AIRPORT COMMISSION Concession Audit of WSE Group, dba Inc., Legends of San Francisco San Francisco PublicLibrary Government Information Center San Francisco Public Library 100Larkin Street. 5th Floor San Francisco, CA 94102 REFERENCE BOOK Not to be taken from the Library 14. c CD O CO mmm GOVERNMENT O >> DOCUMENTS DEPT APR 1 2009 April 9, 2009 D REF SAN FRANCISCO 647.9579 PUBLIC LIBRARY Sa578wse AIRPORT COMMISSION Concession Audit of WSE 05 Group, dba Inc., C/) Legends of San Francisco o £ O o C GOVERNMENT DOCUMENTS DEPT APR 1 2009 April 9, 2009 SAN FRANCISCO PUBLIC LIBRARY CONTROLLER'S OFFICE CITY SERVICES AUDITOR The City Services Auditorwas created within the Controller's Office through an amendmentto the City Charterthatwas approved byvoters in November2003. UnderAppendix F to the City Charter, the City Services Auditor has broad authorityfor: • Reporting on the level and effectiveness ofSan Francisco's public services and benchmarking the cityto other public agencies andjurisdictions. • Conducting financial and performance audits ofcity departments, contractors, and functions to assess efficiency and effectiveness ofprocesses and services. • Operating a whistleblower hotline and website and investigating reports ofwaste, fraud, and abuse ofcity resources. • Ensuring the financial integrity and improving the overall performance and efficiencyofcity government. The audits unit conducts financial audits, attestation engagements, and performance audits. Financial audits address the financial integrity ofboth city departments and contractors and provide reasonable assurance aboutwhetherfinancial statements are presented fairly in all material aspects in conformitywith generally accepted accounting principles. Attestation engagements examine, review, or perform procedures on a broad range ofsubjects such as internal controls; compliance with requirements ofspecified laws, regulations, rules, contracts, orgrants; and the reliabilityof performance measures. Performance audits focus primarilyon assessment ofcityservices and processes, providing recommendations to improve department operations. We conduct ouraudits in accordance with the GovernmentAuditing Standards published by the U.S. GovernmentAccountability Office (GAO). These standards require: • Independence ofauditstaffand the audit organization. • Objectivity ofthe auditors performing the work. • Competent staff, including continuing professional education. • Quality control procedures to provide reasonable assurance ofcompliance with the auditing standards. Audit Team: Mark Tipton, Audit Manager Renato Lim, Associate Auditor 3 1223 08678 6648 CITY AND COUNTY OF SAN FRANCISCO OFFICE OF THE CONTROLLER Ben Rosenfield Controller MonlqueZmuda DeputyController April 9, 2009 San Francisco Airport Commission P.O. Box 8097 San Francisco International Airport San Francisco, CA 94128 President and Members: WSE The Controller's Office, City Services Auditor, presents its report concerning the audit of Group, Inc., doing business as (dba) Legends of San Francisco (Legends). Legends has a 10-year lease agreement, through December24, 2015, with the Airport Commission of the City and County of San Francisco (City) to operate a casual dining and barfacility in Terminal 1 of San Francisco International Airport (Airport). Reporting Period: July 1 , 2005, through June 30, 2008 Rent Paid: $332,086 Results: • Legends correctly reported monthly gross revenues, and correctly paid monthly rent. • Legends sometimes paid its rent late, resulting in service charges due of $1,885. • Legends currently has $1,256 in overdue utility and storage rent payments to the Airport. • Both Legends and the Airport failed to comply with various miscellaneous requirements of the lease agreement. The responses of the Airport and Legends are attached to this report. Also attached is a rebuttal to Legends' response, in which we explain thatwe disagree with one point in Legends' response and clarify our position on another point in Legends' response. The Controller's Office, City Services Auditorwill work with the Airport to follow up on the status of the recommendations made in this report. Respectfully submitted, RobertTarsia^ Deputy Audit Director cc: Mayor Board of Supervisors Budget Analyst Civil Grand Jury Public Library 415-554-7500 CityHall• 1 Dr. Carlton B. GoodlettPlace•Room 316•SanFranciscoCA 94102-4694 FAX415-554-7466 Page intentionally left blank. INTRODUCTION Audit Authority The Office ofthe Controller (Controller) has authority under the San Francisco Administrative Code, Chapter 10, Article 1, Section 10.6-2 to audit, at regular intervals, all leases of City-owned real property where rent of $100,000 or more per year is to be paid to the City. In addition, the City Charter provides the Controller, City Services Auditor We (CSA), with broad authority to conduct audits. conducted this audit underthat authority and pursuant to an audit plan agreed to by the Controller and the Airport. Background WSE Group, Inc. dba Legends of San Francisco (Legends) has a 10-year lease agreement (lease) with the Airport Commission (Commission) ofthe City and County of San Francisco (City). The lease, which has a rent commencement date of December 24, 2005, allows Legends to operate a casual dining and barfacility in Terminal 1 of San Francisco International Airport (Airport). The lease also requires Legends to pay the Airport monthly the greater of one-twelfth of a minimum annual guarantee (MAG) or a tiered percentage rent of between 8 to 12 percent of its gross revenues. The percentage rent tiers are contingent on the amount of Legends' total gross revenues MAG per lease year. During our audit period, the monthly rent was $3,583 from December 24, 2005, through March 31 2007; $3,767 from April through December 2007; and , $3,892 from January through June 2008. Scope and Methodology The purpose ofthis audit was to determine ifthe monthly statements of-gross revenues that Legends submitted to the Airport accurately