The Villa Owners Meeting II

                                                                             Do new revelations suggest possible malfeasance or potential fraud and was Roz Berman hiding something from the Villa owners?

 

David Berman reports elsewhere what Roz Berman now “describes” as what she did at the Villa owners meeting this past week. The problem with Roz’ description is the obvious disconnect between what she described as having done and what actually took place at the Villa owners meeting. While Roz would like us to believe that she addressed “all of the issues that have been raised . . . . ,” that’s not really true. While there may be others, there was one glaring issue facing the Villa owners that was not really addressed at all. Oh, it was mention, all right. But considering the potential concern by and the importance placed by Villa owners on that one issue, one has to wonder how Roz could have missed it in her mission to address all of the issues. That issue, of course, was the status of the Villa owners “capital asset reserve fund”—the money Del Webb had promised was being held in trust for the Villa owners for future maintenance and repairs on the duplexes.

Did Roz not know or understand that the Villa owners were under the impression that a portion of their supplemental assessments were being set apart by Del Webb/Pulte in a reserve fund. And when the question was finally raised, Roz was clearly dismissive as if what DW had told the Villa owners when they made their purchase decision didn’t really matter today. After all, that was way back then and this is now. The impression Roz left with the audience was that Del Webb’s written word, while it may have meant something back in the early years of the Community meant nothing today, and that prior intent to keep a capital reserve fund, has no bearing on the Board’s 2007 budget decision to assess the Villa owners an additional $500 more annually for reserves. I and others disagree. That increase represents a 123% increase in the amount being allocated to the reserve fund over the amount that was paid to reserves last year.

From the Villa owners perspective, they believed they had a right to rely on what Del Webb had told them when they made that Villa purchased decision. Actually, Del Webb went one step further, they made a written commitment to the Villa owners in a State-mandated document that was provided to each and every Villa owner at the time of their purchase decision. That document confirmed in writing what the owners were most like told orally, namely, that as Villa owners, they would pay a $125 a month in additional assessments, of which $33.80 a month would be set aside in a “capital reserve fund” for future repairs on their home. With that assurance, there was no need for Villa owners to worry about funding for future repairs, or so they were led to believe. For the 2007 budget, however, Villa owners were told that instead of paying $33.80 a month towards reserves, they would now have to pay $75.47 a month towards reserves, amounting to an additional $500 a year in assessments. [You can read for yourself that DW statement by clicking here. It begins at the bottom of the first page and continues at the top of the second page.]

So, the natural question is, at the time of transition “what was the amount in that capital reserve fund?” Surly, the Villa owners are entitled to know the answer to that very fundamental question. But, no, they would not hear that answer from the lips of Roz Berman. Roz could have volunteered that number to the Villa owners, but in doing so, she would have to confide that the amount in the reserve account was ZERO. Then she would have been obligated to explain what likely happen to their money, giving this or that reason to account for its use for other, non-reserve purposes. But she chose not to do that. Roz was not there to tell us what she knew but what she wanted us to believe, which was not the same. Mum was the word of the day when it came to disclosing information about the status of that DW promised capital asset reserve fund—assuming there was ever a separately maintained capital reserve fund. While growing evidence suggests that no such reserve account ever existed, that did not relieve Roz from making that disclosure given what Villa owners had been led to believe by Del Webb.

We are talking about 6.4 years of accumulated reserves supposedly going into that capital asset reserve fund DW had promised would be there when there was a future repair need to be met. That fund was ostensibly growing at the rate of $33.80 per month per unit, with 100% of the 162 Villa units having closed escrow by end of 2000. If true, that would amount to a significant reserve amount. I believe DW meant what they had committed themselves to, but things went terribly wrong along the way.

