General

Under the Park Code, Recreation and Park Department properties must be used for recreational purposes. The Partnerships and Resource Development Division of the Recreation and Park Department manages 53 lease, license or concession agreements, including the San Francisco Zoological Society Management Agreement and the San Francisco Forty Niners Signage/Advertising Agreement. In addition, the Recreation and Park Department owns four parking garages that are managed under lease agreements by the Department of Parking and Traffic: St. Mary's, Civic Center, Portsmouth Square, and Union Square Garages. Altogether, the 57 lease, license, or concession agreements generated approximately $25.7 million in General Fund Revenues in FY 2006-2007.

The Controller's Office regularly audits the four parking garages, and has audited six of the 53 other concessions since 2000, according to records provided by the Recreation and Park Department. However, the Department's records show that many concessions were last audited in the 1990s and that some have never been audited.

As part of this follow-up audit to the Budget Analyst's 2006 Recreation and Park Department Audit Report, the Budget Analyst conducted audits of three concessions. The three concessions are as follows:

• Fashion House, Inc., as Tenant for the lease of real property located at the Japanese Tea Garden, Golden Gate Park
  
  
• Emporio Rulli, Inc., as Sublessee for the sublease of the Union Square CafE9
  
  
• Stow Lake Corporation, for Boat Rentals, Bicycle Rentals, and Snack Bar Concession at Stow Lake, Golden Gate Park

The Property Management Section of the Partnerships and Resource Development Division of the Recreation and Park Department which is responsible for managing 53 lease, license, or concession agreements, is authorized 4.0 FTE, classification 1823, Senior Administrative Analyst, Property Manager positions, but only has 1.5 FTE positions filled. The Division cannot adequately manage 53 concessions and related responsibilities with 1.5 FTE positions.

Scope and Methodology

The purpose of each of the three audits was to determine whether the concessionaire complied with the reporting and lease provisions of their leases with the Recreation and Park Department. To conduct the audits, the Budget Analyst reviewed the applicable terms of the lease and the adequacy of the concessionaire's procedures for collecting, recording, summarizing and reporting gross receipts to the Recreation and Park Department. We compared the concessionaire payment statements submitted to the Department to the entity's revenue records and quarterly sales tax returns in order to determine whether the concessionaire accurately reported gross receipts. On a sample basis, we examined the monthly and daily sales reports and cash register reports. The Budget Analyst also reviewed the Recreation and Park Department's concessionaire payment records in order to determine whether the concessionaires correctly paid the rent due in a timely manner.

Japanese Tea Garden, Golden Gate Park

Reporting Period: January 1, 2004 - December 31, 2006

Total Payments During Reporting Period: $494,438.20

Introduction

Fashion House, Inc., is currently operating the Japanese Tea Garden's Gift Shop, Tea House, and the tour bus parking lot at Golden Gate Park on a month-to-month lease with the Recreation and Park Department. Prior to converting to a month-to-month lease on July 1, 2005, Fashion House, Inc., had a two-year lease with the Department with a commencement date of June 1, 2003, and an expiration date of June 30, 2005. The original lease with Fashion House to operate the Japanese Tea Garden facility dates back to July 1, 1992.

Under the terms of the lease, Fashion House, Inc., sells souvenirs, curios, cookies, candies, fruits, nuts, and tea. Fashion House, Inc., also collects parking admission fees from tour buses and limousines and sells gift items from the ticket booth in the tour bus parking lot.

The lease requires Fashion House, Inc., to pay the greater of the minimum annual guarantee fee of $150,000 or twenty-five percent (25%) of gross receipts less applicable taxes from the Tea House and Gift Shop operations inside the Japanese Tea Garden which is directly linked to the annual attendance figure of 350,000. An additional rent, if any, is to be paid at the end of each lease year if attendance is above 350,000 using the schedule shown below:

In addition to the above rent, Fashion House, Inc., is also required to pay twenty-five percent (25%) of gross revenues, less applicable taxes, from the gift items sold at the tour bus ticket booth (Curio Stand) on a monthly basis. Another forty percent (40%) of gross revenues, less parking tax, from the Tour Parking Lot is to be paid to the City on a quarterly basis.

