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Office of the City Auditor
Riverpoint Landing Marina Resort
June 28, 2002
Stockton City Council
AUDIT SUMMARY: RIVERPOINT LANDING MARINA RESORT
In accordance with our 2001-2002 audit plan to provide technical assistance to City
Departments, we have completed a limited scope audit of the lease agreement between
the City of Stockton and Stephens Marine, Inc.(Lessee), dba Riverpoint Landing Marina
Resort. We performed the audit at the request of Tim Gallagher, the previous Parks
and Recreation Director. Our audit was conducted in accordance with Generally Accepted
Government Auditing Standards.
Our audit objective was to determine whether the lessee is in compliance with its financial
obligations under the terms and conditions of the lease agreement, and with applicable
provisions of the Stockton Municipal Code. Our review of financial records was focused on
the 5-year period from 1997 through 2001.
The results of our audit indicate that the lessee is in compliance with its rental
obligations. However, we recommend that the lessee be required to submit a quarterly
detailed balance sheet and income statement to the assigned contract coordinator, to
monitor effectively all aspects of the lease agreement. In addition, we recommend a
periodic appraisal and evaluation of the property and its earning potential to ensure that
the City receives a fair and equitable return on its real property.
Additional information about our audit can be found in the attached AUDIT REPORT.
F. MICHAEL TAYLOR, CIA RICO SANTOS
CITY AUDITOR SENIOR INTERNAL AUDITOR
cc: Mark Lewis, Esq., City Manager
Jayne W. Williams, Interim City Attorney
Katherine Gong Meissner, City Clerk
Christine Tien, Deputy City Manager
Delores Roach, Public Information Officer
Richard Dunn, President, Stephens Marine, Inc.
Macias, Gini & Company, LLP
The Record
AUDIT REPORT
RIVERPOINT LANDING MARINA RESORT
In accordance with our 2001 - 2002 audit plan and a request from the previous Parks and Recreation Director, we have completed a limited scope audit of the lease agreement between the City of Stockton and Stephens Marine Inc., dba Riverpoint Landing Marina Resort. Our audit was conducted in accordance with Generally Accepted Government Auditing Standards.
BACKGROUND
The City of Stockton entered into a 25-year lease agreement on December 27, 1974, with Stephens Marine, Inc. (lessee). The purpose of the lease is to permit the use of approximately 13.35 acres of land situated in San Joaquin County, with access to Buckley Cove Way on the south, for a public small boat harbor, recreational purposes, and related activities. A portion of the premises is underwater, under the "north cove" of Buckley Cove. The lessee is engaged in renting berthing and storage areas for boats. (See Figure A)
Figure A - Entrance to Marina
On June 29, 1987, the lease was amended and extended for an additional 15 years from its original expiration date of March 24, 2009 to December 27, 2024. The amendment changed certain conditions of the lease particularly the basis for calculating rent as a percentage of gross income. It excluded or subtracted from gross income certain revenue and expense items. The amendment also provided for financial records to be maintained and included a provision for audit. A second amendment on the general and legal description of the land was made on March 25, 1999.
The lease agreement provides for the lessee to pay the City 5% of their gross income as rent. Income from sales of fuel is excluded, but the City receives $.015 per gallon of fuel sold. The lessee subleases or rents part of the premises, and the rental income from subleased space is included in the gross income calculation. The Sheriff of San Joaquin County rents office and parking space, dry and trailer storage, and boat berths on a yearly basis. (See Figure B)
Figure B - San Joaquin Sheriff’s Office
The Marina West Yacht Club has a 15-year lease with Stephens Marine, Inc. for the use and occupancy of the premises, parking and guest dock. (See Figure C)
Figure C - Entrance to Yacht Club
Rick Armstrong Engineering also rents office space at the marina. (See Figure D)
Figure D - Rick Armstrong Engineering Office
SCOPE AND OBJECTIVES
Our objective in this audit was to analyze the financial records of the lessee to determine compliance with the rental requirements of the lease agreement. We also reviewed the concerns of management in Parks and Recreation Department regarding the operation of a recreational vehicle campground at the marina. The review of related activities was also included to ensure compliance with applicable provisions of the Stockton Municipal Code. The scope of the audit was limited to the period from 1997 through 2001.
