Penrod Bros Lease Concession Agmt 7-31-15M.IAMIBEACH
BUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division INTERNAL AUDIT REPORT
TO:
VIA
FROM:
DATE:
AUDIT:
PERIOD:
Jimmy L. Morales, City Manager
John Woodruff, Budget and P~eo.rm nee Improvement Director~.-:-t1dl/
James J. Sutter, Internal Auditor ~~ (_/"'"V\J
July 31, 2015 ·
Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
October 1, 2012 to January 31, 2015
This audit report is the result of a regularly scheduled audit of selected terms pertaining to the
Penrod Brothers, lnc.'s lease agreement covering the Pier Park Restaurant located at 1 Ocean
Drive, the concession agreement applying to the area between the restaurant and the dunes
called Nikki Beach and a letter agreement relating to the beaches located seaward of the dunes.
In addition, a resort tax audit verifying the entity's food and beverage revenues was performed
simultaneously by a Tax Auditor whose results are reported separately.
INTRODUCTION
On October 2, 1985, the Mayor and City Commission adopted Resolution No. 85-18223 and the
related lease agreement authorizing Penrod Brothers, Inc. (Penrods) for the development,
construction, management and operation of a restaurant facility in Pier Park pursuant to
Request For Proposal (RFP) No. 202-84/04 issued August 2, 1985. This agreement was for a
period of twenty years expiring May 6, 2006 with two additional ten-year option periods
automatically renewable at Penrods discretion.
Along with this resolution, the City Commission adopted Resolution No. 85-18222, approving a
concession agreement with Penrods for the sale of food and beverages, rental of lounging and
related equipment services within a portion of Pier Park, which expired on November 4, 2000.
The City subsequently extended this concession agreement an additional year to allow for the
issuance of a RFP for the beachfront concessions which was ultimately issued on February 21,
2001 and was subsequently awarded to Boucher Brothers Miami Beach LLC. The new
concession agreement was approved by the City Commission and became effective November
5, 2001 for a period of five years with an option to renewal for an additional five year term.
The City Commission subsequently ratified Resolution No. 2001-24678 authorizing the City to
enter into a concession agreement with Penrods to provide continued service to beach patrons
seaward of Pier Park. The agreement was to be on a month-to-month basis and to include such
terms as requiring Penrods to pay the City annually the greater of $10,000 or 20% of gross
receipts, to comply with the City's insurance and indemnification requirements and to abide by
the City's rules and regulations for beachfront concession operations. A letter agreement was
subsequently signed by both parties on March 1, 2004 listing the pertinent terms for the 2003/04
fiscal year with a second one signed effective October 1, 2013 for the 2013/14 fiscal year.
On February 25, 2004, the City entered into a separate concession agreement with Penrods by
Resolution No. 2004-25506 for the portion of Pier Park immediately adjacent east of the
restaurant (Nikki Beach) since it was not included in any of the other agreements. It
commenced retroactively to October 1, 2003 with the original term expiring on May 6, 2006 with
an option to renew to run concurrent with the terms of the Pier Park Restaurant lease
agreement. The City and Penrods agreed to revisit and negotiate the financial terms governing
We are comm1tted to providing excellent public service and safely to all who live, work, and play m our vibrant, tropical, historic community.
Internal Audit Report
Penrod Brothers, Inc. Lease, Concession and Letter·Agreements Audit
July 31, 2015
the restaurant lease agreement, in regards to percentage payments, and where a concession
agreement would commence covering the rentals of lounging equipment and food and beverage
sales in the portion of Pier Park seaward of the footprint of the Pier Park Restaurant lease
premise.
A third amendment to the lease agreement was entered into on February 25, 2004 under
Resolution No. 2004-25507. Included among its terms, Penrods is to pay the City an annual
minimum guarantee equal to a percentage of the lessee's gross receipts commencing on
October 1, 2003, and thereafter on May 7 of each year during the term of the lease agreement
as well as any renewals. This annual minimum guarantee is to equal 6.5% per year of the
Penrods' gross receipts and is to be paid as monthly percentage rent to the City by the fifteenth
of the subsequent month accompanied by a statement of gross receipts. For example, the
percentage rent payment for the month of December 2014 is due by January 15, 2015; the
January 2015 payment is due by February 15, 2015; and so on.
