c: The Honorable Mayor Joe Carollo Commissioner Tomas Regalado Commissioner Arthur E. Teele, Jr. Commissioner Johnny L. Winton Commissioner Joe M. Sanchez Commissioner Wifredo (Willy) Gort Members of the Audit Advisory Committee Bayside Center Limited Partnership Genaro “Chip” Iglesias, Chief of Staff, City Manager’s Office Dena S. Bianchino, Assistant City Manager, Planning, and Development Robert J. Nachlinger, Assistant City Manager, Finance and Administration Frank K. Rollason, Assistant City Manager, Operations Alejandro Vilarello, City Attorney Laura Billberry, Director, Office of Asset Management Christina Abrams, Director, Conferences, Conventions and Public Facilities J. Scott Simpson, CPA, Director, Finance department Linda M. Haskins, CPA, Director, Management and Budget department Walter F. Foeman, City Clerk File

AUDIT REPORT BASIDE CENTER LIMITED PARTNERSHIP,

(BAYSIDE MARKET PLACE) FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 31, 2000

TABLE OF CONTENTS

INTRODUCTION .............................................................................................................. 1

SCOPE AND OBJECTIVES.............................................................................................. 2

METHODOLOGY ............................................................................................................. 3

AUDIT FINDINGS IN BRIEF........................................................................................... 4

BAYSIDE CENTER LIMITED PARTNERSHIP ......................................................... 4 THE RETAIL LEASE AGREEMENT IS NOT IN THE CITY’S BEST ECONOMIC INTEREST. .................................................................................................................. 4 ADDITIONAL PERCENTAGE RENT DUE TO THE CITY FROM THE OPERATION OF THE PARKING GARAGE. ............................................................ 6 STATE SALES/USE TAX REFUND DUE TO THE CITY. ......................................... 7

AUDIT FINDINGS AND RECOMMENDATIONS ......................................................... 8

BAYSIDE CENTER LIMITED PARTNERSHIP ......................................................... 8 THE RETAIL LEASE AGREEMENT IS NOT IN THE CITY’S BEST ECONOMIC INTEREST. .................................................................................................................. 8 ADDITIONAL PERCENTAGE RENT DUE TO THE CITY FROM THE OPERATION OF THE PARKING GARAGE. .......................................................... 13

FINANCE DEPARTMENT ............................................................................................. 19

STATE SALES/USE TAX REFUND DUE TO THE CITY. ....................................... 19 Exhibit I ............................................................................................................................ 24

1

INTRODUCTION

On December 7, 1984, the City Commission passed and adopted Resolution No. 84-

1341.3, which authorized the City Manager to execute an Agreement between Bayside

Center Limited Partnership (BCLP) and the City of Miami, for the purpose of developing

a portion of Bayfront Park. On January 14, 1985, the City, and BCLP entered into two

lease Agreements. One of the Agreements leased a portion of Bayfront Park to BCLP for

the development and operation of restaurants, fast-food services, retail stores, markets, and

entertainment facilities. The other Agreement leased another portion of the Bayfront Park

to BCLP for the construction of a parking garage to be used by those visiting Bayfront

Park and BCLP facilities. The initial term of the two lease Agreements is forty-five (45)

years, commencing on the first day of the month after the Possession Date. BCLP was

granted the option to renew the two lease Agreements for two additional terms of fifteen

(15) years each. The two lease agreements have undergone several amendments.

The consideration for the lease Agreement pertaining to the construction and operation of

the retail facilities is the greater of (a) thirty-five percent (35%) of Net Available for

Distribution or (b) the Minimum Base Rental for each Rental year as indicated in Section

2.5 of the Agreement. The consideration for the lease agreement pertaining to the

construction and operation of parking garage is (a) $10,000 annual basic rent, (b) plus

additional $80,000 of rent payable, up to the extent there is Net Income Available for

Distribution, and (c) fifty percent (50%) of the remaining Net income Available for

Distribution, if any, after payment of the Annual Basic Rental, Annual Additional Rental,

and after BCLP has been reimbursed up to $90,000 for any negative cash flow previously

earned by BCLP.

The Office of Asset Management (OAM) is responsible for monitoring the compliance of

the Agreements. This report describes the results of an audit to determine the Lessee’s

compliance with the terms of the agreements.

