Audit Report On The Compliance Of USTA National Tennis Center, Inc. With Its New York City Lease

August 21, 2019 | FN18-082A

Table of Contents

    Executive Summary

    On December 22, 1993, the City of New York (the City), through the Department of Parks and Recreation (Parks) entered into a 99-year lease (the Lease) with USTA National Tennis Center, Inc. (NTC) to construct, renovate, maintain, manage, and operate a public recreational facility, also known as USTA Billie Jean King National Tennis Center (the Tennis Center), at the Flushing Meadow-Corona Park, Queens.[1]  The Tennis Center consists of four stadiums, indoor and outdoor tennis courts, a pro shop, restaurants, parking areas, and administrative offices.  NTC is a wholly owned subsidiary of the United States Tennis Association Incorporated (USTA).

    Under the Lease, NTC is expected to: (1) host the United States Open Tennis Championship (the US Open) and other major tennis tournaments and events at the Tennis Center; (2) rent tennis courts; (3) conduct tennis programs for the public; and (4) conduct special events, such as trade shows and graduation ceremonies.  The US Open is an international tennis competition in the United States, which is sponsored and operated by NTC’s parent corporation, USTA.  Based on a separate agreement between USTA and NTC, USTA allows NTC to sell US Open admission tickets and parking privileges, and collect and retain a portion of the revenue from these activities.  However, USTA retains the rights to conduct and promote all activities related to the US Open.

    NTC is required to pay the City an annual fee of $400,000 (Base Rent) plus one percent of its Net Gross Revenues—Gross Revenues generated through the Tennis Center in excess of $20 million (Percentage Rent) during Calendar Years 2016 and 2017.[2]  In addition, per the third amendment of the Lease, signed on March 8, 2010, NTC is allowed to deduct up to $180,000 per annum from the Percentage Rent for payments it makes to the Hall of Science of the City of New York Inc. (HOS) for using the Hall of Science’s parking area during the US Open.

    For Calendar Years 2016 and 2017, NTC:

    • reported approximately $308 million and $349 million in Gross Revenues, respectively;
    • remitted a total of $800,000 ($33,333 per month) in Base Rent; and
    • paid a total of $5.8 million in Percentage Rent to the City.

    In this audit, we determined whether NTC accurately reported its Gross Revenues, properly calculated the Percentage Rent due, paid all rents on time, and complied with two major non-revenue Lease terms: the maintenance of required insurance coverage, and the payment of water and sewer charges.

    Audit Findings and Conclusion

    The audit found that while NTC made timely payments of Base Rent and Percentage Rent, maintained the required insurance coverage for itself, and paid water and sewer charges, it underpaid the Percentage Rent to the City as a result of it underreporting at least $31 million in Gross Revenues generated through the Tennis Center for Calendar Years 2014 through 2017.  As a result, NTC owes the City at least $311,202 in additional Percentage Rent for that period.  In addition, we found that the USTA’s certified financial statements reported $8 million more in US Open revenue and Tennis Center program revenue than the Gross Revenues reported by NTC to the City during Calendar Years 2015, 2016, and 2017.  Therefore, NTC could potentially owe the City up to $82,310 in additional Percentage Rent.

    The audit also found that NTC did not consistently submit annual certified financial statements to the City.  Further, we found that NTC did not ensure that sponsors, broadcasters, and vendors maintained the insurance coverage as required by their agreements with USTA.

    With regard to Parks, we found that it is unable to properly monitor the Lease due to restrictions placed on its access to critical information similar to those placed on the New York City Comptroller’s auditors, the limited information that NTC is required to report to it, and the agency’s staffing and capacity limitations.

    Further, we found that certain critical aspects of the Lease are not in the best interest of the City because they limit the ability of Parks to monitor and enforce NTC’s compliance with the Lease, limit the Comptroller’s ability to carry out its City Charter mandated function to independently audit NTC’s compliance with the Lease, and contain financial terms that are disadvantageous to the City.

    Audit Recommendations

    To address these issues, we make five recommendations to NTC and six recommendations to Parks, as follows:

    NTC should:

    • Remit $311,202 in additional Percentage Rent due to Parks;
    • Determine, with Parks, how much of the $82,310 should be remitted to the City as Percentage Rent;
    • Ensure all Gross Revenues are accurately reported to Parks in accordance with the terms of the Lease by:
      • Accurately accounting for all in-kind benefits received from the sponsors, broadcasting companies, and vendors;
      • Reviewing the Gross Revenues information provided by USTA to ensure there are no inappropriate exclusion or deductions from the Gross Revenues;
      • Including all fees collected from the activities that occurred at the Tennis Center;
      • Accurately recording Gross Revenues in its general ledger; and
      • Making an annual adjustment, when necessary, to the Gross Revenues reported to the City.
    • Submit the certified financial statements to the City within the 90 days after the end of each Calendar Year; and
    • Ensure all sponsors, broadcasters, and vendors maintain the required insurance coverage.

