June 9, 2021

Dear TD management team and the BOD members,
I read your letter to the membership sent on June 7th and evaluated your development fund usage and forecast. A couple of questions:
• Why did you change the development fund increases to just 4 consecutive years vs. 5 presented in your board presentation made on May 28th? Did you inform the membership of these changes? I do not recall you informing the membership about this fact. I would also like to understand your rationale for not projecting the 25% development fund increase in 2025.
• Where would these increases come from? Does our current HOA assessment level ($2,241 per member) allow for this $1MM per year average increased inflow to this fund per year? Are you so confident about your operational improvement that you will budget the construction funding based upon future unrealized savings / profits? Or are you budgeting for future annual HOA assessment increases? I am really confused as I was under the impression that you can only set the next year’s assessment level and not project 4 years of assessment increases. By undertaking this project, are you obligating the future board to a certain assessment increases year year?
• What will happen if your construction costs run over $23MM? Your projection shows only $33,000 of development fund left from the construction at the end of 2024. Is it being fiscally prudent to plan a $23MM project with $33,000 cushion?
I would also like some clarification on our bylaws.
According to Article IX, Section 2 of our bylaws:

Section 2: Limitation on Powers. The Board of Directors whall not be entitled to take any of the following actions without approval f the specified percentage of Members:
(a) The affirmative vote by written ballot of a majority of a quorum of the voting power of the Member shall be required before the Board is authorized to take action on any of the following matters:
(i) Any action or undertaking which requires aggregate expenditures for capital improvement to the Common Area in any fiscal year in excess of 5% of the budgeted gross expenses of the Association for that fiscal year; provided however that this limitation shall not apply to the expenditure of any funds accumulated by the Association on any new capital improvement or development fund so long as the expenditure is for the purpose for which the fund was established.

• Are aggregate expenditures from this down hill lodge construction going to be greater than 5% of our budgeted gross expense? It appears so at the $20-$23MM cost estimate.
• Will TD have accumulated $23MM of the funds by the time take “actions or undertaking” – i.e. I would think that hiring a contractor and an architect would qualify as “undertaking.”
• If this project will cost over 5% of our gross expenses and you have not accumulated $23MM of the funds before you take any actions toward this project, could you explain to me why you think this project can proceed without the member vote as stipulated by our bylaws?
I would really appreciate it if you could answer my questions and share the answers to the general membership.

Yunhee Yoo

 

Response

Dear Yunhee:

Thank you for your continued interest in the Downhill Ski Lodge Replacement Project. We have provided answers to your questions below in red:

Dear TD management team and the BOD members,

I read your letter to the membership sent on June 7th and evaluated your development fund usage and forecast. A couple of questions:

Why did you change the development fund increases to just 4 consecutive years vs. 5 presented in your board presentation made on May 28th? Did you inform the membership of these changes? I do not recall you informing the membership about this fact. I would also like to understand your rationale for not projecting the 25% development fund increase in 2025.

When presenting our initial funding plan to the membership during the October 2020 budget process, the construction/build schedule was still under development, as we did not have an architect under contract. Staff presented a hypothetical plan with completion in 2025. Since that time we have engaged the architect and continued to refine our timeline, scope of work, and budget. The most current project timeline resulting from this evolving process indicates completion in 2024, and thus the most recent update reflects that raising the Development Fund portion of the Annual Assessment by another 25% into 2025 is not necessary to fund the project.

We did add the note into the web version that stated “Note: 2025 projects are placeholders.”

Where would these increases come from? Does our current HOA assessment level ($2,241 per member) allow for this $1MM per year average increased inflow to this fund per year? Are you so confident about your operational improvement that you will budget the construction funding based upon future unrealized savings / profits? Or are you budgeting for future annual HOA assessment increases? I am really confused as I was under the impression that you can only set the next year’s assessment level and not project 4 years of assessment increases. By undertaking this project, are you obligating the future board to a certain assessment increases year?

As stated, the proposed funding plan includes an increase to the Development Fund portion of the assessment over the next three years by 25% each year. This is a proposed assessment increase subject to TDA Board approval (see below). We are not relying on projected savings/profits out of the Operating Fund for future years in the current plan. We are required by law under Davis-Stirling to budget to a $0 Operating Fund net amount. However, better than projected future performance, most likely due to favorable weather, may create an Operating Fund surplus that could impact the funding plan positively. In that case, the TDA Board may elect to transfer budget surpluses to our capital funds. It is important to note that these plans are all projections and subject to change. You may see additional updates in the funding plan as we move through the 30% design phase.