2

SCOPE AND OBJECTIVES

As part of our oversight responsibilities, the Office of Internal Audits (OIA) performs

financial and operational audits to determine the extent of compliance with provisions of

contracts, programs, and/or lease agreements between the City and private companies

and/or other governmental entities. The scope of our audit focused primarily on whether

Bayside Center Limited Partnership (BCLP) complied with the contractual provisions of

the lease agreements between the City and BCLP. The audit also included examinations

of various transactions to determine whether they were executed in accordance with

governing provisions of City Codes, and other guidelines. The examination covered the

period January 1, 1998, through December 31, 2000. In general, the audit focused on the

following five broad objectives:

• To review the reliability and integrity of BCLP’s financial accounting records and

the means and/or the basis used to identify, measure, classify, and report Rental

Income and Operating Expenses.

• To determine whether BCLP remitted the correct amount of revenues due to the

City and also whether the amounts remitted to the City were deposited into the

City’s treasury and also properly recorded in the City’s financial accounting

system.

• To determine whether adequate internal control procedures were maintained.

• To determine whether BCLP complied with provisions of the lease Agreements.

• Other procedures as deemed necessary.

3

METHODOLOGY

We conducted our audit in accordance with generally accepted auditing standards and the

Standards for the Professional Practice of Internal Auditing, issued by the Institute of

Internal Auditors. However, our Office has not gone through the required peer review

process. To obtain an understanding of the internal controls, we interviewed appropriate

personnel, reviewed applicable written policies and procedures, and made observations to

determine whether the prescribed controls had been placed in operation. The audit

methodology included the following:

• Obtained sufficient understanding of the internal control policies and procedures

and determined the nature, timing and extent of substantive tests necessary and

performed the required tests.

• Determined compliance with all the objectives noted on page 2.

• Performed other audit procedures as deemed appropriate.

AUDIT FINDINGS IN BRIEF

4

BAYSIDE CENTER LIMITED PARTNERSHIP

THE RETAIL LEASE AGREEMENT IS NOT IN THE CITY’S BEST ECONOMIC INTEREST.

Our review of Bayside Center Limited Partnership’s (BCLP) financial accounting records

disclosed that for the period 1987 through 2000, BCLP had exceeded the total amount of

the Developers Equity Investment accounts to be recouped by $4,549,571. The excess

amount recouped was due to BCLP’s interpretation of how the Developer’s Equity

Investment account should be accounted for. BCLP Vice President and Deputy General

Counsel, contends that the Agreement allows BCLP to deduct ten percent (10%) of its

total cumulative Developer’s Equity Investment Account from “Net Operating Income”

as a “return on its investment”. Additionally, he stated that the concept of

“Amortization” is not provided in the lease Agreement nor in generally accepted

accounting principles as it relates to the lease transactions. However, the Agreement

does not provide for the term “return on its investment” rather uses the term “un-

recouped” as it relates to Developer’s Equity Investment Account. Financial Accounting

Standard Board (FASB) Statement number 13, Accounting for Leases (generally

accepted accounting principle), provides that leasehold improvements be depreciated for

a specific period of time. There is no Section in this Statement or any other official

accounting pronouncement that provides for a “return on its investment” as it relates to

lease transactions. Therefore, the total cumulative Developers Equity Investment should

be recouped from “Operating income” until the total amount invested is fully recouped,

and thereafter, the deduction of the respective equity components should cease.

Although the Net Income Available for Distributions (NIAD) were understated for the

period 1997 through 2000, as a result of the excess amount of Developer’s Equity

Investment account recouped, the City would still not earn additional revenue during

those periods, due to the provisions of Section 2.5 (a) of the lease Agreement. This

Section of the Agreement provides that if 35% of Net Income Available for Distribution

is less than the Minimum Base Rental, the difference shall be credited to the Developer in

an account known as the “Cumulative Credit Balance Account.” The annual rental paid

5

to the City did not exceed the minimum amounts due from the inception of the lease

Agreement through the rental year ended December 31, 2000 because 35% of Net

Income Available for Distribution (NIAD) did not exceed the minimum amounts except

for the rental year, 2000. In the calendar year 2000, 35% of NIAD totaled $1,020,300

compared to the minimum rent of $1 million. In accordance with Section 2.5 of the

Agreement, the Cumulative Credit Balance Account (CCBA) should offset the $20,300

difference. Our calculations/analysis indicate that the CCBA, as of December 31, 2000,

totaled $18,456,000.

