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HomeMy WebLinkAboutMemo-SUBTHIS DOCUMENT IS A SUBSTITUTION TO ORIGINAL BACKUP. ORIGINAL CAN BE SEEN AT THE END OF THIS DOCUMENT. CITY OF MIAMI CITY ATTORNEY'S OFFICE MEMORANDUM 0 a U) 5c1AsA LT/CiJ // 1.d' . N 0 0 TO: Honorable Mayor and Members of the City Commission FROM: Julie O. Bru, City Attorney. ii DATE: December 8, 2008 RE: Proposed Resolution - City Commission Meeting — December 11 20(? Accepting a Settlement for the case of City of Miami vs. Bayside Center LP, an Affiliate of General Growth Properties, Inc., a Maryland Limited Partnership, American Arbitration Association, Case No.: 32 115 Y 00687 (File No. 08-01458) The attached proposed Resolution pertains to the proposed settlement of the referenced arbitration case. By way of a brief history, in 1985 the City and Bayside Center Limited Partnership entered into several agreements relating to the development of a portion of Bayfront Park including, inter alia: (i) a Garage Lease Agreement, dated January 14, 1985, as amended and restated from time to time ("Garage Lease"); (ii) a Retail Lease Agreement, dated January 14, 1985, as amended and restated from time to time ("Retail Lease"); (iii) a Minority Participation Agreement, dated January 14, 1985 and a First Amendment to Minority Participation Agreement ("Minority Participation Agreement") and (iv) a Miamarina Agreement dated October 24, 1985 pursuant to which Bayside Center Limited Partnership was to develop, construct and operate a parking garage and a retail mall. Upon completion of the garage and retail mall in 1987, Bayside Center Limited Partnership calculated and paid rent due and owing to the City using formulas set out in each of the leases. On a yearly basis, Bayside has provided the City with "Audited Financial Statements" and related documents in support of its calculations of the rent due and owing to the City under the leases. An audit was conducted by Victor I. Igwe, CPA, CIA, Independent Auditor General, Office of the Auditor General, City of Miami for the Bayside Center Limited Partnership (Bayside Marketplace) for the period January 1, 1998 through December 31, 2000. The Independent Auditor General found that Bayside Center Limited Partnership had underpaid the City the percentage rents due under the Garage Lease, as further set forth in his Audit Report Bayside Center Limited Partnership (Bayside Marketplace) for the Period January 1, 1998 Through December 31, 2000. At issue is the interpretation of Section 2.5 (a) of the Garage Lease, which states that, "During each Rental Year during the Original Term and each Renewal term hereof, Developer [Bayside Center Limited Partnership] covenants and agrees to pay the City annually as rental for the Lease Property, the following: • The annual sum of Ten Thousand Dollars ($10,000) (Annual Basic Rental). • To the extent there is Net Income Available for Distribution, the annual sum of Eighty Thousand Dollars ($80,000) (Annual Additional Rental). ag ofg5g'- memo -Su& Honorable Mayor and Members of the City Commission December 8, 2008 THIS DOCUMENT IS A SUBSTITUTION TO ORIGINAL BACKUP. ORIGINAL CAN BE SEEN AT THE END OF THIS DOCUMENT. • Fifty percent (50%) of the remaining Net Income Available for Distribution, if any, after payment of the Annual Basic Rental, Annual Additional Rental, and after Developer has been reimbursed up to Ninety Thousand Dollars ($90,000) for Negative Cash Flow previously paid by Developer (Annual Percentage Rental)." Bayside Center Limited Partnership computes "Net Income Available for Distribution" by subtracting the following transactions from the "Operating Income" for the applicable or pertinent period: • Operating Expenses for the same period_ • Debt Service Payments for the same period. • An amount equal to ten percent (10%) of the total cumulative Developer Equity Investment made from the inception of the Agreement up to the period for which "Net Income Available for Distribution" is being calculated. This cumulative total is not adjusted for costs amortized in the prior years. The Independent Auditor General concluded that 10% of the Developer Equity Investment account should be deducted annually to compute the "Net Income Available for Distribution" and that each item comprising this account should be fully recouped over a ten- year period. Based on that conclusion, his review of Bayside Center Limited Partnership's financial accounting records disclosed that for the period 1987 through 2000, Bayside Center Limited Partnership had exceeded the total deduction of the Developer's Equity Investment account by $429,387. The Independent Auditor General relied on FASB Statement number 13 (generally accepted accounting principle), which provides that leasehold improvements be depreciated for a specific period of time. Therefore, he reasoned that the total cumulative Developer