It's Only Money
In March of 1994, the Miami Beach City Commission unanimously approved an innovative partnership with hotelier Tony Goldman to launch a $9.2 million parking garage project in the heart of South Beach. Now, with about 60 percent of the work completed, city officials have discovered they could owe more than $500,000 in unanticipated expenses, largely because then-city manager Roger Carlton and others apparently misconstrued state requirements involving sales tax and fire safety. Says Commissioner Sy Eisenberg, who from the outset had publicly urged administrators to beware of overpaying for the project: "It's like a slap in the face to the city that we have to come up with additional monies that will make it a super-deal for the private developers."
The complex contract between Goldman's company, Ballet Valet, and the city commits Miami Beach taxpayers to foot the bill for the 646-space garage and first-floor retail space at Collins Avenue and Seventh Street, with Goldman overseeing construction. Once completed, the garage will be owned by the city, the retail space by Goldman, who will also retain ownership of 70 percent of the land. Roger Carlton championed the deal and supervised a fifteen-month negotiation process. Carlton, who resigned this past spring amid heavy criticism -- including the charge that he emphasized big projects at the expense of basic services -- defends the city's decisions regarding the garage. "There is a critical parking shortage, and we had to move the project as fast as possible," he says now. "There were some issues that clearly couldn't be resolved at that time."
The contract set a $6.4 million price cap for construction expenditures. It also specifically excluded outlays for certain items, including a sprinkler system and sales tax on purchased materials. The reason: Carlton and his then-executive assistant (now also interim city clerk) Jack Lubin made certain assumptions about state law that now appear to have been erroneous. Under the terms of the contract, the city agreed to absorb the additional costs of the excluded items if that proved necessary.
The first mixup arose when city officials circumvented the state's 6.5 percent sales tax on materials by authorizing their general contractor to act as purchasing agent. (When a municipality undertakes a construction project, materials it purchases directly are exempt from sales taxes. But contractors and subcontractors are required to pay sales tax on the supplies they purchase, a cost they ordinarily factor into their bids.) Lubin drafted a letter providing the McCarthy Brothers Company with a sales-tax exemption number, and Carlton signed it. (Both Carlton and Lubin say they consulted then-city attorney Laurence Feingold before issuing the exemption. Feingold, who resigned in June, says he doesn't recall any such consultation.)
According to Carlton, the unusual arrangement avoided the delays -- and the risk of purchasing lower-quality supplies -- that might result if the city went through its usual bidding and direct-purchasing process. "The agreement was that the city would make its best-faith efforts to allow the contractor not to have to pay the sales tax," the ex-city manager says now. "If that was unsuccessful, we would pay. We attempted to save money. There was no guarantee that we would."
About six weeks ago, an examiner from the Florida Department of Revenue contacted Peter Liu, a staffer in the city manager's office. The examiner sent an advisory memo explicitly stating that materials purchased by contractors are subject to sales tax. Soon afterward, the city's own internal auditor Izzy Binstock concurred.
By that time McCarthy Brothers had already spent $3.8 million on materials -- a potential bite of $247,000 in retroactive sales taxes.
The City Attorney's Office has asked the Department of Revenue for a formal ruling on the issue. (The prospects don't look good for the city: In response to a description of the city's purchasing agreement with McCarthy Brothers, Dan Wagner, a tax law specialist for the revenue department, says bluntly, "You can't do that A it results in a taxable purchase." Wagner adds that although he has expertise in matters relating to garage construction, he can't recall any Miami Beach bureaucrat contacting him for advice about the project.) In the meantime, says auditor Binstock, a different payment method will be used. From now on, the city's own purchasing agent will buy supplies, making them exempt from sales tax. Judith Ford, the purchasing agent, says she'll be able to bypass the red tape: She'll do a rundown of McCarthy Brothers' vendors, and if they meet the city's bidding requirements, she'll go on buying from them instead of issuing requests for proposals and reviewing competing bids.
Admits Assistant City Attorney Raul Aguila: "It should have been done that way from the get-go."
In any event, a snafu concerning the sprinkler system is likely to add another $175,000 to the garage project's mounting tab.
Chief Tom Sullivan of the Miami Beach Fire Department says that although his staff wasn't consulted until after the contract was signed, he met last fall with representatives from the city and McCarthy Brothers and warned them that state statutes called for sprinklers in buildings of three or more stories that are contracted after January 1994. The statutes were somewhat ambiguous, however, and city officials gambled that they would be revised in their favor. A few months ago, the state modified the law, which now requires sprinklers in garages built less than twenty feet away from adjoining structures -- such as the Goldman project. In July, Miami Beach commissioners approved the additional expense.
When the city's newly hired parking director, Frank Del Monaco, learned that the project required a $175,000 retrofitting, he says his first reaction was, "I want my mommy!"
Lubin argues that it cost nothing extra to postpone the sprinkler installation, pointing out that the existing girders are equipped to carry the pipes. "If we went ahead and spent $175,000 when we didn't need to, how would that look?" he asks.
Chief Sullivan, though, is somewhat dubious: "It won't cost more to retrofit after construction has begun? Really?" he asks with a derisive laugh.
On top of these costs, Beach taxpayers will also have to cover the cost of moving telephone lines at Southern Bell's request ($25,000) and of changing to a new storm-drainage system required by the city's public works department ($85,000). The added expenses will be presented to commissioners as "change orders" later this month, according to Assistant City Attorney Raul Aguila.
The attorney is sympathetic to people such as Commissioner Sy Eisenberg who are disturbed by the soaring costs. "I don't blame them for being surprised," Aguila says. "We're on the hook for the money."
Perhaps not unexpectedly, Tony Goldman takes a brighter view of the construction process. "We're providing a fabulous package to the center of South Beach," he trumpets. "The city got a hell of a deal.
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