ADDITIONAL PERCENTAGE RENT DUE TO THE CITY FROM THE OPERATION OF THE PARKING GARAGE. Our review of BCLP’s financial accounting records for the parking garage operation

disclosed that for the period 1987 through 2000, BCLP had exceeded the total deduction

of the Developer’s Equity Investment account by $429,387. The excess deduction was

6

due to BCLP’s interpretation of how the Developer’s Equity Investment account should

be accounted for, as noted on page 4. The Net Income Available for Distributions were

understated as a result of the excess deductions, during the period 1997 through 2000,

and therefore, the City will be entitled to $214,692 in additional annual percentage rent.

FINANCE DEPARTMENT

STATE SALES/USE TAX REFUND DUE TO THE CITY.

Our audit disclosed that during the period February 1998, through March 2001, the City’s

Finance department remitted 6.5 percent of Rental Income collected from Bayside Center

Limited Partnership (BCLP) as sales/use tax. The amount of sales/use tax remitted

7

totaled $143,067. However, BCLP had already assessed, collected, and remitted all

applicable sales/use tax from its tenants. Therefore the amounts remitted to the City were

solely rental income exclusive of applicable taxes.

We also noted that the State of Florida Department of Revenue (SFDOR) auditors

assessed the City additional taxes and interests totaling $243,881.87 during a tax audit of

the City. However, our review disclosed that $51,439.54 of the $243,881.87 of

additional sales tax and interest paid by the City was for ticket surcharge at the Orange

Bowl and for charges relating to cleaning services at the Coconut Grove Convention

Center. Those transactions are exempt from sales/use tax, pursuant to Sections

212.04(1)(b) and 212.03(10) of the Florida Statutes. Additionally, we noted that

$192,442.33 of the $243,881.87 of the additional sales/use tax and interest paid to the

State was for sales/use tax due from those who leased and used City facilities for certain

events/shows but failed to remit the applicable sales/use tax due from the revenues

collected from the events/shows to the State. The appropriate exemption forms, which

would have relieved the City of this sales/use tax obligation, were not obtained.

AUDIT FINDINGS AND RECOMMENDATIONS

8

BAYSIDE CENTER LIMITED PARTNERSHIP

THE RETAIL LEASE AGREEMENT IS NOT IN THE CITY’S BEST ECONOMIC INTEREST.

Section 2.5 of the Lease Agreement pertaining to the operation of the retail stores

provides that Bayside Center Limited Partnership (BCLP) shall pay to the City as rental

during the term of the lease an annual sum equal to the greater of:

• Thirty-five percent (35%) of Net Income Available for Distribution; or

• The Minimum Base Rental for each Rental Year, as follows:

Full Rental Year Minimun Base Rental 1 - 2 325,000$ 3 - 6 650,000

7 - 35 1,000,000 36 - 45 As stipulated in Section 2.5

We noted that BCLP computes “Net Income Available for Distribution” by subtracting

the following transactions from the “Operating Income” for the applicable or pertinent

period:

• Operating Expenses for the same period

• Debt Service Payments for the same period and

• An amount equal to ten percent (10%) of the total cumulative Developers Equity

Investment made from the inception of the Agreement up to the period for which

“Net Income Available for Distribution” is being calculated. This cumulative

total is not adjusted for the developer’s costs that had already been recouped in

the prior years. Section 1.1 of the Agreement defines the term “Developer’s

Equity Investment” as the “Sum of (i) Development Cost, (ii) an amount equal

9

from time to time to any un-recouped and un-financed cost of Capital

Improvements made and paid for by Developer after initial construction of the

Developer Improvements, and (iii) Operating Losses (except to the extent

recouped under Section 2.5a(3) less (iv) the net proceeds actually received by

Developer from any and all Leasehold Mortgage or Sale-Leaseback Transactions

of the Developer’s estate in the Leased Property and the Improvement.”

The Agreement stipulates that all financial lease transactions relating to this lease

Agreement, including the calculation of “Net Income Available for Distribution” and the

“Developer’s Equity Investment Account” be accounted for in accordance with generally

accepted accounting principles (GAAP). Financial Statement Standard Board (FASB)

Statement number 13 provides guidance on how to account for lease transactions.

Practitioner’s Publishing Company (PPC) provides reference guides to Financial

Statement Standard Board and Governmental Accounting Standard Board Statements.

These Statements are authoritative sources of generally accepted accounting principles.

