Audit Report on the Compliance of Sterling Mets, L.P., (New York Mets) With Their Lease Agreement and Fees They Owed the City

AUDIT REPORT IN BRIEF

This audit, which was requested by the New York City Department of Parks and Recreation (Parks), determined whether Sterling Mets, L.P., (doing business as the New York Mets) complied with their lease agreement with the City, maintained adequate internal controls over the recording of their gross receipts and reported them accurately, accurately deducted allowable credits in fees due the City, and paid those fees as well as fees outstanding from prior audit assessments.

In 1985, Doubleday Sports, Inc., and Parks entered into a 20-year lease agreement for the use of Shea Stadium. The lease, which is monitored by Parks, expires on December 31, 2004. However, a 2001 lease amendment extended the lease to December 31, 2005, and provided for five one-year renewal options that can be exercised at the discretion of the New York Mets. In August 2002, Sterling Doubleday Enterprises, L.P., amended its partnership certificate to effect a name change to Sterling Mets, L.P., (doing business as the New York Mets).

The original lease required that the Mets pay the City the greater of either an annual minimum rent of $300,000 or a percentage of their revenues from admissions, concessions, wait service, parking, stadium advertising (less $8,000 for scoreboard maintenance), and a portion of their cable television receipts. In calculating the amount due the City, the Mets are permitted to deduct: a portion (related to tickets sales and local cable revenues) of the amount they pay to Major League Baseball; and sales taxes included in the amounts collected. In addition to extending the lease, the first lease amendment allows the Mets to exclude certain cable television and advertising revenues from their receipts on which fees are due. A second amendment allowed the Mets to deduct new stadium planning costs equal to, or less than, $5 million each year on their rent statements for calendar years 2001 through 2005.

The Mets adhered to certain non-revenue-related requirements of the lease. In this regard, the Mets maintained the required liability insurance that named the City as an additional insured party, and they reimbursed Parks for electricity and for water and sewer use during the baseball season. In addition, the Mets have an adequate system of internal controls over their revenue collection and accounting functions. However, for the period from January 1, 2001, through December 31, 2001, the Mets underreported revenue by $422,780, overstated allowable deductions against revenue totaling $6,929,804, overstated allowable credits against rent due by $471,934, and took an unallowable credit totaling $203,126. Consequently, the Mets owe the City $1,178,815. Moreover, the Mets have yet to pay previous audit assessments totaling $3,381,816. Therefore, the Mets now owe the City $4,560,631. Specifically, for the audit period, the Mets:

• Underreported Skybox net income by $40,878, which results in $20,439 in fees due the City.
• Did not report $362,102 in concession and wait service revenue because their subcontractor did not report these sales to them. In addition, the Mets did not report $19,800 in advertising revenue because they overstated their bad debt expense. As a result, the Mets owe the City an additional $6,759.
• Overstated the deduction allowed for payments to Major League Baseball by $6,929,804. The Mets report their net operating revenue to Major League Baseball, and Major League Baseball uses these amounts in its revenue sharing calculations. However, the amounts deducted by the Mets were not the actual payments as defined in the lease and therefore should not have been deducted. As a result, the Mets owe the City additional fees totaling $476,557.
• Overstated the credit allowed for new stadium planning costs by $471,934 because they included costs incurred in years before the lease amendment took effect and costs expended in 2002 that the Mets would be allowed to apply to their 2002 rent. Thus, the Mets owe the City an additional $471,934.
• Took an unallowable credit of $203,126 for maintenance costs. Under the terms of the lease, maintenance of Shea Stadium is the responsibility of the City. Moreover, the lease does not contain a provision that allows the Mets to receive reimbursement credits covering expenses for maintenance work that they claim to have performed. Therefore, the Mets owe the City $203,126.

The audit recommends that the Mets: pay the City $4,560,631––$1,178,815 for the fees due as a result of the current audit and $3,381,816 owed the City from prior audits. In addition, the audit recommends that the Mets ensure: that all Skybox, concession, and advertising revenues are reported on their rent statements; that a deduction is taken for only the portion of payments from admissions and local cable receipts that were actually made to Major League Baseball; that only planning costs incurred within the calendar year are claimed as credits; and that credits are not taken for items that are not specified in the lease.

The audit also recommends that Parks ensure that the Mets pay the City $4,560,631 in fees due from this and prior audits and comply with the report’s four other recommendations. In the event that the Mets and Parks continue to disagree on the fees due, Parks can take immediate action to resolve the dispute either through the lease’s panel arbitration process or through appropriate litigation.

In their response, Mets officials stated that: "As of this date [May 21, 2003], Sterling has made payment in full of all undisputed amounts due under prior rent audits. Any and all amounts still identified by the City as outstanding represent disputed items addressed in prior correspondence."

In addition, the Mets did not agree that they overstated the deductions taken for payments to Major League Baseball and that they took planning costs and maintenance credits for which they are not entitled.

Parks responded that it: "has referred the additional fee items and other issues contained in the audit to the Law Department’s Commercial and Real Estate Litigation Division (Law Department) for settlement. . . . Law Department Officials have met with the Mets to discuss the issues and moneys owed."

The specific issues raised by the Mets and our rebuttals are included within the respective sections of this report. The full texts of the Mets and Parks comments are included as addenda to this report.