reflected actual gross revenues based on monthly and daily records; if Legends paid the proper amount of rent to the Airport, according to the terms of its lease; if Legends currently has no overdue rent payable to the Airport forthe audit period; and if Legends complied with the other provisions of its lease. Our audit covered the period July 1, 2005, through June 30, 2008. To conduct the audit, we examined the applicable terms of the lease and the adequacy of Legends' procedures for collecting, recording, summarizing, and reporting its gross revenues to the Airport. To determine whether Legends 1 accurately reported its gross revenues to the Airport, we compared its reported gross revenues to those recorded in its internal monthly summary records on a sample basis. We then tested, on a sample basis, Legends' internal monthly summary records to daily sales reports and other specific source documents. To determine whether Legends had any outstanding rent or other payments due to the Airport forthe audit period, we examined the Aged Accounts Receivables Report from the Airport's Accounting Department. To determine whether Legends complied with other provisions ofthe lease, we selected key lease requirements and performed inquiry, observation, and testing to substantiate compliance with those lease provisions. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for ourfindings and conclusions based on We our audit objectives. believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. AUDIT RESULTS Legends Correctly Forthe audit period July 1 2005, through June 30, 2008, , Reported Its Gross Legends correctly reported its gross revenues of Revenues and Calculated $3,592,621 and correctly calculated and paid its rent of Its Rent But Did Not $332,086. However, Legends often paid late its minimum Always Pay Its Rent on monthly rent. Section 4.3 ofthe lease requires the monthly Time minimum annual guarantee (MAG) rent payment by the first day of each month. Legends made these payments late for 13 (42 percent) ofthe 31 months in the audit period for which rent was due. (Legends did not begin operations until December 2005.) Besides the monthly MAG rent, Legends owed and paid monthly rent calculated as a percentage ofgross revenues. The lease requires Legends to make these percentage rent payments by the 20th ofeach month forthe preceding month, and each monthly invoice from the Airport states that a 1.5 percent service charge will be assessed on late remittances. Legends paid its percentage rent late for 1 (32 percent) ofthe 31 months in the audit period. The Airport did not apply service charges to Legends' late rent payments. Had the Airport done so, the late fees would have totaled $1,885. 1 Gross Revenues Reported and Rent Paid July 1, 2005, Through June 30, 2008 | Reporting Period Gross Revenues Rent Paid July 1, 2005 through June 30, 2006* $ 566,731 $ 36,006 July 1, 2006 through June 30, 2007 1,354,498 125,800 July 1, 2007 through June 30, 2008 1,671,392 170,280 Total $3,592,621 $332,086 *Note: Legendsdid notbegin operating until December2005, atwhich timeitwasrequiredtobegin paying rent. Sources: Airportaccounting monthlysalesreportsand FAMIScash receiptsreport. Legends Has $1,256 in Airport accounting records show Legends has not paid a Overdue Utility and $932 utility bill, invoiced in April 2006, and a $324 storage Storage Space Rent unit rent bill, invoiced in December 2007. Legends disputes Payments the Airport's claim that the amounts have not been paid and, as of February 2009, the Airport and Legends were still working to resolve the disputed billings. 3 Legends and the Airport In addition to requiring Legends to report its gross revenues Did Not Comply With and calculate and pay its rent due, the lease requires both Certain Lease Provisions Legends and the Airport to comply with other provisions. As described below, both parties to the lease failed to comply with some lease provisions. Legends Paid Its Section 4.9 ofthe lease stipulates that infrastructure fees1 Infrastructure Fees Late be paid to the Airport on the first day of each month. Because both the monthly MAG rent and the infrastructure fees are due on the same day each month, the Airport bills both amounts on the same invoice, and Legends pays both amounts at the same time. Thus, because Legends paid its monthly MAG rent late for 13 months ofthe audit period, it also paid its infrastructure fees late. However, the lease does not provide for service charges for late infrastructure fee payments, so no late charges are due. Legends No Longer Since April 2008, Legends has not been certifying the Certifies Its Monthly monthly sales reports it submits to the Airport. Submitting Sales Reports these reports monthly, and having them certified by the tenant, is required by Section 4.4 ofthe lease. The Airport Did Not One provision ofthe lease stipulates that rent must begin Waive or Otherwise no later than 90 days after the lease's commencement Amend the Lease date. However, another provision states the rent Provision for the Rent commencement date in the lease is December 24, 2005, Commencement Date nearly six months afterthe lease's commencement date of June 28, 2005. The two provisions therefore present contradictory rent commencement dates, possibly implying that the Airport did not receive rent from Octoberthrough December. The December 24th rent commencement date resulted from the tenant being unable to remodel the premises and open for business as soon as first anticipated. But the Airport did not waive the 90-day requirement ofthe first provision in writing, resulting in the contradiction. Recommendations The Airport Department should take the following actions: 1 Invoice Legends for rent service charges of $1,885 for . numerous late monthly rent payments. Infrastructurefees are charged bythe Airportto tenants forthe recoupmentofcosts incurred bytheAirportfor installing electrical, plumbing, and otherutility infrastructure in tenantspaces. 4