Section 304.46 of the PPC’s Guide to Preparing Financial Statements (Guide) states that,

“If a company leases land and constructs a building on the land, the lessee’s costs of the

buildings should be charged to leasehold improvement unless the land lease is a capital

lease. However, under SFAS (FASB) No. 13, a land lease may only be considered to be

a capital lease if it passes title or contains a bargain purchase option.” Section 304.47 of

the PPC’s Guide further states, “Accordingly, leasehold improvements should be

depreciated over the shorter of the lease term or their estimated useful lives.” Please note

that the terms of the Agreement already provides that ten percent (10%) of the total

cumulative Developers Equity Investment (which constitute initial development costs,

subsequent un-financed capital improvement costs, and operating losses) be recouped

from “Operating Income.” Therefore, if ten percent (10%) of this account is to be

recouped annually to compute the “Net Income Available for Distribution,” each item

comprising this account should be fully recouped over a ten-year period.

We contend that ten percent (10%) of the total cumulative Developers Equity Investment

be deducted from “Operating Income” until the total amount invested is fully recouped,

and thereafter, the deduction of the respective equity components should cease. A legal

10

opinion obtained from the City Attorney’s Office concurs with our understanding and

interpretation of the terms of the Agreement as it relates to the accounting for the

Developers Equity Investment account.

However, a review of BCLP’s financial accounting records disclosed that for the period

1987 through 2000, BCLP had exceeded the total amount of the Developers Equity

Investment accounts to be recouped by $4,549,571 ($37,696,246 - $33,146,675) as

shown below:

Total Developers Total Developers Equity Total Developers Equity

Equity Investment Accrued Allowed Per Audit Deducted by BCLP

For the Period 1987 Thru 2000 For the Period 1987 Thru 2000 For the Period 1987 Thru 2000

37,285,106$ 33,146,675$ 37,696,246$

The excess amount recouped as noted above was due to BCLP’s interpretation of how the

Developer’s Equity Investment account should be accounted for. BCLP Vice President

and Deputy General Counsel, contends that the Agreement allows BCLP to deduct ten

percent (10%) of its total cumulative Developer’s Equity Investment Account from “Net

Operating Income” as a “return on its investment”. Additionally, he stated that the

concept of “Amortization” is not provided in the lease Agreement nor in generally

accepted accounting principles as it relates to the lease transactions. However, the

Agreement does not provide for the term “return on its investment” rather uses the term

“un-recouped” as it relates to Developer’s Equity Investment Account. FASB Statement

number 13, Accounting for Leases (generally accepted accounting principle), provides

that leasehold improvements be depreciated for a specific period of time. There is no

Section in this Statement or any other official accounting pronouncement that provides

for a “return on investment” as it relates to lease transactions. Therefore, the total

cumulative Developers Equity Investment should be recouped from “Operating Income”

until the total amount invested is fully recouped, and thereafter, the deduction of the

respective equity components should cease.

11

Although the Net Income Available for Distributions (NIAD) were understated for the

period 1997 through 2000, as a result of the excess amount of Developer’s Equity

Investment account recouped, the City would still not earn additional revenue during

those periods, due to the provisions of Section 2.5 (a) of the lease Agreement. This

section of the Agreement states “If in any given Rental Year, 35% of Net Income

Available for Distribution is less than the Minimum Base Rental, the difference shall be

credited to the Developer in an account known as the “Cumulative Credit Balance

Account” which credit shall accrue interest at eleven (11%) percent, compounded

annually. The maximum amount to be credited in any Rental Year shall be no greater

than the Minimum Base Rental for that Rental Year. In any subsequent Rental Year for

which a credit balance exists in the Cumulative Credit Balance Account, the Rental due

to the City, shall be reduced, to not less than that Rental Year’s Minimum Base Rental,

by an amount applied from the remaining credit balance in the Cumulative Credit

Balance Account.”

The annual rental paid to the City did not exceed the minimum amounts due from the

inception of the lease through the rental year ended December 31, 2000 because 35% of

Net Income Available for Distribution (NIAD) did not exceed the minimum amounts

except for the rental year, 2000. In the calendar year 2000, 35% of NIAD totaled

$1,020,300 compared to the minimum rent of $1 million. In accordance with Section 2.5

of the Agreement, the Cumulative Credit Balance Account (CCBA) should offset the

$20,300 difference. Our calculations/analysis indicate that the CCBA, as of December

31, 2000, totaled $18,456,000. Therefore, in subsequent rental years, the rental due to the

City will be reduced to the Minimum Base Rental until the $18,456,000 is fully

exhausted. Given the material amount of CCBA balance currently available, the City

should not expect to earn rental revenue in excess of the basic minimum of the $1 million

annually for quite sometime to come. The provisions of Section 2.5 of the Agreement, as

noted above, are clearly not in the City’s best interest.

