Date: To:

March 26, 2013 L. John Van Norden, Deputy Corporation Counsel

From: H. Patrick Campbell, Chief Auditor Tele: 860.757.9951

City of Hartford Keney and Goodwin Golf Course Management and Operations Audit Report 1313

HPC

I. Executive Summary
At the request of management, we completed an audit in February 2013 of the City of Hartford Keney and Goodwin Park Golf Course Accounts and Operations. The purpose of the examination was to evaluate and test internal accounting and operating controls, the accuracy and propriety of transactions processed, the degree of compliance with established operating policy and procedures, and to recommended improvements where required. The results of our examination were reviewed with L. John Van Norden, Deputy Corporation Counsel, Corporation Counsels Office ; J. Molleda, Director, Finance Department; K. Burnham, Director, Department of Public Works; and, other responsible members of operating management. The summary which follows includes only exceptions disclosed and recommended operating improvements. Included are managements actions taken or planned, including timeframes, to resolve each finding and/or recommendation in this report. We thank the Corporation Counsels Office and Finance Department management and staff for their cooperation and courtesies extended to us during our audit. Background In April 2009, the City entered into a Lease Agreement with MDM Golf of Hartford, LLC (MDM) to operate and maintain its two golf courses, located in Goodwin and Keney parks. The Lease Agreement (the Lease) calls for MDM to pay the City of Hartford (the City) an annual base rent of $100,000 for the five year initial term and $125,000 and $150,000 for the first and second five year renewal option periods, respectively. MDM is also required to pay the City a percentage rent equal to 10% of Gross Revenue for any Lease Year in excess of the applicable Sales Breakpoint. The City also entered into agreements with the towns of Wethersfield and Windsor for payments in lieu of property taxes (PILOT) for the golf course property located in those towns. The PILOTs are equal to a percentage of the rent received by the City from MDM. In addition, MDM is required to make and pay for certain capital improvements to the courses as set forth in MDMs bid. Scope The scope of our audit included various reviews and tests of transactions recorded primarily during the two calendar years ended December 31, 2012. The audit procedures performed included, but were not limited to, the following: Reviews of related City policies, procedures and operating controls; Reviews of applicable Lease Agreements and Amendments;

City of Hartford Keney and Goodwin Golf Course Accounts and Operations Audit

Tests of golf course revenue and rental payments to the City: Reviews and tests, as available, of Capital Improvements and related costs; and Tests of MDMs compliance with other Lease Agreement and Amendment terms and conditions. General In general we found that MDM was not in compliance with various terms and conditions of the Lease Agreement. In addition, we noted that the Citys management and oversight of MDM, the Lease Agreement and Amendment could be improved.

II. Audit Results

Payment of Base and Percentage Rent Various tests and reviews of the Lease Agreement regarding the terms and conditions for MDMs payment of rent to the City and tests of rent payments received and processed by the City disclosed that, in general, MDM was paying the base rent in full and in a timely manner. We did note, however, some issues relating to MDM financial reporting requirements and how certain capital improvement projects were accounted for and paid. Shortly after the execution of the Lease Agreement, MDM complained about the condition of certain aspects of the property at both the Goodwin and Keney golf courses. Based on a subsequent arrangement between MDM and the Corporation Counsels Office specified in a letter dated February 3, 2011, the City agreed to authorize MDM to go forward with the remaining repairs in accordance with the two estimates attached as Exhibit B hereto and to withhold the cost of such repairs from rent due pursuant to the terms of the Lease Agreement. The cost of these repairs according to the exhibits totaled $121,849.85. We verified that MDM reduced their monthly rent payments due the City in an amount equal to the $121,849.85. We were unable to confirm, however, that the actual costs associated with these repairs were equal to or no less than the $121,849.85 reduction in rent payments because MDM informed us that they did not maintain detailed records or a separate accounting of the costs that were incurred for the repairs. As a result, there is no way to confirm that MDM did not inappropriately benefit if the $121,849.85 in unpaid rent exceeded that actual costs of the repairs. It should also be noted that this is not an appropriate method of accounting for capital improvement costs as both revenue and expenses ultimately end up understated. We obtained documentation to support that the Revenue Manager expressed his concern regarding and tried to stop the revenue offset arrangement, but was informed that it had already been finalized. In addition, the Revenue Manager informed us that he had made numerous requests to MDM for, but was never provided, invoices and other documentation including canceled checks to support the capital improvement projects that were reportedly completed by MDM. We recommend that Finance Department management ensure that the practice of allowing MDM or any other entity to forgo rent payments to pay for capital improvements or any other expenses be discontinued so that revenue and capital improvement costs and expenses are properly accounted for in the future.