Look as hard as you can through Roz’ presentation and you will not find one reference to this issue. Yes, while the question of those reserve monies had been out there for some time, as far as Mike Dixon and Roz Berman were concerned, that would be a non issue as far as this presentation was concerned. If Roz had brought forward the data on the amount of money that was supposed to be in that reserve fund, as initially promised by DW, the reaction would have produced widespread relief among the Villa owners. The Villa owners would have then understood that they had no reason, let alone any duty, to pay that increased assessment of $500 for reserves. Why? Because, there should have been enough funds in that reserve account to offset that 2007 increase in assessments.

But Roz knew something the Villa owners did not know and she would refrain from telling what she knew at that tell all meeting. The simple undisclosed fact was that there was no established capital asset reserve fund for the Villa Neighborhoods. And, since there was no reserve fund, no money had ever been set aside for reserves as DW had promised. This would mean that starting with transition in June 2005, the reserve fund balance started at a ZERO balance rather than at the several hundred thousands of dollar that DW had committed to putting into the reserve fund. To some homeowners reading this, that revelation sounds like something akin to fraud from our win-win Developer. How does it go? You’ve heard and seen it, even relied on it, and now you don’t.

You see, with this new bit of information, we can now understand why Roz wanted everyone’s attention focused on, actually diverted to, matters that didn’t really matter at all, such as that rejected 2005 reserve study, that 2006 reserve study, and finally that $240,000 that Pulte forked over in 2007 that, as Roz told us, “fully funded” the reserves as of 2005.

On this Friday afternoon, Roz had a huge objective before her. That objective would be to keep the Villa owners in darkness about that capital asset reserve fund. It was a masterfully performance. In doing so, Roz left the Villa owners with 1) nothing further to pursue; 2) a sense that they had been well provided for by the actions of the Association; and 3) the belief that that $500 increase in assessments was actually justified.

The Board, Mike plus three others he can typically count on, could “win” their case with the Villa owners, but only if they could successfully keep the Villa owners away from what had really happened to their money. And so, on that Friday Villa meeting day, there would be no full disclosure of what had happened. The Villa owners, as in the past, were successfully kept in the dark. They would not learn the awful truth about what had happened to their money. If some believe that the Developer had committed a fraud in the handling of those Villa reserves, others may conclude that a fraud of omission was committed that day by the Association that should be representing the interests of and not running away from the Villa owners. Yes, my friends, the Villa owners were taken in by a well orchestrated charade.

One should not be confused into thinking that Friday's performance was conducted by this sweet little lady and her helper, Mike, who just happened to want to help the Villa owners over this troubled period. No, indeed. Roz was a very competent former Finance Committee member who had the wherewithal, the expertise, access to pertinent financial records, and the capacity to tell all. That the presenters were both Board members was no mistake either as it has become more clear than ever that Mike and Roz had a Board agenda to implement.

Did Roz set out to deceive? I’ll leave that for you to decide. What was apparent, though, was that Roz was not about to reveal the dirty truth about what happened to the Villa owners’ reserve monies, the monies that DW had told Villa owners would be set aside in that “capital reserve fund.”  Did, as Mr. Berman has suggested elsewhere, Roz “deliver exactly what she promised?” Except for that omitted bombshell of a revelation, you might say that she did. According to Mr. Berman, Roz believes that the Developer had met their legal obligation to the Villa owners by the payment of about $241,000. Really! Mr. Berman makes an interesting statement:

“The amount of developer contribution to Villa reserves was to have been calculated in the 2005 reserve study, which was a legal requirement to be performed at transition in May, 2005.”

Now that’s a mouthful given that the Developer was supposed to have been socking away in that capital reserve fund $33.80 a month per Villa owner. The problem for Mike, and apparently for Roz too, is how to deal with or explain away that DW declaration to set aside $33.08 per month for reserves. How can Mike and Roz reconcile a “Developer contribution” to be determined by a 2005 reserve study with a never revised Developer declaration to set aside $33.80 per month per unit for reserves. The simple answer is, they can’t.

A differently phrased statement, one I suggest is more accurate, might look like the following:

“Whether the reserve fund was “fully funded” was to have been calculated in the 2005 reserve study, which was a legal requirement to be performed at transition in May, 2005.”

