City Operated Commercial Leases1\AIAMI.BEACH
BUDGET 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 PerfACJ. r ance Improvement Director
James J. Sutter, Internal Auditoro<"""'#
October 6, 2011
City Operated Commercial Leases
October 1, 2007, through March 31, 2010
This report is the result of an audit performed on the Leases of city-owned properties in accordance
to our Audit Plan. Lease agreements to be reviewed in this audit are those where the City receives
a "flat rent" payment and includes tenants in the 777 Building, Historic City Hall, and the facilities
located at 8128 Collins Avenue.
INTRODUCTION
Leasing responsibilities for the city-owned properties included in this audit are managed by the Real
Estate, Housing & Community Development (REHCD) Department. At the time of this audit, the 777
Building has one vacant space of the four leasable units on the ground floor; Historic City Hall has
three vacant spaces on the third, fourth and fifth floors; and the 8128 Collins Avenue facilities are
being occupied jointly by Log Cabin Enterprises & Sunrise Community Services.
New tenant negotiations are also handled by REHCD; offers made by the tenants interested in
leasing space from these locations are evaluated for reasonableness and presented to the City
Commission for approval before the lease agreement can be executed.
Invoices for rent payments due are prepared by REHCD staff around the middle of the month
preceding the due date. These invoices are reviewed/approved by the Redevelopment Specialist in
the department for adequacy and approved for printing and mailing by a Revenue Supervisor in the
Finance Department. When tenants' rent payments arrive in the Finance Department, payments are
matched to the oldest invoice for that tenant. If payments are not current, they are taken to the
Cashiers' Office for payment processing. These payments consist primarily of base rent and/or
maintenance and operational charges (CAM), and sales tax, but they may also include real estate
taxes, insurance charges, and parking charges. The Finance Department Revenue section is
responsible for making the entries to the appropriate general ledger accounts based on these
various components of the rental payment.
Rental revenues are recognized as invoices for rent payments are generated and posted to
accounts receivable in the general ledger. When rent payments are received and processed they
are credited to this account to reduce the accounts receivable balance.
The following table describes the current tenants and basic information about their leases:
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
Tenants of 777 Building
Vanexa Enterprises Corp. (Unit# 1)
d/b/a Steve's Beauty Salon
Vacant (Unit #2)
SB Waxing/Roma Waxing (Unit# 3)
Damian J. Gallo & Assoc. (Unit# 4)
d/b/a Permit Doctor
Klara Gershman, MD (Suite# 400)
Tenants of Historic Cit~ Hall
Miami-Dade County Court & Clerk
MDGLCC Foundation
Miami Beach Film Society
d/b/a Miami Beach Cinemateque
Paul A. Sack
Gem cor
Immunity
8128 Collins Avenue
Log Cabin Enterprises/Sunrise Comm.
Lease Term Term
Years Year
5 4
n/a n/a
3
5 4
3
n/a 19
3
3
3
3
3
3
(1) Annual rent amounts for contracts executed through 3/31/2010
OVERALL OPINION
Square Annual
Minimum Footage Rent (1)
1,326 $ 39,528
1,803 $ 0
1,291 $ 35,465
1,269 $ 42,544
1,926 $ 54,121
6,285 $
2,543 $ 23,319
2,523 $ 23,136
660 $ 7,121
1,518 $ 16,076
3,036 $ 38,223
54,500 $ 7,200
$ 286,734
For the most part, current lease agreements between the City and tenants of city-owned properties
are in compliance with the terms and key non-financial provisions of the leases. Most tenants have
obtained their required annual business tax receipt and secured the required insurance coverage.
However as a result of our testing, we identified some deficiencies in reference to the management
and rental payment processes for the leasing of city-owned properties reviewed in this audit.
1. Vanexa Enterprises d/b/a Steve's Beauty Salon, a tenant of the 777 Building, consistently
makes late rent payments and currently owes three months of rent totaling $15,744.78, for
March through May of 2010, however the City has not initiated any official collection efforts
from this tenant. We also found that five months of billed rent were adjusted, but the Finance
Department has not yet provided evidence that the adjustments were properly justified.
2. The upper floors of the 777 Building are not assessed ad valorem taxes because the space is
supposedly used for City offices and other non-commercial purposes. However, a portion of
the payment made by a former tenant of the 4 ttl floor was allocated and posted to the property
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
taxes general ledger account. Concurrently, office space leased to five new tenants for
commercial purposes at the Historic City Hall building and one at the 777 building are not
being assessed any allocation of ad valorem taxes as a result of this building being exempted.
