Smith and Wollensky Lease Agreement/V\I.A/vA~i BE CH
BUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division INTERNAL AUDIT REPORT
TO:
VIA:
FROM:
Jorge M. Gonzalez, City Manager ___ /Q' _
Kathie G. Brooks, Budget and Performance Improvement Director ;1!1>
James J. Sutter, Internal Audit~~-
DATE:
AUDIT:
PERIOD:
April13, 2010
Smith and Wollensky Lease Agreement
May 1, 2006 to April 30, 2009
This report is the result of the regularly scheduled audit of the lease agreement between the City
and One Washington Avenue Corporation, operating the Smith and Wollensky restaurant located at
South Pointe.
INTRODUCTION
By Resolution No. 85-18223, the City of Miami Beach entered into a lease agreement with Specialty
Restaurant Corporation dated November 7, 1985, for the restaurant known as South Pointe Seafood
House. On September 2, 1993, the Mayor and City Commission approved Resolution No. 93-20899
for an assignment of the Lease from Specialty Restaurant Corporation, as assignor, to One
Washington Avenue Corporation. One Washington Avenue Corporation filed for bankruptcy on July
26, 1996. Resolution No. 97-22359 dated April 16, 1997 was for approving an addendum to the
lease agreement subject to the final negotiations between the City of Miami Beach and the New
York Restaurant Group LLC (Successor in interest to One Washington Avenue Corporation), for the
purpose of opening a restaurant to be known as Smith and Wollensky (S&W).
An Addendum to the Lease was executed on June 1, 1997 between the City of Miami Beach and
One Washington Avenue Corporations. On April 3, 1998 the City approved the additional two (2)
ten year renewal options extending Smith and Wollensky lease to expire November 6, 2024. The
lessee agrees to pay the City a scale percentage (2.5%-3.5%) of its gross receipts or a minimum of
$2,500 per month. The lessee has also agreed to pay a parking fee equal to $6,250 per month
whereby all parking fees paid by the lessee shall be credited against lessee's percentage rent
obligations. The lessee shall also pay $9,600 parking impact fee; half of all Parking Impact Fees
paid by lessee shall be credited against lessee's percentage rent obligations. During the first ten
(1 0) year renewal period starting on November 7, 2004, the lessee shall pay to lessor the additional
sum representing a Renewal Bonus fee of $25,000 at the end of each applicable lease year. The
second ten (1 0) year renewal period, this Renewal Bonus Fee shall increase to $65,000 per year).
OVERALL OPINION
The lessee was in general compliance with the terms of the lease agreement. Gross receipts
recorded on the lessee's books and records were adequately documented and in general
agreement with the amounts reported to the City. However, the following items highlight those areas
in need of improvement by both parties to the lease:
• Percentage rent payments were underpaid by the lessee by an error made in calculating the
parking fees from April 2008 to May 2009 and incorrectly applying the wrong percentage rate for
the months of March 2008 and 2009. In addition, minor discrepancies were noted between the
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Internal Audit Report
Smith and Wollensky Lease Agreement
April 13, 2010
reported amounts to their supporting POS systems. The total of these items represented
$98,412.21 which was paid to the City during the audit.
• The lessee had not paid their parking impact fees since March 2001 for the year ending
December 31, 2001. Upon notification, the lessee paid the City $38,400 from the years 2002
through 2009.
• The lessee did not submit the annual statements of gross receipts required by the lease
agreement. In lieu of these statements, the lessee submitted when asked a letter specifying the
gross receipts collected in each year.
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.
SCOPE
1. Confirm by examination of the concessionaire's records that all receipts, from the sale of
food, alcoholic or non alcoholic beverage, on site retail sales, space rental or form any
source 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 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: Difference Noted in Calculating Percentage Rent due on Monthly Repotts of Gross
Receipts
For the most part, 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, it was noted that three errors were made in calculating the rental amounts
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Smith and Wollensky Lease Agreement
April 13, 2010
due to the City. The underpayments were as follows:
a. Paragraph 7 of the amended lease agreement dated June 1, 1997 states the percentage
rent to be paid by Lessee is as follows (2.5% to $2,500,000, 3% to $3,000,000 and 3.5%
over $3,000,000. In both March 2008 and March 2009, Smith and Wollensky paid the
percentage rent based on the 3% instead of the 3.5%. This resulted in an
underpayment of $3,845.87 ($3,594.28 plus sales tax of $251.59).
b. Paragraph 8 of the amendment to the lease dated June 1, 1997, reads the lessee is
entitled to 105 parking spaces immediately adjacent to the premises. Upon
commencement of the rent, the lessee shall pay the Lessor a parking fee of $6,250 per
month. All Parking fees paid by the Lessee shall be credited against Lessee's
percentage rent obligations. For the period of April2008 through May 2009 (14 months),
S&W reduced the percentage rent paid by not adding the required Parking fee while
applying the credit for the parking fee in error. This resulted in an underpayment of
$93,625.00 ($87,500.00 plus sales tax of $6,125.00).
c. In addition, an analysis between the amounts reported to the City and Smith and
Wollensky's POS system resulted in variances over the audit period. Smith and
Wollensky had incorrectly posted the amounts from the POS system to their General
Ledger. This resulted in a net underreporting of the percentage rent to the City for
amount equal to $941.34.