City of Hartford Keney and Goodwin Golf Course Accounts and Operations Audit

Management Action Plan Completion Date: April 30, 2013 Responsible Person: Julio Molleda, Director, Finance Department We will work with the Corporation Counsels Office to ensure that the practice of allowing MDM or any other entity to forgo re nt payments to pay for capital improvements or any other expenses be discontinued so that revenue and capital improvement costs and expenses are properly accounted for in the future. Letter of Credit Contrary to Section 2.04 of the Lease Agreement, after numerous requests by the Corporation Counsels Office, MDM did not de liver to the Landlord (the City), for the benefit of Landlord, an unconditional, clean, irrevocable letter of credit (the LOC) in the amount of T wo Hundred Fifty Thousand and 00/100 Dollars ($250,000), issued by a bank reasonably acceptable to Landlord that accepts deposits, maintains accounts, has a local Hartford, Connecticut office, and negotiates letters of credit, and whose deposits are insured by the FDIC. Finance Department management informed us that a valid LOC was received from MDM for the first year of the lease term, however, LOCs had not been received from MDM for any of the subsequent years of the initial term of the lease. Finance Department management provided us with a copy of an email sent to MDM in July 2012 requesting a copy of the LOC and informed us that they also requested a copy of the LOC from MDM on a number of other occasions by phone. We were informed by the Corporation Counsels Office that if they have not received a valid LOC from MDM by an established deadline , they will be proceeding with appropriate action in accordance with the terms and conditions of the Lease Agreement. We recommend that action be taken to ensure that LOCs and other contractually mandated documentation are obtained, as required, by any future lease holders. It is our understanding that this and other work required to ensure that MDM is in compliance with all of the terms and conditions of the Lease Agreement have in the past been the responsibility of the Finance Department Asset Manager. It should be noted that this position is currently vacant. Management Action Plan Completion Date: April 30, 2013 Responsible Person: L. John Van Norden, Deputy Corporation Counsel As noted above, if the City does not receive a valid LOC from MDM by an established deadline, the Corporation Counsels Office will be proceeding with appropriate action in accordance with the terms and conditions of the Lease Agreement. In addition, action will be taken to ensure that LOCs and other contractually mandated documentation are obtained, as required, by any future golf course lease holders.

City of Hartford Keney and Goodwin Golf Course Accounts and Operations Audit

Capital Improvements According to Section 4.02 of the Lease agreement regarding Initial Term Capital Improvements, During the Initial Term, Tenna nt shall construct: (a) at least fifty percent (50%) of the Keney Capital Improvements, said percentage being determined based on the Tenants cost valuation of such Ke ney Capital Improvements and set forth in the Tenants Bid; and (b) at least fifty percent (50%) of the Goodwin Capital Improveme nts, said percentage being determined based on the Tenants cost valuation of such Goodwin Capital Improvements and set forth in the Tenants Bid. According to a report titled Goodwin Park Golf Course &Keney Park Golf Course Capital Improvement Reports for the City of Hartford prepared by MDM Golf Enterprises, LLC, 13 capital improvement projects with total costs of $1,057,000 were completed by MDM at the Goodwin and Keney Park golf courses. We were unable to confirm, however, that the actual costs associated with these capital improvements were equal to or no less than the $1,057,000 because MDM informed us that they did not maintain detailed records or a separate accounting of the costs that were incurred for these capital improvement projects. As a result, there is no way to confirm or verify the propriety of the costs associated with these capital improvement projects. We recommend that Finance Department management ensure that MDM or any successors maintain detailed records or a separate accounting of the costs incurred for all future capital improvement projects so that that the propriety of the costs incurred and reported can be confirmed and verified by the City. In addition, we recommend that Department of Public Works (DPW) management or management from whatever other operation ensure that capital improve projects planned and reportedly done by MDM or any designated successor are executed and completed in accordance with the terms and conditions of any related contracts or agreements. Management Action Plan Completion Date: April 30, 2013 Responsible Person: Julio Molleda, Director, Finance Department; Kevin Burnham, Director, Department of Public Works We will ensure that MDM or any successors maintain detailed records or a separate accounting of the costs incurred for all future capital improvement projects so that that the propriety of the costs incurred and reported can be confirmed and verified by the City. In addition, efforts will be coordinated with DPW management to ensure that they verity that capital improve projects planned and reportedly done by MDM or any designated successor are executed and completed in accordance with the terms and conditions of any related contracts or agreements. Insurance Coverages and Certificates According to Article VII of the Lease Agreement, MDM is required to maintain specified levels of Casualty, Liability, Workers Compensation and other additional insurance coverages for the golf courses. In addition, MDM is required to provide the City with evidence of this insurance coverage. As noted by the Lease Agreement, Tenant shall, upon execution of this Lease and at least annually thereafter or on demand, d eliver to Landlord duly executed certificates of insurance reflecting Tenants maintenance of the insurance required under this Lease and Landlords status as additional insured and loss payee with respect to the same. Although Finance Department management informed us that they received valid insurance certificates for the first year of the lease term it did not appear that MDM had provided executed certificates of insurance to the City annually in subsequent years as required. In addition, MDM was not able to provide us with copies of any of the executed certificates of insurance in effect promptly upon our request.
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City of Hartford Keney and Goodwin Golf Course Accounts and Operations Audit

We recommend that Finance Department management ensure that MDM or any successors provide the City with copies of executed certificates of insurance reflecting their maintenance of the insurance required under the Lease and the Citys status as an additional insured and loss payee with respect to the same in the future. We were unable to determine if documentation of required insurance coverages was provided or obtained at anytime during the term of the Agreement. Management Action Plan Completion Date: April 30, 2013 Responsible Person: Julio Molleda, Director, Finance Department We will ensure that MDM or any successors provide the City with copies of executed certificates of insurance reflecting their maintenance of the insurance required under the Lease and the Citys status as an additional insured and loss payee with respect to the same in the fut ure.

Distribution: City Council Members Internal Audit Commission Members S. K. Borges, Chief Operating Officer K. Burnham, Director, Department of Public Works J. Kupiec, Chief of Staff, Mayors Office J. Mazzuoccolo, Manager, McGladrey & Pullen, LLP J. Molleda, Director, Finance Department J. Sanchez, Director, Management and Budget Department P. Segarra, Mayor

Audit Team: P. Campbell