Lincoln Plaza Project Lease Agreement Audit 8-25-17MIAMI BEACH INTERNAL AUDIT REPORT
City of Miami Beach, 1700 Convention Center Dri ve, M iami Beach, Florida 33139, www .miamibeachfl.gov
Office of Internal Aud it
Tel: 305-673-7020
TO:
FROM :
Jimmy L. Morales, City Manag ~e
James J. Sutter, Internal Auditor
DATE :
AUDIT :
TENANT :
PERIOD :
August 25, 2017
Lincoln Plaza Project Lease Agreement A dit
1691 Michigan Avenue Investment LP
January 1, 2013 to April 8, 2016 (the closing date on which the property was sold to
CLPF -Lincoln , LLC)
This regularly scheduled audit of the 1691 Michigan Avenue Investment LP's compliance with
selected terms in their lease agreement with the City concerning the multi-use building located
at 1691 Michigan Avenue known as The Lincoln.
INTRODUCTION
In 1998, the City of Miam i Beach issued a Request For Proposal (RFP) seeking proposals for
the development of pub lic/private parking facilities at four development projects located at
Michigan and 1 ?1h Street (site 1 ), Lenox Avenue and 1 ?1h Street (site 2), Collins Avenue and 101h
Street (site 3), and Washington Avenue and 16 1h Street (site 4).
Terms were reached with Lincoln Plaza Partners, LLC to build at the Michigan Avenue and 1 ih
Street location (site 1 ). The project was to include a 711 parking space garage , 34,510 square
feet of retail space and 106,000 square feet of office space. The City Commission adopted
Resolut ion No . 99-23236 and its corresponding lease agreement detailing the terms by which
the facility is to be operated . Among other terms, the lease agreement defines the timeliness
and amounts of base and percentage rent payments due , the minimum insurance coverage
required, the need to pay property taxes annually and the timeframe upon which certified
financial statements are to be submitted.
Subsequent ownership changes were approved as follows :
• December 20 , 2000 -sale and assignment of the ground lease from Lincoln Plaza
Partners , LLC to LNR Jefferson LLC.
• October 5, 2005 -LNR Jefferson LLC changed its name to The Lincoln LLC .
• July 18 , 2006 , sale and assignment of the ground lease to Lincoln Miam i Beach
Investment LLC.
• November 17 , 2006, -Name change to OIK Lincoln Miami Beach Investment.
• June 17, 2009 -OIK Lincoln Miami Beach Investment LLC merged with and into 1691
Michigan Ave Investment LP (Tenant).
Resolution No . 2014-28486 was approved on February 12 , 2014 authorizing Amendment 1 to
the ground lease agreement which reduced the minimum number of parking spaces from 700 to
645 , increasing the minimum number of parking spaces required to be maintained at all times
for use by the general public from 100 to 155 , and further increasing the monthly parking spaces
for members of the general publ ic from 50 to 75 , etc.
We are committed ta providing excellent public service and safety ta all who live, work , and play in our vibrant, tropical , historic community .
Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
The following table lists the rounded rental payments received by the City from the Tenant
during the audit period:
Base Rent*
Percentage Rent **
Total Rent Received
01101113-
12131113
$336,000
$188,912
$524,912
01101114 -
12131114
$336,000
$187,418
$523,418
01101115-
12131115
$336,000
$181,350
$517,350
01101/16-
04108116
$91,467
$0
$91,467
Total
$1,099,467
$557,680
$1,657,147
Although one base rent payment of $28,000 was received for the entire month despite the April 8, 2016
closing date, only the prorated amount of $7,467 is listed above ($28,000 x (8 days/30 days in April)).
** The 2016 estimated and final percentage rent payments due in 2017 are the responsibility of the new City's
new Tenant, CLPF -Lincoln, LLC.
Pursuant to section 10.5 of the ground lease agreement, the Tenant notified the City of the
terms of the proposed transfer and/or sale of the Lincoln Plaza project. The City Commission
through the passage of Resolution No. 2016-29268 authorized the City Manager to decline in
writing the City's reciprocal right of first refusal per section 36.2 of the lease agreement to
purchase the building for $109,250,000. As a result, the property was sold on April 8, 2016 to
CLPF -Lincoln, LLC.
Leasing Specialists in the Office of Real Estate, a division of the City's Tourism, Culture and
Economic Development Department, were tasked with monitoring the Tenant's compliance with
the signed lease agreement. Meanwhile, an Office Associate IV was responsible for preparing
all needed City Bills for monthly base rent and annual percentage rent payments plus to invoice
the Tenant for any late charges. Lastly, all payments received are to be processed by the
Central Cashier and posted timely to the City's Financial System.
