Penrods Pier Park Restaurant Lease AgreementBUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division INTERNAL AUDIT REPORT
TO:
VIA:
FROM:
DATE:
AUDIT:
PERIOD:
Jorge M. Gonzalez, City Manager
Kathie G. Brooks, Budget and P~. rfo. r ance Improvement Director
James J. Sutter, lntemal Audita ~~
January 29, 2010 ·
Penrods Brothers Pier Park Restaurant Lease Agreement and Concession Agreement
April 1, 2006 to March 31, 2009
This audit report is the result of a regularly scheduled audit of the lease agreement between the City
and Pen rods Brothers Inc. (Pen rods) concerning the operations of the Pier Park Restaurant and the
related concession agreement for the adjacent City owned property known as Pier Park.
INTRODUCTION
On October 2, 1985, the Mayor and City Commission adopted Resolution No. 85-18223 and the
related lease agreement authorized Penrods Brothers, Inc. for the development, construction,
management and operation of a restaurant facility in Pier Park pursuant to Request For Proposal
number 202-84/04 issued August 2, 1985. This lease agreement was for a period of twenty years
expiring May 6, 2006 with two additional ten-year options periods. Along with this resolution, the
Mayor and City Commission adopted Resolution No. 85-18222, approving a concession agreement
with Pen rods Brothers for the sale offood and beverages, rental of lounging and related equipment
services within a portion of Pier Park, which expired on November 4, 2000. The City extended the
concession agreement an additional year to allow for the issuance of a Request for Proposal (RFP)
for the beachfront concessions. The RFP was issued February 21, 2001 and was subsequently
awarded to Boucher Brothers Miami Beach LLC. The new concession agreement was approved by
the Mayor and City Commission and became effective November 5, 2001 for a period of 5 years
with an option to renewal for an additional five year term.. This concession agreement did not
include the portion of Pier Park and the beaches seaward and immediately adjacent to the
restaurant.
On February 25, 2004, the City entered into a separate concession agreement with Penrods by
Resolution No. 2004-25506 for the portion of Pier Park immediately adjacent east of the restaurant
since it was not included in the concession agreement awarded to the Boucher Brothers. This
concession agreement commenced retroactively back on October 1, 2003 and the original term
expiring on May 6, 2006 with an option to renew to run concurrent with the terms of the Pier Park
Restaurant lease agreement. The City and Penrods Brothers agreed to revisit and negotiate the
financial terms governing the restaurant lease agreement, in regards to percentage payments, and
where a concession agreement would commence covering the rentals of lounging equipment and
food and beverage sales in the portion of Pier Park seaward of the footprint of the Pier Park
restaurant lease premise. Concurrently a third amendment to the Lease agreement was entered
into on February 25, 2004 under resolution number 2004-25507.
Under the third amendment to the lease agreement, Pen rods is to pay the City an annual Minimum
Guarantee equal to a percentage of the Lessee's gross receipts commencing on October 1, 2003,
and thereafter on May 7 of each year during the term of the lease agreement as well as any
renewals. This annual Minimum Guarantee (equal to 5.5% per year of the Lessee's gross receipts)
is to be paid as monthly percentage rent to the City by the fifteenth of the preceding month together
with a statement of gross receipts for the preceding month. At the time of delivery to the City of the
We me cornrnitleclto providing excellent public seNice one/ sofety to oil who live, work, one/ ploy in our vibront, tropicol, historic community.
Internal Audit Report
Penrods Brothers Lease and Concession Agreement
January 28, 2010
Annual Statement of Gross Receipts, the Lessee shall pay any adjustment due the City. In addition,
the City and Penrods have established a target revenue threshold of $12,818,026. Once the
Lessee has met the target revenue, the monthly gross receipt percentage shall increase to 6.5%
and every year after.
The lease agreement responsibilities is divided between two departments, the administration and
enforcement of the lease agreement is handled by the Office of Asset Management, while the
Finance Department is responsible for the processing and recording of the monthly rental payments.
The following chart list the rental payments received from Penrods in the last three years.
*
FY 05/06 FY 06/07 FY 07/08 FY 08/09 Total
(Apr 06-Sept 06) (Oct 08 -Mar. 09)
Rental Payment $364,540.86 $790,256.32 $731,075.92 $349,791.37 $2,235,664.4 7
Parking 1,487.25 2,798.50 2,426.87 1 '143.92 7,856.54
Sales Tax* 25,431.22 55,304.23 51' 163.42 24,437.20 156,336.07
Total Payments $391 ,459.33 $848,359.05 $784,666.21 $375,372.49 $2,399,857.08
The State sales tax figure represents the total amount of sales tax remitted by the City to the State based on
Penrods rental payments. The City's financial system separates Penrods applicable sales tax payments into
two general ledger accounts (one for the Parking Operations Fund and one for the General Trust Fund).