Penrods submits a rent report each month in support of their percentage rent payment to the
City breaking down their gross receipts by the following categories:
• Food and beverages (both alcoholic and non-alcoholic) include all corresponding items
sold by Pen rods at their Pier Park Restaurant, Nikki Beach and beachfront concession
locations plus all sales generated by Le Onde Beach Shack, a separate entity that
operates from a small narrow building at the end of South Pointe Drive that sells non-
alcoholic beverages and pre-prepared foods.
• Door charges represent an entrance fee that is charged periodically to gain access to
the Pearl nightclub located on the second floor of the Pier Park Restaurant building.
• The rental of lounge chairs, umbrellas and cabanas in the Nikki Beach area with prices
ranging between $10 and $50 per day with the highest prices being charged on
weekends and holidays.
• Approximately half of the lot located directly west of Penrods' Pier Park Restaurant
(called lot 1A by the City's Parking Department) is used for valet parking with the
corresponding fee alternating between $1 O during the week and $20 on weekends and
holidays. The remaining half of this lot is metered and is accessible to the general public
so its revenues are captured by the City's Parking Department. Finally, Penrods
continuously leases two valet reserved parking spaces to Jugo Fresh located at 40
South Pointe Drive for the fixed price of $80 per week.
• A small lifestyle boutique located inside the Pier Park Restaurant sells swimwear,
clothing, etc. In addition, any hookah sales earned on Sundays are also included in this
category entitled "gift shop".
Meanwhile, Penrods is to remit 20% of all gross receipts collected on the beach to the City each
month subject to a $10,000 annual minimum guarantee. Beach attendants typically charge $10
for chair and umbrella rentals during weekdays and $20 on weekends which is reported under
equipment rentals. However, any food and beverages consumed and paid for by beach patrons
are reported under the Pier Park Restaurant which is permitted according to the Analysis
section attached to City Resolution No. 2001-24678.
The following table provides a breakdown of the percentage rent payments received from
Penrods during the twenty-eight month audit period for the Pier Park Restaurant and Nikki
Beach plus the beachfront concessions by revenue category:
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
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10/01/12 -10/01/13 -10/01/14 -
09/30/13 09/30/14 01/31/15
Pier Park Restaurant/Nikki Beach:
Alcoholic Beverages $8, 118,478 $7,063,794 $1,763,323
Food $3,741,401 $3, 189,504 $1,004,909
Non-Alcoholic Beverages $631,569 $532,234 $118,326
Door Charges $616,881 $509,401 $280,272
Equipment Rentals $45,223 $45,937 $15,605
Valet Parking $240,682 $247,499 $84,584
Gift Shop $184,413 $226,666 $63,324
Total Gross Receipts $13,578,647 $11,815,035 $3,330,342
6.5% Rent Due $882,612 $767,977 $216,472
Sales Tax* $61,783 $53,758 $15,153
Total Monies Received by City $944,395 $821,735 $231,625
Beachfront Concessions:
Total Equipment Rentals $267,607 $286,542 $72,047
20% Rent Due $53,521 $57,308 $14,409
Sales Tax $3,746 $4,012 $1,009
Total Monies Received by City $57,268.01 $61,320.01 $15,418.00
Total
$16,945,595
$7,935,814
$1,282,129
$1,406,554
$106,765
$572,765
$474,402
$28, 724, 024
$1,867,062
$130,694
$1,997,756
$626, 196
$125,239
$8,767
$134,006.02
* The state sales tax figure represents the total amount of sales tax remitted by the City to the State based on
Penrods monthly percentage rent payments. The City's Financial System separates Penrods applicable
sales tax payments into two general ledger accounts (currently one for the Parking Operations Fund and
another for the General Fund).
Various staff members within the City's Office of Real Estate are responsible for the
administration, enforcement and payment processing components of Penrods' lease,
concession and letter agreements. For example, an Office Associate IV creates the City Bills
and processes the received payments, a Leasing Specialist monitors their compliance with the
applicable agreement's terms and a Field Monitor performs periodic site visits to review actual
beachfront operations.
OVERALL OPINION
Penrod Brothers, Inc. (Penrods) operates with adequate internal controls to provide reasonable
assurance as to the accuracy of reported gross receipts and the supporting documentation
maintained was organized, sufficient and complete. Furthermore, testing found that Penrods
was current with its tax, utility and permit payments. Despite these positive findings, the
following shortcomings were noted that are in need of corrective action:
• Although the Office of Real Estate time/date stamped Penrods' monthly percentage rent
payments when received, it did not necessarily reflect the actual date that it was
received by the City Clerk's Office through the mail. Consequently, the 21 of 28
payments that were stamped after the agreement's designated due date may or may not
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Internal Audit Report
Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
have been actually late so interest was correctly not charged.