Recommendation

12

We recommend that the total cumulative Developer’s Equity Investment be deducted

from “Operating Income” until the total amount invested are fully recouped, and

thereafter, the deduction of the respective equity components should cease. We also

recommend that the Office of Asset Management closely monitor the accounting for

Developer’s Equity Investment Account and the computation of the Cumulative Credit

Balance Account.

Auditee Response and Action Plan

See auditee's written responses on pages 16 though 18.

ADDITIONAL PERCENTAGE RENT DUE TO THE CITY FROM THE OPERATION OF THE PARKING GARAGE. Section 2.5 (a) of the parking garage parcel Agreement between the City and the Bayside

Center Limited Partnership (BCLP) states that, “During each Rental Year during the

Original Term and each Renewal term hereof, Developer covenants and agrees to pay the

City annually as rental for the Lease Property, the following:

• The annual sum of Ten Thousand Dollars ($10,000) (Annual Basic Rental).

• To the extent there is Net Income Available for Distribution, the annual sum of

Eighty Thousand Dollars ($80,000) (Annual Additional Rental).

• Fifty percent (50%) of the remaining Net Income Available for Distribution, if

any, after payment of the Annual Basic Rental, Annual Additional Rental, and

13

after Developer has been reimbursed up to Ninety Thousand Dollars ($90,000) for

Negative Cash Flow previously paid by Developer (Annual Percentage Rental).”

As noted in the preceding finding, BCLP computes “Net Income Available for

Distribution” by subtracting the following transactions from the “Operating Income” for

the applicable or pertinent period:

• Operating Expenses for the same period.

• Debt Service Payments for the same period.

• An amount equal to ten percent (10%) of the total cumulative Developers Equity

Investment made from the inception of the Agreement up to the period for which

“Net Income Available for Distribution” is being calculated. This cumulative

total is not adjusted for costs amortized in the prior years.

Section 1.1 of the Agreement defines the term “Developers Equity Investment” as noted

on page 9. The Office of Internal Audits contends, as noted on page 10 and 11 that 10%

of the Developer’s Equity account be deducted annually to compute the “Net Income

Available for Distribution.” Each item comprising this account should be fully recouped

over a ten-year period. A legal opinion obtained from the City Attorney’s Office concurs

with our understanding and interpretation of the terms of the Agreement as it relates to

the accounting for the Developers Equity Investment account.

However, a review of BCLP’s financial accounting records disclosed that for the period

1987 through 2000, BCLP had exceeded the total deduction of the Developer’s Equity

Investment account by $429,387 ($2,979,293 - $2,549,906) as shown below:

Total Developers Total Developer' s Equity Total Developer' s Equity

Equity Investment Accrued Allowed Per Audit Deducted by BCLP

For the Period 1987 Thru 2000 For the Period 1987 Thru 2000 For the Period 1987 Thru 2000

2,957,520$ 2,549,906$ 2,979,293$

14

The excess deduction as noted above was due to BCLP’s interpretation of how the

Developer’s Equity Investment account should be accounted for. BCLP Vice President

and Deputy General Counsel, contends that the Agreement allows BCLP to deduct ten

percent (10%) of its total cumulative Developer’s Equity Investment account from “Net

Operating Income” as a “return on its investment.” Additionally, he stated that the

concept of “Amortization” is not provided in the lease Agreement nor in generally

accepted accounting principles. However, the Agreement does not provide for the term

“return on it investment” rather uses the term “recoup” as it relates to Developer’s Equity

Investment Account. FASB Statement number 13 (generally accepted accounting

principle) provides that leasehold improvements be depreciated for a specific period of

time. Therefore, the total cumulative Developers Equity Investment should be recouped

from “Operating income” until the total amount invested is fully recouped, and thereafter,

the deduction of the respective equity components should cease.

The Net Income Available for Distributions were understated as a result of the excess

deductions, during the period 1997 through 2000, and therefore, the City will be entitled

to $214,692 in additional annual percentage rent. Please see exhibit I, on page 24.