OVERALL OPINION
1691 Michigan Avenue Investment LP (Tenant) operated the Lincoln Plaza project known as
The Lincoln during the audit period whereby they maintained sufficient complete supporting
documentation that was provided promptly, remitted all tested billed payments, submitted
annual certified financial statements, etc. Despite these positive attributes, the following
findings were identified which are in need of corrective action:
• Over the term of the lease since its September 1, 1999 inception, the City incorrectly
calculated the monthly base rent payments.
• The consistent general ledger distributions on the annual percentage rent payments
received may be revised to include more monies in the general fund for the Lincoln
Plaza, Lincoln Place and Pelican projects.
• The Tenant did not initially provide the Office of Real Estate with documentation verifying
that the $5,680.88 in State sales tax due on 5% of their monthly base rent payments to
the City in adherence with their 2011 Florida Department of Revenue audit was remitted
directly to the State of Florida.
• The Tenant's annual percentage rent payments were not always accurately calculated or
properly posted into the City's Financial System.
• The Tenant did not maintain the required insurance coverage listed in the lease
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
agreement and City staff did not follow the established procedures to facilitate identifying
the existing deficiencies to help reduce the City's risk exposure.
• The Tenant remitted eleven of the forty tested monthly base rent payments or 27.50%
more than thirty days after the due date that were not invoiced interest totaling $3, 103.40
in adherence to section 4.1 of the lease agreement.
• The Tenant remitted estimated percentage rent payments within five days of the March
151 annual due date but their corresponding 2013, 2014,and 2015 calendar year final
percentage rent payments were received after the completion of their certified financial
statements which results in $137.51 in associated interest that was not billed.
PURPOSE
To determine whether 1691 Michigan Avenue Investment LP complied with tested requirements
set forth in the lease agreement, which includes the submittal of timely and correctly calculated
rental payments; whether the required insurance coverage was maintained; whether certified
annual financial statements were provided that reconcile correctly to reported project revenues;
and whether all tested transactions were accurately recorded in the City's Financial System.
SCOPE
The focus of our audit was to confirm that:
1. sufficient internal controls were established and followed.
2. the tested supporting documentation is organized, sufficient and complete.
3. the Tenant made the proper payments to the City during the audit period.
4. tested rental payments received were remitted timely. If not, were the appropriate
amounts of late charges billed and collected?
5. the Tenant paid all tested real estate taxes billed.
6. the Tenant maintains at least the minimum insurance coverage required in section 7 of
the lease agreement.
7. certified financial statements are submitted timely each year and that the audited figures
reconcile correctly to those previously reported to the City.
8. tested transactions were accurately entered into the City's Financial System.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding -Over the Term of the Lease since its September 1, 1999 Inception, the City
Incorrectly Calculated the Monthly Base Rent Payments
In accordance with section 3.2 of the signed lease agreement, it was calculated that the
property's Tenants were to remit the following in base rent monies, excluding state sales
taxes, since the Lincoln Plaza project's September 1, 1999 commencement date:
• a $50,000 lump sum payment on September 1, 1999;
• $14,583.33 per month from September 2000 through August 2002 which equals
$175,000 per year;
• equal monthly payments of $20,833.33 totaling $250,000 in lease year's 1
through 5 (September 1, 2002 through December 31, 2007);
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Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
• $300,000 per year ($25,000 per month) for lease year's 6 through 10 (January 1,
2008 through December 31, 2012; and
• starting in the first month of the eleventh lease year (January 1, 2013) and
continuing every five years thereafter, the annual base rent will be further
increased by the lesser of 12% or the cumulative CPI over the previous five year
period. As a result, the actual base rent payments due for the five year period
beginning January 2013 equals $27,328.77 per month.
Although 1691 Michigan Ave Investment LP (Tenant) only owned the property from June
17, 2009 through April 8, 2016, all the Tenant's base rent payments made to the City
since the agreement's inception were compared to the above figures due to the
cumulative nature of the payment structure. In doing so, the following underpayments
and overpayments were noted which resulted in all of the combined Tenants having net
underpaid the City by a total of $54,309.64 (excluding state sales taxes) since
September 1999:
Underpayments totaling $185,416.64:
• The Tenant did not start paying the $14,583.33 monthly base rent until May 2001
which was eight months after September 2000 resulting in an $116,666.64
underpayment to the City ($14,583.33 x 8 months).
• The Tenant continued paying $14,583.33 per month until July 2003 which was
eleven months after the September 2002 increase to $20,833.33 was warranted.
Consequently, the Tenant underpaid the City by a total of $68,750 (($20,833.33 -
14,583.33) x 11 months) during this period.