• Le Onde Beach Shack was not approved in advance by the City prior to beginning
operations and it was incorrectly reported under Penrods' business tax receipt and resort
tax number despite being a separate entity. In addition, the gift shop located inside the
restaurant operated separately under a different corporate name but did not obtain its
own business tax receipt.
• Penrods was only charged one food and beverage beachfront concession fee on their
2013/14 and 2014/15 fiscal year business tax receipts instead of the required two per
section 3.15 of the concession agreement.
• Misunderstanding exists surrounding the submittal of annual statements of gross
receipts due to inconsistent terms in the associated agreements and amendments
covering the different areas.
• Penrods' combined Pier Park Restaurant/Nikki Beach plus the beachfront concession
monthly percentage rent payments were occasionally entered incorrectly into the City's
Financial System resulting in misstated general ledger account balances.
• Penrods' workers' compensation and employers' liability insurance coverage had
expired on the last policy received by the City.
• Penrods' beachfront concessions letter agreements which specify the pertinent terms
were not prepared at least bi-annually.
PURPOSE
The purpose of this audit was to determine whether Penrod Brothers, Inc. remitted the correct
monthly percentage rent payments based upon their provided supporting documentation; was
otherwise in compliance with selected terms in the lease, concession and letter agreements;
and whether the received monies were correctly recorded in the City's Financial System.
SCOPE
1. Confirm that appropriate internal controls were established and followed.
2. Confirm that the tested supporting documentation is organized, sufficient and
complete.
3. Confirm that all tested monthly percentage rent payments were accurately calculated
and completely reported to the City.
4. Confirm that all tested monthly percentage rent payments were received timely in
adherence to the terms listed in the applicable agreement. If not, was the correct
amount of late charges levied?
5. Confirm that Penrod Brothers, Inc. has complied with selected criteria outlined in the
agreement. Examples include pricing, hurricane evacuation plan, etc.
6. Confirm that the annual certified financial statements of gross receipts were timely
submitted for each fiscal year tested and that the amounts reported therein agree
with those previously reported to the City.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
7. Confirm that Penrod Brothers, Inc. is current with tested business tax receipts, resort
taxes, utilities payments and property taxes.
8. Confirm that Penrod Brothers, Inc. insurance certificates were timely submitted and
approved by the City's Risk Manager.
9. Confirm that all tested transactions were properly recorded in the City's Financial
System.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding: The City does not Properly Record the Date that Penrods' Monthly Percentage
Rent Payments were Received thereby making it Difficult to Determine whether the Late
Charges Addressed in the Agreements are Warranted
Section 13.3 of the lease agreement, section 4.1 of the concession agreement and
section 3 of the letter agreement all state that Penrods must submit monthly percentage
rent payments by the fifteenth of each month for the preceding month. For example, the
December 2014 percentage rent payments are due by January 15, 2015, the January
2015 payments are due by February 15, 2015 and so on.
Testing found that the Office of Real Estate time/date stamped 26 of the 28 Penrods'
monthly percentage rent payments during the audit period as to when they received it.
In its absence, the date listed in the attestation section of Penrods' monthly percentage
rent payment as prepared by Penrods' controller was used. As a result, it was
determined that 21 of the 28 months in the audit period were received after the due date
ranging from a low of one day to a high of sixteen days. It was subsequently calculated
that Penrods would owe a total of $2,098.03 using a 12% per annum interest rate but a
review of the City's Financial System (Eden) found that no interest charges were billed.
Inquiries with Office of Real Estate staff found that Penrods mailed payments are initially
received by the City Clerk's Office Central Services Division before being routed to them.
Unfortunately, there is no known way to determine when the Central Services Division
actually received the payment as they do not record the applicable date, the postmarked
envelopes are not maintained and Office of Real Estate personnel claim that they don't
always receive their mail timely.
Additionally, it was discovered that there is variation by which payments are received
which can create confusion considering that the Office of Real Estate monitors
approximately 70 different agreements which may contain different terms. For example,
some payments are hand delivered to their office, some are mailed to the City's Finance
Department, some funds are wire transferred, etc. Either way, the Office of Real Estate
needs to be notified so that a City Bill can be created in Eden System's Accounts
Receivable Module to apply the corresponding payment against.
