Administrative
Report
H.17., File # 22-4680 Meeting Date: 9/6/2022
To: MAYOR AND CITY COUNCIL
From: GREG KAPOVICH, WATERFRONT & ECONOMIC DEVELOPMENT
DIRECTOR
TITLE
APPROVE A CONTRACT WITH LANCE, SOLL, LUNGHARD, LLP FOR WATERFRONT
LEASEHOLD SALES EXAMINATION AND AUDIT SERVICES FOR AN AMOUNT NOT-TO-EXCEED $40,000 AND THE TERM SEPTEMBER 6, 2022 TO SEPTEMBER 5, 2023 WITH A ONE-YEAR
OPTION TO EXTEND
EXECUTIVE SUMMARY
The Waterfront and Economic Development Department (“WED”) administers eleven (11) Master Leases for property and/or facilities within the Redondo Beach Harbor Enterprise. Property within the waterfront is leased to private sector entities that pay rent to the City utilizing a base rent/percentage of gross sales structure. Lessees must report all gross sales and rental revenues to the City to ensure the accuracy of the rent calculations. Since the revenue from the Harbor Enterprise is the main source of funding for operations, maintenance projects, and capital reinvestment in the area, it is important that all revenues and related rents are reported accurately and paid correctly.
In July 2019, WED solicited proposals for auditing services for the various Master Leaseholds within the Harbor and selected Lance, Soll, Lunghard, LLP (“LSL”) based on a review of the proposals and subsequent in-person interviews. The contract carried a not-to-exceed cost of $40,000 and was funded equally between the Harbor Tidelands and Harbor Uplands Funds for services beginning January 21, 2020 through January 20, 2021 with a one-year option to extend to January 20, 2022. In 2020, WED and LSL began preparations for the first tenant audit; however, due to COVID-19, LSL was not able to begin the audit process. The LSL contract was then suspended for FY 2020-2021 due to the budget deficit. The contract then lapsed in January 2022 before an audit could be conducted. The proposed FY 2022-23 contract resumes these critical services and carries the same one-year term, with a one-year extension, for an amount not-to-exceed $40,000.
BACKGROUND
King Harbor includes several commercial and recreational areas, such as, but not limited to, the Redondo Beach Pier, the Redondo Beach Marina, and International Boardwalk. Significant portions of the Harbor have been leased on a long-term basis to private sector landlords (Lessees) for the development and maintenance of defined areas (Leaseholds).
The leases governing these Leaseholds require the payment of rent to the City. Rent is typically paid monthly and calculated as either a base rent or a percentage of sales/receipts and/or income - whichever is greater. Each month, Lessees report the percentage rents based upon the percentage
H.17., File # 22-4680 Meeting Date: 9/6/2022
whichever is greater. Each month, Lessees report the percentage rents based upon the percentage rent rates prescribed within their lease. As a landlord, the City is required to ensure lease compliance by its private sector tenants. Consequently, each lease entitles the City to audit and investigate the accuracy of reports detailing the amount of rent paid. Audits typically cover up to five (5) years of rental payments. To perform the audit function, the City enters into a contract with a professional services consultant that provides such services. Prior to engaging LSL, the City contracted with CompuAudit, which conducted tenant sales audits for approximately five years before ceasing operations.
In July, 2019 WED issued a Request for Proposals (RFP) to qualified accounting firms to perform sales and revenue examination and audit services. The audits are intended to i) examine and fully investigate the financial records of lessees for accuracy and reliability of reporting; ii) ensure overall lease compliance; (iii) review bank deposits and tax returns to verify that revenues are consistently reported; (iv) compare sales and rental receipts against previous year totals and industry averages; and (v) collaborate with the City Attorney’s Office regarding any legal actions that may result from their findings.
In response to the RFP process, WED selected Lance, Soll, Lunghard, LLP (“LSL”) based on the review of the proposals and subsequent in-person interviews. LSL demonstrated extensive experience conducting comparable sales and revenue examinations as well as general government audits. LSL also continues to serve as independent auditor for the City of Redondo Beach and in that capacity has performed annual financial audits of the City’s financial statements in compliance with all GASB pronouncements.
In 2020, LSL was not able to conduct any on-site tenant visits due to COVID-19. In addition, the FY 2020-2021 budget deficit resulted in the reduction of the WED core budget for the Harbor Uplands & Harbor Tidelands Contract and Professional Services accounts, which resulted in the suspension of the LSL contract. The LSL contract then lapsed in January, 2022 before any audit work could be conducted. As part of the FY 2022-2023 budget, Council approved a Decision Package to restore ongoing funding for tenant audit services. The proposed LSL contract will be funded equally by Harbor Tidelands and Harbor Uplands Funds and includes a not-to-exceed cost of $40,000 for services through September 5, 2023, with a one-year option to extend through September 5, 2024. It is anticipated that a minimum of one to two audits will be conducted within the first year of the proposed agreement.
COORDINATION
The City Attorney’s Office has approved the Agreement as to form.
FISCAL IMPACT
The LSL contract will be funded equally by the Harbor Tidelands Fund and the Harbor Uplands Fund for a total not-to-exceed amount of $40,000 for the contract year. Funding for the agreement is included in the FY 2022-23 Waterfront & Economic Department budget. Audits may also result in the recovery of unreported rent which could offset the cost. Any rental revenue recovered through the audit would accrue to the appropriate Fund.
APPROVED BY:
H.17., File # 22-4680 Meeting Date: 9/6/2022
Mike Witzansky, City Manager
ATTACHMENTS
· Contract - Lance, Soll, Lunghard LLP 2022-2023
· Contract - Lance, Soll, Lunghard CCP 2020-2021