NOTE: Parts I, II and III immediately follows "On Looking Back" (Part IV) in our series on The Case of Disappearing Villa Neighborhood Reserves. In addition, our Villa Reserves "Update" with Tom Stephan of Diversified Facility Studies is here.

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The Case of the Villa Reserves Mystery, Solved!

On Looking Back to 2005

The 100 percent solution to the Villa Neighborhood reserve mystery

Not unlike the fictional detective Sherlock Holmes and his confidant Dr. Watson, our readers will quickly discern the obvious clues and they too will be able to solve the mystery of The Case of Disappearing Villa Neighborhood Reserves. Commenting on whether he has the faith to believe the world was created in seven days, comedian Lewis Black says that he would love to have such faith, “but I have thoughts.” I too would love to have faith in what the Board is all about concerning their intentions for the 2005 Reserve Study. However, not unlike Lewis Black, I too have thoughts. I would suggest that anyone taking the time to take a good look at the events concerning this Villa reserve matter would have great difficulty in not coming to the same conclusion that I and others have reached.

Admittedly, most homeowners are not interested or sufficiently affected by the outcome to delve into the Villa reserve problem. As a result, the Board likely assumed they had carte blanche in their efforts at tinkering with the 2005 RS, presumably in the mistaken believe that their efforts would go unnoticed. That did not happen.

The Board was well aware they had a real problem in requesting the transition 2005 look-back reserve study. First, they initially rejected the idea conducting any look-back reserve studies out of hand. Only much later did the Board agree to contract for six reserve studies, one each for the Association, Pinnacle, and the four Villa Neighborhoods. Some believe that the Board was dragged kicking and screaming by others in the Community who were questioning the adequacy of the reserves the Developer had deposited with the Association at the time of transition in June 2005. Whether that or other factors caused the Board to change their mind is less important than their decision to have a certified reserve company conduct those look-back studies.

Fortunately, the Board, as well as the reserve company, Diversified Facility Services, had the benefit of the 2006 RS not only as a guide but as their starting point for calculating their look-back studies to 2005. Looking back but one year should not be that difficult given the existence of an extensive database of cost data for 2006. Unfortunately, the Board had some major problems to contend with on the Villa reserves matter. Those problems dealt with certain unexplained discrepancies, potential conflicts of interests, and what some may view as persons having a vested interest in the outcome of the reserve study itself.

Those high profile vested interests would steer the Board into making a decision that was blatantly wrong, self-serving, and potentially rising to the level of criminal behavior if one views being assessed substantial ADDITIONAL amounts to fund a shortfall in reserves that Pulte should have met (but failed to) at the time of transition.  While some Board members and others would like the Community to believe that the only issue on the Villa Neighborhood reserve table was the cost of paint, nothing could be further from the truth. Rather than the cost of paint, the Board’s decision to tinker with the Villa reserve studies was specifically and solely designed to demonstrate the following:

• The Villa Neighborhoods transition shortfall was around $200,000;
• There is nothing more due from Pulte since as a result of the 2007 negotiations by Favil West the Association collected about $200,000 to make up that shortfall; and
• Any subsequent Board actions to increase Villa homeowners assessments was necessary and proper in the light of the "fact" that there is no further shortfall for Pulte to make up.

That’s a very nice story, if only it were true. The clincher in that storyline rests on the assumption (false) that the initial Villa shortfall at the time of transition in 2005 was around $200,000. One thing is perfectly clear. If, indeed, the Villa shortfall was around $200,000 in 2005, there would be no need for the Board to go through all of the machinations and tinkering with the Villa reserve studies that has brought us to this sorry point. The so called “the cost of Villa painting” set-up was developed by the Board and Reserve Committee solely in an effort to demonstrate that Favil West’s negotiations with Pulte produced the correct outcome for funding the Villa reserve shortfall. Why would the current Board want to do that? For a variety of reasons, as discussed below.

But, as the Board and others knew all along, the Villa transition shortfall was not around $200,000. Some have calculated that the initial transition shortfall for the Villa Neighborhoods is actually closer to $400,000 than it is to $200,000. Consider, if the actual shortfall was around $400,000, that just might explain the Board’s initial step to “find” a Villa painting rate that just happened to reduce by about 50% the level of fully-funded reserves at the time of transition. What does that mean? If the Board is successful in getting Diversified to substitute a substantially lower cost for painting Villa buildings, as opposed to working back in time from the 2006 Reserve Studies, the amount of fully-funded transition reserves would drop by an even greater percentage. Why? Because the 2006 RS established that the cost of painting accounted for 75% of all Villa reserve requirements. For example, given the significance that painting cost has in the overall reserve requirement, a 40% reduction in the cost of painting can yield a 50% reduction in the amount of fully-funded reserve requirement.  

Who might have a vested interest in the outcome of those look-back Villa Neighborhood reserve studies, other than those 162 Villa homeowners?

• For starters, there is Favil West since he was the person who negotiated in the spring of 2007 that once and for all “final” settlement of additional monies owed by Pulte ($207,000) to augment the monies that already had been transferred by Pulte ($198,000) at the time of transition in 2005. One can reasonably assume that Mr. West might have some interest in assuring that his accounting and negotiated resolution ($207,000) resulted in an equitable and just settlement of all monies owed to the Villa Neighborhood reserve accounts.  
• Then there is Roz Berman, Board Treasurer, who also Chaired that Villa Neighborhood Meeting in July 2007. At that meeting, Roz happened to report her own determination of the amount of fully funded Villa reserves as of 5-31-2005, not knowing at that time that a look-back reserve study would be conducted at a later date. The amount she reported was $324,000 for all four Villa reserves. It would seem that Roz Berman may have a vested interest in being able to demonstrate that her July 2007 determination of the fully-funded Villa reserve amount as of 5-31-05 was at least in the ball park, if not right on the mark. Now, Roz Berman sits as a member of the very Committee that is reviewing the look-back 2005 Reserve Study.
• Mike Dixon, who as President of the Association, retains considerable control over the Board’s decision-making process. Without his active involvement and support, the Board would not have their hands entangled in the Villa reserves mess.
• Members of the Board of Directors. A clear majority of the Board members has no interest in pursuing a potential shortfall in Villa reserves. That matter, after all, had been “finally” settled when Favil West and Kay Dwyer signed that now infamous 2007 Villa Neighborhood Settlement Agreement with Pulte, which declared that the Association could no longer pursue a claim against Pulte. With no such interest, the Board is highly motivated by whatever means available to make that Villa reserves shortfall disappear as if it never existed. 
• Members of the prior Board of Directors, three of whom are serving on the current Board, Bob Berman, Kay Dwyer and Elaine Berg.
• Favil West and Kay Dwyer, as the two Association signatories to that admittedly flawed 2007 Settlement Agreement that allegedly finalized all monies Pulte owed for the Neighborhood reserve accounts.
• Jack Troia, former Finance Committee Chairman and current chairperson of the Reserve Committee task force, who most likely was the person who generated the figures used by Favil West in his 2007 negotiations with Pulte.  