OVERALL OPINION
Penrods operates with sufficient controls in place to ensure essential accuracy of sales reported,
and internal controls were found to be sufficient and the documentation maintained was well
organized and complete. In addition, sales taxes were properly remitted, transactions were properly
recorded in the City's financial system, insurance requirements were complied with and property
taxes were timely paid by the lessee. The following findings highlight the areas that need
improvement:
• Penrods did not increase their lease payment in the fourth year of the contract after meeting the
contracted target revenue threshold amount. However, this was subsequently discovered by the
Office of Asset Management and Penrods remitted payment for the amount due.
• Pen rods did not remit eight of the monthly gross receipts by the due date of the fifteenth day of
the following month. Neither Finance nor Asset Management subsequently invoiced Penrods for
any interest on these late payments.
• Penrods annual statements of the gross receipts certified by an independent Certified Public
Accountant were not received timely.
PURPOSE
The purpose of this audit was to determine whether the lessee paid the correct rent based upon
their supporting records, was otherwise in compliance with the lease agreement; and whether the
City received and correctly recorded all revenues and sales taxes and effectively monitored the
lease agreement.
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Internal Audit Report
Penrods Brothers Lease and Concession Agreement
January 28, 2010
SCOPE
1. Confirm by examination of the concessionaire's records that all remitted revenues for the
concession areas to include the rental equipment and lounging, the food and beverage
services were correctly calculated and remitted in accordance with the signed agreement.
2. Confirm that all monthly percentage rents paid to the City were received timely during the
audit period. The City's monthly minimum guarantee is due by the fifteenth of the month for
the proceeding month.
3. Confirm that the Finance Department receives the sales and use tax from the
concessionaire and remits it to the State.
4. Confirm that all transactions were properly recorded in the City's financial system.
5. Confirm that the annual statements of the gross receipts certified by an independent
Certified Public Accountant were timely submitted and the amounts reported therein agreed
with corresponding amounts previously report to the City.
6. Confirm that all insurance requirements of the lease agreement were complied with.
7. Confirm that all property taxes were timely paid to Miami Dade County.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding: Monitoring for Contract Provision of Targeted Revenue Thresholds
Gross receipts recorded on the lessee's books and records were adequately supported by
documentation and in agreement with the amounts reported to the City. However, Penrods
did not increase their lease payment in the fourth year of the contract after meeting the
contracted target revenue threshold amount.
Paragraph 4.2.1 of the concession agreement specifies that the monthly 5.5% of the
minimum guarantee amount should be increased to 6.5%, once the cumulative target
revenue of $12,818,026 has been reached. Paragraph 4.2.2 of the concession agreement
states once the target revenue threshold has been reached, the Concessionaire shall pay
the City in a lump sum, the difference between the 5.5% and 6.5% for the contract year the
target was met.
The target revenue threshold was met during the fourth contract year May 7, 2006 thru May
6, 2007; upon subsequent discovery by the Asset Management Department, the City notified
the Lessee in August 2008 of the amount due representing $393,490.32 in lease payments,
with an accumulation of interest of $105,941.86, totaling to $499,432.18.
On February 27, 2009, the City agreed to having Penrods pay $393,490.33, representing the
amount for past due minimum guarantee payments before April 23 2009. Furthermore in
this settlement, it was agreed that the past due interest of $105,941.86, would be reduced to
an amount of 80% or $84,753.39 allowing for monthly installments of $7,062.79 to be made
over a twelve (12) month period starting on May 1, 2009. To date, the Lessee has timely
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Internal Audit Report
Penrods Brothers Lease and Concession Agreement
January 28, 2010
paid the $393,490.33 and two Interest payments.
Recommendation
Going forward, the Office of Asset Management should establish a tickler system enabling
them to monitor for compliance for any revenue requirements within their agreements. The
City's Eden's Contract Management software can be utilized to better track compliance to
terms of the agreement.
Management Response:
Asset Management will work with Finance to monitor the timely submission of any revenue
requirements. Additionally, Asset Management is in the process of developing and
implementing a tracking system to monitor contract requirements.
2. Finding: Interest for Late Payments
In accordance with the agreement, the Lessee must submit each monthly gross receipts
payment by the fifteenth of the following month. During the audit period there were a total of
eight late payments by an average of four days based on review of the City's stamped
received date.
In accordance with Section 4.4 entitled "Interest for Late Payment" any payment not received
by the due date is subject to interest at a rate of (12%) per annum, from the due date of
payment until such time the payment is received. The calculation of interest not billed for
late payments during our audit period amounted to $690.77; this amount was based upon
calculating interest charges from the fifteenth of the month. An additional sixteen payments
are also considered to be late, however since the Finance department did not stamp the
date received, the City is not able to invoice for late payment.