The calculation that was to be done in 2005 would have determined the health or adequacy of that already accumulating reserve fund, in other words, was that fund over funded or shorted. Said differently, the issue to be resolved in 2005 was NOT the amount of the Developer contribution, but whether that already established capital reserve fund was or was not “fully funded.” But there was a really big problem. There was no such fund!

Hypothetically, perhaps we can estimate the amount the Developer should have had in that “capital reserve fund.” While nice to know, it may also tell us the magnitude of that potential fraud may have been committed, or, as Pulte might prefer to describe it, that's how the Developer business works.

From what Ms. Berman conveyed at the meeting, she is in possession of account or income information from Villa owners, the very information that had been sought by the Villa owners for some time. That yet to be disclosed figure would be a good start to arrive at what I believe to be a full and complete accounting of that reserve fund balance at the time of transition—the one that should have existed but apparently does not exist.

But what would be a full and complete accounting of the Developer’s potential obligations to fund that capital asset reserve fund? While some of the ingredients to be included in that accounting pie may be debatable, we can at least describe how large that reserve accounting pie might be. For our purposes here, I have broken it down into four accounting parts.

• The first, most obvious and easiest part to calculate is represented by the those Villa owner payments of $125 a month, from which $33.80 was to be set aside for that “capital asset reserve fund.” Roz, I believe, can calculate this number from gross Villa income.
• The second part is represented by any vacancy periods when there was no Villa owner present because the already completed Villa unit that had been sold had not yet closed escrow, or for units that had not been sold by the Developer and were awaiting the arrival of a buyer. That period may be several weeks to several months long.  
• The third part is represented by the period the unit was under construction from the time the City authorized the Developer to develop the parcel of land where the unit was to be constructed. This period may be up to a year and the lots then under construction were typically referred to as “Developer lots.” This ingredient is discussed in some detail below.
• The fourth and final part of the accounting pie is akin to part two, but with a twist. This part is represented by the 32 Vacation Villas, a marketing tool of the Developer, that had closed escrow in 1998 and were leased back by the Developer. These units, however, were not occupied as Villas until they were again sold again beginning in 2004. While the new Villa owners starting paying Villa assessments in 2004, the Villa units they were living in had been aging for 6 years. As a result, the Developer should have to contribute to that reserve fund for that six year period in the same manner Villa owners were required to contribute for future maintenance & repairs.  

Whether the Developer has any additional obligations to contribute towards the Villa reserve fund in the case of Parts 2, 3 and 4 is yet to be determined. However, based on the past practices of the Developer in the case of the sale of unattached homes, I believe a compelling case can be made that they do have such an obligation in the case of Parts 2 and 4, perhaps a slightly less compelling one in the case of “Developer lots” discussed in Part 3.

In the past and prior to transition in 2005, the Developer had an established practice of paying regular assessments to the Association for each lot under development, that is, prior to the close of escrow at an annual rate of $940 a year (or lower at the beginning). A portion of that amount went into a reserve account (we think) for future repairs and maintenance on Association-owned property. Having established that past practice in the case of unattached homes, may Del Webb/Pulte do less in the case of attached homes when the Association has a duty to repair and maintain those Villa homes? If the Developer had a practice of paying on the future needs of Association-owned property, is there any reason why the Developer should not do the same on Villa lots and for the same reason, namely, the Association’s fiduciary obligations to repair and maintain the Villa properties? I believe the answer is, “Yes,” since there is no distinguishable difference between the two entities (the Association and the Villas) insofar as the duty to repair and maintain is concerned.

What would any discussion of these matters be without a discussion of that Developer commitment to set aside $33.80 a month for reserves, technically speaking, for a “capital asset reserve fund.” That sounds like a formally established fund or at least the intent to establish such a fund.

