The Selling of a Country Club Part 3

Introduction – This post details the problems with trying to integrate the newly purchased club into the HOA budget process.  The HOA sent out a budget packet that showed the Master Association Budget, the Division Budgets, and the Drive Budget.  It is difficult to discern the Association’s fiscal position due mainly to poor accounting practices.    

Master Association Budget – The first thing to notice is the 2022 Budget is the same as the 2021 Budget   Equality between budgets was necessary to keep the dues the same level.[1]

More problematical is the failure to consider any impact due to inflation.  The budget for 2021 shows the Master Association breaking even.  With rising costs in 2022 any deficit will have to be funded by a transfer from the Operating Reserves or a reduction in one or more of the expense categories.

It is possible the Master Association had a large operating income last year that it can be used to counter any inflationary cost increases.  There is no indication that is the case.  What happened this year will be detailed in the financial report for 2021 and is not published until 2022.   That report does not report on budget variances and does not use the exact same expense categories as the budget.  As an example, in the year 2020 (the last year available) the expenditure on landscaping was reported to be $719,712.[2]  The budget for landscaping in 2020 was $604,164.[3]  The overrun of approximately $100,000 is not contained in any report made available to the members.  In essence, the budget is not a control document but merely a general idea of where a member’s dues will go.

The budget package includes the Reserve Study completed for 2021.[4] That study states the Master Association reserve account is expected to be only 40 percent fully funded as of December 31, 2022.  The Drive Budget reserves are only 57 percent fully funded as of that date.  The Master Association Board has made an effort to increase the reserve expense to decrease the shortfall.  What is missing in the budget package, however, is any mention of reserves for the recently purchased Club (Cantina, Club House, Tennis Courts, Golf Course, etc.).  Even the divisional budgets (discussed below) for the golf and racquet facilities do not have a “reserve” cost element.    

Division Budgets – There are two divisions—Sports and Fitness and Golf Club.  The budgets for both are shown in Table 1.

Golf Club Budget – It is strange the Golf Club is not a cost element in the Master Association budget.  Instead, it is shown as a separate entity and not the most important asset owned by the Association. Nothing in the budget indicates there is an approximately $8 million liability for refundable member deposits.  A prospective golf member would not know he is accepting this liability when he joins. 

The budget is also mute on estimates of the expected membership fees and refunds to departing members in 2022.  If, for example, all 68 Premier members decide to become full members they would pay approximately $1.97 million to the Golf Club.  Will any net membership fees be set aside for capital expenditures?  The answer does not lie in the budget packet provided by the HOA.               

Table 1

Division Budgets ($)

Description	Combined	Sports & Fitness	Golf Club
Membership Income	9,858,896	3,611,771	6,247,125
G/L Sale of Assets
Golf Shop Net	130,199		130,199
Golf Services	(244,044)		(244,004)
Golf Course Maintenance	(4,898,114)		(4,898,114)
Sports and Fitness Net	(688,833)	(688,833)
Dining Room	(154,083)	(154,083)
Kitchen	(923,404)	(923,404)
Cantina Net	(152,135)	(152,135)
The Turn Net	23,177	23,177
Banquets	11,244	11,244
Clubhouse Operation	(337,222)	(337,222)
General and Administrative	(1,069,365)	(695,087)	(374,278)
Department Expenses	(8,302,541)	(2,916,344)	(5,386,198)
Unadjusted Net	1,556,355	695,428	860,927

 

 A budget should be sufficiently detailed that it can be used for planning and control.  That is not the case for the Golf Club.   That budget only shows the Golf Club has a big pile of money as income and a slightly smaller pile of money for expenses.  The budget gives no indication of what is driving income and expenses as would be expected of a multi-million-dollar company.  The five-line budget prepared for the Golf Club would not even pass muster as a Junior Achievement project.

A closer look at membership income figure will illustrate the inadequacy of the budget.  Membership income is projected to be $6,247,125.  This equals the dues for 348 members, but it is not clear that is the basis for the budget estimate.   If it is, the estimate neglects trail fees, guest fees, credit card fees, and Premier members who will not pay full dues for the entire year.[5] 

Sports and Fitness Budget – This budget suffers from the same lack of specificity as the Golf Club budget.  The food and beverage operation is projected to lose $1.2 million.  Most of this loss is due to a budget category termed “kitchen.”  What are the components of “kitchen” that are driving the cost?  The budget does not tell you. 