Recommendation

We recommend that the total cumulative Developer’s Equity Investment be deducted

from “Operating Income” until the total amount invested are fully recouped, and

thereafter, the deduction of the respective equity components should cease. We also

recommend that the Office of Asset Management closely monitor the accounting for

Developer’s Equity Investment Account.

Additionally, we recommend that the Finance department request the payment of the

additional $214,692 due to the City. The Attorney’s Office should assist in the recovery

of the amount due to the City.

15

Auditee Response and Action Plan

See auditee's written responses on pages 16 through 18.

16

17

18

19

FINANCE DEPARTMENT

STATE SALES/USE TAX REFUND DUE TO THE CITY.

Section 2.6 of the Agreement between the City and Bayside Center Limited partnership

(BCLP) stipulates that: “Developer, in addition to the Rental, covenants and agrees to pay

and discharge, before any fine, penalty, interest or cost may be added, all real and

personal property taxes, all ad valorem real property taxes, all taxes on rentals payable

hereunder and under sublease ……..” Chapter 212 of the Florida Statutes imposes 6.5

percent sales/use tax on certain business transactions. A memorandum dated October 8,

1990, and signed by the District Five Administrator for the State of Florida Department

of Revenue (SFDOR) stated that the City (lessor) should not assess and collect sales/use

tax on rental income received from a lessee, if the lessee had already assessed and

collected the applicable taxes from sub-lessees, and also if the taxes collected were

remitted to SFDOR.

We noted that BCLP had assessed, collected, and remitted all applicable sales/use tax

since the inception of the Retail and Garage lease Agreements, as required. However,

our audit disclosed that during the period February 1998, through March 2001, the City’s

Finance department remitted 6.5 percent of Rental income collected from BCLP, during

this period, as sales/use tax due from the Rental Income earned from BCLP, to the

SFDOR, as noted below:

Sales/UseYear Taxes Remitted

Prior to 1998 29,460$ 1998 36,475 1999 53,741 2000 23,391

TOTAL 143,067$

20

BCLP had already assessed, collected, and remitted all applicable sales/use tax from its

tenants. Therefore the amounts remitted to the City were solely rental income exclusive

of applicable taxes.

Upon audit inquiry, we were informed that a routine sales tax audit performed by SFDOR

also identified the duplicate payments of sales tax to the SFDOR. The City was granted

$52,169.63 credit to offset additional tax liability, which was due from other rental

transactions. The $52,169.63 credit granted was the excess tax paid to the State during

the SFDOR audit period. The City applied for the refund of the $90,898.41

($143,067.04-$52,168.63) balance, which was the excess sales tax paid subsequent to

SFDOR audit period on May 18, 2001.

We also noted that SFDOR auditors assessed the City additional taxes and interests

totaling $243,881.87 during its audit period, as stated below:

City Facilities Amount DueCoconut Grove Convention Ctr - Rent * 11,921.60$ Coconut Grove Convention Ctr - Untaxed Cleaning ** 12,318.71 Manuel Artime Rent 4,146.09 Miamarina-Dockage Rental 2,796.17 Dinner Key Marina-License to use from Coca Cola 858.12 Orange Bowl-Improperly Exempted Rent *** 65,542.61 Orange Bowl-Untaxed Utlities 5,381.43 Other Leases-Improperly Exempted Rent 2,543.43 Monty' s Construction Credit 97,500.00 Bayside Garage-Reimbursement sales tax paid (52,168.63) Subtotal 150,839.53$ Interest Due 93,042.44 Total 243,881.97$ * Ticket surcharge $ 1,945.36** Cleaning Services 12,318.71*** Ticket Surcharge 37,175.45

CITY OF MIAMISALES/USE TAX AND INTEREST DUE TO THE STATE

AS OF SEPTEMBER 28, 2000

21

The total amount ($243,881.97) assessed as noted above was remitted to the SFDOR in

two separate checks. Section 212.04(1)(b) of the Florida Statutes states that surcharge,

which is imposed and retained by a local government are exempt from the assessment of

sales tax. Sections 212.03(10) of the Florida Statutes also state that charges by a

convention hall for cleaning services are tax-exempt. However, our review disclosed

that $51,439.54 of the $243,881.87 of additional sales tax and interest paid by the City

was for ticket surcharge at the Orange Bowl and for charges relating to cleaning services

at the Coconut Grove Convention Center. Those transactions are exempt from sales/use

tax as note above. Additionally, we noted that $192,442.33 of the $243,881.87 of the

additional sales/use tax and interest paid to the State was for sales/use tax due from those

who leased and used City facilities for certain events/shows but failed to remit the

applicable sales/use tax due from the revenues collected from the events/shows to the

State. The appropriate exemption form, which would have relieved the City of this

sales/use obligation, was not obtained.