But, as Roz correctly pointed out, that reserve set aside statement was written back in 1999, perhaps 1998 also, and it refers to the then “current budget” that existed at that time. What we need to know, however, is whether that set aside statement for reserves actually applies to subsequent budgets for 2000, 2001, 2002, etc? While that is certainly a legitimate question to ask, I believe the short answer is, “Yes.” How come?  To answer that question, we need to examine a number of documents, not the least of which are the annual budgets in subsequent years. When you conduct that examination, two things stand out in the case of Villa owners:

• there were no changes in the annual assessment of $1,500 to the date of transition. No change whatsoever. The only change that occurred was with the 2007 budget, when the assessments were raised to $2000 annually.
• More significantly, throughout that entire period no mention was made of any change in the amount being allocated to that e “capital asset reserve fund.”  In other words, nothing had changed as far as Villa owners and as far as the Association was concerned, and as far as the Developer was concerned, at least in writing.

If Del Webb/Pulte had made a change somewhere along the line from 1998 to 2005 in that reserve amount, there would have been a revision either to the Public Offering Statement, where the reserve statement appears, or to the annual budgets, or in some other recorded document putting the Villa owners and the Association on formal notice.

Look as we might, no one has come forward announcing that there was any change in that amount anywhere, and for good reason. Del Webb/Pulte never changed the declared amount that was committed to that “capital asset reserve fund.” As we all know, if Del Webb/Pulte had wanted to make a change, remembering that up until transition that was the Developer’s prerogative or right to do so, they had both the means and opportunity to make a change. Since they took no action to do so, the only conclusion one can reach is that the Developer’s commitment that was valid in 1999 was equally valid throughout the entire period up until the time of transition.  So, not be belabor the point, what happen to that “capital asset reserve fund” that Del Webb said they established for the Villa owners?

While Roz may have been dismissive about the reserve fund language contained in the Public Offering Statement that was handed out to Villa owners back in the 1998-2000 period as being irrelevant today, she may have a greater problem in being as dismissive and questioning its relevance when that same (un-revised) document was handed out to the new Villa owners who first occupied as homeowners those Vacation Villas (now Clubhouse) beginning in 2004.  So, at least from 1998 to 2004, we have Dell Webb, then Pulte, making that same declaration to Villa owners on what monies would be treated as reserves. How could Roz ignore that? It would be very difficult, if not impossible, for one to say today that by May of 2005, that written declaration to maintain a “capital asset reserve fund” meant absolutely nothing if it meant something to new Villa owners as late as 2004. For all we know, some of those Vacation Villa units became individually owned as Villas in 2005. 

Mr. Berman has alluded to another even more profound issue. There was that glaring hint that the Villa assessments were actually commingled into one account. In other words, the Developer who wrote that “the Neighborhood Assessment Fee of $125 per duplex unit includes the sum of $33.80 as a capital asset reserve fund for future maintenance or repairs to the Neighborhood units” was apparently expressing their intentions to treat a portion of those assessments differently. How differently? Very differently, I would suggest.

Did Del Webb deliberately set about to deceive the Villa owners with their promise to set aside monies for reserves. I doubt that. I believe they were telling the truth about their intentions to treat those funds differently. Perhaps it was merely a matter of convenience to have one Villa account. It's conceivable that the reserve fund was supposed to have been set up at the time of transition, but wasn't.

If DW was telling the truth in 1999, did the Developer subsequently change their mind and not tell us about that change? Did the Developer set up only one Villa account and not two, out of which they funded Villa operating expenses, leaving the issue of a shortage in Villa reserves to another day? Can, in effect, at the time of transition, the Developer merely say, sorry, there was only one Villa account to turn over and here is the money, or what’s left of it, in that one account. "Sorry, but we used most of the money to fund operating expenses, leaving virtually nothing for that promised capital asset reserve fund." There are a lot of unanswered questions needing attention.

If, indeed, that’s what happened at transition time, there needs to be some serious questioning and investigation about what really happened. But, let’s assume that’s what’s happened, there was only one account and no separate accounting for that reserve fund. So what? But that’s merely an accounting record. After all, just do the simple calculation and put the required amount of money into a separate reserve fund at the time of transition. Simple, right? But we know that was not done. Why not?

