There's no such thing as a free lunch--why I voted against the Amenities proposal
The second vote on the amenities is in progress and will close on Monday. I'm not in the business of telling anyone how to vote--each Owner needs to become informed and make his or her own decision. But I am in the business of providing facts that will help people become informed--and this Blog is a source of information that hasn't been filtered through rose-colored glasses. In a nutshell, here's the Board's marketing strategy for the amenities:
Given that the Board is well aware of the current tally of this vote and the absence of advocacy in the Club's member blasts, I assume that the Board is highly confident that it has enough votes to approve the 34% cost overrun on the amenities project. But I want to go on the record with my concerns.
I'll make a wild prediction that this isn't the last you'll hear about the amenities--the Board has been clear about the $21 million "sticker price" of the "guaranteed maximum price" contract, but has been quite opaque about the timing of the project, the terms of the "guaranteed maximum price" contract (or whether the contract has even been fully negotiated), objective milestones for monitoring the implementation of these public works projects, who will be held accountable for meeting the milestones, and how the responsible parties will be held accountable. Just as a reminder, here's the history of this initiative:
Here are my three reasons for voting against the amenities:
NO ACCOUNTABILITY: Whether you agreed with the February 2021 proposal or not, the proposal stated with specificity the substance, cost, and timing of the project: in exchange for voting a $20,000 per Owner assessment, the Board promised to deliver the three projects (Dye, Athletic Center, Tennis Center) for $16.5 million (including, we were told, a $1.7 million contingency) by the second quarter of 2023.
These promises were made in two documents: (1) the "frequently asked questions" that accompanied the ballot and (2) a PowerPoint presentation used to market the proposal to the Owners. If the links don't work, you can find these documents on the Club's member website by going to the search block in the lower right hand corner of the home page and searching for "updated amenities plan" and "amenities frequently asked questions." I particularly invite your attention to page 41 of the PowerPoint presentation, which lays out in a clear format the milestones for the amenities--to the best of my knowledge, not a single milestone has been met (not even the vote, which ended in late March 2021, rather than mid-March 2021).
The current Board apparently doesn't believe in such simple and clear communications. Rather, it provides a generalized overview with few specifics. Just by way of example, the Board's February 28, 2022 letter states that "there are only minor changes to the delivery schedule as presented at the 2021 fall Town Hall." I guess it's hard to tell how the Board's doing if it doesn't set milestones.
I took the trouble of going back and looking at the 2021 fall Town Hall. Gil Delgado told people that the timing assumptions laid out were predicated upon receiving building permits in February 2022. If the Club has received the permits, I haven't been able to find any such announcement. If one were to assume that the permits were timely obtained, the Tennis Center is slated for completion in the third quarter of 2022 (i.e., within the next six months), and both the Athletic Center and the Dye clubhouse are scheduled for completion by March-April 2023. Unless the Board envisions "minor changes to the delivery schedule" to be a several month delay, I doubt very much that the project will be completed on time--let alone on budget.
EXCESSIVE FINANCIAL RISK: The February 2021 proposal was conservatively financed. The $20,000 assessment would have raised about $11.5 million and the remainder of the $16.5 million advertised cost was to be financed out of a portion of the capital fund. The financing plan stated that only 40 percent of 2022-2026 capital contributions would be used to fund the amenities, leaving the remainder of the capital fund available for use on other projects.
The current financing plan proposes using the balance of the capital fund to offset part of the $4.5 million increase in the cost of the amenities proposal and to use future contributions to the capital fund to finance the remainder of the cost overrun. After all, if the capital fund isn't there to fund new projects, what's it there for? The problem is that as of September 30, 2022 (the most recent financial statements available--which are six months old), the replacement reserve fund had only $1.4 million available.
What expenses are facing the Club? Here's an off-the-top-of my-head list:
- Roads ands tunnels (we have a lot of heavy construction traffic)
- Cart paths (in particular the Foot Point cart path)
- The Whitehall Gate
- The seawall lawsuit and related costs
- Community irrigation systems
- Eventual re-grass of the Nicklaus course greens
- Upgrade the driving ranges
- Refresh the Nicklaus Clubhouse (the rule of thumb at the Four Seasons Hotels is that carpets, draperies, and upholstery must be updated every seven years--it's already two years since the last Nick facelift).
PROCEDURAL SHENANIGANS: Here's the deal. One year ago, the proposition put to the Owners was: if you agree to be assessed for $20,000 each, we'll deliver to you wonderful amenities at a cost not to exceed $16.5 million and to be completed by early 2023. The proposal was voted as a package and squeaked by with 11 votes to spare. The assessment and the spending were not voted separately--there was a single vote for the package. It's clear that not only did the Board "bait and switch" the Owners from a $16.5 million project to a $21 million project, it also "bait and switched" the Owners from a 2/3 supermajority vote to a 51% simple majority vote. Sweet.
At a minimum, the Board negligently misrepresented the cost of the project to the Owners in the first quarter of 2021. The cost of $16.5 million has since increased to $21 million. COVID had been around for nearly a year in February 2021, so the business risks of COVID were well known--as was the fact that demand for construction services in the low country was high. None of the factors that have increased costs since February 2021 should have come as a surprise to the Board. Moreover, the Board had a duty of care to provide the Owners with accurate information. Needless to say, the increased costs will adversely affect the Owners--with or without a second assessment dedicated to the amenities (funds to be taken from the capital fund would otherwise be available to finance other investments). Yet the Board now says--thanks for the $20,000 assessment--if 50.1% of the Owners want to spend another $4.5 million on amenities, we're good to go (that's about $7,850 per Owner in increased costs--not exactly trivial). I doubt if the initial amenities vote would have succeeded if it had featured a price tag of $21 million, but perhaps I'm mistaken.
The cost and completion dates of the amenities have been a moving target. In July 2022, the Amenities Oversight Committee (presumably with the concurrence of the Board) told the Owners that construction would begin on the Tennis Center in November 2021 and on the Athletic Center and Dye Clubhouse by May 2022, and that all three projects would be completed by October 2023. Two months later at the Town Hall meeting, Gil Delgado told people that permitting would be complete by February 2022 and that all three projects would be completed by the second quarter of 2023. One month after the Town Hall disclosures, the Board learned (but didn't share with the Owners) that Choate (the construction contractor) was forecasting costs in excess of $18 million. Then comes the vote for a $21 million project.
The bottom line is that the Board is being far less forthcoming with forecasts and milestones now than they were a year ago. I wonder why? Perhaps it's because of their failure to hit their past milestones and they don't want anyone to be able to point out future shortcomings.
The proposed increase in the price of the amenities is far from risk-free. Running the capital fund down to a low level to avoid a re-vote of the entire project doesn't inspire confidence in me. You can pay now or pay later. There's no such thing as a free lunch.
Is there an alternative? Sure. The Owners could demand that the Dye renovation be done first. That's an idea so crazy that it may just work!
Chad, thanks for your analysis. Given the 73.5% vote approval for the $4.5 million cost overrun I suspect very few members have a good understanding of what you've laid out here. If members don't devote the time to fully understand how their money is being used they deserve what they get. The problem is those of us who are aware have little choice. I think it very unlikely that the extra $4.5 million will be enough to finish the amenities project on time and on budget.
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