    Parks should:

    • Recoup $311,202 in additional Percentage Rent from NTC;
    • Ensure NTC submit the certified financial statements annually to Parks;
    • Review NTC’s books and records for the years that were not covered in our scope period and determine whether NTC owes any additional Percentage Rent;
    • Conduct periodic reviews of NTC’s compliance of the terms of the Lease;
    • Consider seeking revision of the terms of the Lease including, but not limited to:
      • Requiring NTC to submit annual certified financial statements for the entire operation of the Tennis Center or requiring all revenues generated from the Tennis Center be recorded in NTC’s general ledger;
      • Allowing the City to copy all books and records relating to the Tennis Center’s operation;
      • Requiring NTC to provide electronic copies of the books and records when requested;
      • Imposing late charges when the payments become overdue, not when underpayment exceeds five percent and 10 days after the demanded due date; and
      • Discontinue automatic renewal of the Lease;
      • Cease providing parking credits to NTC after the expiration of the current credits.  If Parks finds it is necessary to provide support to NTC for the parking payments, the payments should be deducted from the Gross Revenues; and
    • Consider the financial impact to the City before amending any financial terms in the Lease with NTC.

    NTC Response

    In its written response, NTC agreed with three of the five recommendations and partially agreed with one recommendation, specifically, that it remit $311,202 in additional Percentage Rent due to Parks.  As to the partially agreed recommendation, NTC agreed to pay a portion of the Percentage Rent that it owes to Parks as a result of underreporting its Gross Revenues.  NTC stated, “Following a thorough review of the Draft Audit’s conclusions, the USTA NTC has concluded, based on the legal interpretation of the Lease and the consistent application of GAAP accounting standards, that it should report $14,329,660 as additional Gross Revenues and pay $143,297 in additional rent for the 2014-2017 period.”

    However, NTC also disputed $167,905 of the $311,202 in Percentage Rent the audit found due, stating, “The deficiencies that exist in the Draft Audit findings result from the auditor misinterpreting the Lease, which they failed to consider specific applicable Lease provisions or failed to comport with or apply GAAP accounting standards, which are mandated by the Lease.”

    We disagree with NTC’s assertion that we misinterpreted the Lease.  In fact, NTC’s response shows that it did not adequately consider the Lease, which resulted in its having underreported Gross Revenues to the City.  NTC does acknowledge a portion of its underreporting and agrees to report more than $14 million additional Gross Revenues, which the audit identified.  We also disagree with NTC’s contention that it correctly applied GAAP accounting standards, in that we found, for example, that certain Gross Revenues were incorrectly recorded in NTC’s expense accounts.  Moreover, no claim of compliance with GAAP can supplant NTC’s responsibility to comply with the Lease terms when reporting Gross Revenues to the City.

    For the remaining recommendation—that NTC ensure that all sponsors, broadcasters, and vendors maintain the required insurance coverage—NTC stated, “This is outside the scope of the audit,” and did not address whether it agreed or disagreed with our recommendation.

    Parks Response

    Parks agreed with five of the six recommendations that were addressed to Parks and stated it will review the relevant records and contracts related to the disputed areas to determine whether additional Percentage Rent is due.  In response to the remaining recommendation, Parks stated, “Financial impact to the City is always a critical consideration during any negotiation and Parks strongly disputes any insinuation that this was not the case in our prior negotiations with NTC.”

    We are glad that NTC remitted $143,297 of $311,202 in additional Percentage Rent due to the City.  However, as outlined in our audit finding, NTC is responsible for remitting $311,202, and we urge Parks to collect the remaining balance of $167,905 due to the City.

    With regard to the last recommendation, as stated in the report, Parks was unable to provide its rationale for the amendment related to the HOS parking lot arrangement—allowing NTC to deduct that expense directly from its rent.  Based on our review of the revised terms, it appears that the amendment inadvertently provided a disproportionate benefit to NTC at the City’s expense.

    [1] The initial lease term is from December 22, 1993 through December 31, 2019.  After the initial lease term, the Lease is automatically renewed every 10 years for six terms and the last renewal (seventh) term is 14 years.

    [2] “Net Gross Revenues” is defined as “the balance of Gross Revenues for such Lease Year after deducting (x) $25 million with respect to each of the first twenty (20) Lease Years . . . and (y) $20 million with respect to each Lease Year thereafter.”

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