EDC faulted: Comptroller found waterfront restaurant violated lease’s revenue- reporting and site-improvement requirements. An audit by City Comptroller John C. Liu concluded that MDO Development Corporation violated its lease agreement for a City-owned site occupied by the Water Club restaurant along the East River between East 30th and 32nd Streets in Manhattan. The audit found, among other things, that MDO did not accurately report revenue from the restaurant and failed to make required site improvements. The City’s Economic Development Corporation administers the lease agreement on behalf of the Department of Small Business Services.
MDO in 1979 entered into a 25-year lease with the City to build and operate the restaurant. The City in 2001 amended the lease and extended its term to 2030. For 2009, the agreement entitled the City to an annual fixed rent of $495,000, but if gross receipts exceeded $8,250,000 MDO would pay six percent of its sales, plus seven percent of receipts exceeding $10,500,000. MDO was also obligated to expend $450,000 on tenant improvements within two years of the amended lease’s commencement date.
The Comptroller’s audit covered 2009. It found that MDO recorded revenue from the restaurant’s dining room, but failed to accurately record revenue from its bar operation and outdoor “Crow’s Nest” dining area. During six unannounced observations at the Crow’s Nest, auditors observed MDO staff entering an excessive number of “no-sale” transactions, whereby orders paid for with cash were cancelled in the restaurant’s computerized register system. Auditors compared sales information against a list of total transactions, including cancelled orders, and found that one no-sale transaction was entered for every four guest checks processed. The audit found that the volume of no-sale transactions indicated a “high probability” that all revenue was not being reported to the City.
The audit also found that MDO could not substantiate that it had completed $527,939 worth of site improvements. Under the lease, MDO was required to consult with Manhattan Community Board 6 and create a landscape plan for the site and the public walkway between the restaurant and the 34th Street heliport. An engineer-auditor determined that it was inconclusive whether MDO had expended any of the required funds.
The audit recommended that MDO implement a series of stricter financial controls and complete the site improvements. MDO stated that it would implement some of the recommendations, but claimed that all site improvements were completed as required. The audit stated that MDO’s contention regarding the improvements was “misleading,” noting that the limited work that was performed fell far short of the lease’s requirements.
The audit cited EDC for failing to ensure that MDO complied with the lease. The Comptroller recommended that EDC ensure that MDO implements proper financial controls to accurately record revenue and develops a plan to complete the site improvements. EDC agreed with the recommendations.
Audit Report on the Compliance of MDO Development Corporation with its Lease Agreement, Office of the Comptroller, February 9, 2011.