The Clubhouse Project: A Financial Review

FOLW Advisory Team

Owners, especially those on fixed incomes, have limited resources. They may not  be able to afford the large special assessments that would be required if reserves are insufficient to cover a major replacement. Special assessments have the reputation of being indicative of poor management.

Community Associations Institute,  Replacement Policy

It’s been just over three years since the Clubhouse was shuttered and closed by the Board.  The new Clubhouse is open, the food is good, the views are lovely, and it’s being well-attended.  With the plan now realized, it is good business practice to conduct a post-completion project review to identify which elements of the project were successful and which were not so successful.

At the request of the Friends of Lake Wildwood (FOLW) Coordinator, this document summarizes financial events related to the cost of constructing a replacement for the Clubhouse, Clubhouse funding sources and methods, the accuracy and understandability of financial reporting to the membership. It also extends an invitation to FOLW and other members of Lake Wildwood Association to participate in a conversation about the future of our community prior to the coming Board election.

CLUBHOUSE CLOSURE: The Board closed the Clubhouse on January 1, 2014 due to “extensive unsafe building conditions” and “life safety issues.”  That severe level of disrepair did not develop over night.

In a courageous mea culpa article two months later, the Board President admitted that the Association had, for 15 years, excluded about 75% of all common facilities and common elements from the Reserve Study and funding to keep assessments low.  That resulted in substantial deferred maintenance and the transfer of costs to a future generation of owners.

About a month after the Clubhouse closed, the Board amended Association Finance Rules, adding all previously excluded assets to the Replacement Reserve Study.  As a result, estimated reserve obligations increased $10 million in FY 2014/15 and another $5 million the following year.

CLUBHOUSE COSTS:  The Board shuttered and closed the old Clubhouse on January 1, 2014.  It then proposed building a larger, upscale Clubhouse at cost of $5.5 million.  The special assessment prospectus for the new Clubhouse expressed a high degree of confidence in cost estimates.

With only a 5% cost overrun allowance, the project was $1.2 million over budget (24%) prior to the start of construction.  Many costs were underestimated (furniture/fixtures/equipment, professional fees, loan points), some were not included (landscaping, an estimate for code changes), and some costs were added when special interest groups asked for changes to the original plan

While Association Declaration Article IX requires the Board to obtain competitive bids from licensed contractors, that did not happen.  Instead, the architect preferred a specific contractor whose profit margins were substantially higher than other builders under consideration.  The Board adopted that recommendation by a 4 to 3 vote.

CLUBHOUSE FUNDING:  The $5.5 million in Clubhouse replacement costs were to be financed by a $4 million loan, the sale of four Association-owned lots for about $1.25 million, and the balance of about $250,000 from replacement reserves.  The Board proposed to assess each membership interest $1,500 to repay the $4 million construction loan.  That assessment was approved by the members in September 2014.

Sale of the four lots netted $943,000, leaving a shortage of $367,000.  That, plus the $1.2 million cost overruns compelled the Board to raise another $1,567,000.  The Board funded most of that shortfall by improperly spending $1,511,826 from Replacement Reserves.

Here’s the problem with that expenditure. The Association maintains two reserve funds: a Replacement Reserve Fund for capitalized assets and a Non-capitalized (Maintenance) Reserve Fund for assets that have not been capitalized.  Finance RULE R-4.10.10 defines capitalized assets as those that have been “booked” or added to the Association’s balance sheet.

The Association never capitalized the old Clubhouse, as required by Finance RULE R-4.20.80. That’s why the 2014 Audit reported no reduction in asset values due to Clubhouse closure. It’s also one reason why spending $1.5 million from the Replacement Reserve Fund for capitalized assets may have been improper.

To keep assessments low, Association reserve policy had long excluded structural components of the Clubhouse and all common facilities, along with the golf course, lake, dam, 5 parks, culverts, etc..  Consequently, the 2014 Audit reported only $374,300 in replacement costs for the Clubhouse, comprised almost entirely of furniture, fixtures, and equipment. NO reserves were targeted for replacement of the Clubhouse structure at the time it was closed.