With $198,00 in the Villa reserve kitty at the time of transition plus and an additional Favil West negotiated settlement of cash in 2007 of $207,000, this might suggest that the amount of fully-funded reserves is somewhere in excess of the sum of the two, or $405,000.

Why in world, with so many high profile parties having such a vested interest in the outcome of the Neighborhood reserve studies, would the Board even consider having such reserve studies conducted in the first place? Consider, wound not the production of such studies produce undesirable outcomes (shortfalls in badly needed reserves) that would potentially embarrass some, or worse, contradict conclusions that had been reached by others? Excellent question since the Board could just have easily voted to omit the Villa reserve studies, instead relying on the outcome Favil West had negotiated or the amount Roz Berman had published as the fully-reserve amount as of 5-31-2005.

So why didn’t the Board do just that and omit these four Villa studies, while saving the additional cost that these studies would cost? Here are some of the reasons:

• The Board did not want to give the impression that in requesting look-back studies they were ignoring the Villa Neighborhoods, especially given the suggestion by some that the Neighborhood reserve accounts continued to have a shortfall and notwithstanding the addition of over $200,000 in cash from the Developer in 2007 to augment their 2005 transition contribution.
• More importantly, however, was the fact that by requesting Villa reserve studies, the Board could then attempt to control the conclusions those study’s portrayed by tinkering with the database for Neighborhood reserves, a subject we have already addressed. As we now know, that is exactly what our current Board has been doing, with the apparent cooperation of their contractor, or their co-conspirator, Diversified Facility Services.
• By controlling the reported outcome of those Neighborhood studies, the Board would be able (1) to provide cover to those who may have acted incompletely and, or who may have acted improperly in the past; (2) to provide “justification” or a presumption of impartiality for the Board’s action in not pursuing any shortfall that was alleged by others since (surprise) the look-back studies conveniently concluded there was no such shortfall for them to pursue; and (3) put to rest, finally (?), those naysayers who had suggested there still existed a substantial shortfall in Villa reserves.
• And finally, equally important, Boards are reticent to admit mistakes, let alone in taking action to correct their misdeeds, especially when it comes down to the past assessment of dues that may not have been due. Say, for example, you were assessed an additional $1,000 a year, like some Villa owners, to fund underfunded reserves and later it was disclosed that the Board had greatly errored when it was determined that the Developer had failed to properly fund the reserve kitty at the time of transition.

If you are on the Board, what do you do? Do you (1) request additional monies from the Developer to remedy that potential $200,000 shortfall; or (2) attempt to phony the reserve database to make it appear that no transition shortfall ever existed.  We know what our Board decided to do.

As one can readily deduce, the Board was highly motivated to have those Villa reserve studies produced Diversified—but only as long as the Board could control the outcome of those studies in a manner that suited their interests. If the Board had been unable to tinker with the outcome of the four Villa Neighborhood studies, it is evident the Board would not have commissioned those particular look-back studies. Why, pray tell, would the Board want to generate Villa studies that the Board knew in advance would produce outcomes that demonstrated a $400,000 shortfall in Villa reserves? They wouldn’t! Moreover, Roz Berman was already in possession of Diversified’s reserve study computer program that we understand can be used to generate such reports. Given that the Board wanted to force the amount of fully-funded transition reserves down by roughly 50 percent, the Board would have been foolish to allow Diversified to publish studies untainted reserve studies. However, the Board needed a co-conspirator if their plans to reduce fully-funded Villa reserves was to succeed. That co-conspirator would be the reserve company they paid to perform the studies, Diversified.

Some may be thinking, so what? Really, what difference does it make whether the amount of fully-funded reserves at the time of transition was about $300,000, as alleged by Roz Berman, or closer to $400,000, based on that West/Dwyer Settlement Agreement, or some other amount? Does it really make any difference at this point in time? While there may be those who would argue, “No,” that it makes no difference, there are those who would argue that it does make a difference. If you, the homeowner, are being asked to foot the bill for a substantial shortage in reserves, it may make a difference, whether the amount in question is an ADDITIONAL $500 or $1,000 a year.

Some members on the Board would likely argue that had they not tinkered with the reserve study numbers, the Board would have been placed on the unwanted and proverbial hot spot since they already had decided not to pursue with Pulte any such shortage for the Villa owners. The Board would then have the wrath of the homeowners for not performing their fiduciary duty for the Villa owners. Moreover, the Board (or subsequent Board) did not want to appear totally irresponsible by possibly negotiating with Pulte over the adequacy of Association transition reserves while at the same time ignoring a reported shortfall in Villa transition reserves. With that onerous prospect in mind, the Board decided it was in their interest to make the adequacy of the Villa transition reserves disappear as an issue.

What, exactly, are we talking about in terms of a potential Villa Neighborhood reserve shortage. It all depends. Depends on what? It depends on the amount of the full-funded reserve amount at the time of transition. Why is that? Because it is that amount, at the time of transition, that sets the initial or banked amount from which the Association’s homeowners starts business. That critical amount at the time of transition also determines whether or not Boards henceforth will be required to approve future assessment increases to augment reserve accounts, something ALL homeowners were required to do this year.

So, what’s the magnitude of the Villa Neighborhood shortfall? That number should help to demonstrate why the Board has been so intent on driving down the level of “fully-funded” reserves at the time of transition. As we shall see, in driving that “full-funded” number down by manipulating the Villa database, the Board was essentially able to ELIMINATE any shortage in the Villa Neighborhood reserve account. By eliminating any such shortage, the Board has accomplished a number of things:

• Pulte owes nothing more to the Villa Neighborhood reserve funds;
• There is no need to negotiate further with Pulte on this issue.
• The Board reneges on their fiduciary duty to protect the interests of Villa owners;
• Villa owners are stuck with having to make up any past or future reserve shortfall.

At the time transition, and working back in time using available data, one more precise estimate of the Villa reserve shortfall is roughly $450,000. In the following discussion, I will use that $450,000 figure as the Villa Neighborhood reserve shortfall at the time of transition. In other words, instead of depositing about $200,000 in the Villa Neighborhood accounts as Pulte did in 2005, some have calculated that amount should have been closer to $650,000, assuming, that is, that reserves should be funded at the 100% level. Whether or not reserves should be funded at 100% at the time of transition is another matter. In 2007, Favil West negotiated an additional $200,000 for the Villa Neighborhoods. With the addition of $200,000 in reserves, that represents about 60% of the amount needed to fully fund the reserve requirement. In other words, Favil West settled for 60% of what some may believe was actually owed. Favil West’s settlement amount still leaves a potential shortfall in reserves of roughly $250,000. [Note, all numbers are rounded for ease of presentation.]