Overpayments totaling $131, 107:
• The Tenant was charged an additional $18, 750 split evenly between August and
September 2003 to help offset previous under billings.
• The Tenant was charged $25,000 monthly in base rent beginning in January
2007 when the increase did not take effect until January 2008 per the lease
agreement. Therefore, the City was overpaid by $50,000.04 during this period
(($25,000 -$20,833.33) x 12 months).
• The Tenant was charged $28,000 per month (($300,000 x 1.12%) / 12 months)
beginning in January 2012 rather than January 2013 resulting in a $36,000
overpayment to the City (($28,000 -$25,000) x 12 months).
• The CPI only increased by 9.32% so the monthly base rent due is $27,328. 77
starting as of January 2013 which resulted in monthly overpayments to the City
of $671.23 (($28,000 -$27,328. 77) = $671.23). Consequently, the total
overpayment received through April 8, 2016 equaled $26,356.96 (($671.23 x 39
months) + $178.99 ($671.23 x (8 days/30 days in April)).
The Tourism, Culture & Economic Development Department's Office of Real Estate
currently performs the base rent calculations and prepares the corresponding monthly
City Bills from which the Tenant remits their payments. Although the audit period ended
as of the April 8, 2016 closing date, the new tenant (CLPF -Lincoln, LLC) overpaid the
City by $671.23 for May 2016. The Office of Real Estate has made the proper
adjustments and has continued to bill the new tenant $27,328.77 in base rent since June
2016.
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
Lastly, the four monthly base rent payments of $14,583.33 for May 2002 through August
2002 were inaccurately posted to the incorrect general ledger account by the Finance
Department. A prior period adjustment is not necessary given the time elapsed and the
immaterial amounts.
Recommendation(s):
Going forward, the Office of Real Estate should more accurately calculate the monthly
base rent payments in accordance with the lease agreement's terms. The new tenant
(CLPF -Lincoln, LLC) should continue to be billed properly going forward ($27,328.77
per month) with the next increase occurring January 2018 so as not to impact the lease
term.
Management's Response (Office of Real Estate):
The miscalculation was partially an error carried forward from 2007 by the parties
involved including the Tenant, the previous tenant, and the City's lease/contract
managers at the time. The Office of Real Estate also believes it is equally the Tenant's
responsibility to verify and pay the agreed upon rent in the contract, as they have access
to the same information.
Management's Response (Tenant):
Tenant disagrees with the following sections in the finding and recommendation. 1) The
audit letter dated March 10, 2016, stated the audit period to be January 1, 2013 through
December 31, 2015. Tenant believes all references prior to January 1, 2013 and after
December 31, 2015 are outside of the audit scope and should not be a part of the
examination or this Internal Audit Report memo. 2) As stated above there is a mention
of 2011 audit. However, Tenant's records show there was a 2013 audit which covers
period 2009 -2013.
Underpayments noted in the findings are for the period 2001 through 2003. This entire
liability belongs to the prior Tenant/The Lincoln LLC and not 1691 Michigan Ave
Investment LP (Tenant). $18,750 of the overpayment from 2003 -2006 belongs to
Lincoln LLC and $112,357 belongs to Tenant. The Tenant requests repayment of all
overpayments from the City of Miami Beach for the audit period January 1, 2013 to
December 31, 2015.
Internal Audit Observation:
Upon learning of the pending sale of the property, the audit period was extended to the
April 8, 2016 closing date from December 31, 2015. No other audit results were
provided other than the one performed by the State of Florida's Department of Revenue
which was completed in 2011.
2. Finding -The Consistent General Ledger Distributions for the Percentage Rent
Payments Received may be Revised to Include More Monies in the General Fund for the
Lincoln Plaza, Lincoln Place and Pelican Projects
Monthly base rent and annual percentage rent payments received are processed by the
Central Cashier in accordance with the designated general ledger accounts listed on the
City Bills created by the Office of Real Estate. Since May 2003, 70% of the amounts
paid were posted to general ledger account 480-8000-344545 (Parking) and 30% to
011-8000-362216 (General Fund). Furthermore, the state sales taxes remitted through
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Lincoln Plaza Project Lease Agreement Audit
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February 2011 were also similarly divided with 70% of the total always being entered
into 480-7000-208100 and 30% into 601-7000-229032.
Resolution No. 99-23236's terms sheet and agreement states that the Tenant was to
pay $175,000 annually during construction of the building and garage to compensate the
City for their loss of parking revenues since there was previously a surface parking lot
located on the property. When the project was completed, the base rents increased to
$250,000 for years 1 through 5 and so on as addressed in finding #1. If you divide
$175,000 by $250,000, it supports the 70% parking and 30% general ledger distribution
which was not changed as the base rents prospectively increased.