We have been advised that the Board’s $1.5 million reserve expenditure on replacement of the old Clubhouse was likely improper because: (1) Exclusion of the Clubhouse structure for so many years confirms that it was not a purpose for which the Replacement Reserve Fund was established; and (2) When the Board decides to replace a destroyed or no longer usable asset such as the Clubhouse, its replacement must be funded out of the operating account unless it involves a like-for-like replacement.  The new Clubhouse certainly does not constitute a like-for-like replacement for the old building.

FINANCIAL REPORTING: At a time when many people wanted to know about reserve liabilities before voting on the clubhouse assessment, the 2014 Audit improperly reported reserve obligations based on the prior year’s Replacement Reserve Study. That caused estimated replacement costs for all major common elements to be understated by $10 million. With no oversight, only a single manager signed the Management Representations letter to the Auditor, thus failing to comply with the two-signature requirement for an audited statement.

In 2015, the Board hired a credentialed reserve specialist to produce the reserve study and funding plans.  Although a major step in the right direction, the new Reserve Study does not provide a complete and understandable picture of the cost of replacing major common facilities and common elements. Instead, the Member Summary reports only the cost of replacing sub-component parts of common facilities like concrete, decking and balconies, roofing, lighting, etc., but does not aggregate those sub-component parts under major common facilities or even the major component categories listed in the full Reserve Study. That makes it very difficult for members — or Board Members — to assess the reasonableness of reserve obligations and funding.

The Reserve Study Member Summary reports available funds from only a single “Reserve Fund” and does not disclose the respective funding status of the Association’s two restricted reserve funds. Consolidation of the two reserve funds into a single Reserve Fund, as has been done the past two years, makes it impossible to see if money is being spent from the proper source or if funds are being improperly co-mingled.

The Association has repeatedly asserted that $1.5 million was available in the reserves to replace the Clubhouse and, has in fact, spent that sum on the Clubhouse project.  However, as previously noted, NO reserves were targeted for replacement of the Clubhouse structure prior to its closure.  By law, the Board may not expend reserve funds for any purpose other that the repairs, restoration, replacement, or maintenance of major components for which the reserve fund was established.

Replacement Reserve Fund expenditures are also restricted to the renovation or replacement of capitalized assets that have been booked to the balance sheet. Since the Association never capitalized the old Clubhouse, the expenditure of $1.5 million on the Clubhouse from the Replacement Reserve Fund for capitalized assets may have been improper.

LET’S FIX THE SYSTEM  This article has presented a troubling list of inadequate construction cost controls, false or misleading financial reports, and improper use of replacement reserve funds.  However, it is not our intent to fault the actions of our well-intentioned Board Members.  

The volunteer Board members who have served Lake Wildwood Association over the years have generally acted with intelligence and in good faith, but sometimes without a clear understanding of what was required of them. Recent results have made clear that we are outgrowing the system of governance and financial management created nearly a half century ago by the developer.

As a starting point for a change conversation, we ask you to think about the following factors as possible contributors to the concerns we’ve presented:

  1. The Board is restructured by elections every year, thus interrupting the continuity of Board planning and actions and leading to inconsistent decision making.
  2. Long-term memory regarding Association policies and practice resides in our standing committees.  The Board has recently circumvented those committees by appointing ad hoc committees that report directly to the Board to serve specific purposes.  Previously, it was Board policy to appoint sub-committees under the standing committees.
  3. The Board eliminated the audit function of the Finance Audit Committee last year, transferring that responsibility to a new Audit Committee populated and controlled primarily by Board Members.  The Audit Committee, which will be restructured annually along with the Board, is not independent and cannot objectively audit Board financial planning and actions.
  4. Volunteer Board Members often have no prior corporate management or Board experience and do not receive adequate training on the highly specialized statutory requirements that apply to homeowner associations in California.  Perhaps all new Board members should be provided with more complete training such as the Leadership Training Course for Board Members that’s offered by the Community Associations Institute?

We ask each of you to respond to the five-question survey we’ve prepared.  Simply click on the following link, and you’ll be taken to the Survey.  We intend to present a summary of the results to the Board, but your answers will remain unattributed and confidential.

https://www.surveymonkey.com/r/BGTMJG9

                                   YOU CAN MAKE A DIFFERENCE!