3. The sales tax amount for the December 2009 rent payment of Rom a Waxing was erroneously
posted to the parking revenue general ledger account.
4. The amounts currently used to allocate operational and maintenance expenses to tenants of
the 777 Building and Historic City Hall are estimates without evidence of support. The Miami-
Dade County Court and Clerk located at Historic City Hall only pays a charge for these
expenses that represent approximately $.21 per square foot, compared to other tenants of that
building paying between $9.20 and $11.08 per square foot of space.
5. The insurance allocation used for the 777 Building and Historic City Hall represents only a
premium amount estimate provided by the City's Risk Manager. Also, the insurance premium
estimate used to assess the square footage allocation for tenants of Historic City Hall is an
incorrect amount.
6. We found that a tenant of the 777 Building paid the Business Tax Receipt (BTR) renewal for
the current year, but a late payment penalty was not collected along with the payment. There
are also two tenants of Historic City Hall that have not obtained their current BTRs.
7. Lease agreements for the 777 Building and Historic City Hall currently require some insurance
coverage that is considered unnecessary by the City's Risk Manager.
8. Written policies and procedures for the administration and monitoring of City leases need to be
established.
Additional details regarding the above mentioned and other areas in need of correction are provided
on the Findings, Recommendations, and Management Responses section of this report.
PURPOSE
To ensure that the management and leasing processes for the tenants of the 777 Building, Historic
City Hall, and the facility used by Log Cabin Enterprises are in compliance with the terms and
provisions of their respective lease agreements and making their rent payments in a timely manner.
SCOPE
1. Review all current lease agreements between the City and tenants of city-owned properties to
confirm that they are in compliance with the terms and key provisions of the leases.
2. Confirm that all lessees have obtained their required annual business tax receipt (BTR).
3. Confirm that all lessees have secured the required insurance coverage and have been
approved by the City's Risk Manager.
4. Confirm that the all lease monthly rent payments and common area maintenance (CAM)
charges are billed in accordance with the lease, including all the consumer price index (CPI)
increases as specified in the lease agreement.
5. Confirm that all monthly rent payments were timely received and correctly reported in the City's
Financial System.
6. Review policies and procedures in place for the administration and monitoring of City leases
and determine that these are being followed.
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
FINDINGS, RECOMMENDATIONS, AND MANAGEMENT RESPONSES
1. Finding -Late Charges on Rent Payments
We noted that one tenant, Vanexa Enterprises d/b/a Steve's Beauty Salon, consistently made
late payments during the audit period reviewed. This tenant's lease agreement, assumed
when the City purchased the 777 Building, contains a late payment charge clause (section 8)
stating that the tenant shall immediately pay landlord each and every payment that is not paid
within five days of the due date, a service charge equal to 10% of the past due sum plus an
additional charge of $25 for every day thereafter until all sums due are received by landlord.
Our testing of this tenant's rent payments revealed the following:
a. As of 5/10/10, the tenant has not made the rent payments for the months of March, April
and May 2010 (invoices# 15606, 15808, 16233) totaling $15,744.78.
b. The rent due for September 2009 (invoice # 13346) was reduced by an invoice
adjustment for $5,389.79 on 1/12/10. There were four other invoice adjustments made
on 6/5/09, totaling $20,152.92, for the months of November and December 2008, and
February and May 2009. These adjustments were discussed at a meeting with
members of the Finance Department on 5/10/10. Proper support and clarification to
determine the adequacy of these entries is pending their research.
c. Section 8 of the agreement also allows the City to assess a fee for returned checks (the
greater of $40 or 5% of amount due). This was not done with the check returned for the
December 2009 payment; the estimated fee not charged is $262.40 or 5% of $5,248.
Recommendation
The City should initiate past due rent collection efforts with this tenant for the three months of
overdue rent payments totaling $15,744.78. If the reasonableness of this process is not
considered appropriate due to the current economic conditions, this matter should be
presented to the City Commission for an acceptable solution for delinquency on rental
payments. The Finance Department should complete their research of the five invoice
adjustments reported above to determine if these were properly done or whether the five
months of rent reduced by the adjustments needs to be added to the overdue rental payments.
Additionally, the tenant should be billed for the allowed returned check fee.
Management's Response -REHCD
The Tenant vacated the leased premises over the 2010 Memorial Day weekend thus
defaulting on the terms of its lease agreement. As required pursuant to the lease, on June 1,
2010, a Notice of Default was issued requesting payment of all past due monies (including
rent payments due all corresponding penalties and interest). Additionally, a Notice of
Termination was sent on June 4, 2010. Additional attempts to reach this Tenant have been
unsuccessful.