Equity Investment should be recouped from Operating Income until the total amount invested is fully recouped, and thereafter, the deduction of the respective equity components should cease. The Independent Auditor General thus concluded that Net Income Available for Distribution was understated as a result of the excess deductions during the period 1997 through 2000, and therefore, the City would be entitled to $214,692 in additional annual percentage rent. The excess deduction as noted above was due to Bayside Center Limited Partnership's interpretation of how the Developer's Equity Investment account should be accounted for. While the Independent Auditor General contends that the total cumulative Developer Equity Investment should be deducted from "Operating Income" until the total amount invested is fully recouped, and thereafter, the deduction of the respective equity components should cease, Bayside Center Limited Partnership has contended that the Garage Lease allows Bayside Center Limited Partnership to deduct ten percent (10%) of its total cumulative Developer's Equity Investment account from "Net Operating Income" as a "return on its investment." Additionally, Bayside alleges that the concept of "amortization" is not provided in the Garage Lease nor in generally accepted accounting principles. 2 Honorable Mayor and Members of the City Commission December 8, 2008 THIS DOCUMENT IS A SUBSTITUTION TO ORIGINAL BACKUP. ORIGINAL CAN BE SEEN AT THE END OF THIS DOCUMENT. While the Garage Lease defines the term "Developer Equity Investment", that definition does not include the term "return on investment", but rather uses the term "recoup" as it relates to Developer Equity Investment Account. Based on the Independent Auditor General's findings, the dispute between the City and Bayside Center Limited Partnership regarding Bayside Center Limited Partnership's compliance with and performance under the Garage Lease resulted in the City filing a demand for arbitration against Bayside Center Limited Partnership with the American Arbitration Association, Case No. 32 115 Y 0068707 (the "Arbitration") including the City's claim against Bayside for underpaid Annual Percentage Rental for the period of January 1, 1998 through December 31, 2000 as determined by the City of Miami audit finding contained in Audit No. 01-013; the City's claims for underpaid Annual Percentage Rental for the periods subsequent to December 31, 2000 due to a continued understatement of Net Income Available for Distribution; and any other claims of the City against Bayside regarding the Garage Lease. The City also included in the Arbitration a claim regarding enforcement of the Minority Participation Agreement. Despite request, Bayside Center Limited Partnership has not provided documentation to the City regarding Bayside Center Limited Partnership's obligations under the Minority Participation Agreement to enable the City to monitor Bayside's performance under that agreement for certain years. Pursuant to the Minority Participation Agreement: "Developer [Bayside Center Limited Partnership] agree[d] to pay to the foundation, ten percent (10%) of Net Income Available for Distribution (as the term is defined in the Retail Lease) or $100,000, whichever is greater ("Foundation Contribution"). The minimum $100,000 annual Foundation Contribution payment is to be made in equal quarterly installments commencing on the Rent Commencement Date (as defined in the Retail Lease), and ending at the end of the term of the Retail Lease. Bayside Center Limited Partnership, pursuant to a merger involving General Growth Properties, Inc., became Bayside Marketplace, LLC after the merger ("Bayside"). The City is seeking at least $838,733 under the Garage Lease for unpaid back rent, plus statutory pre judgment interest of approximately $364,569. Pursuant to extensive negotiations, including a mediation that occurred on October 7 and 8, 2008 between the City and Bayside, the parties have agreed to compromise, settle, and release the claims in the Arbitration. The Resolution accepts a payment to the City in the amount of Five Hundred Thousand Dollars ($500,000) payable in five annual installments of $100,000 pursuant to the schedule in and as more fully set forth in the attached settlement agreement which has been executed by Bayside, in full settlement of the claims and demands in the case of City of Miami vs. Bayside Center Limited Partnership, American Arbitration Association Case No.: 32 115 Y 00687. Further, consistent with the Independent Auditor General's interpretation, Bayside has agreed as follows as part of the proposed settlement: For purposes of this Agreement, the Settling Parties stipulate and agree that the current existing amount of Bayside's Developer Equity 3 Honorable Mayor and Members of the City Commission December 8, 2008 THIS DOCUMENT IS A SUBSTITUTION TO ORIGINAL