Recommendation( s):
Given the City's current inherent difficulties in determining when Penrods' payments are
actually received, the Office of Real Estate's payment receipt process should be
standardized and then communicated to all lessees and concessionaires with the
corresponding duties better assigned to City staff. To facilitate these changes, the Office
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
of Real Estate management and the Finance Department should reach a consensus on
the preferred process as to record the date received. Finally, the Office of Real Estate
should work with Munis, an enterprise system that will be soon replacing Eden, to
determine if the billing of interest can be automated thereby reducing the likelihood of
errors and freeing up staff's time to attend to other duties.
Management Response (Office of Real Estate):
In order for an invoice to be generated, Office of Real Estate staff must populate the
customer information along with the proper revenue, balance and expenses accounts in
Eden (the City's Financial Management System). The invoice must then be posted by
department management in order for the Finance Department to generate the paper
invoice. Note: City generated bills do not have a remittance address. It only states the
main City Hall address without a specific department. As previously stated, monthly
payments may be received by the City through standard U.S. Mail, hand delivery, wire or
online payment. Additionally, mailed items are usually delivered to the City's Central
Services Division, but may also come directly to the Office of Real Estate. Given all of
these delivery options, it is often difficult to determine when payments are actually
received by the City. Furthermore, if a customer submits payment without the invoice, it
is often deposited into a miscellaneous account, which can leave accounts
unbalanced. Department staff then must track down the payment in the miscellaneous
account and request a journal entry adjustment.
Staff agrees that consistent process should be followed and, in light of the
aforementioned challenges with the tracking down the receipt of payment, recommends
charging penalties and late fees on all receivables after an agreed upon number of days
have elapsed. Additionally, staff will now stamp all envelopes when received by the
Real Estate Office.
Management Response (Finance Department):
The Finance Department processes payments on a daily basis as they are received.
Payments received at the cashier's window, directly from the customer, are processed
immediately. Payments received through the mail are processed on the date received by
the City.
2. Finding: Le Onde Beach Shack was not Approved by the City Prior to Beginning
Operations and it was Incorrectly Reported under Penrods' Annual Business Tax
Receipt and Resort Tax Number despite being a Separate Entity
Section 15 of the concession agreement covering the portion of Pier Park immediately
adjacent east of the restaurant (Nikki Beach) states "Except as otherwise provided in this
Subsection, Concessionaire shall not assign; sublease; grant any concession or license;
permit the use of by any other person other than concessionaire; or otherwise transfer all
or any portion of Agreement and/or of the concession area (all of the forgoing are herein
after referred to collectively as "transfers'J, without the prior written consent of the City,
which consent shall not be unreasonably withheld." A separate entity called Le Onde
Beach Shack operates from a small narrow building at the end of South Pointe Drive
where they sell non-alcoholic beverages and pre-prepared foods. Although Penrods
included all tested Le Onde Beach Shack's sales in their monthly percentage rent and
monthly resort tax payments, they did not receive the City's consent in advance as
required.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
Furthermore, Le Onde Beach Shack does not have a business tax receipt through the
Finance Department's Licensing Section or a resort tax account. Penrods' management
claims that the City told them that they could piggyback on Penrods' business tax receipt
and that they could not obtain a resort tax account because Penrods already had one at
that business address. However, no documentation was provided verifying these
statements and when recently inquired, the City's Revenue Manager disagreed stating
that they need to obtain their own business tax receipt and resort tax account to help
improve transparency and accountability as they are a separate corporation.
In addition, a small lifestyle boutique located inside the Pier Park Restaurant sells
swimwear, clothing, etc. Despite being currently included in Penrods' annual business
tax receipt charges, they are a separate corporation and need to obtain their own
business tax receipt per the Finance Department's Licensing Section.
Recommendation( s):
Penrods should immediately request the City's consent concerning Le Onde Beach
Shack's operations. If received, Le Onde Beach Shack should immediately apply for
and obtain its own business tax receipt and resort tax account number. Finally, the
corporation that operates the gift shop should also apply for and obtain its own annual
business tax receipt.
Management Response (Penrods):
We will request the City's consent for the Le Onde and gift shop operations.