Management's Response-Finance
The tenant's account has been reconciled and properly reflects amount due to the City.
2. Finding -Real Estate Taxes for City owned properly.
Through November 2008, the City paid real estate taxes for the "777 Building" as a single
property structure. After the building was turned into an office condominium starting with the
tax year that commenced December 2008, ad valorem taxes are only being paid for the four
commercial units on the ground floor. The upper floors are not assessed ad valorem taxes
because the space is used for City offices, non-profit and community organizations. However,
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
our review of rent payments for 5 of 6 months tested revealed that a portion of the payment
made by former tenant Raben, Feldman & Associates, M.D., P.A., was allocated and posted to
the property taxes general ledger account (#601-7000-229218). Further testing showed that
all payments made from December 2008 through September 2009 were also recorded in this
manner, totaling $5,130.16 for this period. Starting October 2009, this suite was leased to
Klara Gershman, M.D., P.A., but no property tax allocation is included in the billing to this
tenant.
In addition and subsequent to the renovation completion of Historic City Hall, office space in
the building is currently being leased to five new tenants for commercial purposes. The new
tenants are not being assessed a property tax allocation because the building has a tax
exempt status.
Recommendation
Since an allocation of real estate property taxes due is not currently required for the upper
floors of the 777 Building, an adjustment of $5,130.16 should be made to the appropriate
general ledger accounts for the ten-month period indicated above. In addition, the tax exempt
status for the upper floors of this building, in particular the one currently leased in part to a
commercial tenant, and leased spaces at Historic City Hall should be evaluated by the City's
Administration to determine whether this may, in the future, affect the current tax exempt
status of the properties.
Management's Response-REHCD
REHCD will coordinate the $5,130.16 adjustment in the appropriate general ledger account
regarding the payment made by the former tenant. The City Administration will evaluate the
tax exempt status for the upper floors of 1701 Meridian Avenue (which is the office portion of
the "777 building") as well as the tax exempt status for the leased spaces at Historic City Hall.
It should be noted that the Lease Agreements between the City and Klara Gershman, M.D.
PA, for use of space at 1701 Meridian Avenue, as well as the leases for use of space in
Historic City Hall, contain language requiring tenants to pay property taxes, including real
estate taxes, assessments, and special assessments of any kind which may be imposed upon
the premises. Furthermore, the leases contain language which states that tenants shall also
pay any expenses incurred by the City in obtaining a reduction of any such taxes or
assessments
3. Finding -Incorrect Posting of Sales Taxes Paid
The amount of sales tax ($300.23) included in the December 2009 rent payment for Roma
Waxing was erroneously posted to the parking revenue general ledger account (#480-8000-
344506) instead of the sales tax account (#601-7000-229047). This was brought to the
attention of the Real Estate, Housing & Community Development Department.
Recommendation
An adjustment of $300.23 should be made to the general ledger accounts affected by the
erroneous entries.
Management's Response -REHCD
REHCD will follow-up and coordinate with the Finance Department.
Management's Response-Finance
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
An adjustment of $300.23 will be made to the general ledger accounts affected by the data
input error.
4. Finding -Al/ocation of Operational and Maintenance Expenses
The amounts currently used to allocate operational and maintenance (CAM) expenses to
tenants of the 777 Building and Historic City Hall do not have a documented source to support
them. We were informed that these were provided during 2009 by the former Asset Manager.
Additionally, the source of CAM charges for the Miami-Dade County Court and Clerk located
at Historic City Hall are not stated on the original contract or supported by any reasonable
estimate. This tenant pays the fixed amount of $1,301.83 per month for CAM, which
represents approximately $.21 per square foot based on the amount of space they occupy in
the building (6,285 sq. ft.). In comparison, other tenants pay between $9.20 and $11.08 for
operational expenses consisting of water utilities, maintenance, repairs, landscaping, and
garbage service.
Recommendation
A report of current operational and maintenance charges should be requested periodically
from the Property Management Division to ensure these expenses are being properly
allocated and recovered from the tenants of these two buildings. Once a current expense
report is obtained, the amount of CAM charges allocated for the space leased to the County
should be renegotiated accordingly.
Management's Response (Property Management)
Property Management Division will comply with the audit recommendation, i.e., generate a
current operational and maintenance report of charges to include utilities and contract services
for the 777 Building and Historic City Hall. Report will be provided to both REHCD and Internal
Audit prior to the end of this Fiscal Year.
Management's Response -REHCD
Upon the receipt of Property Management's report, the Administration and REHCD should
discuss the impact, if any, said report may have on the City and its Tenants including the
feasibility of implementing any changes during this depressed real estate market I economic
environment.