Some may argue that an additional shortfall amounting to $250,000 is not that much money. On the contrary, when one takes into account the relatively small number of Villa households involved, 162, that number is very significant. On a per household basis, that equates to $1,500. At present, the Board seems intent on sticking the Villa owners with that significant shortfall, while seemingly gearing up to justify their possible approach to Pulte over the adequacy of Pulte’s funding of Association reserves.

In summary, then, we have a potential Villa Neighborhood shortfall at the time of transition of around $450,000. That potential shortfall was reduced (not eliminated) in the 2007 negotiations conducted by Favil West. That left a remaining or unmet shortfall of about $250,000. If you are going to carry away one message from this series, it was the existence of that unmet $250,000 shortfall that drove the Board to take the manipulating actions they have been engaged in to date to make that known shortfall appear as if it never existed. 

Said differently, the Villa homeowners are expendable and can be sacrificed at the expense of the reputations and self-serving actions of others. Did the Board and others conspire to deprive the Villa owners of efforts to secure what some believe is their fair share of reserve monies? While I believe the evidence is clear, others may not be so convinced.

But I ask you, are the actions the Board has taken in this matter actions of the type that we as members of the Association should be expecting from our Board members? I think not.

Of particular note, three of those members favoring such actions are not running for re-election to the Board. As a result, we need to consider very carefully how those who are running for the Board view this situation since few would understand or appreciate the need to continue what I believe have been blatant self-serving efforts by the current Board, as well as efforts to effectively cover over if not cover-up the past deeds of others.

Ron Johnson, 13 February 2008

END, PART IV OF THE SERIES ON THE CASE OF THE DISAPPEARING VILLA NEIGHBORHOOD RESERVES.

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This is Part III in the saga of the "The Case of the Disappearing Villa Neighborhood Reserves." No longer is there any secret about the Board’s plans to scuttle the hopes of Villa residents for what they assumed would be an arm’s length transition Reserve Study for their Neighborhoods. Sadly, Sir Walter Scott’s famous quotation continues to haunt the machinations of the Board: Oh What a Tangled Web We Weave When First We Practice to Deceive. In the process, our Sun City Board seeks to drag the reputation of the reserve study company Diversified Facility Services (DFS) down with it, as I will attempt to explain.

And when the Board’s Plan A failed, as it did when key members of the Reserve Committee recently abandoned 2007 cost data as a basis for calculating Villa Neighborhood painting costs in 2005, the Committee sprung right back with a new plan. Let’s call that new plan “Plan B.” As it turned out, Plan B has the appearance of coming up with the same bottom dollar “solution” as had Plan A, or about $0.80 an hour as “the” cost of painting in 2005. Well, not exactly “the” cost of “all” 2005  painting since, according to Chair Jack Troia, we are looking only at the cost of stucco painting the duplexes in the Villa Neighborhoods.

The cost of “other” stucco painting is another matter, given that the Reserve Committee prefers to disregard the implications of their decision to adopt a dual painting cost strategy. When I discussed that aspect of the Committee’s plans with Tom Stephan, president of Diversified Facility Services (DFS), the company tasked by the Board to do the 2005 look-back reserve study, he was in a state of genuine disbelief, seemingly oblivious to the fact that the SCA Board had actually adopted two markedly different painting cost figures for that look-back study, one for the Association and the other (about 45% lower) for the four Villa Neighborhoods. While that was his initial reaction, one wonders if he has since “reconsidered.” Other than mentioning that serious problem area, my interest here is to address a different matter.

It’s apparent that concerted efforts have been underway to drive the transition cost of Villa Neighborhood painting down, down as far down as possible. The reasoning is simple. As the cost of Villa painting declines, recalling that painting accounts for about 75% of all Villa Neighborhood reserve funding, the amount of reserves needed at the time transition would also be declining as well. If the Board can demonstrate that painting costs in 2005 were 45% less than the amount that was calculated for the 2006 RS, the Board’s believes they would have a basis for demonstrating that the reserves required to meet to that future painting need would be less. How much less?

• Substantially less than the amounts reflected by the 2006 RS.
• And, if at all possible, even less than the additional reserve amounts that were negotiated by Favil West and Pulte in the spring of 2007. If that were the case, that would put an end to the issue of whether the agreed upon settlement amount of additional reserves (valued at about $280,000 in cash and kind) represented all that was owing from Pulte for the Villa Neighborhood reserves.

After all Rich Pendleton, the Reserve Study Committee's self-serving pitchman who should know better, isn’t that spring 2007 settlement agreement is what this is really all about? In a nutshell, the real issue here has nothing to do with finding the proper rate for Villa painting, but in getting the “fully-funded” transition reserve amount for the Villa Neighborhoods knocked down to the amount that Favil West had already agreed to settle for. No one should be deluded into believing that the Board was then or is now in any way in search of the truth, or the actual amount of Villa transition reserves, or, for that matter, in search of equity for the 200+ Villa homeowners they represent. No, indeed.  What the Board is desperately in search of is some vehicle, any vehicle, that would allow them to totally ignore Villa Neighborhood transition reserve requirements as a potential shortfall issue.

But really, how will the Board be able to demonstrate that there is no shortfall in the Villa Reserves? But don’t we already know that such a transition shortfall already exists, leaving as an open question, “how great is that shortfall?” As many are aware, the Board does not want the transition reserve study to report a Villa Neighborhood shortfall, at least one that would required the Board to take some action. The $64,000 question, of course, was that if an arms-length reserve study was going to report a shortfall in Villa Neighborhood transition reserve funding, how can the Board make that shortfall literally disappear? The Board needed a plan. They can make that make that anticipated shortfall disappear by literally lowering the reserve requirement, that is, the amount of fully-funded transition reserves. But that poses an even greater problem. How does one go about lowering the reserve requirement? As it turned out, that task would not prove to be that difficult. The Board would first adopt a scheme to drive the 2005 cost of Villa painting down, given the overwhelming significance (75%) that the cost of painting plays in their reserve requirements. How would such a scheme work? First, the Board would adopt an artificially low painting cost, one based on 2007 painting cost. Then the Board would contact the company the Association is paying to perform the reserve study and have them substitute that cost as a benchmark or standard for determining painting costs in 2005. The old standard (based on the 2006 RS) was $1.57. The new 2007 standard was around  $1.00, which translated to a 2005 painting cost of $.80/sq. ft. That failed strategy was tried in what I call the Board’s now rejected Plan A.

Sadly, the Board is now heavily invested in what I call their Plan B approach, which will run into similar problems if the Board is successful in maintaining their dual painting cost strategy. While the Board may relish their Plan B approach as providential, there are inherent problems in that approach, which they are happy to ignore.