The regular monthly lease payment is due no later than the 10^th of the month following the lease month. Annual payment, if due, for any difference based on the annual attendance of each lease year shall be paid no later than 15 days after the anniversary date of the lease.

Audit Results

During the audit conducted in November 2007 and based on the samples selected for this purpose, the Japanese Tea Garden is in compliance with the reporting and lease provisions of the lease agreement with the Recreation and Park Department. The records and supporting documents maintained by Fashion House, Inc., represent that gross receipts indicated in the Concessionaire's Payment Statements are accurate. There were no material exceptions noted. The Recreation and Park Department is correctly paid and in a timely manner.

Audit Observation

Bank Reconciliation

The Japanese Tea Garden does not perform regular bank reconciliation for the single account maintained for its operations. The audit procedure was limited to the examination of bank deposit advice for any amount deposited indicated in the Daily/Monthly Sales Report. Said amounts were also traced to the bank statements to ensure that the bank balance has been credited for those deposits.

Cash disbursements were tested by verifying the checks issued to the Recreation and Park Department for the monthly payment based on the Concessionaire's Payment Statement.

The Budget Analyst recommends that the Japanese Tea Garden perform monthly bank reconciliations to monitor cash balances and to strengthen internal controls for cash. Bank reconciliation ensures that discrepancies between the books and the bank are due to timing differences rather than due to error, which could eventually result to a potential misstatement.

EMPORIO RULLI

UNION SQUARE

Reporting Period: January 1, 2005 - December 31, 2007

Total Payments During Reporting Period: $395,209.94

Background

Emporio Rulli, Inc., occupies approximately 1,012 square feet of space located in Union Square Park in San Francisco. The CafE9 carries a variety of menu items that feature pastries, coffees, sandwiches and other fine items to go along with shaded outdoor seating at Union Square. Emporio Rulli also offers catering services to those shops around the Union Square area, as well as a wine of the week special.

Currently, Emporio Rulli is being operated under a sublease agreement between the City of San Francisco Uptown Parking Corporation and Emporio Rulli, Inc. Emporio Rulli is open to the public seven (7) days a week from 7:00 am to 7:00 pm except Christmas Day. The Sublessee may extend or otherwise change operating hours only with the prior written approval of the Sub-lessor and the City.

Under the Sublease Agreement, Emporio Rulli is required to pay the City of San Francisco Uptown Parking Corporation (1) base rent of $4,000 payable every first day of the month, and a (2) percentage rent which is calculated at six percent (6%) of all monthly gross receipts up to and including $125,000 plus eight percent of all monthly gross receipts above $125,000, less the base rent of $4,000. Percentage rent is due every 10th day of the following month.

The Budget Analyst sampled a total of six months, two months of each calendar year of the reporting period, to provide an indication Emporio Rulll's accuracy and timeliness in reporting and making payments.

Audit Findings

During the audit conducted in January 2008 and based on the samples selected for this purpose, the Budget Analyst made the following findings and observations:

Percentage Rent Calculations

July 2006 - Gross sales used to compute for the percentage rent was lower than the amount generated in Emporio Rulli's records:

The above difference resulted in an underpayment of $557.41 by Emporio Rulli to the City of San Francisco Uptown Parking Corporation, computed as follows:

According to Vine Solutions, Emporio Rulli's accounting firm, the difference in amounts may have been due to a system error or a timing issue at the time the accountant generated the report that was transmitted to their office.

Emporio Rulli assured the auditor that this will be further investigated to ensure non-recurrence. In addition, the following smaller difference noted during the audit fieldwork was also reported to Emporio Rulli for information and follow-up:

Different Payment Due Dates Observed for Base Rent

The Sublease Agreement between the City of San Francisco Uptown Parking Corporation and Emporio Rulli dated February 20, 2003, Page 5 Paragraph 4, Section 4.1, specifies that monthly base rent of $4,000 should be paid by Emporio Rulli to Uptown Parking on the 1^st day of the month. However, the Budget Analyst noted that monthly payments for base rent of $4,000 were not made on or before the 1^st of each month, but instead payments were made on or before the following 20^th day of each month.

According to the management of Emporio Rulli, they had always thought that payment to Uptown Parking was to be made on or before the 20^th of each following month. Based on the corrected understanding of the payment due date, Emporio Rulli has changed its payment practice in order to comply with the stipulations stated in the agreement.