3. Finding: Penrods was Only Charged for One Food and Beverage Beachfront
Concession Fee on their Annual Business Tax Receipt Instead of the Required Two
Section 3.5 of the concession agreement requires Penrods to obtain one beach
equipment and one food/beverage beachfront concession fee on their annual business
tax receipt for their operations between the Pier Park Restaurant and the dunes.
Similarly, their beachfront concession letter agreement requires another two concession
fees (one for equipment and another for food/beverage) for their operations on the sand.
However, review of their 2013/14 and 2014/15 business tax receipts found that Penrods
was only billed for one food and beverage beachfront concession fee each year instead
of the required two resulting in an under billing of $1,468 ($734 x 2 fiscal years) for the
audit period. A similar review conducted for the 2010/11, 2011/12 and 2012/13 fiscal
years did not find any deficiencies as Penrods was properly billed and paid for a total of
four beachfront concession fees each year.
Recommendation(s):
The Office of Real Estate should ensure that Penrods business tax receipts are billed
prospectively in adherence to the terms of the pertinent agreements. Consequently,
Penrods should be back billed $1,468 for at least the two prior years' under billings
which the concessionaire should promptly pay in full.
Management Response (Penrods):
We will pay for all required licenses when billed by the City.
Management Response (Finance Department):
The Concessionaire will be immediately billed $1,468 for the two prior years' under
billings.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
4. Finding: Misunderstanding Exists Surrounding the Submittal of Annual Statement of
Gross Receipts for the Different Penrods Locations due to Inconsistent Terms in the
Associated Agreements and Subsequent Amendments
There is conflicting terminology in both the lease and concession agreements as to
when the annual statement of gross receipts are due and as to what period the financial
statements are to represent. Section 15 of Penrods' original lease agreement dated
November 7, 1985 pertaining to the Pier Park Restaurant states "within sixty (60) days
after each fiscal year, Lessee shall deliver to the City a written annual statement of the
gross receipts for such fiscal year. Said statement shall be certified as true, accurate
and complete by Lessee, by and through a duly authorized independent Certified Public
Accountant (CPA)" but it does not define what constitutes a fiscal year.
Conversely, the third amendment to the lease agreement dated February 25, 2004
under section 13.3 refers to section 15 of the original lease agreement as to when the
annual statement of gross receipts is due. However, under section 13.3.2 of the same
amendment, the lessee may have to pay an additional lump sum if the amounts paid do
not meet the minimum guarantee payment "at the time of delivery to the City of the
Annual Statement of Gross Receipts no later than June 30, of each Lease year during
the term, including renewal terms, of this lease. 11
Yet section 6, paragraph 3 of the concession agreement pertaining to the area between
the Pier Park Restaurant and the dunes (Nikki Beach) dated February 25, 2004 states
"that within 60 days after each contract year {May 61h}, the Concessionaire shall submit
to the City a written Annual Statement of Gross Receipts for such contract year. 11
Pen rods used a May through April fiscal year for both the Pier Park Restaurant and Nikki
Beach's combined certified annual statements of gross receipts during the audit period.
Testing found that these certified statements were remitted timely based on the Office of
Real Estate's time/date stamp for the fiscal years ending April 2012 and 2014 and the
signed cover letter dated May 22, 2013 for the fiscal year ending April 2013 as it was not
time/date stamped. Regardless, the agreements do not specify any penalties for late
submittals (the only current option is being placed in default) and the certified reported
gross receipts properly reconciled to those amounts provided by Penrods' management
in support of their monthly percentage rent payments.
Meanwhile, the beachfront concession's annual statements of gross receipts which are
not required to be certified were prepared with a September 30th fiscal year end. A
review of the beachfront concession annual statements provided for the fiscal years
ending 09/30/12, 09/30/13 and 09/30/14 found that they were all received annually by
the October 30th due date based on the Office of Real Estate's time/date stamp and/or
the date on the signed cover letter.
Recommendation(s):
The Office of Real Estate should always indicate the date that any documents were
received when the applicable agreement establishes due dates (see finding #2) and
there should be disciplinary actions listed in the event of non-compliance in accordance
with the applicable agreement. Going forward, the City should standardize Penrods'
agreements and require them to submit certified annual statements of gross receipts for
all locations within sixty days following a uniform contract year end.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
Management Response (Office of Real Estate):
While it would certainly be easier to have all reports of all three (3) agreements due on
the same date, this has not created a reporting problem for the tenant. In the event that
one or all of the agreements are amended, staff will negotiate with the tenant to amend
the reporting deadlines.
