Living Arts Trust, Inc. dba 0 Cinema Management Agreement Review 2-20-18MIAMI BEACH INTERNAL AUDIT REPORT
City of Miami Beach, 1700 Co nve ntio n Center Drive , Miami Beach , Florida 33 139, www .mia mi beac hfl.gov
Offic e of Intern a l Audit
Tel : 305-673-7020
TO:
VIA:
FROM :
DATE:
AUDIT :
PERIOD:
Ji mmy L. Morales , City Manager
Mark D. Coolidge , lnt~r~ Internal A
Luis Medina , Auditor ljiYI_
February 20 , 2018
Living Arts Trust, Inc . d/b/a 0 Cinema Management Agreement Review
October 1, 2014 through July 31 , 2017
This audit report is the result of a departmental request to review selected provisions in the executed
agreement between the City and Living Arts Trust, Inc . d/b/a 0 Cinema for the management and
operation of a portion of the Byron-Carlyle Theater for the period October 1, 2014 through July 31 ,
2017 .
INTRODUCTION
Living Arts Trust, Inc. d/b/a 0 Cinema is a Florida not-for-profit 501(c)(3) corporation that showcases
independent, foreign , art and family films with locations in Miami's Wynwood Arts District, the Village of
Miami Shores and the City of Miami Beach . Additionally , 0 Cinema presents special programs that
speak to the needs and interests of children , families, young adults and seniors in an effort to engage
new audiences .
City Resolution 2014-28729 was adopted on October 24, 2014 approving 0 Cinema to manage and
operate a portion of the Byron-Carlyle Theater, located at 500 71 st Street between Byron Avenue and
Carlyle Avenue, for an initial term of five (5) years commencing on October 1, 2014 and ending on
September 30, 2019 with five (5) additional one (1) year renewal terms at the City 's sole option and
discretion. The management agreement requires 0 Cinema to pay the following annual base use fees
over its term:
a) During the first three (3) contract years (October 1, 2014 -September 30 , 2017), in
consideration for their investment in equipment, staffing , marketing and improvement; 0
Cinema shall pay the City a base use fee of $2,500 per year;
b) Commencing with the fourth contract year effective October 1, 2017, 0 Cinema shall pay the
City a base use fee in the amount of 1 0% of all net ticket revenues and net concession
revenues, generated from the facility (percentage base use fee); however, said percentage
base use fee shall not be less than $5 ,000 per year (minimum guaranteed base use fee); and
c) During the remainder of the initial term , commencing with the fifth contract year effective
October 1, 2018 and every contract year thereafter (including any renewal terms, if granted), the
percentage base use fee shall be increased by 1% per year, but not to exceed 20% of total net
ticket revenues and net concession revenues over the total term of the agreement. The
percentage base use fee paid under Section 6.1(c) shall not be less than the minimum
guaranteed base use fee of $5,000.
We ore committed to provid ing excellent public seNice and safety to all who live , work , and ploy in our vibrant , trop ical. historic community
Internal Audit Report
Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review Februarv20, 2018
The base use payments for the first three years were due quarterly on the first day of the months of
January, April, July, and October. Commencing on the fourth contract year starting on October 1, 2017,
the percentage base use fee or minimum guaranteed base use fee, whichever is greater, is to be paid
quarterly, within thirty days from the end of each quarter. The management agreement also requires 0
Cinema to pay utilities, based on its 72% proportionate usage of the Byron-Carlyle Theater, within ten
(10) days following notice of such amount being due.
The Tourism, Culture and Economic Development Department's Office of Real Estate is tasked with
billing 0 Cinema for the base use fees and utility charges. Invoices were created by combining both
base use fees and utility charges into one quarterly bill which was subsequently sent to 0 Cinema for
payment. The table below shows the quarterly base use fee and utility payments remitted to the City
during the audit period by fiscal year:
Category FY FY FY Totals
2014/2015 2015/2016 2016/2017*
Base Use Fee $2,500.00 $2,500.00 $1,875.00 $ 6,875.00
Utility charges
Electricity $15,917.54 $15,565.88 $ 9,206.47 $40,689.90
Water $ 1,554.61 $ 917.94 $ 689.58 $ 3,162.13
Storm $ 3,744.75 $ 3,744.75 $ 3,819.44 $11,308.94
Sewer $ 1,624.30 $ 361.46 $ 1,172.07 $ 3,157.83
Total UtilityCharges $22,841.20 $20,590.03 $14,887.56 $58,318.80
Adjustments** $(4,301.41) $ -$ -$ (4,301.41)
Totals Per Period $21,039.79 $23,090.03 $16,762.56 $60,892.39
* The amounts shown for FY 2016/2017 are for the period October 1, 2016 through July 31, 2017.
** 0 Cinema's first quarterly bill was reduced by $4,301.41 due to incorrect water and sewer meter readings
for December of 2014 and a complete exclusion of the water, sewer, and storm bill for the month October
2014 for the Byron Carlyle Theater due to the agreement's execution date of October 24, 2014.
Furthermore, the management agreement is contingent upon 0 Cinema remaining in good standing,
free of default, and meeting its annual benchmarks, stated below, set forth in Section 4.2.4 of said
agreement:
• Operate a minimum of 5 days a week, 48 weeks a year schedule.
• Present no less than 500 events throughout the year.
• Serve an anticipated 10,000 visitors per year.
• Increase attendance by 5% annually over prior years.
• Highlight and market 0 Cinema Miami Beach as part of 0 Cinema's annual marketing budget,
which budget shall not be less than $50,000.
• Provide Miami Beach residents with discounted quality cinematic offerings (10% discount) at
least 12 times per year, for a minimum of one film screening per month.
The following table shows 0 Cinema's gross sales revenue including taxes collected per fiscal year for
0 Cinema's Miami Beach location since the management agreement's inception:
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review February 20,2018
Category FY FY FY Total 2014/2015 2015/2016 2016/2017*
Gross Admissions Revenue $ 178,443.42 $ 213,488.00 $ 178,420.60 $ 570,352.02
Event Rental $ 12,004.50 $ 400.00 $ -$ 12,404.50
Onscreen Advertisements $ 2,502.50 $ 4,930.00 $ 4,970.00 $ 12,402.50
Service Fees $ -$ 12,898.25 $ 18,760.15 $ 31,658.40
Concession Sales $ 42,689.00 $ 55,036.75 $ 56,281.50 $ 154,007.25
Total Sales $235,639.42 $ 286,753.00 $ 258,432.25 $ 780,824.67
Sales Tax -7% (6% State & 1% County) $ 2,988.25 $ 3,852.59 $ 3,939.71 $ 10,780.55
Resort Tax -2% $ 853.80 $ 1,100.76 $ 1 '125.66 $ 3,080.22
Total Tax $ 3,842.05 $ 4,953.35 $ 5,065.37 $ 13,860.77
Grand Total (Sales +Tax) $ 239,481.47 $ 291 '706.35 $ 263,497.62 $ 794,685.44
* The amounts shown for fiscal year 201612017 are for the period October 1, 2016 through July 31, 2017.
OVERALL OPINION
Living Arts Trust, Inc. d/b/a 0 Cinema (0 Cinema) did not provide the requested Miami Beach records
timely which were needed to evaluate if controls were adequate, appropriate, and effective to provide
reasonable assurance that risks were managed and objectives were met. Once provided, additional
obstacles were faced as the financial records were incomplete and were commingled with their two
other locations (Miami Shores and Wynwood). The following deficiencies, summarized in the bullet
points below, were noted:
• 0 Cinema did not obtain the required Florida Department of Business & Professional
Regulation license or permit to sell alcoholic beverages, as required in Section 4.2.1 ( c )(v) of the
management agreement, pursuant to Section 563.02 (Beer) and Section 564.02 (Wine), 2017
Florida Statutes at all three of 0 Cinema's locations (Miami Shores, Wynwood, and Miami
Beach).
• 0 Cinema did not register with the City's Resort Tax Section and did not remit collected resort
taxes, as required in Section 4.2.1 ( c )(vi) of the management agreement, pursuant to City Code
Section 102-307, resulting in a $5,106.87 assessment including interest and penalties.
