Mission accomplished . . .

Flashback. It’s time to wake up and take a moment to reflect back on December 2019, and the outrage felt by this community regarding the “significant drafting error” found in the previously proposed capital contribution fee amendment that would have eliminated Article VI, Section 13 of our covenants regarding the restricted “Capital Reserve Fund”. (1) (2) (3) Further, consider that this is exactly what is taking place now, only in a craftier manner. Systematically chipping away, bit by bit, piece by piece, little by little.

First, contrary to language found in the covenant, the restricted Capital Reserve Fund (“the fund”) no longer bears any association or relationship to the Capital Reserve Study (“Reserve Study”). (It has been replaced by the Board Designated Capital Replacement Fund.) (4)

Second, as the fund no longer relates to the Reserve Study, there is no mechanism to determine the recommended balance levels in the fund or replenishment requirements as mandated by the covenant.

And now, the most recent discovery that relates to the required Reserve Study casts Article VI, Section 13 even further into irrelevancy.

The oddities . . .

Given several unusual aspects of the recently updated study such as very large negative fund balances and excluded components that were attributed in a separate report addressed to a non-existent entity, further research seemed warranted.

The statute clearly and specifically defines the parameters of the Reserve Study by stating that it must be performed by a Reserve Specialist (“RS”), and it must be done in compliance with the Community Associations Institute (“CAI”), National Reserve Study Standards (“NRSS”). However, unlike reserve studies prepared for the association prior to 2016 and even other sample studies found online, it was quickly recognized that although the preparer did carry the RS designation, there was absolutely no mention anywhere in the reports of the adherence to the CAI – National Reserve Study Standards. Further, even the previous (2016) study prepared by the same company failed to reference the required standards.

Instead, the studies stated they were prepared in accordance with an alternative set of standards (Generally Accepted Reserve Study Principals and Standards and standards of the International Capital Budgeting Institute.) which just happened to have been developed by the preparer of the study rather than the Community Associations Institute.

The required standards . . .

It was also learned that CAI – National Reserve Study Standards seem to specify that reserve fund balances should not dip below zero, yet the separate report addressed to the “Board of Directors – Big Canoe Master Plan” carries significant negative balances for nine straight years.

Perplexed, this writer contacted the preparer of the studies in early July. Some questions asked included:

• • Were these prepared reports also in compliance with the CAI, NRSS standards?

• • Does CAI, NRSS permit negative reserve fund balances? and

• • Does CAI, NRSS permit the exclusion of common property components without explanation?

After several emails and phone conversations with the CEO of the company, notification was received stating that he had forwarded his “proposed response” to association management to answer questions related to sources of funding? This notification was also copied to the POA Director of Finance.

What?  How totally odd . . .

How is a response to questions regarding the report’s compliance with CAI, NRSS “proposed”? It is or it isn’t. And why would the preparer need input or approval of a response only he should be qualified to answer? Needless to say, no further response has been received from association management.

Meanwhile . . .

It is also acknowledged that the preparer of the study may have simply followed the instructions and parameters provided by the association. Recognizing that the association’s “Request for Proposal” (RFP) should have specified the CAI – NRSS requirements, an Ask the POA request was submitted requesting a copy of the engagement letter between the association and the report preparer in order to determine whether the agreement included those specifications.

As has come to be expected, the POA Treasurer provided the response, which stated “We don’t provide copies of contracts between the POA and third parties.” (5)  AskThePOATicket&Response#4497

It was noted, however, that a description of the engagement and procedures were included within certain pages of the report. Thus, without any access to the engagement letter; receipt of the reserve specialist’s “proposed response” and finally without any reference to the CAI, NRSS found anywhere in the pages of the reserve reports, it is reasonable to assume that the updated reserve studies do not comply with the required standards and fail to fulfill the board’s fiduciary obligation to ensure that an appropriately and timely updated Capital Reserve Study is obtained every three to five years.

Time for a mulligan . . .

