven percent in the second year of operation and to eight percent for the third through the twentieth year. A late charge of two percent per month and an interest charge may be assessed on payments not made on or prior to the dates specified in the agreement. Shellbank reported $11,780,914 in revenue and paid license fees totaling $864,319 for the period November 1, 1997, through October 25, 2000.
This audit determined whether Shellbank: properly reported its total gross receipts, accurately calculated license fees due the City, and paid these fees on a timely basis; and complied with certain other non-revenue-related terms of the license agreement (i.e., remitted the required security deposit, maintained the proper amount of insurance, paid its taxes and utilities, and completed required capital improvements).
For the period November 1, 1997, to October 25, 2000, Shellbank underreported gross receipts by $712,349 and owes the City $83,950 in license fees and late charges. In addition, Shellbank owes the City $16,142 for water and sewer use. Moreover, Shellbank never paid commercial rent tax, and TAM, its parent company, has not paid this tax on its operation of the Loeb Boathouse restaurant since May 31, 1995. Consequently, TAM owes the City approximately $489,000 ($57,000 for Shellbank and $432,000 for the Loeb Boathouse) for commercial rent tax, interest and penalties. Also, Shellbank underpaid its New York State sales taxes, did not pay its staff in accordance with New York State minimum wage law, and did not submit its income and expenses statements to Parks on time. Shellbank also violated Article IV (a)(c) of its license agreement because it did not maintain adequate records to support reported revenue, such as catering contacts, catering event calendars, and documentation of its gross receipts from dance events.
To address these issues, this report contains nine recommendations, including that Shellbank pay the City $83,950 in additional license fees and late charges owed; report all revenues generated at the facility to Parks, and pay all outstanding water and sewer charges and commercial rent tax due. In addition, the report recommends that Parks ensure that Shellbank complies with the report’s recommendations and determine whether Shellbank should be assessed additional license fees for the operating year ending October 31, 2001 (which we did not audit).
The matters covered in this report were discussed with Parks and Shellbank officials during and at the conclusion of this audit. A preliminary draft report was sent to Parks and Shellbank officials and was discussed at an exit conference on May 24, 2002. On May 30, 2002, we submitted a draft report to Parks and Shellbank officials with a request for comments. We received written comments from Parks on June 12, 2002, and from Shellbank on June 13, 2002.
In its response, Shellbank took exception to most of the report’s findings and did not specifically address the report’s recommendations. Shellbank stated that it believes that its records are accurate and that it has paid all license fees due. In addition, Shellbank stated that several of the operational issues raised in the report were already addressed. Shellbank indicated that it has instituted tighter controls over dance night receipts and has installed a new computerized tracking system for all catering events.
Parks officials agreed with the report’s findings and recommendations. Parks responded that it issued two Notices to Cure (NTC) requiring that Shellbank pay the audit assessment and implement the report’s other recommendations concerning internal control and record-keeping weaknesses, improper deductions, paying outstanding water and sewer charges and commercial rent tax and, paying its serving staff in accordance with the New York State minimum wage law. Parks also stated that a follow-up review would be conducted in two months to ensure compliance with all recommendations.
While we commend the Parks Department for its prompt issuance of two NTC’s, we remained concerned because of the tone of Shellbank’s response. We fear that unless this concessionaire is closely monitored by Parks, Shellbank might well continue the practices that were uncovered during the audit. We therefore suggest that Parks pay close attention to this concessionaire and conduct an audit of its own at some point in the near future.