Audit Report on the New York City Economic Development Corporation’s Compliance With It’s Lease Agreement for the Brooklyn Army Terminal

AUDIT REPORT IN BRIEF

We performed an audit of the lease agreement between the City and the Economic Development Corporation (EDC) to mange the 97-acre Brooklyn Army Terminal (Terminal) in Sunset Park. According to the lease agreement, EDC is required to pay the City: an amount equal to 100 percent of net operating income; all proceeds received, less those used or to be used to restore the premises, and; all other amounts which EDC is obligated to pay pursuant to the provisions of the lease. The lease requires EDC to provide financial statements to the City 90 days after the end of each lease year and “maintain adequate systems of internal control . . .” The lease permits EDC to enter into sub-leases in accordance with a City approved sub-leasing plan. Furthermore, the lease requires EDC to agree to pay, or to include in sub-leases to be paid by sub-tenants, charges for water, water meter and sewer rents; real property assessments; excises; levies; and fines. In addition, the lease requires EDC to maintain a $500,000 reserve fund, and to develop the Terminal in accordance with one or more development plans approved by the City.

The audit determined whether the Economic Development Corporation complied with the major terms of the Terminal lease agreement with the City; collected appropriate rents and fees from sub-tenants; and ensured that sub-tenants complied with major terms of their sub-lease agreements.

EDC’s certified financial statements for the year ended June 30, 2007 reported Terminal total operating revenues of $18,777,935; total operating expenses of $11,405,171, and operating income of $7,372,764.

Audit Findings and Conclusions

We concluded that EDC ensured that sub-tenants complied with major terms of their lease agreements pertaining to paying rent on time, submitting required security deposits, and maintaining proper insurance coverage. In addition, EDC maintained separate books and records for the Terminal; maintained the required $500,000 reserve fund, and; developed the Terminal in accordance with an approved development plan.

However, EDC did not comply with certain lease stipulations by not collecting appropriate rents and fees from all its sub-tenants, thereby resulting in lost rental fees totaling at least $211,500. Moreover, EDC did not charge certain sub-tenants rents in accordance with market appraisals, again forgoing potential rental payments totaling almost $300,000. In addition, EDC did not itself pay the City for water and sewer use, nor did it charge sub-tenants for water and sewer use as part of their sub-leases. Furthermore, EDC did not maintain records to properly substantiate more than $37,000 in employee expenses.

Audit Recommendations

This report makes a total of ten recommendations as follows:

EDC should:

• Arrange to collect fair market rental income from Turner Construction Company for space occupied at the Terminal.
• In the future, record in the Terminal’s financial statements revenue obtained from Turner Construction Company.
• Cease its practice of providing rentable space at the Terminal to entities free-of-charge.
• Prepare a formal written agreement to document the terms by which the Mayor’s Office is allowed to occupy space at the Terminal without paying rent.
• Ensure that rental rates are consistent with fair market appraisal values.
• Consult with DEP to undertake immediate steps to gain access to the Terminal’s water meters.
• Pay all required water and sewer charges.
• Ensure that it obtains billing statements from DEP in order to bill sub-tenants for water and sewer charges for Fiscal Year 2007 and for a four-year retroactive period.
• Provide adequate documentation to substantiate items expensed for the Terminal’s travel and meals account.
• Remit 100 percent of the Terminal’s net operating income to the City on a quarterly basis, in accordance with the lease agreement.