BACKUP. ORIGINAL CAN BE SEEN AT THE END OF THIS DOCUMENT. Investment ("the Existing DEI"), as defined in the existing Garage Lease, shall be deemed to be $1,000,000. The parties further agree that Bayside shall be able to amortize said $1,000,000 Existing DEI amount in equal $100,000 amounts over a 10-year period, and that Bayside may subtract those "amortizations" in calculating Net Income Available for Distribution ("NIAD"). After 10 years, the Existing DEI shall be deemed to be exhausted. The issue of the continued underpayment of rent to the City for the balance of the lease, which is significant given that the original lease term is for 45 years with an option to renew for two additional 15-year terms, would also be resolved as follows: For purposes of this settlement, the parties agree that any future Operating Losses incurred or unfinanced Capital Improvements paid by Bayside shall be added to another Developer Equity Investment account ("the Future DEI"). Any such additions to Future DEI shall be "amortized" or depreciated in equal amounts and such amortization or depreciation shall be straight line in nature and shall be in accordance with U.S. generally accepted accounting principles, except for the period of amortization or depreciation which shall be a 10-year period, and Bayside may subtract those "10% amortizations" (or depreciations) in calculating Net Income Available for Distribution ("NIAD"). After 10 years, the Future DEI accrued in any calendar year shall be deemed to be exhausted. Also, with respect to the Minority Participation Agreement, Bayside has agreed as follows as part of the proposed settlement: Within 10 days of execution of this [Settlement] Agreement by all parties, Bayside shall provide canceled checks to the City, evidencing payment of the minimum required payment due under the Minority Participation Agreement for the years 2004 through 2008. To the extent that Bayside cannot provide said documentation, Bayside shall pay any such outstanding amounts due to the Bayside Minority Foundation within 20 days after the expiration of the 10 day period. Bayside shall provide the City of Miami with copies of canceled checks evidencing payment of any such outstanding amounts to the Bayside Minority Foundation. The settlement of the Arbitration includes all claims as between the City and Bayside with respect to the Garage Lease, the Minority Participation Agreement and the Arbitration. The settlement has been evaluated and negotiated by the City Attorney, the Chief Financial Officer, the Acting Director of Public Facilities, the Lease Manager and the Independent Auditor General and is recommended for approval by the City Attorney. Attachment(s) 4 SUBSTITUTED TO: ROM: CITY OF MIAMI CITY ATTORNEY'S OFFICE MEMORANDUM Honorable Mayor and Members of the City Commission Julie O. Bru, City Attorney. DA . E: November 25, 2008 RE.11 RE: Proposed Resolution - City Commission Meeting — December 11, 2008 Accepting a Settlement for the case of City of Miami vs. Bayside Center LP, an Affiliate of General Growth Properties, Inc., a Maryland Limited ership, American Arbitration Association, Case No.: 32 115 Y 00687 No. 08-01458) (Fi The attached propo ; d Resolution pertains to the proposed settlement of the referenced arbitration case. By way of a brief histo , entered into several agreements re including, inter alia: (i) a Garage Le restated from time to time ("Garage Le 1985, as amended and restated from time Agreement, dated January 14, 1985 an Agreement ("Minority Participation Agreem October 24, 1985 pursuant to which Bayside construct and operate a parking garage and a retai retail mall in 1987, Bayside Center Limited Partners to the City using formulas set out in each of the le provided the City with "Audited Financial Statements" calculations of the rent due and owing to the City under the in 1985 the City and Bayside Center Limited Partnership ting to the development of a portion of Bayfront Park e Agreement, dated January 14, 1985, as amended and e"); (ii) a Retail Lease Agreement, dated January 14, time ("Retail Lease"); (iii) a Minority Participation a First Amendment to Minority Participation art") and (iv) a Miamarina Agreement dated enter Limited Partnership was to develop, all. Upon completion of the garage and calculated and paid rent due and owing es. On a yearly basis, Bayside has d related documents in support of its eases. An audit was conducted by Victor I. Igwe, CPA, CIA, Office of the Auditor General, City of Miami for the Baysid (Bayside Marketplace) for the period January 1, 1998 through Independent Auditor General found that Bayside Center Limited Part City the percentage rents due under the Garage Lease, as further set fo Bayside Center Limited Partnership (Bayside Marketplace) for the Pe Through December 31, 2000. Independent Auditor General, Center Limited Partnership ecember 31, 