Although, 0 Cinema subsequently remitted payment for this assessment on November 27,
2017 they have not remitted any resort taxes to the City for the six months (August 2017
through January 2018) that have passed since this audit was completed.
• 0 Cinema did not register with the Department of Revenue to collect and remit sales taxes to
the State of Florida, as required in Section 5.3.13 of the management agreement, pursuant to
Section 212.05,2017 Florida Statutes.
• 0 Cinema did not timely renew their business tax receipt, as required in Section 19 of the
management agreement, pursuant to City Code Section 102-357.
• 0 Cinema remitted all of the audit period's eleven (11) quarterly payments after the
management agreement's Section 6.1 specified due dates.
• 0 Cinema did not adhere to the insurance requirements stated in Section 14 of the
management agreement.
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Internal Audit Report
Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
• 0 Cinema did not meet three (3) out of the six (6) stated annual benchmarks setforth in Section
4.2.4 and did not timely submit an annual management plan to the City on or before June 1st of
2016 and 2017 as required in Section 12.1.3 of the management agreement.
• 0 Cinema did not comply with the recordkeeping provisions set forth in Section 12 of the
management agreement.
Based on the deficiencies noted in findings 1, 2, 3 and 6, the Office of Real Estate, through the City
Manager's Office, issued a Notice of Default letter on December 26, 2017. 0 Cinema's legal counsel
provided a response to the noted deficiencies delineated in the Notice of Default letter on January 26,
2018, but has not cured the underlying defaults.
SCOPE, OBJECTIVES, AND METHODOLOGY
The scope of this audit was to evaluate whether the Living Arts Trust, Inc. d/b/a 0 Cinema (0 Cinema)
complied with selected provisions set forth in their executed management agreement with the City of
Miami Beach. The audit covered the period October 1, 2014 through July 31, 2017 and focused
primarily on determining whether the following objectives were satisfied or achieved:
• the permitted uses stated in Section 4.2.1 of the management agreement.
• the annual benchmarks specified in Section 4.2.4 of the management agreement.
• the quarterly payments due to the City as addressed in Section 6 of the management
agreement.
• register with the Florida Department of Revenue to collect, accrue, and remit sales and use
taxes as required in Section 5.3.13 of the management agreement and in accordance with
Section 212.05, 2017 Florida Statutes.
• obtain the City required annual business tax receipts pursuant to Section 19 of the
management agreement and City Code Section 102-357.
• the record keeping provisions set forth in Section 12 of the management agreement.
• adhere to the insurance provisions set forth in Section 14 of the management agreement.
This audit was conducted in accordance with the Standard Operating Procedures of the City of Miami
Beach's Office of Internal Audit as well as internal audit best practices. They require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit objectives.
The audit methodology included the following:
• Reviewing selected provisions within the management agreement between the City and 0
Cinema.
• Interviewing and making inquiries of staff in order to gain an understanding of the internal
controls (relative to the operation of the Byron-Carlyle Theater), assess control risk, and plan
audit procedures.
• Performing substantive testing consistent with the audit objectives, including but not limited to
examination, on a sample basis, of applicable transactions and records.
• Drawing conclusions based on the results of testing, made corresponding recommendations,
and obtaining auditee responses and corrective action plans.
• Performing other audit procedures as deemed necessary.
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSE
1. Finding -Living Arts Trust, Inc. d/b/a 0 Cinema did not Obtain the Required Florida
Department of Business & Professional Regulation License or Permit to Sell Alcoholic
Beverages, as Required in Section 4.2. 1 (c)(v) of the Management Agreement, Pursuant to
Section 563.02 (Beer) and Section 564.02 (Wine), 2017 Florida Statutes
The City Commission adopted Resolution 2014-28790 on October 22, 2014 to allow for alcohol
sales for consumption on site for Living Arts Trust, Inc. d/b/a 0 Cinema (0 Cinema) at the
Byron-Carlyle Theater located at 500 71 st Street. The corresponding management agreement
between the City and 0 Cinema for the operation of the Byron-Carlyle Theater was executed
shortly thereafter on October 24, 2014. According to Section 4.2.1 (c) of the management
agreement, "0 Cinema shall have the right to operate or, subject to the City Manager's prior
written approval, have a third party concessionaire operate: a fully stocked beverage
concession with a concession menu offering regular movie theater fare with an II art house
twist, II including reasonably priced beer and wine, artisan cookies, cupcakes and chocolate
ganache goodies". Additionally, Section 4.2.1 ( c )(v) of the management agreement requires 0
Cinema to obtain the requisite state licenses.
Furthermore, City Code Section 6-2(a) states "No vendor shall sell or distribute any alcoholic
beverages without securing a license from the Florida Division of Alcoholic Beverages and
Tobacco of the Department of Business and Professional Regulation ("state license')". City
Code Section 6-3(a)(9) also delineates the types of penalties and enforcement the City may
impose for violation of City Code Section 6-3(a), which states "The hours of sale of alcoholic
beverages, whether as a permitted main or accessory use, shall require a state license, and
shall be according to the following schedule: .... ".
As a result, copies of the required Florida Department of Business and Professional Regulation
(DBPR) licenses needed by 0 Cinema to sell beer and wine in the City were requested.
Additionally, an online search of DBPR's publicly accessible records was conducted to obtain
evidence of proper licensure and to ensure the validity of state licenses, for permanent food
services and retail beverages, to be submitted by 0 Cinema. The following deficiencies were
noted:
• 0 Cinema did not provide copies of the DBPR state licenses required to sell beer and
wine in the State of Florida and in the City of Miami Beach. Furthermore, 0 Cinema's
Co-Directors stated that they had not acquired the licenses prior to the commencement
of beer and wine sales; however, they claimed to have started the application process
but no evidence was provided to substantiate this claim.
• An online search of DBPR's publicly accessible records confirmed that 0 Cinema does
not possess and has not applied for any of the state licenses required to sell beer and
wine in the State of Florida and in the City of Miami Beach.
The sale of alcoholic beverages without a license or registration is strictly prohibited by City and
State laws and punishable as provided in City Code Section 6-3(a)(9) and Section 775.082 or
Section 775.083, 2017 Florida Statutes. Lastly, Section 4.2.1 states "Failure to comply with the
provisions of Section 4.2.1 shall be deemed to be a Default under this Agreement".
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review Februarv20, 2018
As further addressed in findings 2 and 3, 0 Cinema applied on September 25, 2017 for a resort
tax account in order to collect and remit resort tax to the City as a result of this audit. However,
they have not received their certificate because they do not possess the DBPR state licenses
required to sell beer and wine in the State of Florida and in the City of Miami Beach.
Recommendation( s)
0 Cinema should adhere to the state license requirements set forth in Section 4.2.1 ( c)(v) of the
management agreement, as required by Chapter 6, Article I, Section 6-2( a) of the Miami Beach
City Code. Also, the Tourism, Culture and Economic Development Department's Office of Real
Estate should determine how to proceed as 0 Cinema is in default of the management
agreement.
Vendor Response (0 Cinema):
0 Cinema was limited in its resources and was unaware of a licensing requirement for beer and
wine (B&W). It was 0 Cinema's position such licensing was only required for full liquor
licensing. Since 0 Cinema's discovery of the licensing requirement on December 20, 2017, all
B&W sales have ceased until license with the DBPR has been obtained. 0 Cinema has
already updated its Business Tax Receipt (BTR) pre-packaged food sales. However, as will be
discussed further, 0 Cinema's status as a 501 ( c )(3) organization exempts it from resort tax.
Additionally, 0 Cinema has retained the services of City Land Use Experts (C.L.U.E.) in order to
expedite State license required by DBPR for B&W Sales so we may begin selling Beer and
Wine.
Management Response (Office of Real Estate):
The Office of Real Estate issued a Notice of Default to 0 Cinema dated December 26, 2017 for
failure to obtain the requisite State license for the sale of beer and wine for consumption on
premises, in violation of Sections 4.2.1 ( c )(v) and 19 of the agreement, which ordered 0 Cinema
to immediately cease and desist from the sale or service of any alcoholic beverages at the
Byron-Carlyle Theater. The Office of Real Estate will work in conjunction with the City
Attorney's Office to ensure compliance; otherwise, pursue default proceedings under the
agreement.