Actually, the Board wants to have more than they deserve. They desperately want the 2005 Villa Neighborhood reserve studies to reflect an artificially lower amount reported for “fully-funded” reserves for the Villa Neighborhoods. On the other hand, they appear to also want a properly conducted reserve study for the Association (the big one with 500 separate tasks or items) that is not tainted with dirty fingers. But, can the Board have both, their cake and eat it too? That’s their real dilemma. I say absolutely not. If DFS had their druthers, I believe Tom Stephan would agree with me. Some are beginning wonder whether the price for forcing down the “fully-funded” amount for the Villa Neighborhoods will come at the expense of the “fully-funded” amount for the Association. In other words, will the Board be willing to or be forced to forgo the benchmark figure of $1.57/sq. ft. as the Association’s hallmark 2006 painting quote in order to secure their desired low-ball ends for the Villa reserves by adopting what amounts to a one-price-fits-all, national standard for painting. While some may hope that’s not a likely scenario, it’s clearly something we will have to be alert to.

But without a one-price-fits-all, or national painting standard, applicable to all painting, the Board will ultimately find itself up the proverbial creek, merely treading water and looking for a way out of their 2005 Reserve Study painting dilemma. Sadly, few on the Board, and even fewer on the Reserve Committee, comprehend the issues sufficiently to appreciate the scope of the problem they have created. Let me see if I can shed some light on this murky issue.

If I am correct, the Board had initially attempted to sneak something over on the company charged with performing the already paid for 2005 Reserve Study. That company, a specialist in conducting reserve studies, is DFS. What might that something be? As we have explained, the Board fed DFS certain key information, actually 2007 painting cost data, data that had the effect of reducing the projected estimate of the cost of future painting. That step, in turn, reduced the need for accumulating future reserves for the task of painting. As the theory goes, the lower the cost of painting the Board can portray to DFS, the lower the amount is that would be needed to fund the reserve kitty, or, said another way, the end result would be a lower “fully-funded” reserve amount to meet future projected needs, needs that the 2005 transition Reserve Study would reflect. If dollar-wise those future needs were great enough, compared to the amount Pulte transferred to the Association at the time of transition in 2005, some might conclude that the Pulte may owe the Association the difference, or what our finance gurus call, the shortfall.

That act by itself would be OK were it not for what I believe to be the “sneaky” part of the Board’s disclosure to DFS. While the Board may have had a rationale for their deception, it’s highly doubtful that the Board was totally up front with DFS on what was behind their efforts to tinker with reserve study’s outcome for the Villa Neighborhoods, and those bewildered Villa homeowners who to this day have little to no clue what has been is now taking place.

Instead of addressing the overall task of stucco painting, a single task that had been addressed in the 2006 RS, the Board sought to address only a portion of that task, namely, stucco painting of duplexes in the Villa Neighborhoods. And, in addressing that particular task, the Board sought to establish a new “Board-preferred” rate for painting. The problem inherent with that approach was that there was no such thing as the task of stucco painting just Villa duplexes apart from the overall task of stucco painting. According to DFS, stucco painting is stucco painting, whether on Building A (a duplex building) or on building B (a recreation center building).

You may wonder, “why wasn’t the Board happy with the stucco painting rate they already had as a benchmark, as reported by the 2006 RS?” Actually, the Board was quite happy with that rate, $1.57/sq. ft. In fact, the Board was exceedingly happy to continue to utilize that rate as the benchmark rate for determining 2005 painting costs in 2005, but only for Association buildings, not for Villa buildings. That $1.57 rate was essentially an obstacle to the Board’s objective of lowering the “fully-funded” reserve amount shown by the Reserve Study for the Villa Neighborhoods. For the already published and approved 2006 RS, that $1.57 rate was not only an acceptable rate but it was the approved rate for both Villa painting and Association painting. So what happened to change that conclusion for the year immediately prior to 2006?  Was there a problem? As we had mentioned, there was a big problem lurking about. That $1.57 rate did not necessarily fit with what Favil West had already agreed to accept from Pulte when he negotiated a settlement for Villa reserves back in the spring of 2007.

What the Board desperately wanted was a lower rate for painting, a much lower rate to meet their, admittedly, political agenda. That political agenda, of course, was to minimize, if not eliminate, any reported shortfall in transition reserve funding for the Villa Neighborhoods. That benchmark rate of $1.57 had the potential of creating a Villa Neighborhood reserve shortfall that our current Board (and Jack Troia) did not want to acknowledge existed. While the Board did not wish to embarrass anyone for past services rendered, the Board most definitively did not want to be put in a position of being obligated to address a reported Villa shortfall, an event considered highly likely if they stood by and did nothing to “correct” the Villa database for 2005. The only way for the Board to avoid that anticipated reported shortfall was to substantially reduce the Villa painting benchmark rate from $1.57 (an amount that was OK in 2006) to achieve a 2005 Reserve Study rate of about $0.75. Only by doing that would the Board be able to achieve their political ends.

Mind you, the Board had no real interest in securing a proper painting rate, let alone the best painting rate for Villa painting, or even a rate that was in effect in 2005, but, instead, their interest was limited to the objective of securing a low painting rate, the lower rate the better. As we learned, they found what they were looking for by obtaining a painting bid in 2007 and applying that benchmark rate to 2005. In doing so, however, they may have created an insurmountable problem—the existence in the same Reserve Study of two widely divergent painting benchmark rates for the same task. However, the Board is sure to argue (for the first time) that the task of stucco painting Villa duplex buildings (using ladders) is a markedly different task from the stucco painting of predominately single story recreation buildings (using scaffolding in locations where required). As a result, the Board will argue, a different rate is needed. How much different is another issue.

While the Board’s scheme to adopt two different stucco painting rates is open to serious question, the yet unanswered question is what rate is the proper painting rate at the time of transition in 2005. The Board has already answered that question for the Association’s buildings by adopting the 2006 benchmark rate of $1.57 to determine the rate for the 2005 RS. Now, we learn that the Board is proposing that DFS use something called the National Standard adjusted painting rate for Villa painting, which is about $0.75/sq. ft.

It’s my understanding that DFS and the Board have agreed to utilize that National Standard rate for Villa painting only. A huge mistake in my mind. Consider, since that NS stucco painting rate applies to all stucco painting, it may be difficult for DFS to justify or support the non-use of the NS rate for all stucco painting in Sun City Anthem, including buildings in general since the NS rate applies to all buildings. Will the Board be obliged to discard the $1.57 benchmark rate in favor the NS rate for painting? Highly doubtful! But we do not know how far the Board go in order to achieve their political agenda to eliminate a reported shortfall for the Villa transition accounts.

