DISCUSSION REGARDING THE CONCESSION FEES CONTAINED IN THE CONCESSION AGREEMENT BETWEEN THE CITY OF MIAMI BEACH (CITY) AND BOUCHER BROTHERS MIAMI BEACH 21 & 46 ST, LLC (CONCESSIONAIRE), DATED DECEMBER 17, 2015, FOR THE MANAGEMENT AND OPERATION OF PUBLIC BEACHFRONT CONCESSIONS LOCATED AT 21ST AND 46TH STREETS.

The Administration recommends in favor of amending the Agreement to clarify Section 4 in order to be consistent with the interpretation of the Office of Real Estate.   

The City of Miami Beach (“City”) and Boucher Brothers Miami Beach 21 & 46 St, LLC (“Concessionaire”) are parties to a concession agreement, dated December 17, 2015 (“Agreement”), for the management and operation of the public beachfront concessions located at 21^st and 46^th Streets.  The Agreement was for an initial term of approximately two (2) years, commencing December 26, 2015 and ending on December 31, 2017, with three (3) renewal options for one (1) year each.  Concessionaire is currently in its third and final renewal period expiring on December 31, 2020.

Section 4 of the Agreement, as provided below, stipulates the concession fees which Concessionaire is required to pay to the City.  The salient provisions, as related to this Commission item, are in bold and italics.

 SECTION 4.  CONCESSION FEES.

4.1       Minimum Guarantee (MG):

In consideration of the City’s execution of this Agreement and granting the rights as provided herein, but subject to reduction as may (only) expressly be provided in this Agreement, Concessionaire shall pay to the City a Minimum Guaranteed Annual Concession Fee (MG), in the total amount of $122,000, for food and beverage sales, Beach Equipment rentals, and the sale of Beach-Related Sundries/Skin Care Products.

Fifty percent (50%) of the  MG for each Agreement year shall be due and payable to the City on January 1^st of each such year during the Term, and the remaining fifty percent (50%) of the MG for that Agreement year shall be due and payable to the City on July 1^st of each such year during the Term (the “Year end True-Up”).  With respect to the MG for the six day period from December 26-31, 2015, such amounts shall be prorated daily and paid along with the first payment due on January 1, 2016.

4.2       Percentage of Gross (vs.) MG (PG):

For each Agreement year during the Term, Concessionaire shall pay to the City the greater of (x) the MG provided in Subsection 4.1 above, or (y) after such time as  annual Gross Receipts exceed $600,000.00, twenty-five percent (25%) of all of the Gross Receipts as defined in Section 4.4, including food and beverage sales, the sale of Beach-Related Sundries/Skin Care Products and Beach Equipment rentals (the “Percentage of Gross” or “PG”). 

Any amounts owed under this Section 4.2 shall be due and payable to the City no later than March 1^st of the year following each Agreement year.

4.3       NOT USED.

4.4       The term "Gross Receipts" is understood to mean all income, except as expressly stated otherwise herein, collected and received by the Concessionaire under the privileges granted by this Agreement, including, without limitation, food and beverage sales, the sale of Beach-Related Sundries/Skin Care Products and Beach Equipment rentals. Gross Receipts shall also include all income collected and received by the Concessionaire from the sale of food, beverages and any other products sold by Concessionaire at a special event held at such Concession Area and, in the case of a special event under Section 16 hereof in which Concessionaire is not providing the food and beverage service at a Concession Area, any Displacement Fee or Alternative Consideration (as such terms are defined in Subsection 16.2.1) received by Concessionaire.  Gross Receipts shall not include amounts relating to rental or installation of Mobi Mats, and shall also exclude amounts of any Federal, State, or City sales tax, use tax or other tax, governmental imposition, assessment, charge or expense of any kind, collected by the Concessionaire from customers and required by law to be remitted to the taxing or other governmental authority.

The Office of Real Estate’s interpretation of Section 4 of the Agreement requires that Concessionaire pay the Minimum Guarantee of $122,000 and 25% of all Gross Receipts in excess of $600,000.  Accordingly, the chart below illustrates the fees the Concessionaire paid to the City for contract years 2016-2018.

However, as contained in the Office of the Inspector General’s internal audit of the State Beachfront Management Agreement (No. 3595), dated December 5, 2019, the OIG stated the following:

“In addition, under the interpretation of the Office of Real Estate given to Section 4.2's true­ up provision, Boucher Brothers Inc. was charged as follows: $122,000 MG + 25% of all gross receipts AFTER $600,000. However, this practice differs from both the OIG and the City Attorney's Office interpretation, which is that 25% of ALL gross receipts received during the specified Agreement year (going back to the first dollar earned) are to be paid to the City once the $600,000 threshold is surpassed. It is the position of the OIG that the plain language, "all gross receipts", rather than, "all gross receipts in excess of $600,000" compels this result.”

Accordingly, using the above interpretation, the chart below illustrates the fees the Concessionaire would have been required to pay to the City for contract years 2016-2018.

As stated by the Office of Real Estate in the audit response:

“The City Manager's Office agrees with the interpretation by the Office of Real Estate regarding Section 4.2 of the Agreement in that the amount paid by concessionaire shall be a $122,000 Minimum Guarantee + 25% of all gross receipts after $600,000. Otherwise, using OIG's interpretation, concessionaire could actually increase gross sales while at the same time earning less revenue.  For example, if concessionaire generated $600,000 in gross sales, they would owe the City $122,000 (the minimum guarantee) in concession fees and retain $478,000.  However, if concessionaire increased its gross sales by only $1.00, to $600,001, it would owe the City $150,000 (25%) in concession fees and only retain $450,000.  Thus, a $1,00 increase in sales would actually cost the concessionaire $28,000 in additional fees to the City.  The Office of Real Estate and the City Manager's Office believe the intent of Section 4.2 of the Agreement is to provide an incentive for the concessionaire to increase gross sales while allowing both the concessionaire and the City to share in the increased revenue.  Accordingly, the $56,000 ($28,000 times two years) is not owed from concessionaire.”

In response, the OIG Audit Observation stated:

“The Boucher Brothers Inc. should be recognized for increasing annual revenues from $510,708.03 for Agreement year 1 which falls below the designated $600,000 threshold for which no true-up monies are due to $1,026,785.92 and $1,008,950.38 for the Agreement years 2 and 3 respectively which were significantly above the threshold. Consequently, the Office of Real Estate concerns about de-incentivizing the concessionaire to attain and report gross revenues exceeding $600,000 are not relevant to the application of the clear language in the agreement to the revenues in question. Enforcement of the existing language would be in the City's financial interests. If the language does not accurately reflect the mutual intent of the parties, it must be promptly corrected.

In the event that the City elects to adopt the interpretation of Section 4.2 favored by the Office of Real Estate, OIG staff proposes that the MG should be increased exponentially each agreement year as the $600,000 designated threshold is fixed and is set too low. Consequently, the City has had to wait until the following March to collect the balance of the monies owed in the true-up payment.”

The Administration recommends in favor of amending the Agreement to clarify Section 4 in order to be consistent with the interpretation of the Office of Real Estate.