In addition, the agreement summarized requires the additional payment of percentage
rent equaling 2.5% of gross revenues annually starting at the earlier of the sale of the
project or beginning in year 9 for every lease year thereafter. The same distribution was
applied to these percentage rent payments of 70% parking fund and 30% general fund.
Similar logic was applied to the base and percentage rent payments for the following two
public/private projects: Lincoln Place located at 161h Street and Washington Ave, which
was also distributed 70%/30%, and the Pelican located at Collins Avenue and 1 oth
Street, which is distributed 56%/44%.
Internal Audit opines that the parking fund is sufficiently compensated for its loss of
surface parking lot revenues by the 70% distribution of an increasing base rent payment.
As a result, 100% of the annual percentage rent payment can be entered into the
general fund prospectively. The table below shows the increase in the general fund
balance of $262,907 if this logic would have been applied on the 2015 percentage
rounded rent payments received from all three projects:
Total %age Rent Payments Less Parking Fund Distribution
Received (2015)
Lincoln Plaza $181,350 $126,945
Lincoln Place $142,120 $99,484
The Pelican $65,139 $36,478
Total $388,609 $262,907
Recommendation(s):
The City Administration should consider revising the distribution of funds so that 100% of
the percentage rent payments for the Lincoln Plaza, the Lincoln Place and the Pelican
are recorded in the general fund going forward.
3. Finding -The Tenant did not Initially Provide the Office of Real Estate with
Documentation Verifying that the $5,680.88 in State Sales Tax due on 5% of their
Monthly Base Rent Payments in Adherence with their 2011 Florida Department of
Revenue Audit was Remitted Directly to the State of Florida
The Tenant properly increased their monthly base rent and annual percentage rent
payments by the applicable of state sales tax prior to February 2011 in accordance with
the lease agreement. When questioned as to the reasons for this change, the Tenant
provided a copy of their Florida Department of Revenue audit dated November 19, 2010
which was not present in the Office of Real Estate's maintained files.
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
This Florida Department of Revenue audit concluded that under rule 12A-1.070(5)
Florida Administrative Code "Only one tax on the rental or license fee payable from the
occupancy or use of any real property from which the rental or license fee is subject to
taxation under Section 212.031, F.S. shall be collected, and the tax shall not be
pyramided by a progression of transactions; however the amount of tax due the State of
Florida shall not be decreased by any such progression of transactions." Furthermore,
the auditor calculated by dividing the taxable square footage on the ground floor by the
total area of the ground lease with the City that 95% of the land lease is exempt and 5%
is taxable. Internal Audit assumed that these calculations remained constant as the
building's layout has not changed.
Prior to this audit's completion, the Tenant would increase their monthly base rent
payment to the City by 7% state sales tax which was posted 70% to general ledger
account number 480-8000-208100 and 30% to 601-7000-229032. In turn, the City's
Finance Department would remit these amounts monthly to the State of Florida. Once
this audit was completed, the Tenant incorrectly stopped remitting any state sales taxes
on their monthly base rent payments to the City as of March 2011. Consequently,
Internal Audit calculated that the Tenant would owe a total of $5,680.88 in state sales tax
covering March 2011 through their April 8, 2016 sale date ($1,623, 109. 70 base rent
payments received x 5% taxable x 7% state sales tax).
Finally, the Office of Real Estate was able to attain the individual yearly Florida Annual
Resale Certificates for Sales Tax from the Tenant for the audit period as additional
support for not including state sales tax on all their lease payments.
Recommendation( s):
The Office of Real Estate should always review and approve the supporting
documentation (Florida Department of Revenue audits, Florida Annual Resale
Certificates for Sales Tax, etc.) prior to any changes in payment amounts. Afterwards, it
should be maintained in their files to provide a proper audit trail.
The Tenant should promptly remit the $5,680.88 in state sales taxes owed to the City so
that it can be included in the next monthly remittance to the State of Florida. Also, the
Office of Real Estate should increase the monthly City Bills base rent amount by $95.65
($27,328. 77 current monthly base rent x 5% x 7% state sales tax). The amount of sales
tax going forward will have to be adjusted as the base rent changes in accordance with
the lease agreement's terms.
Management's Response (Office of Real Estate):
The Office Of Real Estate believes that it's more efficient for all involved to continue
having the Tenant pay the taxes directly to the State of Florida. Asking for a Resale
Certificate and backup for payment should be due diligence enough for our office.