Internal Audit Observation:
The Office of Internal Audit conducted an entrance meeting with 0 Cinema's principals on
Thursday, August 31, 2017 at the Byron-Carlyle Theater to discuss the audit scope, objectives,
methodology, timeframe, and records requested. As part of this entrance meeting, inquiries
were made about whether alcohol was sold at the concession stand of the Byron-Carlyle
Theater and, if so, to submit a copy of 0 Cinema's state license permitting the sale of alcohol.
0 Cinema's principals advised that beer and wine were sold at the concession counter and that
they did not possess the state license required to sell beer and wine. Furthermore, they advised
that they were aware of the state license requirement since the beginning of their operations in
October of 2014, but they did not follow up with obtaining the license.
During this meeting, 0 Cinema's principals advised that they were in the process of obtaining
the required license. In response to this claim, Internal Audit requested supporting
documentation. 0 Cinema's principals advised that a permit expediting service was hired to
obtain the state license and that they would request supporting documentation. However,
supporting documentation has not been provided to date to substantiate their claim.
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Internal Audit Report
Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20. 2018
2. Finding -0 Cinema did not Register with the City's Resort Tax Section and did not Remit
Collected Resort Taxes, as Required in Section 4.2.1 (c)(vi) of the Management Agreement,
pursuant to City Code Section 102-307, Resulting in a $5,106.87 Resort Tax Assessment
Including Interest and Penalties
Section 4.2.1(c)(vi) of the management agreement requires 0 Cinema to collect and remit
resort taxes to the City, as required pursuant to Chapter 102, Section 102-307 of the City Code.
City Code Section 102-307 calls for a two (2) percent tax to be levied upon the total sales of all
food, beverages, alcoholic beverages or wine sold at retail of any restaurant. Chapter 102 also
includes City Code Section 102-310 entitled "Resort tax registration certificate" which states
"Within 15 days after commencing business, each operator of any hotel, motel, rooming house,
apartment house or restaurant shall register such hotel, motel, rooming house, apartment
house or restaurant with the City finance director and obtain from him a resort tax registration
certificate to be at all times posted in a conspicuous place on the premises."
In order to determine whether 0 Cinema complied with the resort tax requirements set forth in
Section 4.2.1 ( c )(vi), copies of their resort tax certificate and filed returns with payments were
requested. Additionally, monthly point of sale (POS) reports, federal returns, and merchant
activity statements were requested by a Tax Auditor who performed a resort tax audit in
conjunction with this review. The following deficiencies were noted:
• 0 Cinema did not register and obtain a resort tax account with the City's Finance
Department, yet sold beer, wine, candy, coffee, tea, popcorn, snacks, soft drinks, and
water during the audit period of October 1, 2014 through July 31, 2017.
• 0 Cinema charged and collected resort taxes on the concession items listed above but
did not remit any of these monies to the City.
0 Cinema's failure to adhere to the resort tax requirements set forth in Section 4.2.1 ( c )(vi)
resulted in $154,007.25 of unreported concession revenues and $5,106.87 in resort taxes
($3,080.15), penalties ($1 ,540.07) and interest ($486.65) owed to the City. As stated in City
Code Section 102-320, ':4ny such tax collected by an operator that has not been paid to the
City shall be deemed a debt owed by the operator to the City." Lastly, Section 4.2.1 states
"Failure to comply with the provisions of Section 4.2.1 shall be deemed to be a Default under
this Agreement".
As a result of this audit, 0 Cinema applied on September 25, 2017 for a resort tax account in
order to collect and remit resort taxes to the City. However, they have not received their
certificate because they do not possess the DBPR state licenses required to sell beer and wine
in the State of Florida and in the City of Miami Beach as further discussed in finding 1. Lastly, 0
Cinema remitted payment for the $5,106.87 assessment owed to the City on November 27,
2017 but they have not remitted any additional resort taxes for the six months (August 2017
through January 2018) that have elapsed since this audit was completed.
Recommendation( s)
It is recommended that 0 Cinema adhere to the management agreement's established resort
tax requirements by immediately registering and obtaining a resort tax account with the City as
well as to acquire the DBPR state licenses required to sell beer and wine in the State of Florida
and in the City of Miami Beach. Also, the Tourism, Culture and Economic Development
Department's Office of Real Estate should determine how to proceed with the management
agreement as 0 Cinema is in default. Lastly, the City should ensure that 0 Cinema complies
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Internal Audit Report
Living Arts Trust Inc. d/b/a 0 Cinema Management Agreement Review February20, 2018
with the aforementioned resort tax requirement and remits all monies owed prior to the City's
Cultural Affairs Division disbursing any pending and future Cultural Arts Council grant monies.
Vendor Response (0 Cinema):
As stated in 0 Cinema's response to the City of Miami Beach's notice of default, it was not and
is not subject to Miami Beach's resort tax due to its status as a 501 ( c)(3) organization. Section
102-308 (2) of the Miami Beach City Code specifically states that no tax shall be imposed upon
"any ... nonprofit charitable institutions when engaged in carrying on the customary ...
nonprofit charitable activities." 0 Cinema is clearly acting in accordance with the City Code.
Management Response (Cultural Affairs Division):
At this time, the FY 2017/18 Cultural Arts Council grant agreement with 0 Cinema has not been
executed and any outstanding or future grant payments will not be made until compliance is
met.
Management Response (Office of Real Estate):
The Office of Real Estate issued a Notice of Default to 0 Cinema dated December 26, 2017 for
failure to remit City of Miami Beach resort taxes, in violation of Sections 4.2.1 ( c )(vi) and 19 of
the agreement. The Office of Real Estate is in the process of formulating its response to 0
Cinema's assertion that it is somehow exempt from remitting resort taxes collected from the
general public for food and beverage sales at the Facility. City disagrees with 0 Cinema's
assertions in its response to the City's default letter. To begin with, City disagrees with any
assertion (nor did 0 Cinema provide any legal authority for the proposition), that the operation
of a food and beverage concession, incidental to 0 Cinema's charitable purpose of promoting
and exhibiting films, is itself a charitable non-profit activity that would somehow exempt 0
Cinema from complying with the requirement to collect taxes from the general public on sales of
food and beverage items. Further, resort taxes are not "imposed upon" 0 Cinema in
connection with its nonprofit charitable activities. Rather, resort taxes are imposed upon
patrons who purchase food and beverage services at the Facility. 0 Cinema's obligation,
pursuant to Section 102-309 of the City Code and its Management Agreement with the City, is
to collect and remit resort taxes at the time of sale.
Moreover, in the instant matter, the issue identified by the auditors relates to 0 Cinema's failure
to remit taxes already collected from the general public, as outlined more fully in the Internal
Audit observations (noted below), and as required under Section 102-309 of the City Code and
the Management Agreement. City submits that there is no exemption available under the law
that would permit 0 Cinema to falsely represent to its customers that it was charging them a
tax, or which would permit 0 Cinema to actually collect monies from its customers under such
fraudulent pretenses, when in fact 0 Cinema merely intended to keep those funds for itself on
the basis of any purported exemption from the very same tax it collected from its patrons.
The Office of Real Estate is in the process of finalizing its response in coordination with the City
Attorney's office, and will work with 0 Cinema to ensure compliance or otherwise pursue default
proceedings under the agreement. Going forward, the Office of Real Estate will coordinate with
the Finance Department to implement a process to ensure annual compliance with resort tax
payments.
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
Management Response (Finance Department):
0 Cinema does not have a Business Tax Receipt (BTR) to sell food or alcoholic beverages. 0
Cinema cannot obtain a BTR for to sell the aforementioned goods until they obtain the required
State Licenses to conduct such business activities. Until they obtain the appropriate BTR, a
Resort Tax account will not be opened for a business engaged in illegal activities.
