COMMENTS:

The Tenant has not maintained daily source documents relating to gross sales such as daily cash register tapes, daily sales receipts, etc. for the period under review.  The Tenant (or his representative) was asked to provide the examiner with the requested documentation.  It is therefore our opinion that the Tenant is not in compliance with Section 5.01 of the lease agreement, with regard to record keeping, which states, “… Tenant agrees to keep and preserve in the Demised Premises … for a period of 3 consecutive years following the end of the Lease Year, a complete and accurate record of all Gross Sales ...  Tenant further agrees to keep and preserve for at least 3 years after the expiration of each Lease Year, all original sales records and sales slips or sales checks and other pertinent original sales records …”

Section 4.01 of the lease defines gross sales allows the deduction of finance charges on sales payable to any firm in which Tenant has no affiliation or interest.  However, the Tenant deducted credit card fees from reported gross sales.  In our opinion, this is not an allowable deduction because they are not considered finance charges; therefore this revenue should be included in reported gross sales for the calculation of percentage rent.

This section also allows for the deduction of employee sales from reported gross sales.  The Tenant correctly deducted employee sales of $35,951, $29,104 and $31,007 for the lease years ended December 31, 1999, 1998 and 1997 respectively.  By allowing the above deduction, the Landlord lost the opportunity to bill additional percentage rent of $1,438, $204 and $160 for the respective lease years.

Section 5.02 of the lease states “If any such audit discloses that the actual Gross Sales differ from those reported by three percent (3%) or more, Tenant shall pay the cost of such audit.”  Sales were understated by more than the allowable three percent (3%); therefore, the Tenant should be billed for the cost of this examination.