The Tahoe Donner board must approve the budget and Annual Assessment every year during the budget process. Staff’s role is to provide the board with the best available information during the budget process, to identify what reserve and capital investments will be needed in the future and to develop a plan to achieve that level of funding. The plan for a 25% annual increase to the Development Fund was presented during the 2021 budget approval process and will be discussed and voted on again during the 2022 and 2023 budget processes.

What will happen if your construction costs run over $23MM? Your projection shows only $33,000 of development fund left from the construction at the end of 2024. Is it being fiscally prudent to plan a $23MM project with $33,000 cushion?

As stated in the update, this is a preliminary estimate and is based on the best available information we have at this time. The $20-23M estimate includes a 10% contingency, which is typical for this size of a construction project. Contingency is money set aside for project overruns, and the contingency is considered the “cushion”, not the remaining $33,0000 in the Development Fund. There has been preliminary discussion about increasing the contingency from 10% and that will be evaluated as we move forward. The $20-23M is an “all-in” estimate and includes soft costs, planning, design, construction management, construction costs, a contingency and inflation.

As we move into 30% design phase, we will continue to refine the construction costs and scope of work to fit the budget and required contingencies before a decision is made to proceed with construction.

I would also like some clarification on our bylaws. According to Article IX, Section 2 of our bylaws:

Are aggregate expenditures from this down hill lodge construction going to be greater than 5% of our budgeted gross expense? It appears so at the $20-$23MM cost estimate.

Will TD have accumulated $23MM of the funds by the time take “actions or undertaking” – i.e. I would think that hiring a contractor and an architect would qualify as “undertaking.”

If this project will cost over 5% of our gross expenses and you have not accumulated $23MM of the funds before you take any actions toward this project, could you explain to me why you think this project can proceed without the member vote as stipulated by our bylaws?

The following responds to your three questions above seeking clarification of the Bylaws and why a member vote is not required.

The exceptions to the member vote requirement in both Article IX, Section 2(a)(i) and Section 2(a)(ix) apply.

Article IX, Section 2(a)(i) provides an exception to a member vote for “…the expenditure of any funds accumulated by the Association on any new capital improvements or development fund so long as the expenditure is for the purpose for which the fund was established.”

Article IX, Section 2(a)(ix) provides additional and related exceptions to a member vote, and provides that:

“[t]he Approval or initiation of construction of any new recreational Common Facility (including expansion of existing facilities) which is not specifically described in Article I, section 10 of the Declaration when: (A) the budgeted cost of constructing the new Common facility will exceed 5 percent of the Association’s budgeted gross expenses for the fiscal year in which the project is approved; and (B) the funds required for construction shall be derived from one or more Member Assessments. No new recreational Common Facility construction project shall be approved by the Board without first adopting a detailed budget of the total projected project construction costs.

Expenditures from Association capital replacement reserve funds or capital development funds for purposes for which the funds have been accumulated shall not be subject to the approval requirements of this subparagraph. The annual budget disclosures (Article XII, section 5 (a)) shall include a description of capital improvements projects for which reserve or development funds are being accumulated.”

The Declaration of C&R’s, Section 10 that is referenced above reads:

Section 10. “Common Facilities” means (i) the recreation facilities located within the Common Area, including the 18-hole golf course, the ski complex (including downhill and cross country ski areas), the Donner Lake beach area, swimming pools, the tennis courts, the campground, the equestrian center; and (ii) the main clubhouse and recreation building, and the maintenance buildings and other facilities constructed or installed or to be constructed or installed, or currently located within the Common Area or the Other Association Real Property and owned or leased by the Association.

As you see in Section 10, there are several existing common facilities that are exempted from the requirement of a member vote, the Downhill ski complex being one of them. The funds to be used are also expenditures from the reserve or development fund collected for that purpose.

It is also important to keep in mind that one of the board’s most important fiduciary duties is to maintain, repair and replace the existing common facilities. The consensus of the consultants has been that working with the current building and infrastructure of the aged and outdated ski lodge and its related facilities presents too many challenges and unknowns, and the end result would not be in the best long-term interest of Tahoe Donner. Thus, the board is pursuing, with robust owner engagement along the way, a thoughtful plan to demolish and replace the existing facility as the preferred option.

I would really appreciate it if you could answer my questions and share the answers to the general membership.

We hope the above responses answer your questions. This response will be shared online at tahoedonner.com/member-letters. As the planning process continues to unfold over the coming weeks and months, we will continue to solicit owner input and regularly update the general membership on our process.