The audit report presented the results of our audit of the lease agreement between the Department of Lands and Natural Resources (DLNR) and Marine Revitalization Corporation (MRC) for the operation of the Outer Cove Marina. This audit was requested by the former Speaker of the House of Representatives, Ninth CNMI Legislature. The objectives of the audit were to determine whether: (1) the reported project cost represents the actual construction cost of the Outer Cove Marina project, (2) DLNR and MRC fully complied with the terms and conditions of the lease agreement, (3) the fees charged to boat owners are reasonable and in accordance with the lease agreement, and (4) the CNMI will realize any rental revenues during the lease term. This audit also responded to the ten specific questions raised by the former Speaker.

Our audit showed that both the lessor and lessee, namely, DLNR and MRC failed to comply with the terms of their lease agreement. More specifically, DLNR failed to prevent commercial boats from being moored at the Smiling Cove Marina. Both parties failed to clarify terms of the lease agreement as it: (a) does not specify a basis the lessee can use to establish mooring fees, (b) contains no language that would ensure a minimum level of revenue from MRC, and (c) does not specify: (i) a fixed project cost ceiling, (ii) how project costs are to be allocated to facilities and infrastructure, or (iii) a limit on fees that MRC can collect. Further, of the 76 boat slips desired to be built at the Outer Cove Marina according to the lease agreement, MRC built only 45. Finally, while MRC records and documents show that the Marina had cost $3,590,857 when completed in July 1998, we were unable to determine whether all costs were actually incurred in constructing the project.

The Office of the Public Auditor sees two alternative courses of action that MRC and DLNR may take in order to continue the operation of Outer Cove Marina. One is to substantially amend or to completely change the lease agreement, and the other is to have another entity take over the Outer Cove Marina operations. As such, we are offering two sets of recommendations.

As concerns the first alternative course of action which addresses amending or changing the lease agreement, we recommend that the Secretary of DLNR and MRC:

1. Amend or completely change the lease agreement so that there will be clearer understanding of each party's obligations and responsibilities, taking into account: (a) the components that will comprise the actual Outer Cove Marina project cost, (b) the allocation of Outer Cove Marina project cost between the area covered by the lease agreement and the area covered by the concession contract, and (c) the provisions in the lease agreement that may no longer be practical to implement, i.e., basing the computation of the CNMI's lease revenue on a percentage of MRC's net earnings.
2. Obtain an understanding about the fees to be collected from the boat owners. The parties to the agreement must agree: (a) on what will comprise the total cost that must be recovered from fees to be charged to the boat owners, (b) on the type and amount of fees MRC will be allowed to charge, (c) if the fees to be computed and the related revenue projections will yield a profit providing both yearly rental and a reserve for future development, (d) to have a periodic review conducted on MRC's financial operations, and on the amount of fees and type of revenues MRC will be allowed to collect, (e) to extend the lease period to allow MRC to collect lower fees and have a longer time to recover its investments, and (f) on any possible assistance from the government.
3. Dissolve other supplemental agreements. To avoid confusion, other agreements such as those for the breakwater and fender installation should either be dissolved or made part of a new or amended lease agreement.

As to the second alternative course of action of whether another entity should take over Outer Cove Marina operations, we make no specific recommendations. Instead, we only enumerate actions that the CNMI government and MRC may take. DLNR, as the government agent for the agreement, must spearhead the review of each alternative available for achieving a workable settlement. We believe that to be successful in resolving the current Outer Cove Marina problems, DLNR must have the cooperation and support of the Executive and the Legislative Branches. Most of the viable solutions, which may require delving into limited financial resources, go beyond the scope of authority of the DLNR Secretary.

The Secretary of DLNR concurred with OPA's recommendations: (1) to amend or substantially revise the lease agreement or, alternatively, (2) to have either the CNMI government or another entity take over operation of Outer Cove Marina, but stated it could not pursue either alternative until the Senate Oversight Committee had submitted its report and the current legislation (House Bill 12-250) is enacted. We agree with DLNR that it cannot implement either alternative action until the Senate Oversight Committee submits its report and unless some form of legislation is enacted for the amendment of the agreement. MRC did not comment on OPA's recommendations.

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