According to a member of the Florida Institute of CPA’s, State Taxation Committee, the

City may be precluded from obtaining a refund from the SFDOR for those sales/use tax

relating to surcharge and cleaning services because a “Florida Department of Revenue

Closing Agreement” was executed. This document states: “Accordingly, the Florida

Department of Revenue and the Taxpayer accept the settled Liability reflected in this

agreement as the lawful amount due the State of Florida with respect to this liability.” If

this agreement had not been signed, the City may have been entitled to a refund.

Recommendation

We recommend that the Finance department establish the necessary procedures to ensure

that all the City departments responsible for the renting of City facilities assess and

collect the appropriate sale/use tax from those who rent City facilities. Alternatively, the

appropriate exemption form, which would relieve the City of this sales/use obligation,

should be executed at the time the lease Agreement is signed by the parties.

22

Additionally, the Finance department should identify all tax-exempt transactions and

ensure that those transactions are not assessed sales/use tax.

Audited Response and Action Plan

See the auditee’s response on page 23.

23

24

Exhibit I

BAYSIDE

GARAGE PARCEL

RECOMPUTATION OF RENT DUE CITY

Per Per Per Per Per Per Per Per Per Per

Bayside Audit Bayside Audit Bayside Audit Bayside Audit Bayside Audit

Parking Revenues 4,235,364$ 4,235,364$ 4,061,163$ 4,061,163$ 4,676,944$ 4,676,944$ 4,305,995$ 4,305,995$ 17,279,466$ 17,279,466$

Operating Expenses 1,315,038 1,315,038 1,343,815 1,343,815 1,323,525 1,323,525 1,594,450 1,594,450 5,576,828 5,576,828

Subtotal 2,920,326 2,920,326 2,717,348 2,717,348 3,353,419 3,353,419 2,711,545 2,711,545 11,702,638 11,702,638

Ground Rent (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (40,000) (40,000)

Bond Principal (540,000) (540,000) (564,996) (564,996) (590,000) (590,000) (620,000) (620,000) (2,314,996) (2,314,996)

Bond Interest (809,373) (809,373) (785,326) (785,326) (759,038) (759,038) (730,285) (730,285) (3,084,022) (3,084,022)

Subtotal 1,560,953 1,560,953 1,357,026 1,357,026 1,994,381 1,994,381 1,351,260 1,351,260 6,263,620 6,263,620

10% of the Developers Equity Investment *** (247,407) (232,722) (241,752) (149,650) (232,752) (72,295) (223,752) (46,519) (945,663) (501,186)

Net Income Available for Distribution 1,313,546 1,328,231 1,115,274 1,207,376 1,761,629 1,922,086 1,127,508 1,304,741 5,317,957 5,762,434

Calculation of Ground Rents Payable

First $80,000 is Additional Ground Rent (80,000) (80,000) (80,000) (80,000) (80,000) (80,000) (80,000) (80,000) (320,000) (320,000)

Next $90,000 as Recovery of Developer' s

Operating Losses (90,000) (90,000) (90,000) (90,000) (90,000) (90,000) (90,000) (90,000) (360,000) (360,000)

Amount Subject to 50% Percentage Ground Rent 1,143,546 1,158,231 945,274 1,037,376 1,591,629 1,752,086 957,508 1,134,741 4,637,957 5,082,434

50% Percentage Ground Rent Payable to the City 571,773 579,116 472,637 518,688 795,815 876,043 478,754 567,371 2,318,979 2,541,218

50% Percentage Ground Rent Received by the City (571,773) (571,773) (472,637) (472,637) (795,815) (795,815) (478,754) (478,754) (2,318,979) (2,318,979)

Additional 50% Percentage Rent Due to the City -$ 7,342$ -$ 46,051$ -$ 80,228$ -$ 88,616$ -$ 222,237$

Deduction Shortage - Prior Year (15,090)

Percentage Rent Due to the City X 50% (7,545)

Additional Percentage Rent Due to the City 214,692$

*** Bayside did not adjust the cumulative total of Equity Investment for those costs already recouped in the prior years.

TOTAL1997 1998 1999 2000

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