April 20, 2011
Feedback on Development Fund and the General Plan Implementation Process
By Hank and Eileen Lewis
March 30, 2011
We submitted written comments on the draft general plan where we supported adoption of the general plan and the proposed funding scheme for the Designated Building Replacement Fund as a foundation for moving forward with specific capital projects over the coming years.
While we agree that Tahoe Donner’s infrastructure is aged, and some facilities need renovation, major upgrades, or even replacement, TD should not approve a basket of large capital projects all at once. Rather TD should evaluate and approve projects individually, one step at a time using an accountable process, which we believe the Board is committed to do.
Additionally, TD should continue to make operational performance and service level improvements within existing operations, including improving under utilization and operating results, before making new capital investments. Capital projects should be assessed, designed, and funded individually to meet specific needs, based on sound business assumptions and clear homeowner benefits.
With regard to the financial analysis of TD amenities, it is important to note that the positive changes in net operating results (NOR) that occurred between 2007 and 2008 were due to a change in accounting practice. The elimination of administrative cost allocations produced these changes, so they were not due to actual performance improvements. Since then some amenities have achieved real incremental performance improvements, which are reflected in net changes in NOR from year-to- year after 2008.
Currently TD amenities and operating departments pay no expenses for administrative services by IT, HR, Accounting, Marketing, and Administration, and they are not charged for the cost of the property and equipment to support their operations. However, some reports do include certain allocations for their contributions to the Replacement Reserve Fund.
An example is the Downhill Ski Area. This amenity is now reporting positive NOR in the range of $400,000 to $500,000 per year, based on accounting for its own revenue, cost of goods sold, and direct operating expenses. If the Downhill Ski Area had to pay for the Association’s administrative services that are required to support its operations and pay for its own property and equipment costs, that business entity would show a significant operating loss.
You can see some of this impact on page 11 of the 2009 Annual Report, in which there is a table showing NOR for the amenities and operating departments, based on their own operations and also net of their contributions to the Replacement Reserve Fund. On that basis, in 2009, the Downhill Ski Area made a net contribution to overhead, property and equipment of $211,104, but the amenities as a whole cost the association $1.65 million. And the amenities made no contributions to the other property and equipment funds, including the Development Fund.
Therefore, it is misleading to use NOR for the amenities or the operating departments as a financial basis for making capital investment decisions, because the Association is paying all administrative expenses as well as all property and equipment costs for those operations.
Additionally, Tahoe Donner, as any California HOA, accounts for its property and equipment (all fixed assets) in the Property Fund, which is funded by the HOA’s homeowner assessments. In 2009, the Property Fund took $2.225 million in depreciation expense on behalf of the amenities and the operating departments of the Association. New capital additions from the Replacement Reserve Fund, the New Machinery & Equipment Fund, and the Development Fund totaled $1.779 million in 2009, of which $1.578 million was spent on the amenities as a whole, and included $703,802 in capital additions to Downhill Ski.
Therefore, we must consider any positive NOR among our amenity operations as merely as a source of funding to support:
- Underperforming amenities,
- Association administrative expenses, and
- Funding of our property and equipment costs.
As a result, there is no free cash flow being generated among our collective amenity operations to pay for additional capital improvements. All capital improvements are funded by the Association through its Property Fund and all depreciation is an Associations expense.
Additionally, with regard to the Development Fund, both the Designated Regular Fund and the Designated Building Replacement Fund, these reserves are being funded entirely by homeowner assessments and not by any positive results from business operations.
As a mutual benefit association, TD must manage its amenities in this context by determining and evaluating their relative performance, and by assessing their value to homeowners and the Association as a whole. Capital improvements will be required to maintain their viability and protect our property values, but those investments must be managed wisely as an Association expense.
TD should also consider the seasonal nature and actual utilization of our amenities and their facilities. The two largest amenities are the Golf Course, which is a summer amenity, and the Downhill Hill Ski Area, which is a winter amenity. Both produce revenue for about 4 months a year. Other amenities such as the Lodge, the Lodge building, and Trout Creek are true year-round amenities. Others, such as Cross Country and the Equestrian Center compliment each other during winter and summer seasons as multi-purpose facilities.
Therefore, it is important to control the size of our capital investments based on the seasonality of their operations, their actual utilization, and the value they bring to the TD homeowner community. We should also create facilities that serve multiple purposes year round rather than ones that are specialized for seasonal use. The larger the investment, the shorter the seasonal benefit, and the lower the mutual benefit, the more difficult the justification process should be for new capital projects.
In conclusion, we recommend that the Board, the General Plan Committee, and the Finance Committee, working with senior management, jointly establish a clear set of criteria and a formal process for evaluating all Development Fund capital projects. This process must use objective data, such as user demographics, historical utilization, growth projections, pricing, financial performance,
operational requirements, and capital investment requirements, along with more subjective information such as value to homeowners and the Association as a whole to justify capital expenditures. This process should be conducted in an open and transparent manner, with homeowner input on a project-by-project basis.
In addition, unless TD has already done so, TD must establish a formal policy for the utilization of the Development Fund, including financial projections and funding. This fund, unlike the Replacement Reserve Fund, is unrestricted, is accumulating significant value, and may be used at the complete discretion of the Board.
It has now been well over 5 years since the FC, the Board, and senior management agreed to develop formal written financial policies to govern a wide variety of financial activities. So, unless those efforts have been realized, they should be performed and given a very high priority.