5. Finding -Allocation of Insurance Expenses
The insurance allocation used for the 777 Building and Historic City Hall comes from a
premium amount estimate provided to the Real Estate, Housing & Community Development
Department by the City's Risk Manager. They informed us that there is no specific premium
paid for insuring these buildings, so the estimate only represents a portion of the premium paid
for an "umbrella policy' that covers all City buildings and structures. In addition, the insurance
premium estimate used to assess the square footage allocation of tenants of Historic City Hall
is incorrect since it does not correspond to the amounts provided by the Risk Manager.
Recommendation
We recommend that the adequacy of this insurance premium estimate be reviewed and
approved by the City Administration to ensure the costs associated with insurance coverage
are reasonably recovered from tenants of city-owned properties.
Management's Response -REHCD
REHCD will work with the Administration and Risk Management to ensure the costs
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
associated with insurance coverage are reasonably recovered from tenants of city-owned
properties in all future agreements.
6. Finding -Business Tax Receipts (BTRs)
We reviewed the status of Business Tax Receipts (BTR) in the Eden system for tenants of the
selected city-owned properties to confirm their licenses are current. This review revealed that
Klara Gershman, M.D., P.A., a tenant at the 777 Building, paid BTR renewal fees on 2/17/10,
but a late payment penalty of 25%, approximately $57.75, was not assessed or collected when
the payment was made. For Historic City Hall, we found that Paul A Sack, a tenant since
3/1/10 has not obtained the required BTR or completed an application for this; and the BTR for
Gemcor, Inc. remains pending.
Recommendation
The Finance Department should bill the tenant for the late charge penalty not collected. In
addition, follow up efforts should be initiated by the appropriate departments to ensure the
other two tenants obtain their required BTR(s).
Management's Response-REHCD
REHCD will follow-up and coordinate with the Finance Department.
Management's Response -Finance
Lists of all unpaid Business Tax Receipt renewals are periodically sent by the Finance
Department to the Code Compliance Division for enforcement.
7. Finding -Insurance Coverage Requirements
During our evaluation of the adequacy of insurance coverage for tenants of city-owned
properties reviewed, we found that all tenants, except Immunity and Log Cabin Enterprises,
did not show evidence of Workers Compensation and Employers Liability on their certificates
of insurance. Also, none of the tenants had secured all-risk protection for leasehold
improvements as required per their agreements. This was brought to the attention of the
City's Risk Manager who indicated that the City has no responsibility or enforcement capability
for Workers Compensation, and he added that the City purchases property insurance for these
locations, which includes coverage for improvements. In summary he indicated that in his
opinion there is no need to include these as insurance coverage requirements in the lease
agreements for city-owned properties.
Recommendation
The City should initiate the necessary amendments to these lease agreements to remove
unnecessary insurance coverage requirements, per the Risk Manager's recommendations.
Management's Response -REHCD
REHCD will work with the Administration, Legal, and Risk Management to ensure that all
future agreements do to contain unnecessary insurance requirements.
8. Finding -Policies and Procedures
During the audit it was noted that there are no written procedures for the function, of
administering and monitoring of City Leases. Policies and procedures serve both as a
benchmark to measure individuals' performance and as an instruction manual in the event
employees' change.
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Internal Audit Report
City Operated Commercial Leases
October 6, 2011
Recommendation
Written policies and procedures for the administration and monitoring of City leases need to be
established.
Management's Response-REHCD
REHCD agrees.
EXIT CONFERENCE
An exit meeting was held to discuss the audit report and to solicit management responses noted
above. Attendees were Anna Parekh, Director, Real Estate, Housing & Community Development,
Robert Reboso, Redevelopment Specialist, Duane Knecht, Property Management Division Director,
Georgie Echert, Assistant Finance Director, Manny Marquez, Finance Revenue Manager, James
Sutter, Internal Auditor and Luis Lopez, Internal Audit Contractor. All were in agreement with the
contents of this report.
JJS:LL:II
Audit performed by Luis Lopez, Internal Audit Contractor
F:\OBPI\$AUD\INTERNAL AUDIT FILES\DOC09-10\REPORTS-FINAL\City Operated Commercial Leases.doc
cc: Hilda Fernandez, Assistant City Manager
Anna Parekh, Director, Real Estate, Housing & Community Development
Patricia D. Walker, Chief Financial Officer
Georgie Echert, Assistant Finance Director
Beckman, Fred, Public Works Director
Duane Knecht, Property Management Division Director
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