0 Cinema has been issued a Code violation for the business operations not listed on the
theater's BTR. Resort Taxes assessed by our Office of Internal Audit have been collected.
Internal Audit Observation:
Internal Audit confirmed 0 Cinema's not-for-profit 501 (c)(3) status on the Internal Revenue
Service's online Exempt Organizations Select Check Tool. As a not-for-profit organization
operating within the City of Miami Beach, 0 Cinema is exempt from taxes that may be imposed
upon them per City Code Section 1 02-308(2) which states "No tax shall be imposed upon: (2)
Any nonprofit religious, nonprofit educational or nonprofit charitable institutions when engaged
in carrying on the customary nonprofit religious, nonprofit educational or nonprofit charitable
activities."
However, 0 Cinema is not exempt from collecting resort tax on behalf of the City as required in
City Code Section 102-309 entitled "Duty of operators to collect tax". City Code Section 102-309
states "Each operator shall collect the tax imposed by this division to the same extent and at the
same time as the rent or sales price is collected from every occupant or guest. No operator
shall advertise or state in any manner, whether directly or indirectly, that the tax or any part
thereof will be assumed or absorbed by the operator, or that it will not be added to the rent or
sales price, or that if added, any part will be refunded except in the manner hereinafter
provided."
In the same manner that 0 Cinema has collected, not paid, and will make arrangements to pay
Sales and Use Tax to the Florida Department of Revenue, mentioned in finding 3, 0 Cinema
has been collecting and not remitting resort tax to the City since the agreement's inception. A
$5,106.87 (including interest and penalties) assessment of resort taxes charged, collected but
not remitted during the audit period, of October 1, 2014 through July 31, 2017, was paid by 0
Cinema on November 27, 2017. However, 0 Cinema has not remitted any resort taxes to the
City for the six months (August 2017 through January 2018) that have passed since this audit
was completed.
Lastly, Internal Audit reviewed 0 Cinema's sales summary report, sent by email on Wednesday,
September 20, 2017, which showed that sales tax and resort tax had been collected, for
concession sales, during the audit period of October 1, 2014 through July 31, 2017.
3. Finding-0 Cinema did not Register with the Florida Department of Revenue in order to Collect
and Remit Sales Taxes to the State of Florida, as Required in Section 5.3.13 of the
Management Agreement, pursuant to Section 212.05 and 212.054 of the 2017 Florida Statutes
Section 5.3.13 of the management agreement requires 0 Cinema to act as a collection agent
for the City on sales taxes from the operation of the Byron-Carlyle Theater and to remit sales
taxes collected to the State of Florida. Additionally, Section 19 of the management agreement,
as mentioned in Finding 4, requires 0 Cinema to obtain all of the permits and licenses
necessary for the legal operation of Byron-Carlyle Theater.
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review Februarv20, 2018
Section 5.3.13 is in accordance with Section 212.05 of the 2017 Florida Statutes which states
that "every person is exercising a taxable privilege who engages in the business of selling
tangible personal property at retail in this state, including the business of making mail order
sales, or who rents or furnishes any of the things or services taxable under this chapter, or who
stores for use or consumption in this state any item or article of tangible personal property as
defined herein and who leases or rents such property within the state." Per Section
212.05(a)(1.a), 2017 Florida Statutes, 0 Cinema was required to collect and remit a six (6)
percent tax of the sales price of each item or article of tangible personal property sold at retail in
the State of Florida. Moreover, Section 212.054, 2017 Florida Statutes allows Miami-Dade
County to impose a one ( 1) percent discretionary sales surtax on retail sales that occur within
its boundaries. Therefore, 0 Cinema was required to collect and remit a total of seven (7)
percent in sales tax to the State (6%) and County (1%).
In order to determine whether 0 Cinema complied with these terms, copies of State Sales Tax
Returns for the audit period were requested. Additionally, monthly point of sale (POS) reports,
federal returns, and merchant activity statements were requested by a City Tax Auditor who
performed a resort tax audit in conjunction with this review. The following deficiencies were
noted:
• 0 Cinema did not provide copies of the requested State Sales Tax Returns forthe audit
period. 0 Cinema's Co-Directors stated that they had not obtained a Sales and Use Tax
collection account with the Florida Department of Revenue to date but they said that
they had begun the application process. However, documentation was not provided by
0 Cinema to substantiate this claim.
• 0 Cinema charged and collected the seven (7) percent sales tax, 6% for the State and
1% for the County, on all concession items but not on admission sales which are also
subject to state sales tax. No monies were remitted to the either the State or the
County.
0 Cinema's failure to adhere to the sales tax requirements resulted in unreported concession
revenues of $154,007.25 during the audit period to the State of Florida which is subject to
penalties set forth in Chapter 212 of the 2017 Florida Statutes. More specifically, Sections
212.07, 212.085, 212.12, and 212.15 detail applicable penalties that 0 Cinema may be subject
to.
Recommendation( s)
It is recommended that 0 Cinema immediately adhere to the sales tax requirements setforth in
Section 5.3.13 of the management agreement. In addition, the amount owed to the State of
Florida continues to increase for each day going forward that 0 Cinema does not comply.
Vendor Response (0 Cinema):
As was the case with the beer and wine application, 0 Cinema was limited in their resources
and believed its sales tax exemption certificate exempted its collection by 0 Cinema. Since 0
Cinema's discovery of the tax requirement, 0 Cinema has taken steps to report and pay all
sales tax due to the State of Florida as per the state voluntary disclosure process.
We have also retained the services of attorney Senen Garcia who specializes in Sales Tax in
order navigate the payments of sales tax for the State of Florida's Department of Revenue.
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Internal Audit Report
Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review February 20. 2018
We have collected and are holding in our account the 7% Sales Tax due the State of Florida for
the amount due.
Management Response (Office of Real Estate):
The Office of Real Estate issued a Notice of Default to 0 Cinema dated December 26, 2017 for
failure to pay Florida sales tax, in violation of Sections 5.3.13 and 19 of the agreement. The
Office of Real Estate will work in conjunction with the City Attorney's Office to ensure
compliance; otherwise, pursue default proceedings under the agreement. Going forward, the
Office of Real Estate will require proof of sales tax payments on an annual basis.
Internal Audit Observation:
During Internal Audit's entrance meeting with 0 Cinema on Thursday, August 31, 2017, 0
Cinema's principals advised that they were aware of their obligation to collect and remit Sales
and Use Tax to the Florida Department of Revenue (FDOR). However, they had not registered
an account with FDOR to collect and remit sales tax. Furthermore, Internal Audit reviewed 0
Cinema's sales summary report, sent by email on Wednesday, September 20, 2017, which
showed that sales tax and resort tax had been collected, for concession sales, during the audit
period of October 1, 2014 through July 31, 2017.
4. Finding-0 Cinema did not Timely Renew their Business Tax Receipt, as Required in Section
19 of the Management Agreement, Pursuant to City Code Section 102-357
Section 19 of the management agreement states "0 Cinema agrees to obtain and pay for all
permits and licenses necessary for the conduct of its business and agrees to comply with all
laws governing the responsibility of an employer with respect to persons employed by 0
Cinema. 0 Cinema shall also be solely responsible for payment of any and all taxes levied on
the Facility and its operations. In addition, 0 Cinema shall comply with all rules, regulations and
laws of the City; Miami-Dade County; the State of Florida; and the U. S. Government now in
force or hereafter to be adopted." Examples of permits and licenses mentioned in Section 19,
applicable to 0 Cinema, include state license permitting the sale alcohol (finding 1 ), resort tax
certificate permitting collection and remittance of resort tax to the City (finding 2), state sales tax
account permitting collection and remittance of sales tax to the State of Florida (finding 3),
business tax receipt certificate permitting the operation of the business within the municipal
boundaries of the City, etc.
City Code Section 102-357, pursuant to Section 205.042 of the 2017 Florida Statutes
authorizes the City to levy a business tax for the privilege of engaging in or managing any
business, profession or occupation within the City. Moreover, City Code Section 102-377
delineates the penalties and enforcement that the City may impose for violation of City Code
Section 102-357.