Management's Response (Tenant):
Tenant agrees with the calculated $5,680.88 related to 5% taxable portion of the land
lease from period March 2011 -April 2016. However, Tenant has paid related amounts
monthly. Instead of making payment with the land lease payments, the Tenant paid
amount directly to the Florida Department of Revenue each month along with the
monthly Tenant sales tax deposits.
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Internal Audit Observation:
Although it was verified that the Tenant properly paid the state sales tax due to the
Department of Revenue, the City was not provided with any documentation annually
showing that the corresponding payments were remitted until the completion of this
audit. Going forward, the new Tenant should either remit the state sales tax to the City
or provide the needed documentation timely to the Office of Real Estate verifying that
the payment was made in full.
4. Finding -The Tenant's Annual Percentage Rent Payments were not always Accurately
Calculated or Properly Posted into the City's Financial System
The Tenant's certified annual financial statements were computed based on the accrual
basis of accounting in accordance with the Accounting Principles per section 28.1 of the
lease agreement. However, their subsequent percentage rent payments were made on
a cash basis so the Tenant submitted a rent reconciliation explaining the reasons for the
differences in reported project revenues. However, not all the figures in the
reconciliation could be found in the certified financial statements thereby diminishing
their value. Upon request, the Tenant provided supporting schedules that reconciled to
their tested 2013 calculated figures.
The following differences were noted upon reviewing the accuracy of the Tenant's 2013,
2014 and 2015 percentage rent payments as well as their corresponding postings into
the City's Financial System (separated by calendar year):
For contract years 2011-2013 percentage rent, the Tenant did not accurately account for
deductions taken for outstanding rent. They take a deduction from their accrued revenue
for rent due as shown in their accounts receivable (AIR) report; however, the Tenant did
not properly account for, in the following year, any rent collected after the fact, deposits
withheld, and written-off bad debt. This creates a situation where the Tenant deducts
write-offs twice (first time in AIR, then again as bad debt) and does not pay percentage
rent on rent collected after the AIR reporting period or on customer deposits that were
kept for rent owed. As a result, the Tenant owes the City $17, 140.11 for contract years
2011-2013.
2013
• The Tenant remitted a total of $188,911.91 ($188,253.03 on 03/06/14 and
$658.88 on 05/04/14) for their 2013 estimated percentage rent payment that was
all recorded as revenue in general ledger account #s 480-8000-344545 and 011-
800-362216. However, the $658.88 payment represented state sales tax which
resulted in these monies not being remitted to the State of Florida.
• The Tenant's final 2013 percentage rent calculations found that they their
estimated payment resulted in the City being overpaid by $3,369.12. As a result,
they deducted the monies from their June 2014 base rent payment posted on
07/30/15 but again it was incorrectly all considered revenue. Instead, $3,357.33
was revenue and $11. 79 was state sales tax.
• Tenant never reversed the deduction for outstanding rent, Accounts Receivable
(AIR) from 2012, in the amount of $220,077.38, in the "2013 % Rent
Reconciliation Per Audited Financials" report; instead of an overpayment, Tenant
owed the City $2, 132.80 plus $7.46 in sales tax from the 2013 percentage rent
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2014
true-up. Total currently due for 2013 is $5490.13 plus $19.22 in sales tax which
includes a credit of $3,369.12 the tenant received.:.
• The Tenant submitted check #2000 dated 02/12/15 for $185, 094.25 for their
2014 estimated percentage rent payment. However, their submitted "2014 %
Rent Reconciliation Per Audited Financials" report incorrectly listed $185,516.06
as the amount of the prior estimated payment. As a result, the Tenant owes the
City the $421.81 difference.
• The City Bill created by the Office of Real Estate for the 2014 estimated
percentage rent was incorrectly for $185,094.25 as it inadvertently excluded the
$647.83 in state sales tax due.
• The Tenant's final 2014 percentage rent calculations found that an additional
$2,323.27 was owed to the City. However, the total payment was posted to
revenue on 12/03/15 when it included $8.13 in state sales tax that was not
remitted to the State of Florida.
2015
• Tenant submitted Check 2588 dated 2/8/2016 for their 2015 estimated
percentage rent payment of $181,910.29 which included $634.47 in state sales
tax. The City incorrectly posted the sales tax as revenue.
• Tenant submitted "2015 % Rent Reconciliation per Audited Financials" report and
incorrectly listed the $181,910.29, as the estimated rent paid, instead of the
$181,275.82 actually paid. The report shows the 2015 percentage rent is equal to
$181,349.58. Tenant owes the City $73.76 plus $0.26 in sales tax.
