Why You Should Attend the Villa Owners Meeting
When:   Friday, 20 July at 2:00 p.m.
Where:   Independence Center, Penn Room

Of all the events and meetings scheduled for this week, one has the potential for reaching into our pocket books. That meeting will occur this Friday, the 20th of July at 2:00 pm in the Penn room of the Independence Center.  While labeled a meeting with the Villa Owners, the meeting is actually open to all residents. The importance of this meeting for the Community cannot be overstated since we have been told, actually forewarned, that if the Villa Owners are not entirely satisfied with what they hear, they may sue, possibly the Association, for past reserve amounts they believe were not properly maintained or reasonably calculated.

You may ask, why would they even consider suing the Association? After all, the reserves at issue are reserves the Developer was legally responsible for accumulating prior to transition in 2005. And we all know that the attached Villas were all completed years prior to transition. If there is any dispute, it should be with the Developer and not with the Association. Accordingly, the dispute over the reserves matter should be between the Association (representing the Villa neighborhoods) and the Developer.

As we have since learned, that dispute was recently resolved with a written secret settlement Agreement with Pulte when the then prior Board (a few months back) agreed to accept $241,000 as monies owed to the Association for Villa reserves. That amount was intended to cover all monies owned by the Developer up to the date of transition in May 2005 in lieu of the Developer offering to account for the Villa neighborhood funds.  Actually, that amount was portrayed by the former Board as being far in excess of the amount that was then computed as owing. While the then Board may have gotten it right all along, there is no data available to support their conclusions, let along their actions.

While the amount of settlement continues to be an issue of concern for the Villa owners, that secret Agreement contained two provisions of interest here:

• The Association (meaning you and me) agreed to accept financial liable for any additional reserves found owing beyond the amount Pulte had recently agreed to pay; in writing the Agreement, Pulte made sure that if any mistakes were made, the Association, and not the Developer, would be legally liable to make up any amount that was owing.
• The Board signed a formal written document that declared they had the benefit of legal counsel for the contents of the Agreement when, in fact, there is no evidence in the record that the Board had secured a legal opinion from the Association’s legal counsel.

By now, the Villa Owners have an array of unanswered questions. Whether or how those questions will be answered to their satisfaction this Friday is unknown. I will not even attempt to summarize those questions as they are too numerous and require a great deal of additional study. I will, however, attempt to set forth an example, which I believe focuses on on what I understand to be the nut of the problem.

The first bulleted statement below sets the stage for the ongoing dispute between the Association/Developer and the Villa owners, who number 162. As Villa owners, they have paid an additional assessment of $1,500 a year, or $125/month, which is in addition to the $940 a year that everyone pays. That additional amount goes towards two items: (1) operating expenses consisting of landscape maintenance; house insurance on the structure; garbage collection; electric bill on the landscaping clocks only; and a water bill on irrigation only; and (2) for reserve items to take care of future painting and roofing needs. According to the Developer's Public Offering Statement, the following applies to each Villa owner:

"If you purchase a duplex unit . . . . Under the current Budget, the Neighborhood Assessment Fee of $125.00 [per month] per duplex unit includes the sum of $33.80 per unit as a capital asset reserve fund for future maintenance or repairs to the Neighborhood units."

• The inability of Villa owners to collectively account for monies paid to the Association/Developer for covered expenses & reserves compared to the amounts that have been allocated by the Developer for such purposes.

• If such records of monies paid and expended are not currently available because they are “lost” somewhere in storage, it would be terribly wrong as well as premature for the Association at this time to draw any conclusions about anything, let alone whether or not there exists any potential liability, underfunding or excess funding that may or may not have occurred during the period of Villa ownership and the date of transition on 5/31/2005.

• If such records are indeed unavailable to make that proper accounting to the Villa owners of monies spent and held in trust, three things are readily apparent:
  1. The Association lacked any basis for approving the 2007 increase in assessments for Villa owners amounting to $500 annually, effective 1 Jan 2007. The Association has the burden under law to establish that such an increase in special assessments was in fact needed. Failing the ability to meet that burden, the Association would seem to be precluded from collecting that assessment. Surely, the Association cannot merely assert the Villa owners owe more money because the Association doesn't know where the money is or because they are unable to make a proper accounting.
  2. Until such time as the Association can produce the records, or reconstruct such records to the best of their ability, the Association would seem to be barred from making any future special assessments for Villa owners for reserve purposes, as they are now planning for 2008.
  3. If the Association does not agree, and given the potential magnitude of the issue, the Association is cautioned to seek a written legal opinion on this critical matter.

 

• Unlike the Association in general, where reserve studies are useful in allocating member assessments between operating funds (to meet current needs) and reserve funds (to meet future needs), Villa neighborhoods may require special treatment. The reason they may require special treatment is because ALL of the extra assessments paid by Villa owners are paid for one of two very specific and well defined purposes, designated operating needs and reserves. That’s not as true in the case of the Association’s general assessments since those monies are allocated for an extensive variety of general purposes. As a result, the fiduciary obligations on the Association are quite different in the case of Villa owners. As provided in our governing documents, if all of the monies paid by Villa owners are not expended in any one year, the excess funds must be carried over. That money, at least in theory from an accounting perspective, is never lost.