Advertisements

Can we trust our leadership to spend our money wisely? – Reserves Funding, the Club House, get the full picture

Submitted by Darrell Trimble – Skipper Ct

This is a second in a series of three articles on “Can we trust our leadership to spend our money wisely?.  In the last article we looked at HOA operations.   In this article we will look at how we prepare for future needs by looking at reserve funding and how our Board has dealt with or ignored the realities of an aging infrastructure.

As we receive our voting information on the new club house, we have to make a large spending decision.  I personally like the thought of a new clubhouse, though like many of you I am concerned whether the current plan is what we need or is it bigger than we need?  We are looking at an estimate exceeding $5m (which will probably exceed $6 given our track record) .  Is the hill at the golf course the right place to invest in a large group meeting place, or should it be kept to just a bar and grille, and expand the community center for larger groups?  All of these things are questions.

With the exception of the present BOD, over the past 5-7 years our Board has largely ignored the issue of not having enough funded reserves, again to “keep our annual fees low”.    Many community members asked about the issue of funding our future, but for the most part the past BODs “avoided” the discussion.   In fact, had the reserves been done correctly on the club house, we would not be facing such a big bill.

Regardless we need to understand that the clubhouse is a minor expense, given the other upcoming infrastructure liabilities that we have.    Did you know that we have as much as $8m in unfunded reserves beyond the club house?  We are all painfully familiar with the Chaparral culvert project (over $300k).  Did you know that there are many more bridges and culverts that may need the same repair?  Did you know that the golf course needs a new sprinkler system that is more than $1.5m?    An article on this blog was done in March of 2013, which laid out the unfunded infrastructure in some detail.   The point I am making is don’t we deserve to see the entire financial picture as we are making the decision on the club house and how much to spend?   Should we not get a full picture of the impact on our annual dues inclusive of properly funding the reserves and what we will have to pay for the club house annually? Continue reading

Candidate Statement: Paul Towne

I would like to summarize my positions as a candidate for the Lake Wildwood Board of Directors.
•    Clubhouse: Certainly something must be done. Repair, replace or remodel – it all comes down to what best will serve our community, not just for now, but for many years in the future. We, as a community, need to study a variety of options and scenarios. This decision will affect our community for decades in the future. There is no need to rush this project.
•    Long Term Capital Improvement Fund: The Clubhouse is not the only amenity that needs major improvements Everything on this wish list would make our community a better place to live, not only for today’s residents, but also tomorrow’s. We need to find a way to finance these improvements without putting the burden solely on our current residents, but also shared by future residents.
o    The irrigation system on the golf course in need of major repair or replacement. Cost for this project has been estimated at 1.5 million.
o    Sections of the Voight ranch are rumored to be up for sale in the near future.
o    Pickle ball needs a permanent home.
o    Meadow Park upgrade
o    Fitness/Wellness Center
o    Secure parking structure for the community’s motor cycle riders.
o    How about an indoor lap/exercise pool?
We need to establish a long term capital improvement fund!
•    Full Service Restaurant: Our current operation is costing our members over $200,000 a year! If we were to close the restaurant today, in five years we would have more than enough money to fund a pickle ball facility, the Meadow Park upgrade and a structure for our motor cyclist. Certainly our members need a place to purchase a good, wholesome meal, but do we need something that is as labor extensive as a full service restaurant? This discussion must go hand in hand with our clubhouse project!
•    Marketing: The largest generation in this countries history is about to retire! Lake Wildwood offers the finest amenities and living environment in the country. We need to get the word out! There is a limited supply of homes in Lake Wildwood, so increase demand will mean increased home values. New members with fresh ideas can only make our community a better place to live…for everyone!

Lake Wildwood is a community with members who have a variety of special interest. It is the sum of our parts that make this a wonderful place to live. I plan on representing everyone equally. As a member of the board I believe we must represent not only the Lake Wildwood of today, but of tomorrow. It is time for our community’s leaders to be proactive, rather than reactive! If you believe as I do, than I would appreciate your vote!!!

Paul Towne

You Can Make A Difference By Robert Bumgarner,

You Can Make A Difference

By Robert Bumgarner, Sun Forest Dr.