Upon notification of these mistakes, S&W remitted the monies due for the above amounts
totaling $98,412.21 on August 26, 2009. While these amounts included both the percentage
rent and parking fees, this payment was placed into the General Fund since the Finance
Department has initially transferred the parking fees to the parking fund.
Recommendation
Office of Asset Management should verify the calculation of remittance on a periodic basis,
and advise the Lessee of any discrepancies that need to be resolved. Any outstanding
amounts due and related Interest should be billed by the Office of Assets Management. It is
also recommended that Asset Management coordinate with the Finance Department to
calculate any interest due on the above amount paid and send a City bill to Lessee.
Management Response
The Office of Asset Management agrees with the first part of the recommendation and will
follow-up accordingly. However, the Lease Agreement does not provide for the assessment
of interest and/or penalty fees.
2. Finding: Parking Impact Fees
Paragraph 9 of the Addendum to Lease regarding parking impact fees states that "Lessee
shall pay lessor, annually the amount of $9,600 as payment of all current applicable parking
impact fees, as required by the City Ordinance No.89-2665, Section 7-7, as same may be
amended from time to time. The $9,600 parking impact fee shall represent payment for use,
as made available to Lessee, of an additional 32 parking spaces thorough the term of the
lease, making the total number of spaces available to Lessee a total of 137 spaces.
Notwithstanding anything to the contrary contained in the Lease, half of all parking impact
fees paid by the Lessee, as same may be amended from time to time, shall be credited
against Lessee's percentage rent obligation."
Internal Audit inquired and it was determined that the last time that the parking impact fees
had been paid was in March 2001 for the 2001 year. Furthermore, Smith and Wollensky
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Internal Audit Report
Smith and Wollensky Lease Agreement
April 13, 2010
were under the impression, that an invoice billed by the Parking Department on a monthly
basis for an additional 40 spaces covered the parking impact fee. The City's Parking
Department indicated that the invoice was for separate spaces not associated to with the
parking impact fee. Therefore, Smith and Wollensky owed a total of $38,400 in parking
impact fees. On August 26, 2009 the lessee remitted the impact fees due. In subsequent
conversation with the Planning Department it is believed that the amount charge to Smith
and Wollensky was incorrectly done since there had been increases in the Parking Impact
fee that was not taken into consideration.
Recommendation(s):
The City's Planning Department should ensure that the parking impact fees are invoiced on
a yearly basis. It is further recommended that the Planning Department revisits the parking
impact fees for Smith and Wollensky since this is a 1985 agreement and the seating
capacity may have increased. It is further recommended that the Planning Department goes
back and invoice Smith and Wollensky for the difference of the increases.
Management Response:
Planning Department staff is working with the Finance Department to refine and coordinate
the billing function for Parking Impact Fees. While the Planning Department keeps the
records for this program and bills for the one-time payments, when yearly billing is involved
the Planning Department will work with the Finance Department to ensure proper billing of
the yearly parking impact fees due in future. Planning Department staff has also verified the
amount required to satisfy the yearly parking impact fee obligation is now actually $33,600
per year, based upon the most recent increase in the adopted parking impact fee enacted
December 6, 2006. The Auditor may wish to obtain the dates of the last few increases to
this fee, which went from $300 at the time the agreement was enacted, up to $600, and then
to the current $1,050 in force as of December 2006. This would increase the actual amount
of parking impact fees owed to the City. The Planning Departments agrees with the
recommendation to invoice Smith and Wollensky the difference.
3. Finding: Annual Statement of Gross Receipts
Paragraph 13 of the 1985 lease agreement, Records, Accounts, Statements and Audits,
specifies that "within sixty (60) days after each fiscal year, Lessee shall deliver to Lessor a
written annual statement of the gross receipts for such fiscal years. Said statement shall be
certified as true, accurate, and complete by Lessee, by and through a duly authorized officer
of Lessee."
During the audit period no annual statement of gross receipts has been received from the
Lessee. However during the audit, the Lessee was informed and they immediately
submitted a letter, as the annual statements of gross receipts for each period. Amounts were
traced to the amounts submitted and no exceptions were noted.
Recommendation(s):
The Office of Asset Management should notify the Lessee in writing that, a certified
statement of gross receipts must be delivered to the City within 60 days (by November 2ih)
after each of the Lessee's fiscal year ending September 28th. The Office of Asset
Management should ensure that the certified 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 certified statement, inquiries should be made to see if the City is owed
additional money.
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Management Response:
The Office of Asset Management agrees with the recommendations and will follow-up
accordingly.
EXIT CONFERENCE
An exit meeting was held 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 Management, James Sutter,
Internal Auditor and Laura Franco-Rubines, Assistant Internal Auditor. Responses were solicited
from both the Finance and Planning Departments. 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)
F:\obpi\$AUD\INTERNAL AUDIT FILES\DOCOB-09\REPORTS-FINAL\Smith and Wollensky Audit.doc
cc: Hilda Fernandez, Assistant City Manager
Jorge Gomez, Assistant City Manager
Anna Parekh, Director, Office of Real Estate, Housing & Community Development
Robert Reboso, Redevelopment Specialist -Asset Management
Richard Lorber, Acting Planning Director
Patricia D. Walker, Chief Financial Officer
Shauna Grant, Senior Accountant, Smith and Wollensky Restaurant Group
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