Since the 2006 benchmark rate for Association painting of $1.57 is 75% more than the National Standard rate of around $0.75 for painting, just how reasonable (compared to the benchmark rate of $1.57) is that NS rate? Really?  The Board believes they are essentially home free in adopting the NS rate for painting as a standard. After all, Jack and the Board are likely of the opinion that the adoption of the National Standard painting rate for 2005 is unassailable and cannot be challenged. But is that so?
          Just as the $1.57 rate the Board wants to retain was not based on the NS rate for painting in 2006, there is nothing preventing the Board from using another or different rate for painting, assuming, of course, that the accepted practice in the reserve study industry is to recognize two different stucco painting rates. If, however, the practice in the reserve study industry is not to recognize the existence or adoption of differing rates for stucco painting, DFS may have some difficulty in deviating from accepted industry practice.
Are There Other Options?

But, let us assume for the moment that the industry practice allows for more than one stucco painting rate, however doubtful that may be. The next issue is how to settle on differing stucco painting rates. By what method may DFS or the Board determine the most “acceptable” stucco painting rate. We already know of one such acceptable method, which would be to obtain a painting bid or quote in the open market. That $1.57 rate the Board wants to hold on to for Association stucco painting was secured by the Board in just that way. The then Board in 2006 (for the 2006 Reserve Study) got that price from a prospective painting contractor. That price was then given to DFS by the Board, which then incorporated that price in their 2006 RS as the price for stucco painting.  Actually, that price was utilized in that Study for all stucco painting, whether for painting Villa duplexes or for recreation centers.

While the Board had many options in seeking an appropriate benchmark for Villa painting, they were not interested in pursuing those options, given their objective in securing the lowest possible price for Villa painting. In fact, the Reserve Committee, that is, Jack Troia acting in behalf of the Board, has either ignored or fought any efforts and suggestions to actually find out what the cost of painting was in 2005, almost as if relevant information should be ignored or disregarded.

What’s Good for the Goose is Good for the Gander.

          In considering relevant information, the Board is completely satisfied with that $1.57 rate as a benchmark rate for 2005. While it may suit this Board’s special interests to discard that rate for painting the 81 Villa duplexes, is the Board really the proper party or in the position to make that determination? Not really! If not the Board, who then? The more obviously answer is the painting contractor who provided the Association with that $1.57/sq. ft. bid. That painting contractor could tell us if that $1.57 rate (a bid for recreation center painting) would have been more than, equal to, or less than the rate that was quoted for the recreation center. With that critical information in hand, it would very difficult, if not impossible, for the Board to now declare that the benchmark painting figure for Villa painting should be based on anything other than cost as provided by those 2006 contractors. The logic is clear: If the shoe fits for the determining the cost of one type of stucco painting, clearly that same shoe (the contractor(s)) would be the best source for determining the cost of Villa painting.

Clearly, the Board is not impressed with logic, reason, relevancy, let alone in keeping their hands away from the 2005 Reserve Study and out of manipulating those "fully-funded" the Villa reserve amounts. The Board’s agenda is nothing more than an unadulterated sham, is self-serving and constitutes a blatant deceit on every Villa owner. They know that, but sadly the Villa representatives on the Reserve Committee are either too naïve or are unwilling to acknowledging what’s going on. Few need wonder why it was that Favil West, unlikely to be seen at any committee meeting these days, showed up to the last meeting of the 2005 Reserve Committee.

Some may wonder what does the data show. What data might that be? Just as there is an index of Leading Economic Indicators at the state, national and local levels, there just happens to be an Index of construction activity for Clark County. That index is maintained by the Center for Business and Economic Research (CBER) at UNLV. That index tracks the level of construction activity month by month. While not earth shattering and not generating certain information, the below charts serve as a valuable indicator of overall construction activity for the greater Las Vegas area.

When construction activity is rising or high, one can reasonably assume that the demand for construction workers is also rising. As that demand rises, the cost of securing labor in the short run can be expected to increase in the presence of an existing labor supply. With an upturn in demand, contractors typically need to pay more to secure qualified workers. Those workers will come from the ranks of the other contractors who are likely paying lower wages or from nearby communities, etc. Those pressures on price and labor supply will stabilize over time as the level of activity rises or falls.

As construction activity falls, there is less need to pay premium wages and charge premium prices. In a declining construction market, one can expect an oversupply of workers compared to the need for workers. As a result of the decline in economic activity, contractors have an incentive to lower their bid price in order to get the fewer jobs that are available. While other factors are also involved in this process, these are some of the major factors affecting the price of construction. OK, enough of that economic and market theory.

Immediately below is a chart of construction activity covering the period from 2004 to 2007. Except for that one quite significant upward blip you can see in 2006, there is nothing particularly remarkable about the level of construction activity in Clark County, except to note periodic fluctuations in the Index as well as a general movement over time (trends) either up or down.

The CBER Construction Index is a simple average of three series—construction employment, residential units permitted, and commercial units permitted. By the way, that 2006 upward blip in activity (Index of 264) most likely created conditions that subsequently led to that now well-known painting quote of $1.57.

 Selected Index numbers are shown below. A even more interesting Chart follows this Chart.         

Here below is another Chart I created comparing construction activity for the same periods, Calendar Years 2005, 2006 and 2007. Some features of this Chart include:

• Clearly demonstrated is the presence of cyclical activity, with activity typically rising in March and in the summer months.
• Of the three years charted, the level of activity in 2007 is markedly lower than in 2005 and 2006.
• Construction activity in 2005 (the BLUE line) shows a general rise, also reflected by the rising trend line (solid).
• By contrast, construction activity in 2006 (the RED line) shows a general fall in activity, also reflected by the falling trend line (dotted). Prominent is the March Index of 264.
• Comparing 2005 with 2006, the Index of construction activity in 2005 is higher than the Index of construction activity in 2006 in the last 7 consecutive months of the 12-month period.
• Comparing the highest and lowest Index months for 2005 and 2006, the construction Index in 2005 (222) is 51% higher than the lowest construction Index for 2006 (147).

		CBER Clark County Construction Index, 2005-07, by Month
Line color	CY	January	February	March	April	May	June	July	August	September	October	November	December
	2005	151	182	191	164	199	214	180	203	222	180	213	199
	2006	193	186	264	191	203	206	167	180	157	156	147	162
	2007	141	148	178	168	170	153	147	176	173	172	Unknown	Unknown
Source: Private communication from Bob Potts, Assistant Director, Center for Business and Economic Research, University of Nevada, Las Vegas. ULR: http://cber.unlv.edu

Ron Johnson, 2 February 2008

End of Part III

______________________________________________________________________

The Case of the Disappearing

Villa Neighborhood Reserves, Part II

Introduction.

