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AUDIT REPORT AUDIT REPORT 175 Central Avenue Leases 175 Central Avenue Leases July 2018 July 2018 Susan Rizzo Susan Rizzo Chief City Auditor Chief City Auditor Office of Audit and Control C I T Y O F A L B A N Y ---PAGE BREAK--- 1 Audit Team Susan Rizzo, Chief City Auditor Ransom Moore III, Deputy Chief City Auditor Aindrea Richard, Analyst Eric Ma, Auditor A full copy of this report is available for download at our website: www.albanyny.gov/Government/Departments/OfficeofAuditandControl You may also contact our office by email at [EMAIL REDACTED] ---PAGE BREAK--- 2 Preface The Office of Audit and Control (OAC) exists to provide oversight, transparency and public accountability as a means to improve the City of Albany Administration accountability. This audit is a part of that function. When the OAC takes on an audit subject and, setting aside issues of misconduct, the City department(s) or entities concerned respond positively to address the audit’s findings, it is the commitment of the OAC to support and encourage use of the audit process by City departments as a means to improve their operations. This audit was conducted with the full cooperation of the Department of Youth & Workforce Services and Jonathan Jones, the Department’s Commissioner. The City of Albany Administration and the Department of Youth & Workforce Services have committed to addressing any findings. The proper use of the audit findings in these circumstances is to provide for the oversight of the resulting changes and to be the basis for informed public policy discussions. Given that the New York State Department of Labor (DOL) and the City of Albany Department of Youth & Workforce Services have given their full cooperation, it would be unfair and damaging to the audit process for this audit’s findings to be used for political gain. As such, the OAC will view the political use of this audit’s findings as detrimental to our mission. We thank the New York State Department of Labor and the Department of Youth & Workforce Services employees for their cooperation and commitment. ---PAGE BREAK--- 3 Table of Contents Audit Team 1 Preface 2 Background 4 Introduction 4 Scope, Objective and Methodology 5 Scope Objectives Methodology CMcD Properties’ Lease 6 DOL Sublease Agreement 7 Audit Results 8 New Proposed Contract Recommendations 8 Appendix I 10 Executed DOL One Stop Costs Contract 10 DOL Addendum Contract Cost Breakdown 14 The OAC’s Proposal for Revision of Addendum 15 Detailed Annual Savings & Prorated Reimbursement (OAC Analysis) 16 Appendix II 17 Department of Youth and Workforce Services’ Response 17 Office of the Corporation Counsel’s Response 17 Department of Budget’s Response 18 Auditor’s Response 18 ---PAGE BREAK--- 4 Background Each month, the Office of Audit and Control (“OAC”) reviews and approves two vouchers for the City of Albany to pay rent for space occupied by the Department of Youth and Workforce Services (“the Department”), at 175 Central Avenue and 184 Sherman Street. Each month, one voucher is payable to CMcD Properties, LLC (“CMcD”) and the second is to reimburse the Department of Labor In the process of reviewing these vouchers, it was noted that the contract providing for payment to DOL had expired in 2011. CMcD owns 175 Central Ave and 184 Sherman St. The two properties are connected to create, in essence, one building. For the purposes of this report, the two properties will be referred to collectively as “175 Central Avenue.” The City of Albany and the DOL both lease space at 175 Central Avenue from CMcD. Additionally, DOL sub-leases a portion of their space to the City of Albany for use by the Department of Youth and Workforce Services. The lease with CMcD is for the term November 1, 2013 – October 31, 2018. The sublease with the DOL is the contract which had expired in 2011. The City has continued to pay rent to DOL since the expiration of the sublease. Introduction In initiating this audit, our larger goal was to preserve more of the limited funding available for the valuable programs conducted by the City of Albany Department of Youth and Workforce Services, which serve City residents in a direct and meaningful way, and improve the quality of life of our community. The primary objective of this audit was to confirm the amount of space occupied by the Department at 175 Central Avenue, and to assure that The City of Albany has documentation of such leased space. Additionally, we sought to determine whether it may be possible to reduce the City’s rental expense at 175 Central Avenue without compromising the operation of the Department. The OAC requested all past and present leases for 175 Central Avenue from the City’s Corporation Counsel. An analysis was done of the varying costs incurred, over the years, by the City in the rental of this space. The Chief City Auditor and the Commissioner of Youth and Workforce Services jointly ---PAGE BREAK--- 5 conducted an examination of the physical space at 175 Central Avenue and the ways in which it is utilized by the Department. The audit findings are as follows: 1. The lease with CMcD properties began in 2000 and was amended in 2002, 2010, 2011 and 2013. As noted, this lease expires on October 31, 2018. 