4/18/2007

Community Center Pros and Cons

For:

Paying the piper
By Tom Olson
Ocean Pines Association General Manager

If you had a chance to review the last two articles highlighting the issues surrounding the new Ocean Pines Community Center referendum, you know that the question before the Ocean Pines community is whether or not they approve continuation of the Community Center construction project at an estimated cost of $5.4 million.  You also know that should the membership decide to abandon the project, the Association has paid or may be obligated to pay over $900,000 to cancel agreements entered into to construct the building. 
Now comes the question of how will Ocean Pines pay for the project if the membership approves the $5.4 million dollar cost? 

As originally proposed, the Association has commercial and residential real estate holdings that include but are not limited to; a valuable 2.78 acre commercial property located adjacent to Route 589 in front of the Post Office and Worcester County Library and 19 residential lots available for sale within the community.   Combined, the Association estimates that the value of this real estate will meet or exceed the cost of this project.   Prior to postponing our commercial real estate auction scheduled for March 16, 2007, about 30 information packets were issued by our auctioneer as a result of sale advertisements.  This interest underscored the demand for high quality commercial property in the Ocean Pines area that provided developers with sufficient sewage capacity (EDU's).  To avoid the risks that the controversy surrounding the new Community Center might limit bidding, the Association chose to postpone the auction until the referendum question was decided.  Strategically, your Board of Directors saw the need to protect this valuable asset by removing any cloud that might depress the value of the property. 

We all know that residential property sales have slowed compared to the pace of pre 2006 sales. In addition to the 19 lots identified, the Association is also reviewing its inventory of other building lots that may be offered for sale.  Although some remediation may be required, we believe several additional lots can be placed on the market in the future.  Our goals are to obtain market value for all properties owned by the Association, and cover all or a majority of community center costs through real estate sales.  Liquidating tangible assets like real estate however can be slow.  Interest rates, unemployment, and the health of the overall economy can affect demand and prices.  Understanding real estate economics has caused us to anticipate slow sales and plan for interim financing and maybe even some long term financing if we do not sell all properties within the next 12 months.

What resources does the Association have for interim financing?  There are many different options available to an organization like Ocean Pines with a stellar business record and a rock solid credit rating.  First and foremost we have money in the bank.  It is money that we hold in reserves for future repair or rehabilitation of existing facilities but will not be used within the next 12 months.  Funds not being used can be borrowed internally and used as bridge financing for the community center project.  Another option you may be familiar with is a construction loan.  This type of financing allows the Association to draw funds as needed to pay a contractor as they have reached pre-specified stages of completion.  In addition to these options, the Association would be eligible for a traditional long term mortgage.   I'll re-emphasize that the Association's goal and intent is to pay for the Community Center project through proceeds from real estate sales. 

Will the Association need to borrow money to complete this project?  Given slow residential lot sales to date it is quite possible that the Association will need to do some interim financing until lots are sold.  A large percentage of the construction cost is expected to be covered by the commercial property auction sale.  The remainder will depend on lot sales.  As an example, if the Association needed to borrow $1.9 million dollars due to slow residential lot sales, the impact per property would be $22.65 per paying the piper member per year.  The impact would decrease each time the Association sold a residential property until it became 0 when all lots were sold.

One more time…we expect that over time, the cost to construct the new Ocean Pines Community Center can be covered through the liquidation of real estate assets owned by the Association.  If we are successful, there would be no long term impact on a member's annual dues, for the initial capital outlay.  Members will see an annual obligation for depreciation, operations and maintenance offset by assessments paid by commercial and residential properties sold, in addition to fees generated from activities and facility rental.  The operating impact on member assessments is estimated at $36 per year beginning with the 2008-2009 fiscal year.

Is there a cost to construct and operate the new Ocean Pines Community Center?  The answer is yes.  As for the decision to vote on this important subject, each one of us has to ask ourselves;

Does this project help our property values?  Does this project enhance the quality of life in Ocean Pines?  Does this project improve the community image? 

The final installment of this commentary will be issued next week and I am looking forward to sharing my thoughts with you on these important questions.

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Against:

This week's commentary is presented by David N. Honick of the law firm of David N. Honick in Salisbury.  Mr. Honick is well schooled and highly respected in Homeowner Association law.

HOAs must follow the laws
By David N. Honick

What may be viewed by some as a dispute about whether or not to build the Community Center at its newly projected cost of approximately 5.4 million dollars is, in my opinion, about something much more fundamental than this one proposed project and its cost.  It is about the expectations, faith and reliance that members of homeowners associations ("HOAs") have, or rightfully should have, in their governing boards.  The controversy is not (or should not be) about the Community Center, but is (or should be) about what the Community Center represents. Building the Center is a major action and expenditure which, according to the Ocean Pines Bylaws, Maryland Homeowners Association Act, agency law, corporate law, standard practice for HOAs, and sound public policy, should be by and for the HOA members and should only take place with their informed consent and vote of approval. The following hypothetical illustrates the delicate balance between the expectations and obligations of HOA members and their boards. 

In Tidytown Estates, everything is going well: the elected board members are fairly enforcing bylaws, appropriately expending funds, and dutifully maintaining common areas and facilities.  The community looks great and property values increase.  One day, perhaps at the behest of some members, the board proposes installing a very large granite statue of the president in one of the parks commonly used by all members and owned by the association. The bylaws require that any expenditure that may favor, or appear to favor, a political or ideological belief be put up for a vote by all members.  The statue is of the president, for whom some voted and others did not.  Some members agree with the president's policies and others do not.  The installation of the statue on a common area would suggest that all members agree with the president's policies or ideas.  It is therefore, required to be approved by voting of the members.  Five out of seven board members zealously support the president and strongly favor the installation.  Because they know that the president's policies are controversial and the president was voted into office by a very slight margin, these members suspect that the statue installation is likely to be disapproved if subject to voting by the HOA members. The bylaws require a vote, but based on their own strong feeling that the president is good for the community, the board members lead the board to decide, in its representative capacity, that the statue does not support a political ideology or belief and therefore does not require a vote for approval. The statue is installed without a vote and half of the membership is happy and half is horrified.

All the members of Tidytown read the bylaws and agreed to their terms before buying their properties.  All expect that the bylaws, including the requirement for a vote for any political expenditure, would be complied with. All rely upon their expectations of compliance and any benefits gained from such compliance in making the decision to buy.  The members who do not desire to have the statue installed and were not given the chance to vote, have relied upon their expectations, but have suffered as a result of this reliance because they have been shut out of a vote and their interests were ignored in favor of the interests of the board as a whole and/or one or more of the board members.  They have given up what they had not agreed to give up, but they have not received at least one significant benefit that they expected.  It has nothing to do with the statue; it is about the process that led to its installation.

I know that some, especially those who would have voted for the statue anyway, might argue that the process is not important.  To them, I would like to say that next time around, the statue might be of a president that they did not vote for, do not support and do not want in their park.

Compliance with the bylaws works for everybody and should be enforced each and every time. Contriving or altering the bylaws to support any one position when it is convenient for a few creates chaos and destroys reliance without which a HOA system cannot thrive.

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