In Part I, I alluded to the efforts of the 2005 Reserve Study Committee as a sham. Of course, some will feel I was overreacting or a bit too strong in attempting to describe what I saw as taking place in the Board’s efforts to “adjust” the reserve study’s database for the Villa Neighborhoods. A sham is something false that is purported to be genuine. Since the Board/Committee are planning to present the 2005 transition reserve studies to the Community as if those studies reflected events occurring at the time of transition in 2005, and since Jack Troia said the 2005 reserve study will be using Board supplied cost data for painting from 2007 instead of leaving those matters up to the to the reserve specialist company hired to perform the task, one might be a little confused on what actual cost data from 2007 has to do with 2005 costs. Nothing, but that's the Board's problem.

And interestingly, the Board is not proposing to adjust reserve cost data for all reserve items, but only for ONE item, namely, painting. And while some may believe that stucco painting is painting, the Board has proposed to change the database for only Villa Neighborhood painting and not for Association building painting. And, as far as data is concerned, the Board and the reserve specialist company decided to ignore the data contained in the 2006 Reserve Study that was used for the Villa Neighborhoods.

 If the Board can justify using 2007 cost data as a benchmark year for determining reserve study costs for 2005, so be it. But, really, can the Board justify their use of 2007 cost data as a benchmark for computing 2005 cost data? I say NO!

But to do so for only ONE item out of literally hundreds of reserve items would seem to pose some awkward questions for the Board to answer. Why is it that the cost of painting as reported in the 2006 RS ($1.57/sq. ft.) should be ignored and that “painting” as a reserve item is the only item among hundreds requiring a special downward adjustment in cost and, in particular, why that special adjustment in cost all the way down to $0.80/sq. ft. should be based on a contractor's bid in 2007?

Is 2007 really a good benchmark year for making that 2005 cost determination? As the evidence will show, 2007 is not a good year for that benchmark calculation. In fact, 2007 is an awful benchmark year, given the whirlwind of negative and contrary events occurring during the year.

If the Board is correct in their thinking and actions taken in making 2007 a benchmark for the purposes of establishing 2005 painting costs, the Board would seem to carry the burden, a quite heavy burden, of demonstrating to the Community that the economic conditions prevailing in 2007 were not unusual or atypical to such an extent that would make 2007 cost data just as unsuitable, albeit for a different reason. We know the Board has already rejected 2006 RS data for painting costs as being unsuitable as a benchmark for determining 2005 painting costs. What we do not know, however, is just how suitable is the year 2007 as a benchmark year for determining 2005 painting costs?

To address that issue a little differently, we might ask the question of whether there were any unusual conditions prevailing in 2007 that might make the Board’s decision to rely on 2007 as a benchmark year for 2005 a very good or a very poor decision. Fortunately, we have available an abundance of economic indicators telling about the just completed year.

Unfortunately, at least for the Board, that data is not merely negative for the year 2007, but it portends a grim outlook for 2008, not only generally but for the industry of primary concern here, the construction industry. Assuming the reports I’m reading and paraphrasing below are correct, the Board’s leap in jumping on 2007 cost data as a benchmark year for establishing 2005 painting costs would seem totally out of line, ill advised,  unsupportable and reflects exceedingly poor judgment. That Board “leap” was essentially one giant misstep for all mankind living in Sun City.

So what’s so unusual about the year 2007 to make it especially unsuitable as a benchmark year for determining cost data for 2005? Below are some recent headlines and story lines that should tell the most naïve Sun City homeowner that 2007 was a most unusual year. As such 2007 stands out, not as a benchmark year for comparison purposes to 2005, but, instead, as one that is clearly unsuitable for the purpose the Board and Jack Troia has set about creating. Sadly, the Board’s agenda has been a political one.

Some recent headlines.

• The dreaded “R” word for “Recession” is being employed by economists more and more frequently, based on 2007 economic indicators. Even low keyed and frequently obtuse economic forecaster former Federal Reserve Chairman Alan Greenspan recently acknowledged that the economy may be in a downturn.
• The White House and the Congress are actively working on an economic stimulus package in clear recognition of a continuing weakening economy in 2007.
• Home construction has fallen by half since the housing bubble burst in 2006.
• Home building plunges. The prolonged slump in housing pushed construction of new homes in 2007 down by the largest amount in 27 years.
• The Conference Board reports that CEO confidence is at a seven year low.
• The Conference Board reported that the U.S. leading index decreased again in December, the third consecutive decline, and it has been down in four of the last six months. According to the Conference Board, housing permits made the largest negative contribution to the index.
• Nevada’s unemployment rate climbed to 5.8 percent in December 2007, the highest in more than five years. State economist Jim Shabi said that the economy is slowing everywhere.
• Nevada, comparing latest month data to the same period a year ago, commercial building permits are down 46%, while new home sales and existing home sales are down 56% and 50% respectively.
• Nevada, construction industry lost nearly 8,000 jobs in 2007.
• Las Vegas business have a bleaker outlook for 2008 than for previous years.
• Consumer expectations have been squelched by a slow real estate market, skyrocketing foreclosures, and tumbling home prices.
• Consumer spending is showing signs of cracking. Retail sales plunged in December as consumers handed retailers their worst Christmas in five years.

Here I will enumerate a number of stated and quite benign agendas as well as some unstated or hidden agendas of the 2005 “Look-Back” Reserve Committee. As you go through the listing, I will be asking the question of why anyone who fully understands what the Board is proposing to do would want to serve as a member of that Committee, especially in the case of those who either have volunteered or have been asked to participate as representatives of one of the Villa Neighborhoods.
Among those agendas are the following:

• To conduct a review of the recently produced “look-back” 2005 reserve study that was generated by Diversified Facility Services.
• To form a committee of resident volunteers who will conduct that review and in so doing act collectively to give a sense of credibility to the outcome of the Committee’s recommendations to the Board in March. The decision to create a committee to perform this task is both interesting and strange. Jack Troia, known by some as “Mr. Reserves” for his long standing expertise in delving into and resolving reserve matters, is the last person who would be in need of any help to pursue, study and evaluate the 2005 “look-back” reserve study produced by Diversified Facility Services. In fact, one can assume that Jack has pretty much already finished that task prior to the first meeting of the Committee. So, if Jack is not in any need of any assistance from the Community, the big question is what’s the real purpose behind the creation of 10+ person committee to do what Jack has most assuredly already done?
• Continuing along that same thought, a committee may serve a useful purpose under certain conditions, such as to produce an objective, unbiased and impartial review of seemingly important and relevant data generated by a company that’s in the business of conducting reserve studies. That would be the credible outcome that residents would expect. However, that’s not going to happen here. No, indeed. This Committee’s real mission is quite different. As announced, the Board and Committee’s Chair have little interest in creating a credible outcome, one that all homeowners can accept as reliably reflecting reserves at the time of transition. In fact, of the 6 reserve accounts and corresponding studies to be reviewed, 4 will end up being tainted by unreliable data to produce nothing more than a politically convenient outcome that will primarily serve the interests of selected current and past Board members. So, why not just come out and say that?
• The data will be manipulated in such a manner so that the affected 4 Villa reserve studies will produce results that more favorable compare to already determined amounts that were negotiated by Favil West with the Developer in the spring of 2007. As a result of that manipulation, the “fully-funded” reserve amounts to be reported will be lower than they would have been had the manipulation not occurred. That manipulation translates directly into the unanswered question of whether there exists any potential future liability on the part of the Developer to the Villa owners for underfunded reserve amounts.
• Said differently, that planned manipulation of the data (as contained in the outcome of the RS) goes towards establishing whether the Villa Neighborhood underfunding of reserves was greater than the Favil-Dwyer settlement agreement amount. The alleged Board cover-up of that underfunding will be at the expense of the Villa owners.
• Take about three months to conduct that review process while delivering a set of recommendations to the Board in March for their action in April, before Bob Berman, Kay Dwyer, and Elaine Berg leave the Board. As you will learn, action by a majority of the current Board is critical if their overall plan to deceive the Villa owners is successful. A newly elected Board may or may not be willing to go along with the shenanigans being played out by the current Board and Reserve Committee.
• Since the mission of the Committee is being tainted and subverted in the case of Villa Neighborhoods, those resident volunteers on the Committee who are representing their respective Villa Neighborhoods will have great difficulty in performing their task since their hands are effectively tied and their lips have been effectively sealed given that the Committee’s Chair (not the Committee) will represent and present their work product to the Board. Sadly, whether they know it or not, they are merely pawns in the overall scheme to deceive, and some would say defraud, the Neighborhood Villa owners from knowing the true amount of any shortfall in their Villa reserve accounts.
• Instead of using a single criteria to establish valuation or cost for performing a given task (painting), as was done in the past in the case of the reserve studies by the reserve specialists, the Committee will use two different cost standards for performing the same work, one for the Villa Neighborhoods and one for the Association. That this makes no sense and is unsupportable is evident on its face, the Board and the Committee’s Chair are unfazed by their inability to justify their action.
• The Committee’s agenda envisages using a cost figure for painting Villas that is 33% lower than the cost figure for painting Association buildings. Looking at the cost difference from the perspective of the Villas, the cost for painting Association buildings is 50% higher than the cost figure being used for painting the Villas.
•   The current plan, scheme if you will, is to project 2005 Villa reserves based on a painting cost of about $1.00 per sq. ft., while at the same time, projecting a 2005 painting cost of around $1.40+ per sq. ft. for all association buildings. That “around $1.40+/sq. ft.” figure will be derived from the Board accepted and available 2006 Reserve Study that was conducted by Diversified Facility Services, the same company doing the “look-back” study as of 31 May 2005. Accordingly, the “around $1.40+/sq. ft.” is intended to reflect the cost of painting at the time of transition in 2005. On the other hand, Villa painting is computed for 2005 at around $0.80 a sq. ft.
•   The cost of painting to calculate the transition reserves amount for the Villa Neighborhoods will be based on a painting contractor’s bid (in 2007) for work to be performed in 2008, not on a cost estimate at the time of transition.  
•   What does NRS say about transition reserves? NRS reserve requirements are specific as to time: the Developer’s obligations are to be determined at the time of transition from Developer control to resident control. In the case of Sun City, that took place on 31 May 2005. The Developer has 30 days from that date in which to comply. A properly completed reserve study completed at the time of transition will establish the amounts that are needed to make the reserve fund “fully funded.”  

Ron Johnson, 20 January 2008

Part III will cover what’s really going on and what homeowners can do.

End of Part II

PART I IS IMMEDIATELY BELOW

“Of the 6 reserve accounts and corresponding studies to be reviewed, 4 will end up being tainted by fraudulent data to produce nothing more than a politically convenient outcome that will primarily serve the interests of selected current and past Board members.” From Part II (forthcoming)

 

A brief word of caution. While a major thrust of this report focuses on Board actions directed against the interests of Villa Neighborhood owners, a significant portion of the report also applies to reserve studies in general and what homeowners might expect to see from the ongoing review of overall association reserves that is now taking place.

A meeting this past week of the 2005 Reserve Study Committee exposed that committee for what it is—a sham, at least in the case of the transition reserve studies for the Villa Neighborhoods. What’s the purpose of this Committee? Ostensibly, the purpose of this ad hoc Committee is to set straight what did not take place at the time of transition, 31 May 2005.

1. to replace the admittedly defective 2005 RS that was subsequently rejected by the Board of Directors;  
2. to secure a properly conducted transition reserve study effective 31 May 2005 that both the Board and the unit owners can rely on as establishing the “fully-funded” level of reserves needed in the association’s six reserve accounts at the time of transition; and
3. As the data warrants, to provide a basis for taking further action with the Developer in resolving any potential dispute over the shortfall in reserves.   

For reasons that are spelled out below, transition reserve studies have a unique, legal and fiduciary importance to the Developer and to the Community that will be assuming control of the association.

For those who would like additional information on what reserve studies are all about, definition of terms and a even a sample Reserve Study report to review, click on the following very informative documents from the website of Associated Reserves, a company in the business of conducting reserve studies:  1) Reserve Study Standards, and 2) A sample HOA Reserve Study. Associated Reserves website:  http://www.reservestudy.com/

Sadly, the power elites have met and the fix is already in place, or so we were told. In simple terms, the Committee has been pre-programmed by the Board’s majority to accept and recommend back to the Board a substantially lower reserve amount for the Villa Neighborhoods than the amount that would have been developed and reported had the Board not attempted to interfere with that process.

 As Chairman Jack Troia, former Finance Committee Chair and adroit budget presenter,  made abundantly clear, there will be no discussion on the central issue of or the justification for treating the reserve studies of the Villa Neighborhoods in a manner markedly differently from the Association’s overall reserve study. Why are different standards of review being applied? So far, the Board has not been forthcoming with any acceptable rationale for its decision, at least not one that has any credibility or passes the smell test. All we know is that the Board, presumably the president, had given a directive (or his consent) for the Committee’s Chair to manipulate the Study’s database to serve a political end.

And just in case the Committee’s discussion got off track, as it did on occasion, the Committee’s minder, Board member Roz Berman, was present to make sure the Board’s intentions were clear.