Unfortunately, unless the preparer of the updated reports can provide the requested written assurance that the studies were, in fact, prepared in accordance with CAI, National Reserve Study Standards, a new, appropriately prepared Reserve Study should be commissioned by this board as soon as possible. Failure to do so will be further demonstration of the systematic and orchestrated dismantling of Article VI, Section 13.

Pause now and proceed to Policy and Procedure Revisions ahead . . .

And finally, proposed revisions to board policies 152 & 153 now seek to eliminate property owner approvals for all capital projects funded outside of the restricted Capital Reserve Fund and designated as maintenance or replacement . . . regardless of amount. These revisions have sailed through the second reading and will be voted on at the September 30^th board meeting. If approved, these revisions (6), will complete the cycle, and any procedural resemblance to the property owner approved 2010 covenant will be no more.

It is important to note that even though the covenant language required property owner approval of capital projects exceeding $1 million only if the funds were withdrawn from the restricted Capital Reserve Fund, it has always been the perceived intent of both property owners and leadership that the statute required property owner approval of all capital projects exceeding one million regardless of funding.

The loophole . . .

Leadership has been well aware of the loophole in the 2010 covenant yet they have failed to ever codify the intent as a statutory requirement. (7) Instead, previous boards have relied on the established board policies and procedures in place since at least 2012 to enforce this requirement. This reliance is demonstrated in the present board policy #153 which states:

“Capital funds shall not be used for a single capital project of more than $1,000,000 (as adjusted per the CPI beginning in 2010) unless the project is approved by more than fifty percent (50%) of the votes cast by members.”

Further, section III of the same policy states:

“This policy provides consistency with the intent of Article VI of the Big Canoe Covenants regarding projects of more than $1,000,000 in cost, as adjusted.”

In fact, even the 2019 board acknowledged the intent and requirement for property owner votes regarding capital additions in the December 2019   Notice from the POA Board  (2)

Unfortunately this board appears to see it differently. As long as the board chooses to classify a project as primarily maintenance or replacement and funds it outside the restricted Capital Reserve Fund, such as was done with the recent Creek 9 renovation, no property owner vote will be required.

What happened?. . .

Quite remarkably, as the promoter and one of the architects of the proposed revisions to 152 & 153, the current POA Treasurer shared a very different view via the much maligned social media in late 2019. “P &P’s are clear that any expenditure even if it isn’t paid for out of the restricted capital reserve must follow the same guidelines as Section 13c, and as we know changes to that policy requires 3 readings and a Board vote on record, so changing the policy whimsically is not going to happen.” (8) and “Property owners spoke in 2012 that $1mil adjusted was reasonable and I’m ok with that standing.”

So what did happen?

This board’s legacy . .

And now, it is a bit hypocritical to cite and paraphrase Article IV, Section 7 of the 1988 covenants as justification for the removal of these property owner approval requirements (9) when this same board has already effectively disregarded the very clear and specific requirements (restricted Capital Reserve Fund balance and replenishment requirements along with nexus to the Capital Reserve Study as well as the CAI – NRSS requirements) coupled with the implied intent found in Article VI, Section 13 of the 2010 and 2012 amended covenants.

Instead, this board will vote to approve or disapprove the revisions to P&P 152 & 153 eliminating those property owner approvals as recommended by the POA Treasurer, Finance Committee and Audit & Risk Management Committee. Board votes will be tallied at the September board meeting, and it presently appears that the revision will pass.

Completely untethered . . .

Meanwhile, the financial damage and chaos that will ensue is already falling into place and becoming apparent. Consider the following:

• • August 19^th motions from the Finance Committee (10) for acceleration of certain Master Plan projects such as:
    

*Completion of clubhouse renovations in year 2022 at $2.972 million; (Cost      estimates obtained from the Reserve Management Plan/Big Canoe Master Plan Fund) (11)

*Completion of Choctaw renovations in year 2023 at $3.862 million; (11) and

*Completion of Cherokee renovations in 2025 at $4.008 million. (11)

• • And how will the association pay for these accelerated completions? Well . . . the “committee stands ready to meet with the board . . . to discuss various financing options to achieve this motion” (10)

• • The Master Plan Fund referenced in the updated reserve reports goes negative beginning in 2023 and PRIOR to the acceleration of these Master Plan projects.

