Audit Report On The Compliance Of York Avenue Tennis, Llc, With Certain Provisions Of Its License Agreement And Payment Of Fees Due The City

AUDIT REPORT IN BRIEF

The audit determined whether the York Avenue Tennis, LLC, (York) accurately reported its total gross receipts, properly calculated the license fees due the City, paid its license fees on time; and complied with certain major non-revenue terms of its license agreement (i.e., carried the proper types and amounts of insurance, maintained the proper security deposit; and paid for its utilities).

On August 13, 1997, the City’s Department of Parks and Recreation (Parks) awarded York Avenue Tennis, LLC, a 10-year license agreement that expires on April 29, 2007. The license agreement requires York, located under the 59th Street Bridge in Manhattan, to provide the public with an indoor tennis facility and a refurbished clubhouse. York is required to pay the City minimum annual fees of $315,000 in the first year, escalating annually to $488,668 in the tenth year, or 25 percent of gross receipts derived from the operation of the license agreement, whichever is greater. A late charge of 2 percent per month is applied to license fees that are not paid on time. The agreement states that gross receipts shall include all funds received by the licensee from its tennis operation, without any deductions, and all funds received from the sale of food, wares, merchandise, or services of any kind resulting directly or indirectly from the operation of the license. The agreement was amended on July 21, 2004, to permit York to deduct professional fees paid to tennis instructors functioning as independent contractors from the gross receipts derived from its operations.

York is also required to carry Workers’ Compensation insurance; carry a $1 million employer liability and general liability insurance policy that names the City as an additional insured; maintain a $122,167 security deposit with the City; and pay all required utility charges. For the period May 1, 2004, to April 30, 2006, York reported revenues totaling $5,566,035 and paid the City $1,391,509 in license fees.

Audit Findings and Conclusions

York generally adhered to the provisions of its license agreement with the City. York recorded its revenue fairly in its books and records, accurately calculated and paid its minimum annual fee payments on time, maintained the required property and liability insurance that named the City as an additional insured party, contributed the required $122,167 as security deposit, and paid the required charges for utilities and water and sewer use. York had an adequate system of internal controls over its revenue and recording functions. However, York made a non-allowable deduction from gross revenue on its reported gross revenue submitted to the City for operating years 2005 and 2006.

Specifically, on the gross receipts statements that York submitted to Parks, York improperly deducted from the revenue reported $149,728 in “professional fees” paid to employees who were not functioning as independent contractors—those individuals who give instruction in the rules, methods and techniques of the game of tennis. These deductions totaled $76,579 for the 2005 season and $73,149 for the 2006 season. Consequently, York owes the City $37,432 in additional fees ($19,145 for 2005 and $18,287 for 2006), plus $11,465 for late charges.

Audit Recommendations

We recommend that York Avenue Tennis, LLC:

• Pay the City $48,897 in additional license fees and late charges.
• Deduct from gross revenue professional fees paid only to those individuals receiving 1099 tax statements.
• Annually provide Parks with a schedule detailing the names and the amounts paid to each tennis instructor functioning as an independent consultant. The total amount reported on the schedule should equal the amount of professional fees deducted from gross revenue.
• Immediately cease deducting any payment from gross revenue made directly or indirectly to any director, officer, member, partner, affiliated party, or employee who has any interest in York Avenue Tennis, LLC.

We recommend that Parks should:

• Require York to cease deducting the portion of gross receipts it derived from tennis services provided at other locations and the portion of professional fees paid to its Director, affiliated third-parties, and its employees. Should York fail or refuse to implement such corrective action, Parks should consider exercising its option to terminate the agreement.
• Ensure that York pays the City $48,897 in additional license fees and late charges.
• Use the recommended schedule, to be provided by York, to verify the amount of professional fees deducted from gross revenue.
• Ensure that York complies with the recommendations made in this report.