Late Payments for Percentage Rent

As previously stated, the Sublease Agreement between SF Uptown Parking Corporation and Emporio Rulli dated February 20, 2003, Page 5 Paragraph 4, Section 4.2, stipulates that a percentage rent, which is calculated at six percent (6%) of all monthly gross receipts up to and including $125,000 plus eight percent (8%) of all monthly gross receipts above $125,000, less the $4,000 base rent payment, is to be paid to the City of San Francisco Uptown Parking Corporation every 10^th day of the following month.

The Budget Analyst noted that late payments were made on the following months:

According to the management of Emporio Rulli, delays in payments were caused by staff movements or employee turnover at Vine Solutions, Emporio Rulli's accounting firm. Emporio Rulli disclosed to the Budget Analyst that the office of the City of San Francisco Uptown Parking Corporation has always been notified about such late payments.

The Budget Analyst also noted and confirmed with Emporio Rulli that no late charges or interest charges were demanded from them regarding these particular delays in percentage rent payments.

Paragraph 4, section 4.3 stipulates that if the Sub-lessee fails to pay any rent or any portion of rent within five (5) days after the due date, the unpaid amount will be subject to a late payment charge of 6% in each instance. For the three days that were in excess of five days delinquent, the six percent penalty total was $2,192.83.

Section 4.4 also states that if any rent not paid within five (5) days following the due date, such unpaid amount shall bear interest from the due date until paid at the rate of 10% per year. For the three days that were in excess of five days delinquent, the penalty total was $71.80.

STOW LAKE BOATHOUSE

GOLDEN GATE PARK

Reporting Period: January 1, 2005 - December 31, 2007

Total Payments: $343,299.72

Background

Stow Lake is a water recreation area located at 50 Stow Lake Drive within the City's Golden Gate Park. Available activities include boating, duck feeding, and bicycling. The facility includes a snack bar. Stow Lake is open to the public seven days each week during the summer and for at least six days each week during the winter months.

Stow Lake is being operated by the Stow Lake Corporation under a lease agreement between the Corporation and the City and County of San Francisco acting by and through the Recreation and Park Commission. The lease agreement had a term of fifteen (15) years commencing in November of 1991 and ending in November of 2006. Currently, Stow Lake is operating under a holdover period which started in December of 2006 under a month-to-month agreement.

Under the holdover provisions of the lease, Stow Lake Corporation is paying Recreation and Park Department a straight ten percent (10%) from all revenue received instead of the significantly higher percentage rent in effect prior to the holdover period. Also, no minimum rent is imposed during the holdover period. However, under the prior 15-year lease agreement, the lessee was required to pay 31 percent of the gross receipts from boat rentals plus 21 percent of the gross receipts from snack bar operations and merchandise sales.

The Budget Analyst sampled a total of six months transactions, two months of each calendar year of the reporting period, to provide an indication Stow Lake Corporation's accuracy and timeliness in reporting and making payments.

Audit Observation

Bank Reconciliation

Stow Lake Corporation does not perform regular bank reconciliation for the bank account maintained for the operation of Stow Lake Boathouse.

The Budget Analyst recommends that Stow Lake commence monthly bank reconciliations to monitor cash balances and to strengthen internal controls for cash. Bank reconciliation ensures that discrepancies between the books and bank deposits are due to timing differences rather than due to error which could eventually result to a potential misstatement.

Audit Findings

Regular Deposit of Cash Receipts

Stow Lake does not observe a regular schedule of depositing cash from the boathouse to the bank. There are times when the boathouse is holding up to $20,000 in cash that is not necessary for the day to day operations.

The Budget Analyst recommends that regular and timely deposits of cash be instituted in order to reduce the possibility of theft and loss. This will also reduce the possibility of unauthorized employees gaining access to the cash on hand. This procedure will also facilitate preparation of bank reconciliation ensuring that all cash receipts and disbursements are fully accounted for and that reconciling items are readily identifiable.