5. Finding: Incorrect Entries were made into the City's Financial System for the Penrods'
Restaurant/Nikki Beach and Beachfront Concession Percentage Rent Payments
Based upon receipt of the supporting documentation provided accompanying Penrods'
Pier Park Restaurant and Nikki Beach monthly combined percentage rent payments, the
Office of Real Estate would create City Bills in the City's Financial System's Accounts
Receivable module accordingly. These City Bills would contain a breakdown of the
amounts to be entered into the four designated general ledger accounts. Upon
reviewing the 28 applicable monthly payments received during the audit period for
Penrods' Pier Park Restaurant/Nikki Beach, incorrect general ledger entries were made
for the October 2012 through September 2013 payments which resulted in the following
misstated account balances:
480-7000-208100 (Parking state sales tax) was overstated by $1, 168.69
601-7000-229032 (General fund state sales tax) was understated by $1,317 .93
480-8000-344502 (Parking lot 1A) revenues were understated by $2, 171.21
011-8000-369924 (Penrods' rent) was overstated by $2,290.46
A similar analysis of the 28 monthly beachfront concession percentage rent payments
identified the following incorrect balances caused by inaccurate programmed
calculations in the City's Financial System:
011-7000-208100 (General fund state sales tax) was overstated by $58.18
601-7000-229068 (Sand tax) was understated by $11,763.98
011-8000-369922 (Rent) was overstated by $12,705.79
A total of $9,705.30 of the sand tax understatement above occurring between October
2012 and August 2014 has already been addressed in the annual State Beachfront
Management Agreement audits, while the $2,058.68 remainder will be captured in next
year's fiscal year audit. The errors all occurred in the processing of February 2014
through October 2014's payments as the decimal point was incorrectly positioned in the
concessionaire's sand tax calculations programmed in the Eden System. The necessary
corrections were made as the November 2014 through January 2015 reviewed entries
were properly posted.
Finally, it was found that Penrods' management commingled their beachfront food and
beverage revenues with those generated by the Pier Park Restaurant and Nikki Beach
whereby the City receives 6.5% of gross revenues instead of the 20% earned for sales
occurring on the beach. It was subsequently concluded in meetings held with the City
Attorney and the Chief Financial Officer that this practice was correct based on the
negotiations held which were memorialized in City Resolution No. 2001-24678's
Commission Memorandum. As a result, Penrods management commingles the
beachfront food and beverage revenues with those generated by the Pier Park
Restaurant and there is no easy way to distinguish between the two.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July31,2015
Unaware of this inclusion, the Office of Real Estate did not make the correct entry into
the City's general ledger and the City did not remit the required in 25% sand tax to the
State of Florida. Unfortunately, the corresponding food and beverage amounts would be
time consuming and difficult to calculate.
Recommendations:
A designated Office of Real Estate employee, independent of the creation of the City
Bills, should review the entries periodically to help ensure that the stated account
balances are accurate. Although it is n<;:>t necessary for the Finance Department to
prepare a prior period adjustment for these incorrect prior fiscal years' related entries
due to their immateriality, a designated employee should be tasked with reviewing these
and other accounts for accuracy prior to the City closing out the fiscal year. Lastly,
Penrods management should continue to remit 6.5% of its beachfront food and
beverage revenues but they should be reported separately on their monthly reports so
that the City can make the appropriate general ledger entries and timely remit 25% in
sand tax to the State of Florida.
Management Response (Penrods):
We will separate the food & beverage on the rent reports so the City can pay the correct
amount to the State.
Management Response (Office of Real Estate):
The Office of Real Estate agrees with the recommendations and has now assigned the
Tourism, Culture and Economic Development Department Senior Administrative
Manager to review these entries periodically to help ensure the account balances are
correct.
Management Response (Finance Department):
The Finance Department will task a designated employee with reviewing sand tax
accounts for accuracy prior to the City closing out the fiscal year.
6. Finding: Penrods Workers' Compensation and Employers' Liability Coverage had
Expired on the Insurance Policy Last Received by the City.
All three agreements require Penrods to maintain at its sole cost and expense stated
insurance coverage levels at all times. A copy of their most recently submitted
insurance policy was obtained from the Office of Real Estate. Although the general
liability and umbrella liability coverage was sufficient and valid through August 1, 2015,
the workers' compensation and employers' liability coverage had expired on January 1,
2015. No documentation was provided showing that an updated insurance policy had
been requested from Penrods. Upon request from Internal Audit, the new current policy
was promptly received from Penrods which was subsequently approved by the City's
Risk Manager.