Recommendation( s):
The Office of Asset Management should prepare a City bill for $690.77 for the interest due
for the above late payments. In addition, the Office of Asset Management should remind the
Lessee that all checks should be sent directly to the City's Finance Department.
Furthermore, the Office of Assets Management should coordinate with the Finance
Department to be notified on the receipts of payments so that payments can be monitored
for timely acceptance. Interest due on any late payments should be billed by the Office of
Assets Management.
Management Response:
The Office of Asset Management will notify and invoice Tenant's/Concessionaire's for late
payments. The Office of Asset Management will work with the Finance Department to
reinstitute the previous process of receiving monthly reports from the Revenue Manager
indicating all payments received by the Finance Department. Since said payments (and
corresponding financial reports) are sent directly by the payee, as required by contract, to
the Revenue Manager, this report to be generated by the Finance Department will assist the
Office of Asset Management in identify those entities that are not paying in a timely manner,
and notify same accordingly.
3. Finding: Submittal of Annual Statement of Gross Receipts
There is conflicting terminology in both the lease and concession agreements as to when the
Annual Statement of Gross Receipts are due and for what period the financial statements
should represent.
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Internal Audit Report
Penrods Brothers Lease and Concession Agreement
January 28, 2010
Section 15 of Pen rods' original lease agreement dated November 7, 1985 states "within sixty
(60) days after each fiscal year, Lessee shall deliver to the City a written annual statement of
the gross receipts for such fiscal year. Said statement shall be certified as true, accurate
and complete by Lessee, by and through a duly authorized independent Certified Public
Accountant (CPA)." There is no definition as to what period the fiscal year covers. On the
other hand, the third amendment to the lease agreement, dated February 25, 2004, under
section 13.3 refers to section 15 of the original lease agreement as to when the Annual
Statement is due. However, under section 13.3.2 of the same amendment to the lease, the
Lessee may have to pay an additional lump sum if it does not meet the minimum guarantee
payment "at the time of delivery to the City of the Annual Statement of Gross Receipts no
later than June 30, of each Lease year during the term, including renewal terms, of this
lease."
In addition, the corresponding concession agreement dated February 25, 2004, under
section 6 paragraph 3 states "that within 60 days after each contract year, the
Concessionaire shall submit to the City a written Annual Statement of Gross Receipts for
such contract year."
The Annual Statements of Gross Receipts submitted by the Lessee represented their fiscal
years ending December 31 5 t. The statements for 2006, 2007 and 2008 were received an
average of 55 days past the due date of 60 days. There was no correspondence between
the City and Penrods requesting these late statements. We compared the revenues
reported on these statements to the amounts reported to the City and found no exceptions.
With both the lease and concession agreements now requiring a settlement of actual rent
paid verse the minimum guarantee after each contract year based upon the receipt of
annual statements, we feel that the period of the Annual Statement of Gross Receipts
should be the contract year (May ih to May 6th). This will allow a better comparison of the
amounts reported during the contract year for both the lease and concession agreements.
Recommendation(s):
The City should request that going forward the period reported under the Annual Statement
of Gross receipts should be the contact year ending May 6th. The Office of Asset
Management should ensure that the CPA statements are received in a timely manner.
Meanwhile, the Finance Department should compare the certified figures with the reported
amounts for agreement. If there is a discrepancy between what was submitted and what
was reported by the CPA, inquiries should be made to see if the City is owed additional
money.
Management Response:
Asset Management will work with Finance to monitor the timely submission of any required
statements. Pending Tenant/Concessionaire's review and submission of comments, a
Letter of Understanding could be executed between the parties to the Agreements that will
clarify and set forth all future reporting due dates.
EXIT CONFERENCE
An exit meeting was held October 2, 2009 to discuss the audit report and to solicit management
responses noted above. Participants included Anna Parekh, Director, Office of Real Estate,
Housing & Community Development, Robert Reboso, Redevelopment Specialist -Asset
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Internal Audit Report
Penrods Brothers Lease and Concession Agreement
January 28, 201 0
Management, James Sutter, Internal Auditor and Laura Franco-Rubines, Assistant Internal Auditor.
Management responses were received thereafter and incorporated in the report. The
Tenant/Concessionaire was provided a copy of the preliminary report. All were in agreement with
the contents of this report.
JS:LR:Ir
(Audit performed by Laura Franco-Rubines, Assistant Internal Auditor)
F:\obpi\$AUD\INTERNAL AUDIT FILES\DOCOB-09\REPORTS-FINAL\ Penrods Lease Agreement.doc
cc: Hilda Fernandez, Assistant City Manager
Anna Parekh, Director, Office of Real Estate, Housing & Community Development
Robert Reboso, Redevelopment Specialist-Asset Management
Jack Penrod, President, Penrods Brothers, Inc.
Patricia Walker, Chief Financial Officer
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