Why do you suppose it is that so few members attend Board meetings, Board-sponsored workshops, or even engage in the most basic of governance processes like voting? For example, more than 1,500 members (53%) failed to vote in the 2012 Board of Directors election.

As a result of such inaction, the majority of homeowners cede control of our common enterprise to the minority, which then elects seven volunteers to direct the multi-million dollar corporation that runs Lake Wildwood. Unfortunately, this corporation is subject to very little oversight and is free to spend – or not spend – money on our common elements in ways that many may not support. Continue reading

Response to February 28, EBits Articles – Beyond This There Be Dragons

A response to a Lake Wildwood Assoc. Ebits article  From Mike Doscher

Asking Questions is the End of the World?

Don Streseman, in his capacity with the Board’s Clubhouse planning Group, used Ebits this past week to publish an article (content below) that might be considered by some to be inappropriate.  Singling out community members raising reasonable and well founded questions regarding the Board’s current approach to the Clubhouse renovation will not stop the growing awareness and discussion of this situation.  The community needs to understand that the Board has not yet voted on hiring an architect, but they are moving in that direction.  Several of us have voiced opposition to spending our money on an architect without having some basic functional requirements agreed by the community, or at least discussed.  We have voiced our opinions with the Board in private and in open Board Meetings before making our opposition public.

 

I applaud Don’s work on communicating with the community regarding the present issues with the Clubhouse.  His tours and discussions are helping the community to understand the challenges.  Where I take issue is when Don bends the facts to justify the Board’s current approach.  Don noted that the “Clubhouse Requirements Development – Working Draft” was very impressive and that it would be provided to the architect as a reflection of need.  As one of the authors of that document I have reminded Don and the Board that this was a “wish list.” The Planning Committee recommended that a professional with Clubhouse strategic development skills be hired to work with the community sorting out the “wants” from the “needs”, and more important understanding the willingness to pay.  As long as Don was quoting this document why didn’t he note that the last section addressed further work required on “Business Scenarios to Test The Requirements?” These included outside use, various food service business models, and anticipated shifts in demographics (if any).

Continue reading

An alternative plan on how to move Lake Wildwood into the 21st century – One Member’s View

An Editorial Post Submitted by Paul Towne  Jayhawk Dr.

Originally conceived by Boise Cascade in 1968, LakeWildwood was to be a summer and weekend recreation retreat. In very short order however, as people came and fell in love with the areas beauty, weather, wildlife, friendly people and the wonderful amenities they decided to make LakeWildwood their full time residence. The question now facing our residents is LakeWildwood still as attractive to upcoming retirees and business professionals today, as it was forty-five years ago?

 

Certainly what attracted people to LakeWildwood in the first place still exist. In fact over the years LWW has grown and matured and now offers a wonderful number clubs and activities. Is that enough to attract new people? I don’t think so. I believe we need to look at what is going to attract a new generation of retirees.

Continue reading

Get Involved On Clubhouse Planning

Guest Editorial 2-10-2013 – Wildwood Interactive

Marty Domagala – Hummingbird Drive

Mike Doscher – Camas Court

We are writing this to encourage Members to become actively involved in the Board’s current efforts at planning for a new or remodeled Clubhouse. From our experience in the planning and consensus-building that resulted in the Community Center, we can tell you that over two years and thousands of hours of volunteer work, and many town hall meetings, went into this effort. Key to this successful undertaking was the community becoming actively involved early and throughout the process. In the end all these efforts led to a strong majority vote for the project.

We are concerned that the Board’s current aggressive Clubhouse schedule and process has leapfrogged several steps that any large project anywhere must follow to be a success. First and foremost for our Clubhouse are its basic requirements. What Member needs should the design be focused on achieving? Second is the forging of a community consensus around these requirements so that the final design best meets those requirements. Given LWAs many and diverse interests, this is a very tough job that any Board must facilitate. In fact we contend that consensus-building is the hardest of all Board responsibilities, something that we must all help in shaping. It’s also a tough task for each of us too, for in the end many of us will have to “give up” on our individual ideas for solving our Clubhouse problem, deferring to and buying into a broader consensus for the betterment of the entire community.

Continue reading