That’s going to take some time for me to explain and more will be covered in Part III. For illustrative purposes only, say the amount the Developer transferred for Villa reserves was $500,000. That’s not the actual figure since we are only attempting to illustrate a point. The real and the key question to be resolved for transition purposes is what was the amount that was due the association from the Developer at the time of transition? Some believe there is no answer to that question, that the matter of what is due from the Developer is in dispute. On the other hand, others refer to that amount due at the time of transition as the “fully-funded” reserve amount, as reported by a formal reserve study. Nevada law mandates that such a study be conducted at the time of transition by a Reserve Specialist holding a permit to conduct such a study. The Developer did so in 2005 and the Association repeated that call in 2007 in their request for what amounts to a 2005 “look-back” study.

Despite what you may hear from the 2005 Reserves Committee, the “fully-funded” is the only amount in need of determination, that is, the amount due at the time of transition. Sadly and quite deceptively, the Committee’s Chair, I assume at the direction of the Board, is intent on generating not the amount due at the time of transition, but something quite different. In fact, the intent of the Board, as being implemented by the Chair of the Reserve Committee, is to generate an artificially created substantially lower “fully-funded” reserve amount and have this lower amount reported by the 2005 Reserve Study as the “fully-funded” reserve amount at the time of transition. This new, substantially lower figure will bear no relationship to the amount that is actually due. We are looking at some serious hanky-panky going on, a concerted effort to commit fraud on a selected group of Sun City homeowners.

For now, I need to digress for a moment and bring in some other terms. You will frequently hear, for example, from CAM officials who are employed by RMI and others, that the obligation of the Developer at the time of transition is to transfer an amount that “adequately” funds the association’s reserves. Translated, that means the association gets what it gets at transition and nothing more. Even though a reserve study at the time of transition is mandated by law, one is encouraged to assume that there is no relationship between the amounts reported in the study as “fully funded” amounts and the amounts actually transferred by the Developer at transition time.

For example, say in our illustration the “fully funded” amount is $1 million. What does that mean? In practical terms, it means the following:

1. If the Developer had actually transferred $1 million (or more) to the association, reflecting an amount equal to 100% of the fully funded reserve amount, the theory behind the RS data tells us (at that time) that the reserves to be transferred to the Association would be sufficient to meet the future repair needs of the entity that was the subject of the study, like a Villa Neighborhood, Pinnacle, or the Association. That assumes no incremental changes in the future, like the addition of more units to the Neighborhood, or a new recreation center, etc.;
2. However, since the Developer hypothetically transferred only $500,000 at transition time, leaving a shortfall of $500,000 in reserve funding, reserves are said to have been funded at only 50% of what was actually needed to fund future repairs; and
3. Given the magnitude of the shortfall in our illustration, there is a pressing need for homeowners through their Board to take some decisive steps. Such steps might include: a) do nothing and let facilities age without repair; b) make only those repairs considered absolutely necessary; c) postpone needed repairs to a subsequent year, presumably when more funds will be available; d) raise assessments, or e) some combination.   

Notwithstanding what CAM staff members and others may report on the obligations of the Developer at transition, there is NOTHING stated in NRS that supports the concept of “adequate” reserves or “adequate” funding of reserves as being legally acceptable or in compliance with NRS. It’s important to understand what NRS actually mandates, not what others might tell us what NRS says.

First, NRS does not use the term “adequate,” or anything like that term in addressing the monetary obligations of the Developer at the time of transition. Second, those who use that term often do so in an apparent misguided effort to relieve the Developer of any future liability to the association for any monies owed. Said another way, such efforts are typically designed to lower or diminish homeowner or association expectations on the part of a Developer who may be unresponsive to association demands.

Unfortunately, NRS is less clear in setting forth the Developer’s specific transition monetary obligations, except to state as follows, in pertinent part, that the Declarant is required as provided in NRS 116.31038(3)(a) to “deliver to the association a reserve account that contains the declarant’s share of the amounts then due . . . .” That’s it! Click here to read what this section of NRS states.

As to what constitutes “the declarant’s share of the amounts then due” is not defined further in NRS. Here is the question: Is the declarant’s share equal to 100% of the fully funded reserve amount (as shown by the transition reserve study), or is that share of the amount then due some lesser figure? Some have concluded that that phrase is the amount not less than the “fully funded” amount as shown by the “complete study of the reserves of the association” at the time of transition. If that were the case, the declarant’s share would be easily determined by referring to the amounts reported in the transition reserve study.

If conducted properly, and the Board refrains from getting their hands dirty, Sun City’s look-back 2005 Reserve Study should specify the “fully-funded” reserve level for each of the six association legal entities, along with reporting what percent of actual deposited reserves at transition time is of the “fully-funded” level of reserves.

In other words, here is a hypothetical sample of how that report might read:

Pinnacle Not at Issue.

While Pinnacle (the gated community off Hampton Rd. and immediately east of Anthem Center) is considered a neighborhood for budgetary purchases, references herein to Neighborhoods applies only to the four Villa Neighborhoods since, in contrast to the Villa duplexes, homes in Pinnacle are not maintained (exterior painting) by the Association.

That would be nice to know, but admittedly, there is some degree of uncertainty on that point. But to conclude that the amount then due at transition time is up in the air and uncertain raises all kinds of unanswered questions, if not legal disputes, on just what are, to quote NRS, “the amounts then due.” 

The clear impression given by NRS is that at the time of transition there is some amount that is due. Interestingly, the ONLY identifiable amount, as reported in the transition reserve study, is the amount that reflects “fully-funded” reserves. We will know what that amount is and we can measure that amount against the amount that was actually transferred to the association since we know those amounts as well.

For example, we’ll know whether the amount transferred by Pulte was 25%, 57% or 75% of the amount that reflects the fully-funded reserve amount. That’s important because it tells us the amount of the potential shortfall in reserve funding that must be made up—made up either by the Developer or by the homeowners in increased assessments.

What also seems clear is that that the Developer’s share of the amount then due is not necessarily the amount the Developer happens to have on hand in their accounting record at the time of transition (as in Sun City’s case) and turns over to the association. In Sun City’s case, the Developer did just that, namely, they merely turned over what happened to be reflected in the accounting records. That deposited amount had absolutely NOTHING to do with the results of that flawed reserve study completed that year, with any NRS mandate, or with anything else. If “x” dollar amount was on the books at the end of May, then “x” dollar amount was transferred by Pulte to the Association. Separate accounting records were maintained for each of the six legal entities comprising the Association.

If the amount so transferred at transition had been sufficiently high, say at the 90%+ level, the potential shortfall and any potential Community concern would be nonexistent. There would be no outcry and clearly no interest in looking back at 2005 to determine what should have taken place.  On the other hand, if the potential shortfall in funding was substantial, as we might well anticipate from the results of the 2006 RS, one might easily be justified in wanting to look back to what should have happened at the time of transition.

Ron Johnson, 12 January 2008

End of Part I

Part III will delve further into what’s really going on and what homeowners can do.