In order to determine whether 0 Cinema complied with the business tax receipt {BTR)
requirements set forth in Section 19, copies of 0 Cinema's BTR certificates for fiscal years
2014/15, 2015/16, and 2016/17 were requested. Additionally, a search of the City's current and
previous licensing and permitting software was conducted to obtain evidence of proper
licensure and to ensure the validity of business tax receipt certificates submitted by 0 Cinema.
The following deficiencies were noted:
• 0 Cinema did not renew their BTR for fiscal years 2015/16 and 2016/17 in a timely
manner as payment for both renewals occurred on August 24, 2017 which was 693
days late for fiscal 2015/16 and 327 days for fiscal year 2016/17. The Finance
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review February20, 2018
Department's Customer Service Division did not assess late payment penalty fees for
these renewals for unknown reasons.
• 0 Cinema did not obtain the appropriate alcohol and food sales categories to their BTR.
On September 25, 2017 0 Cinema applied with the City's Customer Service Division to
add these categories to their BTR; however, they cannot be added until 0 Cinema
obtains a state liquor and/or food sales license (Finding 1) and a City issued resort tax
registration certificate (Finding 2).
• 0 Cinema's BTR record for fiscal year 2014/15 shows that they were only charged an
application fee of $45 thereby omitting the required fire annual inspection fee to be paid
by all not for profit businesses.
Recommendation( s)
0 Cinema should adhere to the BTR requirements set forth in Section 19 of the management
agreement, as required by City Code Section 102-357, pursuant to Section 205.042 of the 2017
Florida Statutes. The Office of Real Estate should check annually to ensure that the BTR is
complete and current. Also, the Finance Department's Customer Service Division should inform
the Code Compliance Department of 0 Cinema's alcohol and food sales operation without the
appropriate BTR categories, state licenses or permits, and resort tax certificate. Additionally,
the Customer Service Division should calculate and assess late payment penalties for 0
Cinema's BTR renewals for fiscal years 2015/16 and 2016/17 as well as properly charge them
for the 2014/15 fiscal year.
Vendor Response (0 Cinema):
Regarding the renewal of 0 Cinema's Business Tax Receipt, it has been renewed and is
effective. Regarding the renewal's timeliness, it is unfortunate this took place. However, this
tardiness was due to the documentation for the renewal arriving at the incorrect address. All
correspondence regarding 0 Cinema is to be sent to its Wynwood location. 0 Cinema has
since rectified the issue to avoid the tardiness in the future. As for the classification of 0
Cinema's BTR so as to include food sales, said classification has been amended and now
correctly reflects the additional sales activities. Finally, any penalties contemplated should be
waived for having correspondence sent to the incorrect mailing address.
Management Response (Office of Real Estate):
The Office of Real Estate will coordinate with the Finance Department to implement a process
to ensure annual compliance with the BTR requirements set forth in the agreement.
Management Response (Finance Department):
As a 501 (c)(3) not-for-profit entity, 0 Cinema is exempt from the BTR portion of their renewal
notice; however they are responsible for fees associated with the Certificate of Use and Annual
Fire Inspection portions of their renewals. 0 Cinema has been invoiced $232.20 for Fiscal Year
16 and 17 late fees and FY 15 Annual Fire Inspection fees. These fees were not billed as a
result of a clerical error by new staff members that were under the assumption that in addition to
being exempt from the BTR portion of their bill, not-for-profits were also exempted from the
Annual Fire Inspection fees and late penalties. This matter has been discussed and
addressed with the two employees involved. Additionally, 0 Cinema has been issued a Code
violation for the business operations not listed on the theater's BTR.
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20. 2018
Internal Audit Observation:
It is 0 Cinema's responsibility to timely inform the City of any address changes as established in
Section 32 of the management agreement, which states "0 Cinema and the City may change
the above mailing addresses at any time upon giving the other party written notification. All
notice under this agreement must be in writing." As a result, they are at fault for any subsequent
correspondence not received and Internal Audit opines that no penalties should be waived.
5. Finding-0 Cinema Remitted All of the Audit Period's Eleven (11) Quarterly Payments after the
Management Agreement's Section 6. 1 Specified Due Dates Resulting in $2, 164.06 in Late
Charges that were Not Billed and Collected
Section 6 of the management agreement states "All payments are payable quarterly, as of the
first day of the months of January, April, July, and October of each contract year without
demand, commencing on the commencement date. The base use fee shall be paid on a
quarterly basis, except with respect to the payment for the first quarter, which will be due upon
execution of the Agreement."
Additionally, Section 29 of the management agreement states "0 Cinema's Defaults -The
occurrence of any one or more of the following events shall constitute an event of default by 0
Cinema:" Sections 29.1.2.1 and 29.4 are set forth in Section 29 as default events. Furthermore,
Section 29.1.2.1 states that 0 Cinema's failure to make any payment required by the City,
which continues for more than ten ( 1 0) days after written notice from the City, shall constitute as
an event of default. Additionally, Section 29.4 establishes that any payment owed to the City or
0 Cinema under the management agreement that is not received by the City or 0 Cinema
within ten (1 0) days following notice of such amount being due shall bear interest at the rate of
18% per annum, known as the "Default Rate" in the agreement, or the highest allowable rate
under Florida law, whichever is less from the date due until fully paid. Section 687.02, 2017
Florida Statutes establishes 18% per annum simple interest as the highest allowable rate under
Florida law.
In order to determine whether 0 Cinema complied with the payment requirements set forth in
Section 6 and default and termination provisions stated Section 29.1.2.1 and Section 29.4,
Internal Audit conducted a search for 0 Cinema's payment records in the City's current and
previous enterprise resource planning systems during the. October 1, 2014 through July 31,
2017 audit period. Both bill creation dates and payment received dates were examined to
determine if the Office of Real Estate timely created the invoices and whether 0 Cinema made
timely payments. The following deficiencies were noted:
• The Office of Real Estate created a combined invoice for 0 Cinema's quarterly base
use fee and utility charges. This resulted in a portion of the invoice (base use fee) due,
according to Section 6's specified due dates, on the first day of the months of January,
April, July, and October and another portion (utility charges) due upon the invoice's
actual due date. However, the base use fee was consistently billed after its due date
since all the charges were all combined. In addition, the Office of Real Estate created
ten (1 0) out of eleven (11 ), or 90.91%, of 0 Cinema's base use fee quarterly payment
invoices after the management agreement's specified due date, ranging from 6 to 76
days late.
• 0 Cinema remitted all 11 quarterly payments owed to the City after the management
agreement's specified due date. Internal Audit calculated an average of 122 days late
for these payments throughout the audit period, ranging from 18 to 306 days late.
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• The 18% per annum penalty interest rate was applied to the late payments submitted by
0 Cinema resulting in $384.65 in late charges owed for quarterly base use fee
payments and $1,779.41 in late charges owed for quarterly utility payments totaling
$2,164.06 owed to the City.
Section 6 of the management agreement and the payment due dates stated therein explicitly
apply to the base use fee while Section 29.4's late payment penalty interest can be applied to
all payments owed to the City or 0 Cinema. Consequently, penalty interest was applied to base
use fee portion of the quarterly payment amounts based on the management agreement's
specified due dates and to the utility portion using the invoice's specified due date. Although the
Office of Real Estate created over 90% of the quarterly payment invoices after the due date, 0
Cinema is bound by Section 6 of the management agreement that stipulates that the base use
fee of $2,500 per year or $625 per quarter was owed annually on the first day of January, April,
July and October, regardless of the timeliness of the created City Bill or invoice.
Recommendation( s)
0 Cinema should adhere to the management agreement's established payment requirements
set forth in Section 6 and Section 29.4. Additionally, 0 Cinema should work to submit the base
use fee stated in Section 6.1 (b) accurately and timely going forward as they are required to
submit a percentage base use fee ( 10% of all net ticket and concession revenues) commencing
on the fourth (4th) contract year, or October 1, 2017 within thirty (30) days from the end of each
quarter.
