The City of New York Office of the Comptroller Bureau of Financial Audit

Audit Report on the Compliance of Sterling Doubleday Enterprises, L.P., (New York Mets) With Their Lease Agreement And Fees They Owe the City
April 1, 1996,through December 31, 2000

FN02-125A
January 16, 2003

EXECUTIVE SUMMARY

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Background

In 1985, Doubleday Sports, Inc., and the New York City Department of Parks and Recreation (Parks) entered into a 20-year lease agreement for the rental and use of Shea Stadium. In 1986, Doubleday Sports, Inc., assigned the lease agreement to Sterling Doubleday Enterprises, L.P. (doing business as the New York Mets). The lease, which is monitored by Parks, expires on December 31, 2004. The first amendment, dated December 28, 2001, extends the lease to December 31, 2005, and includes five annual renewal options to be exercised at the Mets’ discretion.

According to the agreement, the Mets are required to pay the City the greater of either an annual minimum rent of $300,000 or a percentage of revenues from gross admissions, concessions, wait service, parking, stadium advertising, and a portion of cable television receipts. The agreement allows the Mets to deduct portions of the payments they make to Major League Baseball and all sales taxes before calculating rent payments to the City.

The audit objectives were to determine whether the Mets: accurately reported all gross receipts in accordance with the agreement; paid the appropriate fees due the City and paid these fees on time; maintained adequate internal controls over the recording and reporting of their gross receipts; complied with certain other requirements of their agreement (i.e., maintained required insurance and reimbursed the City for utility use); and paid a prior audit assessment to Parks. For the audit period, April 1, 1996, to December 31, 2000, the Mets reported gross revenues totaling $499.4 million and paid the City $36.6 million (7.3 percent).

The New York Mets had an adequate system of internal controls over their revenue collection and reporting functions. In addition, the Mets adhered to certain non-revenue-related requirements of the agreement. The Mets had the required liability insurance that named the City as an additional insured party in accordance with Article XXVI, § 26.3 and § 26.7, of the agreement; and the Mets reimbursed Parks for electricity and for water and sewer use during the baseball season, in accordance with Article XXII, § 22.1, of the agreement.

However, from April 1, 1996, through December 31, 2000, the Mets underreported their revenue by $18,363,226 and overstated the deductions against revenue that they were entitled to take by $27,766,408. Moreover, the Mets have yet to satisfy a portion of the prior audit assessment pertaining to homeplate advertising totaling $83,186. Consequently, the Mets owe the City $3,381,816. (The amount owed is net and does not include any late payment penalties or interest, since there is no clause in the agreement requiring that such penalties or interest be added to the assessed amount.) Specifically, the Mets:

Did Not Report $13,475,218 in Advertising Revenue. The Mets did not report $12,915,547 attributable to homeplate advertising, underreported scoreboard advertising for 1998, 1999, and 2000 by a total of $149,831, and did not report $409,840 generated from advertisements displayed behind first base and third base during the 1998 baseball season. Article XVI, § 16.2 (ii), requires that the Mets pay the City fees on certain advertising revenues amounting to 10 percent less $8,000, excluding Diamond Vision advertising revenue. The issue of homeplate advertising was raised in a prior audit report issued June 16, 1997. (First base and third base advertising was installed during the 1998 baseball season.) That report noted that the Mets installed revolving advertising signs behind homeplate, received $831,857 in homeplate advertising revenue for the 1995 season and accordingly owed the City $83,186. The report’s assessment was supported by a May 5, 1997, opinion from the New York City Law Department. (See letter from the Law Department in Appendix I.)

Did Not Report $4,870,964 in Concession and Wait Service Revenue. The Mets agreement requires them to pay the City a percentage of concession and wait service revenue when their seasonal paid attendance exceeds two million patrons. For the years 1996, 1997, and 1998, the Mets reported that attendance was less than two million and did not pay any percentage fees for their concession and wait service revenues. However, for the 1998 season, the Mets Sales Summary report and Daily Turnstile reports indicated that attendance exceeded the two million paid ticket threshold. In addition, our review of the Mets concessionaire’s (Aramark) 1998 audited financial statements disclosed that the Mets underreported their concession and wait service revenues by $568,324. This resulted in the Mets’ owing the City $38,999 in fees for 1998. Moreover, concession revenue amounts from Aramark’s audited financial statements for the 1999 and 2000 seasons indicated that the Mets underreported concession and wait service revenue by $4,302,640 in their calculations of fees due the City and owe the City additional fees of $69,249. In total, the Mets owe the City $108,248 for underreporting concession and wait service revenue for the 1998, 1999, and 2000 seasons.