Recommendation( s):
Tenants should remit their annual percentage rent payments that like their provided
audited financial statements are calculated on an accrual basis to facilitate City
reconciliations. Also, both the Tenant and the Office of Real Estate should closer
scrutinize all payments for accuracy to help identify and correct any noted deficiencies
quicker. The Office of Real Estate should create a City Bill for $421.81 due to the 2014
identified difference and the $74.02 due to the 2015 identified difference. Lastly, the
Office of Real Estate should better ensure that prospective payments are properly
posted into the City's Financial System and ensure that state sales tax equal to 5% of
taxable revenues is collected and recorded in adherence with finding #3.
Management's Response (Tenant):
Tenant made monthly payments based on revenue received monthly (cash basis). The
ground lease agreement requires an annual audit to attest to the accuracy of the
monthly payments made during the prior year. The Tenant's audited financials are kept
on the tax basis method of accounting which closely follows accrual basis accounting
except for a few areas. Upon completion of each year's audit, the Tenant provides the
City with the audited financial statements and a detailed Excel reconciliation to reconcile
from tax basis to cash basis payments. Tenant was not previously informed of any
issues with its method of reconciliation annually.
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For 2014, Tenant reviewed its calculation and payments and agrees $421.81 plus $1.48
in sales tax is due to the City. The above mentioned $647.83 and $8.13 were paid
directly to the Department of Revenue.
Management's Response (Office of Real Estate):
In keeping with response number three, the Office of Real Estate believes it's best if the
new tenant pays any sales tax directly to the State of Florida. We concur that the
amounts used to calculate the percentage rent should exactly match information in the
independent audit provided by the Tenant; and for the most part it does. The difference
is an NR deduction from their revenue which should be reversed the following year.
Using only the accrued rent rather than the accrued rent modified for outstanding rent
would result in greater error. Further, even if the amount matched what the independent
auditor attested to, if the amount is not reversed the following year, there would be a
miscalculation of the Percentage Rent due to the City as previously explained.
Internal Audit Observation:
The detailed Excel reconciliations were not present in the Office of Real Estate's
maintained files thereby indicating that they were either not received or were misplaced.
Any differences in the Tenant's reported revenues to the City from their financial
statements should be reviewed and attested to by their designated independent auditor
to provide a higher comfort level as to their accuracy.
5. Finding -The Tenant did not Maintain the Required Insurance Coverage in the Lease
Agreement and City Staff did not Follow the Established Procedures to Facilitate
Identifying the Existing Deficiencies to help Reduce the City's Risk Exposure
Review of the Eden System's Contract Management Module found that the entered
information for the Lincoln Plaza project is very basic and there is no attached
documentation present (lease agreement, insurance policies, etc.). Subsequent
inquiries with Office of Real Estate staff found that they typically don't utilize the Contract
Management Module as they rely instead on internally maintained spreadsheets to track
needed information and expiration dates thereby potentially increasing the possibility of
mistakes.
The City Commission authorized the procurement of the Certificate of Insurance
Tracking System from Insurance Tracking Services, Inc. piggybacking on Palm Beach
County Contract No. 13-100-MW through the May 21, 2014 adoption of Resolution No.
2014-28589. As of the completion of this audit, most of the approximately seventy lease
agreements managed by the Office of Real Estate were not yet uploaded into this
insurance tracking system which included the Lincoln Plaza project.
Therefore, copies of the Lincoln Plaza project's current insurance policy were requested
from and promptly received from the Office of Real Estate. This policy which covers July
31, 2015 through July 31, 2016 was not approved by the City's Risk Management
Division for sufficiency. Once Internal Audit brought the relevant lease agreement
sections and the submitted insurance policy to the City's Risk Management Division,
deficiencies were identified which significantly increased the City's risk exposure. The
Risk Management Division subsequently sent an email listing these deficiencies to the
Office of Real Estate which are in need of immediate correction to better protect the City.
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Recommendation(s):
Going forward, all pertinent insurance information should be uploaded as quickly as
possible into the insurance tracking system to help identify any deficiencies sooner. In
the interim, the Office of Real Estate and any other City divisions/departments whose
information is not uploaded should be immediately done so and brought to the Risk
Management Division for review. Lastly, the deficiencies noted at the Lincoln Plaza
project and any others subsequently identified should be immediately corrected to help
reduce the City's risk exposure.
Management's Response (Risk Management Division):
Before the Risk Management Office began using the services of Insurance Tracking, Inc.