2. The City has been paying rent on underutilized space at 175 Central Avenue. It will be cost- efficient to reduce some of the space occupied by the Department at this location. As a result, and during the course of this audit, as of December 22, 2017, the Department vacated some of the space it had occupied at 175 Central Avenue via the aforementioned sublease with the DOL. This sublease expired on December 31, 2011, but was implicitly extended by tacit agreement of both parties. Scope, Objective and Methodology Scope The Audit was focused on the sublease with the DOL, which expired in 2011. Objectives The objectives of this audit were as follows: 1. Determine whether the City has an agreement with CMcD Properties; 2. Determine whether the City has an agreement with the Department of Labor; 3. Review and analyze the history of the City’s leases and subleases at this address; and 4. Determine if the space is currently being fully utilized and complete a thorough analysis of the shared costs charged to the City that are reimbursable. Methodology The overall audit methodology consisted of the following: Examination of the space utilized by the Department under the existing tacit agreement, by working with the Department to assess the use of the occupied space at 175 Central Avenue, with the goal of reducing its office space to be more cost efficient. Collecting, reviewing, and evaluating all historic rental and escalation costs related to the property. ---PAGE BREAK--- 6 CMcD Properties’ Lease As part of this audit, the OAC reviewed the City’s rates per square foot paid in prior leases of 175 Central Avenue from CMcD. Please refer to the table below for the summary of lease agreements. Lease Type and Year Lease Term Square Ft. Rent Annual Rent Price per Sq. Ft. per year Escalation per Sq. Ft. per year Total Price per Sq. Ft. per year 2000 Lease July 1, 2000 to June 30, 2010 12,200 $6,666.67 $80,000.00 $6.56 2002 Lease Modification Effective April 1, 2002 13,000 $7,643.34 $91,720.00 $7.06 2010 Lease Modification July 1, 2010 to April 30, 2011 10,700 $5,416.66 $65,000.00 $6.07 2011 Lease Modification Effective May 1, 2011, month-to- month 6,046 $3,879.51 $46,554.20 $7.70 2013 Lease Modification and Renewal November 1, 2013 to October 31, 2018 6,046 $3,879.51 $46,554.20 $7.70 $4.96 $12.66 The current payment to CMcD is $6,379.79, which includes $3,879.51 that is listed in the 2013 lease modification and renewal plus $2,500.28 in escalation charges, which is 47% of the gas and electric charges for the property. Escalation Charges The CMcD lease escalation charges include taxes, building maintenance, labor, water, and pest control fees. The current charges are $2,500.28 per month and are detailed in a letter dated December 13, 2016 from Charles A. DiGangi of Campito Properties (on behalf of CMCD Properties) to Douglas Lansing, Director of Enrollee Services for the Department of Youth and Workforce Services. The $2,500.28 per month charge totals $30,003.36 per annum. The escalation charges’ price per square foot is $4.96 per year. The current total price per square foot, including lease and escalation charges, is $12.66. The letter dated December 13, 2016 states, “The appropriate adjustments will be made at the end of the lease term and shall be based on the actual expenses incurred for period 11/1/15 through ---PAGE BREAK--- 7 10/31/16.” However, the OAC has found that there is no record of adjustments in expenses made at the end of the 2017 term. The letter, which includes a breakdown of expenses, states that the escalation charges are “In accordance with Section 4, Paragraph entitled ‘Operating Expenses, Taxes and Insurance’ of the City of Albany lease for property at 175 Central Ave…” See Section 4, Paragraph of the original 2000 lease agreement in Appendix. DOL Sublease Agreement As of February 10, 2011, the City and the DOL made and entered into an office space permit agreement for January 1, 2010 through December 31, 2011. The agreement states that the City is thereby a tenant at 175 Central Avenue, and grants a permit to use and occupy 5,733.9 square feet of space. The City agreed to pay the DOL a permit fee of $20.33 per square foot, equal to $116,570.19 per annum, to be paid in equal installments of $9,714.18. During the course of this audit, the Chief City Auditor and the Commissioner of Youth and Workforce Services conducted a of 175 Central Avenue. They examined the space occupied at 175 Central Avenue and its functions. As a result of this analysis, as of December 22, 2017, the Department elected to move out of some of the space it had occupied at 175 Central Avenue via the tacit extension of the sublease from DOL. The renegotiated DOL sublease, referred to as the Shared One Stop Costs Contract was executed on May 1, 2018, between the DOL and the City, for December 1, 2017 through November 30, 2022. The new contract reduces the amount of rented space from 5,733.9 square feet to 1,187.0 square feet. The new contract will cost the City $21.00 per square foot, totaling $24,927.00 per annum to be paid in equal installments of $2,077.25. The rent also covers operating expenses (janitorial, HVAC, electricity, fuel, parking, and grounds maintenance). In addition to the rent, the Department will pay for its communication expenses. This consists of 16 VOIP phones at a cost of $16.57 each, per month, for a total of $265.12 per month. The total payment payable to DOL is $2,342.37. ---PAGE BREAK--- 8 Audit Results New Proposed Contract Since the expiration of a lease on December 31, 2011, the City has been paying $20.33 per square foot for rent. Working with DOL, the new proposed Addendum was executed at $21.00 per square foot. This agreement covers all operating expenses, plus communications expense of $265.12 per month. On May 1, 2018, the City signed a contract with DOL, which is attached to the report. In the attached Addendum of the contract, DOL states that the City will be credited $14,743.62 for invoices paid based on the prior rent cost of $9,714.18. The contract failed to include the additional four invoices paid from February 1, 2018 to May 31, 2018, totaling $29,487.24 for four months of rent. OAC determined that the City should be credited $44,230.86, instead of the $14,743.62. The contract total price of $125,798.58 should be $96,311.34 for the five year term. Please see the attached OAC’s Proposal for Revision of Addendum on page 16. The previous lease total cost was $116,570.16 per annum. With the new proposed DOL contract, the City will save $88,461.72 per year. The new contract states the term as “beginning on December 22, 2017 and ending on November 30, 2022”. The DOL has agreed to credit the City for its overpayment of rent during the months following the vacating of space at 175 Central Avenue, but prior to the establishment of the new sublease contract. The OAC calculates this credit to be $44,230.66. The City should have this credit applied toward future rent payments. Recommendations Recommendation #1 - For the CMcD Lease, the OAC recommends the City request documentation of the actual amount of operating expenses incurred instead of paid each month for year-end 2017. Recommendation #2 - The OAC recommends the City amend the contract that was signed and executed on May 1, 2018, to credit the appropriate amount of $44,230.86 versus the $14,743.62 credit as noted on page 15, DOL Addendum Contract Cost Breakdown and revised on page 16. The City should look at APPENDIX II - Executed DOL One Stop Costs Contract “revision” on page 11 that is attached as an example. This analysis was calculated by the OAC. ---PAGE BREAK--- 9 Recommendation #3 - The OAC recommends that the City review its rent expense on a regular basis with the goal of eliminating over-payment in this area. Based on the table on page 6, the City has a contract price of $12.66 per square foot with CMcD, which includes escalation. In comparison, the City is paying DOL $21.00 per square foot. The only difference is that DOL shared cost contract includes parking. The City should identify why the rate with DOL is higher than the CMcD direct lease. If the only difference is parking, the City should compare this to the market rate for parking spaces. Recommendation #4 - The OAC recommends that the City adopt the practice of maintaining valid, current leases for all rented spaces. All existing leases should be reevaluated and renegotiated prior to the date of expiration. Conclusion The City of Albany often needs to rent space for its different operations. Many of these rentals consist of an agreement between the City and New York State entities. The City should periodically review its rental agreements with the goal of reducing expense whenever possible. In some cases, space may have become redundant since the rental agreement was executed. A department may have changing needs and/or staffing levels, which leads to a decrease in the office size necessary. During the course of this audit, the OAC, the Department and the City Administration agreed that the Department should vacate some of the rented space within the building to occupy a lesser portion of 175 Central Avenue. As stated previously, this reduction was finalized during the course of this audit. With the cooperation of DOL, the City’s Corporation Counsel, and the Department of Youth and Workforce Services, a new sublease contract was executed and signed. The addendum to the contract reflects a $14,743.62 credit, whereas the credit should be $44,230.86 due to rent payments made during contract negotiations. With the new proposed DOL contract, the City will save $88,461.72 per year. ---PAGE BREAK--- 10 Appendix I Executed DOL One Stop Costs Contract ---PAGE BREAK--- 11 ---PAGE BREAK--- 12 ---PAGE BREAK--- 13 ---PAGE BREAK--- 14 DOL Addendum Contract Cost Breakdown ---PAGE BREAK--- 15 The OAC’s Proposal for Revision of Addendum ---PAGE BREAK--- 16 Detailed Annual Savings & Prorated Reimbursement (OAC Analysis) ---PAGE BREAK--- 17 Appendix II Department of Youth and Workforce Services’ Response Office of the Corporation Counsel’s Response The Corporation Counsel responded to decline the opportunity to respond. ---PAGE BREAK--- 18 Office of Administrative Service’s Response Auditor’s Response The Office of Audit and Control will follow-up to verify if recommendations are addressed.