Underreported Skybox Revenue by $17,044. In 2000, the Mets omitted $8,880 in revenue from one daily luxury suite rental on the revenue reported to the City and Skybox concession receipts totaling $8,164 from 1996 to 1998. Consequently, the Mets owe the City $8,522 in additional fees.

Overstated Major League Baseball Deductions by $27,766,408. On their 1996 through 2000 rent statements, the Mets reduced reported revenues by $47,411,806. However, according to Major League Baseball’s Revenue-Sharing reports and the Mets own books and records, the Mets should have deducted $19,645,398. Thus, the Mets overstated the deductions claimed on their rent statements by $27,766,408, and consequently owe the City additional fees totaling $1,834,338.

The amount claimed by the Mets as a reduction of revenues on which fees to the City are based, bears no relationship to the amount that they actually paid to Major League Baseball. Instead of deducting the allowable portion of the actual payments made, the Mets deducted the reported amounts of net operating revenues that Major League Baseball used for its revenue sharing calculations. For example, for 1999, the Mets reduced reported revenues on their rent statement to the City by $11,151,430. According to the Major League Baseball’s Revenue-Sharing reports for 1999, the Mets paid $10,803,174 to Major League Baseball and received $709,531 as a final audited adjustment for the 1999 season. Based on the net amount paid, the Mets should have taken $6,205,343 (57.44 percent of the $10,803,174 actually paid), as a deduction from their revenue reported to the City. Therefore, the Mets owe the City $334,511 for the 1999 season.

A particularly egregious example of these excess deductions was the Mets’ deduction of $5,761,785 from their reported revenues on their rent statements to the City for the 1996 baseball season, when in fact, they should have taken no deduction. According to Major League Baseball’s Revenue-Sharing reports, in that year, the Mets received $1,012,943 from the Revenue-Sharing pool and paid $731,385 into the pool, a net receipt of $281,558. Consequently, the Mets owe the City $367,176 for the 1996 season.

Continue to Owe the City $83,186 of an Unpaid Prior Audit Assessment. The Mets agreed with and paid the City $104,544 in additional fees due the City from a previous audit (Audit #FN97-098A). However, the portion of the audit assessment that pertained to the previously discussed homeplate advertising remains unpaid.

This audit recommends that the Mets: pay the City $3,381,816 for outstanding fees due; ensure that all advertising, concession, and Skybox receipts are reported on the their rent statements to the City; and ensure that only final audited year-end Revenue-Sharing payments pertaining to admissions and cable television receipts are subtracted from their rent statement and fee calculations.

The audit also recommends that Parks: ensure that the Mets pay the City $3,381,816 for outstanding fees due; comply with the audit’s other two recommendations; and incorporate a late payment penalty clause in future contracts with the Mets that at a minimum assesses penalties/interest on any late payments at the prime commercial lending rate. In the event the Mets and Parks continue to disagree on the fees due, Parks should take immediate action to resolve the dispute through either the lease’s panel arbitration process or appropriate judicial proceedings.

Discussion of Audit Results

The matters covered in this report were discussed with Mets and Parks officials during and at the conclusion of this audit. A preliminary draft report was sent to Mets and Parks officials and was discussed at an exit conference on September 12, 2002. On September 27, 2002, we submitted a draft report to Mets and Parks officials with a request for comments. On October 10, 2002, we received written responses from Mets and Parks officials.

In their response, Mets officials stated: "Of the several issues raised in the audit report, only two remain in dispute: the calculation of advertising revenues (which pertains to the 1995 audit as well), and the application of deductions related to sharing of revenues with other Major League Baseball entities. We do not take issue with any of the other issues raised in the report, and will remit a check to the Parks Department to resolve those undisputed issues."

With respect to advertising revenue, the Mets stated that they "previously addressed this issue in response to the 1995 audit." In addition, the Mets stated that "neither the letter nor the spirit of the lease agreement entitles the City to share in the revenues from the signage in question, due to the fact that both signs are predominantly television advertising signs, not stadium advertising signs."

With respect to Revenue-Sharing, Mets officials contend that their claimed deductions are correct, that the audit’s methodology would result in the City receiving a share of revenues to which it is not entitled, that the Revenue-Sharing procedures are misunderstood by the auditors, and that the revenue deductions allowed by the lease are unfairly limited.

In their response, Parks’ officials stated that: "DPR has issued the attached letter to the Mets requesting payment under Recommendation 1 for the full amount of $3,381,816."