Furthermore, the Office of Real Estate should create separate invoices for the percentage base
use fee and utility charges in order to better track the timeliness of payments submitted by 0
Cinema and assess late payment penalty interest when required. The Office of Real Estate
should create an invoice to bill 0 Cinema for the $2,164.06 in outstanding late payment penalty
interest owed to the City. Lastly, the Office of Real Estate should determine how to proceed with
0 Cinema as they are in default under Sections 29.1.2.1 and 29.4 of the management
agreement.
Vendor Response (0 Cinema):
0 Cinema worked to make all payments timely and currently is current with all quarterly
payments to the City of Miami Beach. 0 Cinema is aware the City of Miami Beach was
unsatisfied with the overall time 0 Cinema took to submit payments. Therefore, in order to
assist in compliance with our management agreement, 0 Cinema hired a managing director,
Sarah Roffman and retained accountant Billy Bolin of Ace Professional Services to oversee the
recordkeeping of 0 Cinema. Ms. Roffman will be assisting in improving our payments and
timely payments to the City of Miami Beach along with the assistance of Billy Bolin. Though,
this again, goes to the need of a subsidy as the many requirements set forth in the
management agreement cannot be adequately maintained while operating the theater at its
current admission levels without the financial support of the City of Miami Beach.
Management Response (Office of Real Estate):
Historically, the Office of Real Estate has created one invoice combining the base use fee and
utilities. The utilities are calculated on a percentage of actual use, and typically don't become
available until at least one week after the end of the month, causing a delay in invoicing. Going
forward, effective with the fourth contract year, the Office of Real Estate will separately bill the
quarterly invoices for the percentage base use fee, due within thirty (30) days from the end of
each quarter, and the utilities, due within thirty (30) days of receipt of invoice.
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
6. Finding-0 Cinema did not Adhere to the Insurance Requirements Stated in Section 14 of the
Management Agreement
As per Section 14.1 of the management agreement, "0 Cinema shall maintain, at its own cost
and expense, insurance coverage at all times throughout the term of the agreement." The
following are the required types of insurance coverage:
a)
b)
General Liability
General Aggregate:
Products -Completed Operations Aggregate:
Personal and Advertising (Injury):
Per Occurrence:
Fire Damage:
Medical Expense:
Liquor Liability
Aggregate Limit:
Per Occurrence:
$2,000,000
$2,000,000
$1,000,000
$1,000,000
$ 100,000
$ 5,000
$2,000,000
$1,000,000
Furthermore, workers' compensation insurance coverage, required under Section 14.2 of the
management agreement and in accordance with Chapter 440, 2017 Florida Statutes, must be
provided to 0 Cinema employees.
Section 14.3 of the management agreement restricts 0 Cinema from cancelling or making
changes to City approved insurance certificates unless the City is given at least thirty (30) days
written notice and written approval has been given by the City's Risk Manager. 0 Cinema must
provide the City with an insurance certificate for each such policy, which should name the City
as an additional name insured. Insurance certificates submitted to the City are then compiled
and archived in the Insurance Tracking Services, Inc. (ITS) website, which automates
managing and tracking insurance certificates and assists in verifying compliance with insurance
requirements.
In order to determine whether 0 Cinema complied with the insurance requirements set forth in
Section 14, copies of their insurance certificates since the agreement's inception were
requested. Simultaneously, Internal Audit accessed copies of City approved insurance
certificates through the ITS website in order to confirm the validity of copies submitted by 0
Cinema. Additionally, online research was conducted to confirm that workers' compensation
coverage had been provided to 0 Cinema employees. The following deficiencies were noted:
• Proof of insurance coverage for the period November 1, 2015 through November 1,
2016 for 0 Cinema was found on the ITS website. This insurance certificate copy
showed compliance with the management agreement's insurance requirements.
However, upon Internal Audit's request, 0 Cinema provided an insurance certificate
copy generated on August 22, 2017 showing coverage for the period November6, 2015
through November 6, 2016. This insurance certificate copy's effective policy date
(November 6th) differs from the submitted insurance policy's effective date (November
1st). Additionally, this copy did not meet the insurance requirements stated in Section
14 of the management agreement. Differences identified included a reduction in
Products-Completed Operations Aggregate coverage amount from $2,000,000
(minimum required per the management agreement) to $1,000,000 dollars; the City was
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
not named as an additional insured on the modified certificate; Liquor Liability coverage
was missing; and the policy effective and expiration dates for workers' compensation
coverage are the same day, November 18, 2015. Documentation to show City approval
for the above mentioned changes could not be found.
• Proof of City approved insurance coverage for 0 Cinema for the period November 17,
2016 to November 17,2017 was found on the ITS. Additionally, 0 Cinema provided a
copy as requested by Internal Audit. Again, a difference between the ITS City approved
copy and the 0 Cinema copy was noted as the Products-Completed Operations
Aggregate coverage amount was reduced from $2,000,000 (minimum required per the
management agreement) to $1,000,000 dollars. Documentation to show City approval
for this change could not be found.
• A lapse of 0 Cinema's insurance coverage occurred in 2016. Certificates of insurance
submitted to ITS and separately to Internal Audit contain policy expiration dates that
occur prior to the November 17, 2016 policy effective date for the 2016/2017 coverage
period. Based on the 2016/2017 certificate of insurance, the 2015/2016 insurance
coverage should have expired on November 16, 2016. However, the City approved ITS
copy expired on November 1, 2016, revealing a 15 day lapse in coverage. Additionally,
the copy submitted to Internal Audit expired on November 6, 2016, showing a 10 day
lapse in coverage.
• A search on the Division of Workers' Compensation Compliance Proof of Coverage
Search Page showed that 0 Cinema's insurance carrier reported zero (0) employees for
the organization from November 2015 to current date searched of September 19, 2017.
The failure of 0 Cinema to adhere to the insurance requirements delineated in Section 14 of
the management agreement increases the City's risk exposure. Section 14 states "Should 0
Cinema fail to obtain, maintain or renew the policies of insurance referred to above, in the
required amounts, the City may, at its sole discretion, obtain such insurance, and any sums
expended by City in obtaining said insurance, shall be repaid by 0 Cinema to City, plus ten
percent (1 0%) of the amount of premiums paid to compensate City for its administrative costs. If
0 Cinema does not repay City's expenditures within fifteen (15) days of demand, the total sum
owed shall accrue interest at the rate of twelve percent (12%) until paid, and such failure shall
be deemed an event of default hereunder." Since the City was unaware of these insurance
coverage shortcomings during the audit period, Section 14's provisions were not implemented
so no monies are due. However, the City's Risk Management Division should apply this
section's terms going forward, if applicable.
Recommendation(s)
0 Cinema should adhere to the management agreement's established insurance requirements
to mitigate its and the City's risk exposure. Furthermore, the City's Office of Real Estate should
periodically verify the validity of insurance certificates submitted by 0 Cinema and the coverage
amounts contained therein on ITS. If not, 0 Cinema should promptly be notified of the need to
comply and Section 14's enforcement terms should be applied.
Vendor Response (0 Cinema):
0 Cinema attached a letter from its insurance agent, the Miami Beach based South Florida
Assurers, to confirm that 0 Cinema has had consistent, uninterrupted coverage since the
commencement of the management agreement without any change to aggregate amount of
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coverage. 0 Cinema has attached the appropriate insurance certificates as well. 0 Cinema has
asked its insurance agents to explain why there were conflicting dates on these certificates.
While the differentiating dates do stand out, 0 Cinema has in no way altered or amended any
certificates provided to the city, as is insinuated in the audit findings. Additionally, 0 Cinema
has consistently maintained Workman's Compensation coverage. As a result of these audit
findings, it was brought to 0 Cinema's attention that its insurance carrier has incorrectly listed
employees as zero though it did correctly list its payroll amount so that the correct amount of
Workman's Compensation coverage has been in place. 0 Cinema has requested from its
insurance carrier the correct amount of employees be reflected immediately on the policy.
Management Response (Risk Management Division):
Ideally, since the City is named as an additional insured as a basic boiler plate requirement, the
insurance companies and the insurance agents should be notifying the City in writing. There
may be instances where a vendor may change their effective coverage dates throughout the
policy term along with cancelling certain term of their insurance program through non-payment.
