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    City Hall-Sought Report Concludes QM Operator Misinterpreted Lease & Likely Underpaid Rent; Urges Forensic Accounting Review To Determine Amount & Discuss Reconciliation Plan

    (May 19, 2004) -- Following a lengthy (up to two hours) closed session agendized "for the purpose of a conference with the City's real property negotiator Gerald R. Miller, City Manager, and Queen Seaport Development, Inc. concerning terms of [its] lease," Councilmembers heard a representative of the Staubach Co. publicly deliver a diplomatically summarized version of its report on issues related to City Hall's lease with Queens Seaport Development, Inc. (QSDI), City Hall's operator of the Queen Mary.

    Although the report was agendized for the public May 18 Council session, the written report itself was not available (online or otherwise) to the public or media until about an hour before the Council meeting. Shortly after 4:00 p.m., (which had previously requested the report) and other LB media outlets were faxed copies.

    In its Findings and Conclusions, the report by the Staubach Co. (retained with Council approval at management's request in December 2003) states in its summary:

    Based on [5 cited] lease clauses and the apparent misinterpretation of the lease documents by QSDI/RMS Foundation, Staubach is of the opinion that there has likely been an underpayment of rent due from QSDI/RMS Foundation to the City. Staubach's recommendation is that a thorough forensic accounting review be performed (if it has not been already) to determine the magnitude of any rent shortfalls and subsequently discuss a reconciliation plan with Queen's Seaport Development, Inc/RMS Foundation.

    In the report's overall summary:

    Moving forward, it is our recommendation that the above areas be discussed and reviewed, through both verbal discussion and/or contractual agreements (as applicable), in order to reconcile different opinions and interpretations between the parties. In addition to preventing future misinterpretations, this will also help facilitate a long term Landlord/Tenant relationship of open communication and understanding, and allow all parties to focus on their core responsibilities while serving the needs of their customers, constituents, the community, etc.

    In a public power-point presentation, Staubach Co. Principal & Executive VP Thomas Turley summarized the report...and didn't use the term "forensic accounting review."

    The Staubach report gave scant mention to a written statement signed by City Auditor Gary Burroughs in Nov. which Burroughs declared in writing (in a letter given to a then-prospective lender to QSDI) that the City Council had approved a proposed lease amendment and was in the process of preparing a written amendment to the ground lease consistent with millions of dollars in rent credits that would be allowed QSDI. (The loan to QSDI took place, but the lease amendments didn't.)

    The Staubach report relegated Burroughs' statement to a section titled "Other Findings and Comments" near the end of the report, listing it as number four among a dozen items:

    November 2002 Council Letter/Proposed lease amendment - We understand that this is an open issue but is in the process of being documented. QSDI/RMS Foundation contends that there had been finding agreement on this matter and had taken steps based on this assumption, including taking on additional debt. We recommend that this proposed amendment be addressed and consummated by all parties.

    The circumstances under which the City Auditor signed his name to the representation, and on whose authority, have not been publicly discussed by the Council. The City Attorney's office has taken the position that Mr. Burroughs' representations did not bind the City of LB. QSDI President/CEO Joe Prevratil has contended otherwise and denied owing City Hall $2 million percentage rent (which Burroughs asserted in a March 2004 public report that didn't mention his signed statement).

    Mr. Burroughs' signed statement was first reported by Press-Telegram reporter Jason Gewirtz. In March 2004, requested a copy from Mr. Burroughs, which he provided and we posted publicly. At that time, City Auditor Burroughs told that his report covered the last official document signed which is the 1998 QSDI lease and did cite the publicly released city management memo that accompanied the publicly agendized November 12, 2002 Council item which authorized the City Manager to execute a QM lease amendment substantially in the form delineated in the memo.

    "The November 12 [management] memo was covered in our report and in my view it is the more authoritative document. It covers items that were considered in [the lender's letter]. To me, the items are in the staff report that was sent to the Council and the Council voted on it," Mr. Burroughs said.

    During the May 18, 2004 public Council session, Councilmembers said little. Councilmember Tonia Reyes-Uranga acknowledged that the Queen Mary item was discussed in that afternoon's closed session.

    LB Mayor Beverly O'Neill read aloud a written statement that she said was delivered to her that afternoon by QSDI president/CEO Prevratil, addressed to the Mayor and Councilmembers:

    "At this writing, we have not had an opportunity to see the review. However, we look forward to working with the City Manager to resolve any issues that result from the report. I fully believe that reasonable minds can arrive at reasonable solutions," the QSDI statement said.

    Reached for comment at late afternoon by, Mr. Prevratil said he was told of report's availability at late afternoon and hadn't yet had an opportunity to review it.

    Likewise reached for comment, former LB activist (now midwest resident) Traci Wilson-Kleekamp (who sued City Hall alleging it failed to produce QM related documents under the Public Records Act and improperly allowed rent credits) also said she had not yet seen the report.

    Councilman Dan Baker made a motion to refer the report to the City Manager for ongoing discussions...which the Council did.

    Prior to the vote, the Mayor invited a brief response from City Manager Jerry Miller, which he delivered extemporaneously:

    I think one of the clear findings of the review by Staubach is that we do believe that there has been some rent credits that were taken incorrectly and the city is rightfully due some percentage rent, and I have communicated that finding to QSDI.

    Mr. Prevratil and I have agreed to working together over the course of the coming month or so to try to resolve differences and to work toward some sort of an equitable resolution of the outstanding issues, and I expect that we will do that and come back to you in the month of July with recommendations for hopefully addressing the outgoing issues and also perhaps making recommendations from a clean-up perspective on some new adjustments to the agreement on a go-forward basis.

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