• • Now referred to by leadership as the association’s “correctly referenced” reserve fund, the Board Designated Capital Replacement Fund balance dives to only $266k in July 2021 even after the April infusion of $1.1 million from the operating account. (12)

• • The association carries $5.870 million in debt and leases at July year end. (12)

• • Long term debt (land loan) is secured by our common properties.

• • It is anticipated that an additional $510k in debt will be acquired upon delivery of the new fire engine. (13)

• • Leadership seems to boast a low debt to equity ratio without giving any consideration to industry standards. Other associations that have been compared on the pages of this blog have zero debt. (14)

• • The Strategic Planning Committee proactively incorporated the proposal for accelerated completion of capital projects in it’s  Survey distributed prior to the Finance Committee motion and while providing misleading information in an effort to seek property owner consensus. (15)

Finally, with no property owner approval ever required for the association to borrow money coupled with no required approval of capital projects for maintenance or replacement, property owners will have lost all control of their destiny.

Into nonexistence . . .

Frankly, the proposed revision of policy 152 & 153 is a low blow from leadership. It completes the cycle of dismantling Article VI, Section 13 of our covenants which, if followed, would have provided our community with adequate reserve funds for the maintenance and replacement of our common properties without the need for additional debt or special assessments. And honestly, today’s dismantling is no different from that 2019 proposed amendment containing the “significant drafting error”. The results are the same. If approved as stands, this will become Big Canoe’s new road map. Wild and free.

Enjoy. This is your board.

. . . . .

As always, please feel free to contact me at thepcrosses@gmail.com for questions or further discussion. Meanwhile . . . take care and stay safe.

Patricia Cross (10438 Big Canoe)

References:

1) “Property owner protections & controls in jeopardy”, December 1^st, 2019, bcmatters.org https://bcmatters.org/property-owner-protections-and-controls-in-jeopardy/

2) December 2^nd, 2019, “A Notice from the POA Board Regarding the Ballot for the Capital Contribution Fee”     Notice from the POA Board

3) https://smokesignalsnews.com/archive/vote-on-capital-contribution-fee-delayed-by-serious-error-in-ballot-text/article_454a0afc-6d6e-552b-a63c-8ba3553599cb.html

4) “In discussion of recent communications”, June 26^th, 2021, bcmatters.org https://bcmatters.org/in-discussion-of-recent-communications/

5) AskThePOATicket&Response#4497

6) August 25^th, 2021 POA Eblast, “Updated: August 26^th, 2021 POA Board” Agenda including Policy 152 and Procedures

7) “Save the Postage”, December 3^rd, 2019, bcmatters.org   https://bcmatters.org/save-the-postage/

8) Facebook: Group – “BC Property Owners Issues and Concerns (now archived), circa December 2019.

9)  March 26^th, 1988 Covenants Article IV, Section 7

10) Finance Committee Meeting Minutes, August 19^th, 2021(POAwebsite>login>POA>Committees>Finance>Minutes>August2021

11) Reserve Management Plan, Big Canoe Master Plan, beginning January 1 pgs. 21, 24 & 25 (POAWebsite>login>POA>Reports and Studies>Reserve Study 2021)

12) July 2021 Financial Package, “Comparative Balance Sheet”, pg. 2 (POAwebsite>login>POA>Financials>2021>July)

13) 2021 First Quarter Capital Reconciliation (POAwebsite>login>POA>Financials>Budgets>2021>2021FirstQuarterCapital)

14)  “Time to talk about our Capital Reserve Fund”, November 2020, bcmatters.org    https://bcmatters.org/time-to-talk-about-our-capital-reserve-fund/#more-660

15) “Strategic Planning Survey” – Questionnaire, Survey