Certain information in the income statement pertaining to the various sources of rent income is restricted from disclosure because of a provision in section 3.6 of the lease agreement. It states in part that "All information so obtained by lessor or otherwise obtained under the percentage rent provisions of this lease shall be treated as trade secrets and confidential except in any arbitration or litigation proceeding between the parties." Under the Government Audit Standards, which the Office of the City Auditor follows, this restriction falls under the category of privileged and confidential information. Accordingly, details of the lease income and expenses are not included in this report.
METHODOLOGY
Our audit was performed using the standard office methodology of documenting and reviewing financial activities. We reviewed the income statements for the period, and traced balances to State, Local and District Sales and Use Tax Returns. We verified the basis of the monthly rent calculation to the income statements, and recalculated the remittances. We gathered information about the business activity not only from the review of financial records and documents, but also from interviews of personnel, and by observation.
RESULTS
Monthly Rental Payments to the City
The results of our audit did not disclose any material differences in the recalculation of the monthly rental payment to the City based on the gross income for the 5-year period. The lessee has not been subtracting the uncollectible accounts that were written off in calculating rent. Recoveries from bad debts were also not taken into account. The lessee attributed these to timing differences in recognizing bad debts in one year and writing them off in another.
Since there was no provision for doubtful accounts, we recommended to the lessee that bad debts be deducted from the gross income in the year the accounts were written off to avoid any adjustments after the remittance has been made to the City.
City Approval to Sublease or Rent
It was noted that there are agreements to sublease or rent part of the premises without the City's written approval. Records at the Parks and Recreation Department, and Housing and Redevelopment Department do not have the approval to some sublease or rental agreements. Section 6.2 of the lease agreement between the City and the lessee states that "lessee shall not sublease or rent all or part of the premises or improvements nor assign this lease to any other person or entity without lessor's written approval."
Management at Parks and Recreation Department had indicated that a letter will be sent to Stephens Marine emphasizing that they are required to obtain prior written approval before entering into a sublease or rental agreement on any part of the premises.
Transient Occupancy Tax
The lessee maintains a trailer with one bedroom that it rents for at least 3 nights or one-week stay. (Figure E)
Figure E -Trailer with Bedroom
The transient occupancy tax has not always been collected and remitted to the City. The Stockton Municipal Code section 6-105-2 states that "for the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax in the amount of 8% of the rent charged by the operator. Section 6-105-7 of SMC imposes penalty and interest on the amount of the tax for failure to remit within the time required.
The lessee remitted the tax due to Administrative Services Department and is now on the renewal list of that department.
Recreational Vehicle Campground
The Parks and Recreation Department had indicated their concern about the operation of a recreational vehicle campground at the marina. The lessee maintains a recreational vehicle campground with 32 spaces. (Figure F & G)
Figure F - RV Campground
Figure G - RV Campground
It was brought to the attention of management at Parks and Recreation Department that some renters at the campground have been living there for years. One of Park and Recreation's concerns is the sanitation and safety issue in operating a recreational vehicle campground.
Parks and Recreation Department had asked the lessee to develop and submit a location and development plan for the City's Community Development Department to evaluate. Community Development Department approved the location and development plan, but imposed a condition to limit the length of stay at the vehicle campground to 21 consecutive days and no more than 30 days in a 60-day period.
COMMENTS
The results of our audit indicate that the lessee is in compliance with its rental obligations to the City under the lease agreement. However, in any future amendments to the lease agreement, we suggest that the lessee be required to submit quarterly, a detailed balance sheet and income statement to the assigned contract coordinator in Parks and Recreation Department. These financial statements are necessary for the contract coordinator to monitor effectively all aspects of the lease agreement.
The City has an established policy that where practical and prudent, return on real property owned or leased by the City be maximized. In this particular lease agreement, there is a need to periodically appraise and evaluate the earning potential in today's market. The City should receive a fair and equitable return on any of its real property leased to a person or entity.
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