All right, then, there was only one account, with no separate accounting for those reserve funds. Then, the question to be answered is what was the amount that was transferred by Pulte to the Association at transition? This should be a well known fact at the time of transition in May 2005. Now, take that amount and compare it to the amount that was supposed to be in that “capital asset reserve fund,” or CARF account. That CARF amount is readily computed, as previously explained, by taking roughly 27% of the total amount paid by all Villa owners up to the time of transition. If the amount Pulte transferred to the Association in June 2005 was greater than the computed CARF amount, the Association (in 2005) should have immediately established the reserve fund that Del Webb/Pulte had promised to establish. To do so, the Association could have “reallocated” monies from the single operating fund that existed immediately following transition to a newly established capital asset reserve fund. That, I suggest is SCA’s fiduciary problem, not the Developer’s problem to correct.

I would hope that some folks would have great difficulty in attempting to justify the receipt of monies from Pulte without knowing the intended purposes served by those funds. If those funds were commingled and were in one account, fine. However, that in no way should have relieved the Association at the time of transition from setting up a “capital asset reserve account” for the Villa owners, based on the accumulation of reserves from 1998 until transition. However, a real huge problem occurs, of course, if the amount that was transferred by Pulte to the Association in 2005 was insufficient to fund both the operating account and the intended “capital asset reserve fund.” If that’s the case, we are talking about real shortages due from the Developer. The ultimate question here and now is whether the Developer’s 2007 payment in 2007 of $240,000 meet those shortages?

Finally, How Much are We Talking About? 

So, how much money are we talking about? At the time of transition, Pulte should have transferred to the Association around $400,000, broken down as follows:

       An operating account:  Around $100,000, or 7/12 of the annual operating assessment of $180,000 to pay for the remaining 7 months of the year.
                A reserve account:  Around $300,000  (necessary to fund that “capital asset reserve fund” based on 27.04% of the income received from Villa owners.

So, at the time of transition, did we get about $400,000 from Pulte for the Villas account? If not, why not? How much money was transferred?   

Counter Arguments

Some may argue that wherever the money went, it all went for the Villa properties in one form or another. Somehow, I’m not too impressed with that argument. Amounts that were specifically designated for a “capital asset reserve fund” should, if anything, have a special meaning or significance, even a legal or fiduciary significance. And, besides, monies designated for a "reserve fund" are really not available to non-reserve purposes. Others may argue that DW/Pulte could do what they wished with those monies. If those funds were needed for operating expenses, so what, Pulte might claim. After all, this was prior to transition and NRS may have a different application to the Developer prior to transition. I guess my retort to that would be that’s a very big “so what.” The real issue here is whether the Developer should get out of paying what they had committed in writing to paying merely because 1) they kept the money in one pot and 2) used that money for operating expenses instead of meeting reserve needs that they had committed to funding. Was Pulte merely clever or deceptive in not funding the “capital asset reserve fund?” And were they even more clever or deceptive when it came time to negotiating with representatives of the Association over how much was owed, or did we drop the negotiating ball at that time?

Another $50,000 for Those Vacation Villas, And More

Roz or another should be able to tell us exactly how much money was transferred from Pulte to the Association for the Villa neighborhoods. Added to that amount, of course, would be roughly $50,000 for the reserves imputed on those 32 aging Vacation Villas, plus a yet to be determined amount for potentially disputed items mentioned above.

Final Thoughts

From the above, I would conclude that the entire community is entitled to a further and much more detailed accounting of monies owed at the time of transition. It is apparent the Association has not been entirely helpful or responsive in their efforts to fully and properly address the Villas reserves matter. As a result, no one should be surprised if some homeowners will find good cause to lose trust and faith in the word of some Board members.

Whether the Association can now be relied upon to come forward with all of the facts, along with an action plan to correct the Villa reserves matter, is in serious doubt.

Ron Johnson 26 July 2007