("ITS") in 2014, most contracts were handled at the department level, without any
involvement from Risk Management. The Risk Management Office along with
Procurement, began uploading contracts (insurance language) into ITS for tracking. As
you can imagine there were many contracts that had not been monitored for insurance
compliance (approximately 80% of the contracts were in non-compliance). After the
majority of the City's contracts were uploaded, we began to check with individual
departments to see if there were other agreements that needed monitoring. Between
March and May of 2016, we began uploading real estate lease agreements into ITS,
which included the Lincoln Plaza Project. Upon receipt of the certificate of insurance,
several deficiencies were noted, but were cured shortly thereafter. Their coverage
expired July 31, 2016. ITS sent a first and second notice (8/4 and 9/26) to Lincoln
Plaza, with no response of their renewal certificate of coverage. On October 20, 2016,
we received certificates from Clarion Partners (CLPF-Lincoln LLC), who has acquired
Lincoln Plaza Partners. We also received certificates from Laz Parking, which is the
valet parking operator, contracted with CLPF-Lincoln LLC. Their insurance was
previously being monitored by ITS and is compliant.
The Tourism/Real Estate Office has access to the ITS system and is able to monitor any
deficiencies for their lease agreements. For those cases where the insurance is not
provided within a 30-day period, the Office of Real Estate should consult with the City
Attorney's Office so that they may get advice on their contractual remedy.
6. Finding -The Tenant Remitted Eleven of the Forty Tested Monthly Base Rent
Payments or 27.50% More than Thirty Days after the Due Date but was not Invoiced
Interest Totaling $3, 103.40 in Adherence to Section 4.1 of the Lease Agreement
Section 3.2(g) of the lease agreement summarized states that the base rent shall be
paid monthly in advance on the first day of each and every calendar month.
Consequently, January 2013's base rent would be due on January 1, 2013; February
2013's rent would be due on February 1, 2013 and so on. Given this information, testing
found that thirty-four of the forty months base rent payments in the January 2013
through April 2016 audit period or 85.00% were received after this due date.
Although the monthly base rent amount has been fixed for five year intervals per the
lease agreement since September 1, 2002, eight (8) of the forty months sampled City
Bills or 20.00% were created either on or after the first day of the applicable month by
the Office of Real Estate. The date of these delinquently manually prepared City Bills
ranged from October 2014 being created on 10/01/14 to March 2013's 03/29/13.
Subsequent inquiries found that Munis (the new enterprise system that the City
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
converted to in May 2016) does not presently have the ability to auto-bill the Tenant
each month which would better ensure these City Bills future timely creation and save
staff input time.
Furthermore, section 4.1 states that if the Tenant fails to make any required payment
within thirty days after the first of each month, the late payment shall bear interest from
the due date until the date paid at a rate equal to the lesser of the prime rate plus 4% or
the maximum interest rate permitted by law. Interest was not billed to the Tenant during
the audit period despite the receipt of eleven of the forty sampled payments (27.50%)
after the thirty days threshold. The number of days late for these eleven months ranged
from a low of 32 for March 2013 to a high of 141 for February 2015 and the total interest
owed is $3, 103.40.
Recommendation(s):
The Finance Department should contact Tyler Technologies to determine whether Munis
has the ability to set up the auto-bill feature. Regardless, the new Tenant should remit
all prospective base rent payments prior to the first day of the month due date as the
amount is fixed and the lease agreement's specified due dates are known (excludes
January 2018, January 2023, etc.). If the base rent payments are not received within the
thirty day grace period, then the Office of Real Estate should timely and accurately
charge interest in accordance with section 4.1 of the lease agreement. Finally, a City Bill
should be created invoicing 1691 Michigan Ave Investment LP a total of $3, 103.40 in
interest.
Management's Response (Tenant):
Tenant disagrees with findings and recommendation regarding 27.50% was remitted
more than 30 days late. Based on Tenant's check register all payments were made by
mid-month. Over the years tenant has noticed a significant lag after checks are mailed
and payments clear the bank.
Management's Response (Office of Real Estate):
The Office of Real Estate is looking into the possibility of implementing a lockbox which
would eliminate the payment tracking issue. Generally, the Office of Real Estate only
receives payments for percentage rent, all other monthly base rent payments are
received directly by the Finance Department.
Internal Audit Observation:
The payment receipt dates were copied directly from the City's Financial System
showing when the monies were processed by the Central Cashier's Office. Internal
Audit has no direct knowledge that the Office of Real Estate and the Finance
Department do not timely process all payments shortly after receipt and has no means to
verify that the Tenant's checks were promptly mailed after being recorded in their check
register. Regardless, the Tenant should consider sending the payments prior to their
first of the month deadline and by wire transfer or credit card to better confirm a timely
receipt date.