Nonetheless, any change made should require notification to the City directly and not to ITS.
Internal Audit Observation:
Internal Audit reviewed the insurance certificate documentation sent by email from 0 Cinema's
legal counsel on Wednesday, January 31, 2018. A statement from Florida Assurers, Inc. was
sent along with the insurance certificates stating that the policy limits and the insurance
coverage complying with the City's minimum required insurance coverages were maintained by
0 Cinema since the inception of the management agreement. The 2015/16 and 2016/17
submitted insurance certificates represent the third unique versions of these documents. A
review of all three years insurance certificates identified the following deficiencies:
• 0 Cinema's commercial general liability coverage was maintained for November 6,
2015 through November 1, 2016; which represents a 5 day lapse as the prior certificate
effective date ended on November 1, 2015 and this year's certificate began on
November 6, 2015.
• 0 Cinema's commercial general liability coverage was maintained for November 17,
2016 through November 1, 2017; which represents a 16 day lapse as the prior
certificate effective date ended on November 1, 2016 and this year's certificate began
on November 17,2016.
• 0 Cinema's commercial general liability coverage was maintained for November 17,
2017 through November 17, 2018; which represents a 16 day lapse of coverage as the
prior certificate effective date ended on November 1, 2017 and this year's certificate
began on November 17, 2017. Although this insurance certificate was outside our
stated audit period, 0 Cinema's legal counsel provided this document as support for
their claim. Additionally, on this certificate, the Products -Completed Operations
Aggregate coverage given is $1,000,000 while the City requires a minimum of
$2,000,000.
7. Finding -0 Cinema did not Satisfy Three (3) of the Six (6) Stated Annual Benchmarks Set
Forth in Section 4.2.4 and they did not Create nor Submit an Annual Management Plan to City
on or before June 151 of 2016 and 2017 as Required in Section 12. 1.3 of the Management
Agreement
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review February 20,2018
Section 4.2.4 of the management agreement states "Every year, throughout the Term of the
Agreement, 0 Cinema shall achieve the following benchmarks:
Operate a minimum of 5 days a week, 48 weeks a year schedule.
• Present no less than 500 events throughout the year.
• Serve an anticipated 10,000 visitors per year.
Increase attendance by 5% annually over prior years.
• Highlight and market 0 Cinema Miami Beach as part of 0 Cinema's annual marketing
budget, which budget shall not be less than $50K.
• Provide Miami Beach residents with discounted quality cinematic offerings (1 0%
discount) at least 12 times per year, for a minimum of one film screening per month."
In addition to the aforementioned annual benchmarks, Section 12.1.3 of the management
agreement requires 0 Cinema to provide an annual management plan to the City on or before
June 1st of each year, commencing on October 1, 2015. The annual management plan should
include the annual operating budget for the then current fiscal year, information regarding 0
Cinema's anticipated operations for such fiscal year, including planned operating and
maintenance activities, anticipated capital improvements and capital equipment purchases, an
anticipated budget, anticipated events and other uses at the theater, and planned equipment
and furnishings purchases. 0 Cinema shall have the right from time to time to make any
changes it deems necessary or appropriate to any such annual plan so long as the annual plan
is consistent with their fulfillment of its obligations hereunder. The City Manager or his designee
may request additional documentation and information as the City believes necessary, in order
to confirm compliance with the annual benchmarks set forth in Section 4.2.4.
In order to determine compliance with these benchmark and annual plan requirements set forth
in Section 4.2.4 and Section 12.1.3, copies of event inventory and attendance reports, for the
period October 1, 2014 through July 31, 2017, and the annual management plans were
requested. It is important to note that the annual management plans requested were to be
submitted on or before June 1st, 2016 and June 1st, 2017. Moreover, ticket sales revenue
reports were requested to confirm that event inventory and attendance reports were accurate.
During the audit, 0 Cinema provided an annual benchmark report, which was completed on a
calendar year basis, on September 22, 2017 in an effort to demonstrate their compliance with
Section 4.2.4. However, as further discussed in finding 8 of this report, 0 Cinema submitted
consolidated financial documents on October 2, 2017, such as monthly profit and loss
statements. The consolidation of financials included 0 Cinema's locations in Miami Beach,
Wynwood, and Miami Shores. The format of the aforementioned reports did not allow Internal
Audit to break down marketing expenditures on a monthly basis, which was required to
calculate the annual benchmark amounts per fiscal year as they were furnished to us on a
calendar year basis. However, the management agreement does not state specifically whether
annual benchmarks are expected to be achieved on a fiscal or calendar year basis.
Nonetheless, Internal Audit utilized 0 Cinema's annual benchmark report to determine
compliance with Section 4.2.4. This report reveals deficiencies in three (3) out of the six (6)
stated annual benchmarks as shown below:
• 0 Cinema did not meet the required benchmark to increase attendance by 5% annually
over prior years. 0 Cinema's 2016 attendance, 26,091 visitors, increased by 4.30%
over their 2015 attendance of 25,016 visitors. Attendance increases from 2014 to 2015
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Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review February 20, 2018
and 2016 to 2017 were not tested as attendance for 2014 only includes the period from
October through December and the attendance for 2017 only includes the period
January through July.
• 0 Cinema's expenditures for 2015 and 2016 fell below the $50,000 minimum annual
marketing budget required by the annual benchmarks stated in Section 4.2.4.
Additionally, 0 Cinema did not provide a projected annual marketing budget for 2017. 0
Cinema's stated marketing expenditures on their benchmark report showed $56,891.87
expended in 2014, $42,325.86 in 2015, $29,573.46 in 2016, and no projected annual
marketing budget for 2017.
• 0 Cinema did not meet the required benchmark to provide Miami Beach residents with
discounted film screenings at least 12 times per year, for a minimum of one film
screening per month. 0 Cinema's annual benchmark report showed that discounted or
free film screenings were offered on one (1) occasion in 2014, sixteen (16) in 2015, four
(4) in 2016, and four (4) in the seven months between January and July 2017.
• 0 Cinema did not create nor submit an annual management plan to the City as required
in Section 12.1.3 of the management agreement prior to the aforementioned report
furnished on September 22, 2017.
The table below summarizes the annual benchmark data provided by 0 Cinema on a calendar
year basis:
2014 2015 2016 2017
Annual Benchmark Nov-Dec Jan-Jul
Operate a Minimum of 5 Days a Week, 48 Yes Yes Yes Yes
Weeks a Year Schedule
Present No Less than 500 Events 107 703 947 557
Throughout the Year
Serve an Anticipated 10,000 Visitors Per 2,023 25,016 26,091 18,516
Year
Increase Attendance by 5% Annually N/A N/A 4.30% N/A
Over Prior Years
Highlight and Market 0 Cinema Miami Not Beach as Part of 0 Cinema's Annual $ 56,891.87 $ 42,325.86 $ 29,573.46
Marketing Budget, which Budget Shall Submitted
not be Less Than $50K*
Provide Miami Beach residents with ~
Discounted Quality Cinematic Offerings
(10% discount) at Least 12 Times Per
1 16 4 4
Year, for a Minimum of One Film
Screening Per Month
*Marketing expenditures were provided by 0 Cinema on a calendar year basis; annual marketing
budgeted figures and expenditures were not submitted for calendar year 2017
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Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review Februarv20. 2018
0 Cinema's did not satisfy three (3) of the six (6) stated annual benchmark requirements set
forth in Section 4.2 and they did not create the annual management plan required in Section
12.1.3 of the management agreement.
Recommendation( s)
0 Cinema should adhere to the management agreement's established annual benchmarks and
annual plan requirements set forth in Section 4.2.4 and Section 12.1.3. Moreover, the
development of an anticipated budget, information regarding 0 Cinema's planned operating
and maintenance activities, anticipated capital improvements, anticipated capital equipment
purchases, and planned equipment and furnishings purchases should be included in the annual
management plan. Lastly, the Office of Real Estate should request and review documentation
annually from 0 Cinema to determine whether the designated benchmarks have been satisfied.