2000. The ership had underpaid the in his Audit Report 'od January 1, 1998 At issue is the interpretation of Section 2.5 (a) of the Garage Lease, w "During each Rental Year during the Original Term and each Renewal term here [Bayside Center Limited Partnership] covenants and agrees to pay the City ann for the Lease Property, the following: • The annual sum of Ten Thousand Dollars ($10,000) (Annual Basic Rental). • To the extent there is Net Income Available for Distribution, the annual sum of Eighty Thousand Dollars ($80,000) (Annual Additional Rental). ch states that, Developer as rental SUBSTITUTED Honorable Mayor and Members of the City Commission ovember 25, 2008 • Fipercent (50%) of the remaining Net Income Available for Distribution, if any, after payme t of the Annual Basic Rental, Annual Additional Rental, and after Developer has been reimburs,.• up to Ninety Thousand Dollars ($90,000) for Negative Cash Flow previously paid by Develo. - r (Annual Percentage Rental)." Baysid- Center Limited Partnership computes "Net Income Available for Distribution" by subtracting t following transactions from the "Operating Income" for the applicable or pertinent period: • Operating Expenses . the same period. • Debt Service Payments or the same period. • An amount equal to ten . - rcent (10%) of the total cumulative Developer Equity Investment made from the inception of e Agreement up to the period for which "Net Income Available for Distribution" is being calc . ated. This cumulative total is not adjusted for costs amortized in the prior years. The Independent Auditor Investment account should be deduct Distribution" and that each item compris year period. Based on that conclusion, hi financial accounting records disclosed that Limited Partnership had exceeded the total account by $429,387. neral concluded that 10% of the Developer Equity annually to compute the "Net Income Available for g this account should be fully recouped over a ten - review of Bayside Center Limited Partnership's the period 1987 through 2000, Bayside Center d- • uction of the Developer's Equity Investment The Independent Auditor General relied on ASB Statement number 13 (generally accepted accounting principle), which provides that lea hold improvements be depreciated for a specific period of time. Therefore, he reasoned that total cumulative Developer Equity Investment should be recouped from Operating Income un the total amount invested is fully recouped, and thereafter, the deduction of the respective eq ♦ components should cease. The Independent Auditor General thus concluded that Net Income vailable for Distribution was understated as a result of the excess deductions during the pe od 1997 through 2000, and therefore, the City would be entitled to $214,692 in additional annupercentage rent. The excess deduction as noted above was due to Bayside Cen : Limited Partnership's interpretation of how the Developer's Equity Investment account sho d be accounted for. While the Independent Auditor General contends that the total cumulati Developer Equity Investment should be deducted from "Operating Income" until the total . ount invested is fully recouped, and thereafter, the deduction of the respective equity compone should cease, Bayside Center Limited Partnership has contended that the Garage Lease : .ws Bayside Center Limited Partnership to deduct ten percent (10%) of its total cumulative N eveloper's Equity Investment account from "Net Operating Income" as a "return on its in - stment." Additionally, Bayside alleges that the concept of "amortization" is not provided in the Garage Lease nor in generally accepted accounting principles. 2 SUBSTITUTED Honorable Mayor and Members of the City Commission ovember 25, 2008 While the Garage Lease defines the term "Developer Equity Investment", that definite n does not include the term "return on investment", but rather uses the term "recoup" as it rela s to Developer Equity Investment Account. Baseon the Independent Auditor General's findings, the dispute between the City and Bayside Cent Limited Partnership regarding Bayside Center Limited Partnership's compliance with • d performance under the Garage Lease resulted in the City filing a demand for arbitration ag nst Bayside Center Limited Partnership with the American Arbitration Association, Case 32 115 Y 0068707 (the "Arbitration") including the City's claim against Bayside for underpai• Annual Percentage Rental for the period of January 1, 1998 through December 31, 2000 as . -termined by the City of Miami audit finding contained in Audit No. 01-013; the City's claims or underpaid Annual Percentage Rental for the periods subsequent to December 31, 2000 du: to a continued understatement of Net Income Available for Distribution; and any other cl.