7. Finding -The Tenant Remitted Estimated Percentage Rent Payments Within Five Days
of the March 151 Annual Due Date but their Subsequent 2013, 2014 and 2015 Calendar
Year Final Percentage Rent Payments were Received upon the Completion of their
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
Certified Financial Statements which Resulted in $137.51 in Associated Interest Charges
that were not Billed
Section 3.3 of the lease agreement summarized states that the annual percentage rent,
equal to 2.5% of project revenue for each lease year, shall be paid within sixty days after
the December 31st lease year end or by March 1st. These terms were in effect starting in
the tenth lease year which represents the 2012 calendar year.
Although the tenth lease year occurs outside the designated audit period, it was included
because the Tenant's corresponding percentage rent payments were received during
the 2013 calendar year. As previously mentioned in finding #6, interest is accrued after
thirty days of non-payment from the due date until the date paid at a rate equal to the
lesser of the prime rate plus 4% or the maximum interest rate permitted by law.
It was concluded that the Tenant remitted the annual percentage rent payments for the
2012, 2013, 2014 and 2015 calendar years based on estimated project revenues within
five days of the March 1st due date so no interest would be due. However, a second
estimated percentage rent payment of $658.88 which represented state sales tax was
received on May 14, 2014 which was 74 days after the due date. In addition, the 2012,
2013 and 2014 final percentage rent payments or deductions were remitted later during
the same calendar year after the completion of their audited financial statements.
Although Internal Audit finds this practice satisfactory, these final percentage rent
payments were received well after the lease agreement's stated March 1st due date
ranging from a low of 138 days for the 2012 calendar year payment to 277 days for the
2014 calendar year payment. The final 2012, 2013 and 2015 calendar year percentage
rent payments were excluded from the interest calculations as it was determined that the
Tenant had overpaid by $1,627.99; $3,369.12 and $560.71 respectively which were
subsequently deducted from the next monthly base rent payments. Calculations found
that interest totaling $137.51 would be due for these remaining two sampled late final
percentage rent payments but no City Bills were created by the Office of Real Estate.
Furthermore, section 28.1 (c) of the lease agreement states that the certified annual
financial statements shall be made available no later than 150 days after the end of the
December 31st lease year end (May 30th). While there was no documentation
maintained to indicate when the 2013, 2014 and 2015 calendar year financial statements
were received by the City, the date of the independent auditors' reports showed that
were completed 4, 83 and 38 days after the due date respectively.
Recommendation(s):
The Office of Real Estate should create the City Bills necessary to invoice the Tenant for
the $137.51 due in interest from these two late final percentage rent payments. Going
forward, the Tenant should remit all prospective percentage rent payments prior to the
stated March 1st due date. If the percentage rent payments are not received within the
thirty day grace period, then the Office of Real Estate should timely and accurately
charge interest in accordance with section 4.1.
Management's Response (Tenant):
Tenant agrees with $137.51 due to City. Section 28.1 (a) of the lease agreement requires
Tenant to provide an annual audit report performed by the Tenant's external auditor.
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Internal Audit Report
Lincoln Plaza Project Lease Agreement Audit
August 25, 2017
Per section 28.1 ( c) the report is due 150 days following the end of the calendar year.
The annual audit report is used to attest to the accuracy of the percentage rent payment
due. Tenant has remitted estimated percentage rent payments as described above in
the finding section. Since the City uses the report to verify accuracy, it is not practical for
Tenant to provide final percentage rent calculations before the auditors have attested to
the revenue information.
Tenant worked diligently with its auditor to deliver audit timely. Calendar years 2013,
2014 and 2015 were challenging audits which led to delays. Each year, the Tenant sent
an email to the City informing the City of the status. For 2013 calendar audit, the Tenant
delivered the report on June 61h, 2014.
Management's Response (Office of Real Estate):
The Office of Real Estate agrees and will bill the Tenant accordingly.
EXIT CONFERENCE
Due to the complexity of this audit, a number of meetings were held with City staff to fully
discuss and analyze all issues. Any necessary revisions were made to the draft report following
each meeting. In addition, the draft report was subsequently sent to the 1691 Michigan Ave
Investments LP for review. Additional meetings and correspondence were subsequently held to
further discuss the issues presented above as needed. Management responses were solicited
and included above. All parties were in agreement as to the contents of this report.
JJS:MC:mc
Audit performed by Assistant Internal Auditor Mark Coolidge
F:\OBPl\$AUD\INTERNAL AUDIT FILES\DOC15-16\REPORTS -FINAL\LINCOLN PLAZA PROJECT LEASE AGREEMENT.docx
cc: Kathie Brooks, Assistant City Manager
Eva Silverstein, Tourism, Culture and Economic Development Department Director
Mark Milisits, Asset Manager
John Woodruff, Finance Director
Chris Williams, Vice President -Accounting, HQ Capital Real Estate LP.
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