In order to address the issue of the lack of monitoring issuance Citywide, the City
Commission on May 21, 2014 ratified Resolution No. 2014-28589 authorizing the
procurement of the Certificate of Insurance Tracking System from Insurance Tracking
Services, Inc. This system is managed by licensed insurance professionals that perform
all the necessary functions to monitor compliance, audit incoming certificates and follow-
ups for renewals.
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Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
The City's Risk Manager has been uploading vendors and contractors' insurance
information into the Certificate of Insurance Tracking System in phases. The original
goal was to have all lessees and concessionaires' insurance information uploaded by
July 1, 2015. Although not started as of yet, the City's Risk Manager expects to begin
this process within the next month.
Recommendation ( s):
The Office of Real Estate should coordinate with the City's Risk Manager to commence
the uploading of the pertinent lessees and concessionaires' insurance information as
soon as possible into the Certificate of Insurance Tracking System so that its benefits
can be fully realized thereby better protecting the City's assets.
Management Response (Office of Real Estate):
The Office of Real Estate agrees with the recommendation and, once the City's Risk
Manager advises the Certificate of Insurance Tracking System has been expanded to
include the City's assets, will commence uploading the pertinent documents.
7. Finding: Penrods Beachfront Concessions Letter Agreement was not Finalized at least
Bi-Annually
The City Commission ratified Resolution No. 2001-24678 authorizing the City to enter
into a concession agreement with Penrods to provide continued service to beach
patrons seaward of Pier Park. The agreement was to be on a month-to-month basis and
to include such terms as requiring Penrods to pay the City annually the greater of
$10,000 or 20% of gross receipts, to comply with the City's insurance and
indemnification requirements and to abide by the City's rules and regulations for
beachfront concession operations.
A letter agreement was subsequently signed by Penrods and the City listing the
pertinent terms for the 2003/04 fiscal year. No other signed letter agreements could be
found afterwards until one dated August 26, 2013 was made effective for the 2013/14
fiscal year. The City Attorney confirmed that the usage of letter agreements instead of a
concession agreement is satisfactory but that they need to be completed at least
biannually in conjunction with the price changes.
Also, the language in section 3 entitled "Minimum Guarantee (MG)" incorrectly states
that the concessionaire is to remit the greater of $10,000 or 20% of gross receipts.
However, they are to remit 20% of beachfront equipment gross receipts and 6.5% of
food and beverage gross receipts as previously discussed in finding #5.
Recommendations:
The Office of Real Estate should complete bi-annual letter agreements for each
applicable fiscal year prospectively until at least May 6, 2026 which represents Penrods'
lease and concession agreements' expiration date. In doing so, Office of Real Estate
staff should confirm that the minimum guarantee language is correct and that Penrods
does not have any delinquent outstanding balances before renewing the agreement.
Management Response (Office of Real Estate):
The Office of Real Estate agrees with the recommendation.
Page 11 of 12
Internal Audit Report
Penrod Brothers, Inc. Lease, Concession and Letter Agreements Audit
July 31, 2015
EXIT CONFERENCE
An exit conference was held in the Office of Budget and Performance Improvement on June 11,
2015. Participants included Tourism, Cultural Affairs and Economic Development Director Max
Sklar; Asset Manager Mark Milisits, Assistant Finance Director Georgina Echert, Revenue
Manager Manny Marquez, Assistant Internal Auditor Laura Franco-Rubines and Senior Auditor
Mark Coolidge. The agreed upon revisions were made in the draft audit report which was
subsequently sent to the beachfront concessionaire for review. Management responses were
solicited and included above. All parties were in agreement as to the contents of this report.
JS:MC:mc
(Audit performed by Senior Auditor Mark Coolidge)
F:\OBPl\$AUD\INTERNAL AUDIT FILES\DOC14-15\REPORTS -FINAL\PENROD BROTHERS PIER PARK LEASE
AGREEMENT.docx
cc: Kathie G. Brooks, Assistant City Manager
Max Sklar, Tourism, Cultural Affairs and Economic Development Director
Patricia Walker, Chief Financial Officer
Jack Penrod, President, Penrod Brothers, Inc.
Page 12 of 12