►'ms of the City against Bayside regarding the Garage Lease. The City also included in i. e Arbitration a claim regarding enforcement of the Minority Participation Agreement. Despi : request, Bayside Center Limited Partnership has not provided documentation to the y regarding Bayside Center Limited Partnership's obligations under the Minority Part • pation Agreement to enable the City to monitor Bayside's performance under that agre= .ent for certain years. Pursuant to the Minority Participation Agreement: "Developer [Baykde Center Limited Partnership] agree[d] to pay to the foundation, ten percent (10%) of Net Income Available for Distribution (as the term is defined in the Retail Lease) or $100,000, whi The minimum $100,000 annual Foundation C quarterly installments commencing on the Rent Co Lease), and ending at the end of the term of the Retai ever is greater ("Foundation Contribution"). tribution payment is to be made in equal encement Date (as defined in the Retail ease. Bayside Center Limited Partnership, pursuant to a merger involving General Growth Properties, Inc., became Bayside Marketplace, LLC after th= merger ("Bayside"). The City is seeking at least $838,733 under the Garage ease for unpaid back rent, plus statutory pre judgment interest of approximately $364,569. Purs ► , t to extensive negotiations, including a mediation that occurred on October 7 and 8, 2008 betw--n the City and Bayside, the parties have agreed to compromise, settle, and release the claims in th Arbitration. The Resolution accepts a payment to the City in the amount of ve Hundred Thousand Dollars ($500,000) payable in five annual installments of $100,000 purs t to the schedule in and as more fully set forth in the attached settlement agreement which h. been executed by Bayside, in full settlement of the claims and demands in the case of City of ami vs. Bayside Center Limited Partnership, American Arbitration Association Case No.: 32 11 ' Y 00687. Further, consistent with the Independent Auditor General's interpretation, ' ayside has agreed as follows as part of the proposed settlement: For purposes of this Agreement, the Settling Parties stipulate and agree that the current existing amount of Bayside's Developer Equity 3 \,1, onorable Mayor and Members of the City Commission vember 25, 2008 SUBSTITUTED nvestment ("the Existing DEI"), as defined in the existing Garage Lease, s 11 be deemed to be $1,000,000. The parties further agree that Bayside sh be able to amortize said $1,000,000 Existing DEI amount in equal $100,$00 amounts over a 10-year period, and that Bayside may subtract those ' ortizations" in calculating Net Income Available for Distribution ("NIAD' . After 10 years, the Existing DEI shall be deemed to be exhausted. The issue of the continued underpayment of rent to the City for the balance of the lease, which is significant giv that the original lease term is for 45 years with an option to renew for two additional 15-yea terms, would also be resolved as follows: For purposes of this s lement, the parties agree that any future Operating Losses incurred or anced Capital Improvements paid by Bayside shall be added to anoth- Developer Equity Investment account ("the Future DEI"). Any such a. 'itions to Future DEI shall be "amortized" or depreciated in equal amounts d such amortization or depreciation shall be straight line in nature and s . 1 be in accordance with U.S. generally accepted accounting principles, e cept for the period of amortization or depreciation which shall be a 10-y: ar period, and Bayside may subtract those "10% amortizations" (or depre iations) in calculating Net Income Available for Distribution ("NIAD"). • fter 10 years, the Future DEI accrued in any calendar year shall be deeed to be exhausted. Also, with respect to the Minority Particip. ion Agreement, Bayside has agreed as follows as part of the proposed settlement: Within 10 days of execution of this [Settlement] A;, eement by all parties, Bayside shall provide canceled checks to the City, e ' dencing payment of the minimum required payment due under the Mi .rity Participation Agreement for the years 2004 through 2008. To the e ent that Bayside cannot provide said documentation, Bayside shall ..y any such outstanding amounts due to the Bayside Minority Foundat .n within 20 days after the expiration of the 10 day period. Bayside shall •rovide the City of Miami with copies of canceled checks evidencing paym . t of any such outstanding amounts to the Bayside Minority Foundation. The settlement of the Arbitration includes all claims as between the ity and Bayside with respect to the Garage Lease, the Minority Participation Agreement and the : bitration. The settlement is recommended by this Office, the Chief Financial Officer, the Acting Director of Public Facilities, the Lease Manager and the Independent Auditor Gener Attachments) 4 N SUBSTITUTED onorable Mayor and Members of the City Commission vember 25, 2008 c: ' edro G. Hernandez, City Manager E i Gallastegui, Agenda Coordinator 5