Supporting Documentation from Wheel Fun Rentals

The bicycle rental facility is operated by Wheel Fun Rentals based on a sublease agreement with Stow Lake Corporation that provides for Wheel Fun Rentals to pay twenty percent (20%) of gross revenues to the sublessor, Stow Lake Corporation. Wheel Fun Rental is supposed to provide a monthly summary of revenue together with the check submitted to Stow Lake as a supporting document to the calculation of the twenty percent (20%).

However, the Budget Analyst determined that Wheel Fun Rentals has not submitted the monthly summaries to serve as support for the amount of the check submitted to the Stow Lake Corporation, nor have they been required by the Stow Lake Corporation.

For audit purposes, Wheel Fun Rentals was requested to provide revenue summaries for the sample months selected. These reports were compared to the records of Stow Lake Corporation based on the monthly checks received from the sublessee, noting the following differences:

Going forward, the Budget Analyst recommends that Stow Lake strictly impose Wheel Fun Rentals' submission of revenue summary in order to reduce the possibilities of over or under payment to Stow Lake and eventually to the City.

Holdover Period

The Lease Agreement had a term of fifteen (15) years which ended in November 2006. Currently, Stow Lake is operating under a holdover period which started in December of 2006, based on Paragraph 60 of the agreement. The holdover stipulates that the percentage rent will expire and that only ten percent (10%) of all gross sales shall be paid to the City instead of the significantly higher percentage rent of 31 percent of the gross receipts from boat rentals plus 21 percent of the gross receipts from snack bar operations and merchandise sales it received under the original provisions.

Had the original percentage payment provisions of the Stow Lake lease been in effect during calendar year 2007 instead of the ten percent (10%) holdover rate, the Recreation and Park Department would have received total revenue of $169,767.50 instead of the actual amount $57,683.44 collected, or a difference of $112,084.06.

Conclusions

The Recreation and Park Department has 57 lease, license or concession agreements, which generated approximately $25.7 million in General Fund Revenues in FY 2006-2007. The Department of Parking and Traffic manages four parking garage lease agreements: St. Mary's, Civic Center, Portsmouth Square, and Union Square. The remaining 53 agreements are managed by the Department's Property Management Unit, which is part of the Partnerships and Resource Development Division.

The Controller's Office regularly audits the four parking garages, but has audited only five of the 53 other concessions since 2000, according to records provided by the Recreation and Park Department. The Department's records show that whereas many concessions were last audited in the 1990s, some have never been audited.

The Budget Analyst's audit of three concessions revealed instances of inaccurate and untimely payment practices as well as a lapse in the term of an agreement that has resulted in activating a holdover period. Under the provisions of the holdover period, the Recreation and Park Department received $112,084 less in calendar year 2007 than it would have under the provisions of the lease prior to the holdover period. Further, The Union Square CafE9 sub-lessee made three late payments in the audited months that would have incurred $2,192.83 in penalties and $71.80 in costs.

The Recreation and Park Department would enhance its revenue collection and general oversight and control of concessions by performing audits on a regular basis, either with in-house resources or through work-orders with the Controller's Office.

The Property Management Section of the Partnerships and Resource Development Division of the Recreation and Park Department is authorized 4.0 FTE, classification 1823, Senior Administrative Analyst, Property Manager positions, but only has 1.5 FTE positions filled. The Division cannot adequately manage 53 concessions and related responsibilities with 1.5 FTE positions.

Recommendations

The Recreation and Park General Manager should:

6.1 On an expedited basis, act to implement provisions of a Stow Lake lease that enables the Department to collect revenues based on economic realities and not on the unrealistic provisions of a holdover lease.

6.2 As resources permit, on a priority basis, allocate additional staffing to the authorized Property Management positions.

6.3 As resources permit, task the appropriate primary staff director to develop and oversee a concession audit program that is based on the relative risks of the managed concessions and request that the Controller execute that concession audit program.

Costs and Benefits

The Recreation and Park Department would incur additional undetermined costs in obtaining additional concession audit resources, either from within or external to the Department. However, in the professional judgment of the Budget Analyst, there is a strong possibility that such additional costs would be compensated by increased revenue collections due to improved compliance by concessionaires because they would be much more subject to an audit. Additional savings could also result from the recommendations for improved practices and controls that an auditor can provide.

By converting the rental provisions of the holdover period to those of the original Stowe Lake lease, the Department would realize additional cash collections in excess of $100,000 per year.