• Say, for example, I pay a supplemental annual assessment for an array of purposes, such as landscaping, insurance, etc., including an amount designed for reserves, amounting to $1,500 annually. And, say, of that $1,500, $1,100 goes in the pot for current operating expenses, amounts which were hypothetically incurred in the year. The remaining amount, or difference, $400, is mine, no matter what name is attached to this amount. The Developer tags this $400 amount as reserves, setting it aside to pay for future expenses such as painting or roofing repairs. From a fiduciary perspective, that $400 is my money held in trust for neighborhood reserve items, whether that money is held by the Developer or its successor, the Association upon transition on 5-31-2005.

• What is clear is that unless the Association can demonstrate how my $1,500 payment was allocated, I along with each Villa owner am entitled to a full faith credit for every penny of that amount, less any amount that can be documented was expended for operating expenses.

• Relying on the above hypothetical, we have the following:

Say, for example, I’m Mr. Average Villa owner, with 5.5 years in the Villas, and there are 162 Villa owners. Totaling up all of the built up reserves for all Villa owners yields a total of $356,400. That amount was theoretically put away in trust. The Developer was supposed to have turned over that money to the Association on transition on 5-31-2005, but they failed to do so. In general, the law prohibits reserve amounts from being used for non-reserve purposes. So, where's the money? More precisely, as noted above, the reserve amount held in trust was $33.80 per month, or $405.60 per year.  

• The Association has a fiduciary obligation to account for all available Villa owner “credits.” What does that mean? Essentially, that means the Association must be able to account for the subsequent allocation of all income for the Villas. How much income are we talking about? About $1.34 million. 

• Unless and until the Association can provide the Villa owners with a verifiable audited account of all payments into the system and payments for authorized expenditures, with the entire difference going to the credit of the Villa owners, the resolution of this disputed matter would appear to be beyond reach at this juncture.

• If the Association is unable to demonstrate that $980,100 was allocated for operating expenses, the Villa owners may have an outstanding credit available for the neighborhoods. On the other hand, if the Association can demonstrate that the cost of operating the Villas exceeded $980,100 until transition, that would raise other issues.

• The “required” level to adequately or fully fund reserves is a separate issue, apart from the amount that Del Webb/Pulte advised Villa owners in their Pubic Offering Statement had been allocated to the reserve fund.

• Here are some questions or potential issues: 
  1. What was the Villas reserve amount Pulte transferred to the Association upon transition? Was that amount zero?
  2. What additional amounts did Pulte give the Association for Villa reserves? About $241,000!
  3. What is the sum of (1) + (2)?
  4. What is the difference between the amount in (3) and the reserve amount estimated above ($356,400)?
  5. That difference in (4) may reflect a potential shortage or overage in the reserve account.
  6. In addition, the Villa neighborhoods may be entitled to a credit if actual operating expenses were less than the amounts that were actually allocated for ongoing operations, i.e., $1,500 less $400 for reserves, or $1,100 per year per Villa unit owner.

What might be the Board’s response?

Really sympathize with the plight of the Villa owners. As our Bangalore friends might say, “We are very, very sorry for your situation.”

Provide no justification whatsoever for the increase in annual assessments ($81,000/yr. for Villa owners) since the Association has no justification to support their decision. The Board never looked for the records last year and can’t find the records this year, but, we are told they are making some progress.

Expect the Association to offer to work with the Villa owners in an effort to mitigate the pain that the Board’s past omissions and fiduciary mistakes have wrought on the Villa neighborhoods. The Villa owners will be ever so thankful!

As we listen from afar to the Villa owners' plaintiff lament, "Oh, Marcus Brutus, we are so grateful for any relief you can provide."

How might the Villa owners respond?

Demand the accounting that the owners are entitled to, nothing more, nothing less.

To such a demand, expect the Association to be dismissive, suggesting that such an accounting is simply impossible or just too hard to accomplish. So what! If called upon, accountants have the ability to reconstruct records. I did so without any records and came up with a reserve estimate of over $300,000.

If the records demonstrate that the Association had dropped the ball in some material way, meaning that the Villa owners were fiscally screwed somewhere along the line, the Villa owners should first insist that the Association rescind the additional special assessment. The sooner those records are either found or reconstructed, the better for all parties concerned.

How should the Association respond?

If an accounting establishes a substantial underfunding of reserves, approach the Developer for some mutually agreeable resolution, despite the language in the Agreement.

If the Association is unwilling to approach the Developer, then monies would have to be transferred from the general fund (most likely from the capital budget) to the Villa accounts.

A Concluding thought.

While the recommended approach above would seem to be fairest approach, I do not see that approach being adopted by the Board. On the contrary, I view the Board's "enlightened" approach as one which is designed to literally stick it to the Villa owners, if for no other reason than the Board has the power and the Villa owners do not.

After all the trauma generated over this matter, it comes down to a very distasteful dilemma, either take it (no Board accountability and pay the inceased assessments) or sue if you don't like it, believing that the Villa owners have no option other than to comply and suck up to the Board.

The spirit of cooperation and accommodation belies the reality that things have not really changed that much.

Ron Johnson, 19 July 2007