Vendor Response (0 Cinema):
Attendance-At the time of the execution of the management agreement, it was anticipated the
attendance figures for the theater to be approximately 1 0,000 and increase from that starting
point. However, due to unexpected growth from 0 Cinema's showings, attendance increased
dramatically by 150%. Upon reaching such a high and surprising growth, maintaining the
benchmark laid out in the management agreement were not and would not be able to be met
consistently. This was not due to inability to achieve numbers but because it achieved near
maximum growth in its first year. The solution to this issue is an amendment to the
management agreement to accurately reflect the current nature of what took place regarding
attendance and what will continue following the high growth in attendance.
Marketing -0 Cinema's marketing budget marks were in compliance with management
agreement while 0 Cinema received necessary subsidies from the Knight Foundation for its
marketing budget. Unfortunately, the Knight Foundation's subsidy was eliminated forcing 0
Cinema to absorb the loss, which it was unable to do absent a new subsidy. 0 Cinema did
realign its advertising to continue to generate interest and even achieved higher attendance. In
review of the management agreement, it is clear the purpose of the specific marketing budget
benchmark was implemented to ensure proper marketing of the location to maximize
attendance. However, in retrospect, 0 Cinema has been able to maintain, if not exceed the
minimum 10,000 annual visitors each full year in operations. To penalize 0 Cinema for being
cost effective all the while achieving the result would be inappropriate. In fact, the operations of
the Miami Beach location are such that a subsidy would be necessary to maintain the marketing
budget required while simultaneously maintaining the viability in a similar fashion as with other
organizations that receive a subsidy from the City of Miami Beach that are located on Miami
Beach. Examples of such organizations are Miami New Drama and Rhythm Foundation whose
management agreements with the City of Miami Beach are not nearly as costly as 0 Cinema's
management agreement with the City of Miami Beach. In fact, Miami New Drama receives
$255,000 for hosting 75 events a year and Rhythm Foundation receives $45,000 for hosting 35
events a year while 0 Cinema hosts at a minimum 700 events a year and receives $0 in
subsidies. As can be established from this review, this benchmark should be amended to
accurately reflect the success 0 Cinema has been able to achieve and not be penalized for it.
Discounted Screenings -Concerning offering discounted tickets to Miami Beach residents, 0
Cinema in fact superseded such a requirement by offering free admission to City of Miami
Beach residents as mentioned in the audit report. However, to ensure compliance with the
management agreement, 0 Cinema will maintain a higher discount requirement for City of
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Internal Audit Report
Living Arts Trust. Inc. d/b/a 0 Cinema Management Agreement Review Februarv20. 2018
Miami Beach residents with a discount of 20% for showings on the first Monday of every month
beginning on February 5, 2018.
Management Plan-Once more, 0 Cinema's financial and operational constraints did limit the
time and function with which to resolve these matters. However, 0 Cinema will be able to
provide a management plan in less than 30 days. It should be noted, 0 Cinema considers this
benchmark to be rather onerous after conducting operations on the beach and, as such,
requests this benchmark to be amended to fall in line with the operational flow of the theater.
Additionally, this again, goes to the need of a subsidy as the many requirements set forth in the
management agreement requiring compliance cannot be adequately maintained while
operating the theater year round, 7 seven days a week at its current admission levels without
the financial support of the city of Miami Beach.
Management Response (Office of Real Estate):
The Office of Real Estate requested the requirements set forth in Section 4.2.4 and Section
12.1.3 on July 24, 2017. 0 Cinema failed to provide this information to the Office of Real Estate
and instead, upon commencement of this audit, provided their response to Internal Audit.
8. Finding-Living Arts Trust Inc. d/b/a 0 Cinema did not Adhere to the Recordkeeping Provisions
Set Forth in Section 12 of the Management Agreement
Section 12.1.1 of the management agreement requires 0 Cinema to keep at least three (3)
years following each fiscal year, or for as long as such records are required to be retained
pursuant to Florida Public Records Law (whichever is longer), all sales slips, rental agreements,
purchase order, sales books, credit card invoices, bank books or duplicate deposit slips, and
other evidence of operating revenues and expenses for such a period. Under this provision, 0
Cinema is also required to provide to the City, on or before 120 days following each fiscal year,
a line item (i.e. by categories) statement of operating costs and revenues (and profit and loss)
for the facility for the preceding fiscal year, including the number of tickets sold and events and
other uses held, prepared in accordance with generally accepted accounting principles certified
as accurate by 0 Cinema's Chief Accounting Officer or Chief Financial Officer.
In order to determine whether 0 Cinema complied with the recordkeeping requirements set
forth in Section 12.1.1, copies of credit card statements, monthly point of sale (POS) reports,
federal returns, merchant activity statements, monthly profit and loss statements, general ledger
report, and bank statements for the audit period were requested. Additionally, the line item
statement required to be prepared in accordance with generally accepted accounting principles
and certified as accurate by 0 Cinema's Chief Accounting Officer or Chief Financial Officer and
be submitted to the City on or before 120 days following each fiscal year was requested. The
following deficiencies were noted:
• Financial documents requested on August 24, 2017 were not available until October 2,
2017. Additionally, the financial documents provided such as monthly profit and loss
statements for 0 Cinema Miami Beach were consolidated with additional 0 Cinema
locations in Wynwood and Miami Shores and were not separated.
• The line item statement to be prepared in accordance with generally accepted
accounting principles and certified as accurate by 0 Cinema's Chief Accounting Officer
or Chief Financial Officer was not prepared nor submitted.
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Internal Audit Report
Living Arts Trust, Inc. d/b/a 0 Cinema Management Agreement Review February 20,2018
Recommendation( s)
0 Cinema should adhere to the management agreement's established recordkeeping
requirements. If not, the City's Office of Real Estate should promptly notify 0 Cinema and take
any corrective action outlined in the management agreement.
Vendor Response (0 Cinema):
0 Cinema worked to be transparent and responsive to all requests from the Office of Internal
Audit and began submitting financial documents and requested reports shortly after the August
241h request and completed said request as quickly as possible. 0 Cinema is aware the City of
Miami Beach was unsatisfied with the overall time 0 Cinema took in completing the document
request. Therefore, in order to assist in compliance with our management agreement, 0
Cinema hired a managing director, Sarah Roffman and retained accountant Billy Bolin of Ace
Professional Services to oversee the recordkeeping of 0 Cinema. Ms. Roffman will be
assisting in improving our record keeping and proper reporting to the City of Miami Beach along
with the assistance of Billy Bolin. Though, this again, goes to the need of a subsidy as the
many requirements set forth in the management agreement such as the record keeping cannot
be adequately maintained while operating the theater at its current admission levels without the
financial support of the city of Miami Beach.
Management Response (Office of Real Estate):
The Office of Real Estate requested the requirements set forth in Section 4.2.4 and Section
12.1.3 on July 24, 2017. 0 Cinema failed to provide this information to the Office of Real Estate
and instead, upon commencement of this audit, provided their response to Internal Audit.
EXIT CONFERENCE
An exit conference was held on December 20, 2017 and the participants included Kathie Brooks (Assistant
City Manager), Eva Silverstein (Tourism, Culture and Economic Development Director), Brandi Reddick
(Cultural Affairs Program Manager), Benjamin Nussbaum (Revenue Manager), Manny Marquez (Assistant
Finance Director), Sasha Gonzalez (Customer Services Manager), Mark Coolidge (Interim Internal Auditor)
and Luis Medina (Auditor). The agreed upon revisions were made in the draft audit report which were
subsequently sent to Living Arts Trust Inc. dba 0 Cinema for review. Management responses were solicited
from all parties and were included above.
F:\OBPI\$AUD\INTERNAL AUDIT FILES\DOC17-18\REPORTS-FINAL\Living Arts Trust Inc DBA 0 Cinema-Management Agreement
Review.doc
cc: Kathie G. Brooks, Assistant City Manager
Eva Silverstein, Tourism, Culture and Economic Development Director
Mark Milisits, Asset Manager
John Woodruff, Chief Financial Officer
Manny Marquez, Assistant Finance Director
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