The membership income is apparently based on 912 members (890 HOA members plus 22 Invitational members) though even that is not clear.  Also hidden is any revenue from the dining room. The Cantina and the Turn are given net estimates while the dining room is not.

It is also curious the Sport and Fitness divisional expense of $2,916,344 does not reconcile with the Racquet Club expense of $3,524,400 shown in the Master Association budget.  There is a $600,000 difference.   

Drive Budget – This budget is arcane and has outlasted its usefulness.  This budget was intended to allocate joint costs among the Club, the Ventanas, and the HOA according to the 2009 Drive Agreement.   With the Club gone,[6] it would be more understandable to have a unified budget that displays all income and expenses.  There no longer is a need to separate costs such as landscaping and security into two separate budgets.  A unified budget would be more transparent in informing members where their dues are being spent and would also allow for year-to-year comparisons.   

Table 2 demonstrates the problems with the 2022 Drive Budget.[7]  It is clear something is amiss as shown by the large differences in cost categories between the 2021 and 2022.  It is possible landscape personnel were classified as administrative in 2021.  If so, it raises the question of why any accountant would approve of such an allocation.  The two budgets indicate the HOA has budgeted $2,657,949 for landscaping in 2022.   This differs radically from the reported expenditures for landscaping in the 2020 Financial statement ($719,712).  This lack of consistency in budget assumptions makes it impossible to determine the efficacy of expenditure decisions.

Table 2

Drive Budget Comparison ($) 

Drive Budget	2021	2022	Difference
Operating Income	4,018,390.12	4,018,390.12	0.00
Costs
Administrative	970,082.51	52,367.45	-917,695.06
Professional Services	271,120.12	281,120.12	10,000
Utilities	749,060.00	749,060.00	0.00
Landscaping	178,400.00	1,096,565.06	918,165.06
Repair & Maintenance	116,515.00	113,140.00	-3,375.00
Access Control	1,387,935.49	1,391,310.49	3,375.00
Taxes	3,911.00	3,911.00	0.00
Reserve Contribution	330,916.00	330,916.00	0.00
Total	4,007,940.12	4,018,390.12	10,470

 

In the brochure promoting buying the Club (Better Together), it was never mentioned the Club owner  paid the HOA approximately $300,000 a year as its share of the Drive Expenses (e.g., Security, landscaping).  How was the HOA to make up for this drop in income after the purchase?  It simply charged the Golf Club that same amount in the Drive Budget.  Whether the Golf Club actually incurred this charge cannot be determined because the Golf Club budget does not show that level of detail. 

 

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[1]Staff had some problem in copying the 2021 Budget.  For example, the 2021 Budget expense for utilities is $280,000.  The 2022 Budget package shows the 2021 budget for utilities to be $290,000.  This is not a major error but does indicate a lack of care in preparing the 2022 budget.

[2] Beck and Company, Master Association Audited Financial Statement for 2020, May 17, 2021

[3] The Operating budget has a landscape expense of $425,764. The Drive Budget has a landscape expense of $178,400. 

[4] SCT Reserve Consultants, Temecula CA, November 11, 2021

[5] The Club has 68 Premier members in 2021 as reported in the sales contract.  T.D. Desert Development kept the initial membership payment for these members leaving a liability of 468 months of foregone dues to the new Golf Club

[6] T.D. Desert Development still operates the real estate office so it should make a reduced payment under the Drive Agreement.

[7]It was not possible to get the 2021 total expense to match what was reported in both the 2021 and 2022 budgets (i.e., $4,018.390.12). 

The Selling of a Country Club Part 4

 

This post is not directly about golf handicaps.  When a homeowner's association takes over a golf course, however, the election of the Board will have a huge impact on how the golf course will be run.  Below is a case example of how an election should and should not be run.  Golfers should be vigilant about elections to ensure their rights are protected.  It is important that election inspectors are independent and not appointed by the incumbent Board as in the case cited below.

Though a secret election of HOA directors is required by law, the election at this Club was far from secret.   The vote tally was run by three inspectors, A, B, C.   At first, A would call out the name on the outer envelope, open the inner envelope, and pass ballot on to B.  B would check off the name on a master list and pass ballot onto C.   C would announce which candidates received votes and record the votes.  To be fair, I asked the votes to be announced so I could keep an independent tally.  It was obvious there was no secrecy.  For example, the seller of the Club always cast two votes for the HOA's lead negotiator.

After about 20 percent of the vote was counted, C realized the lack of secrecy and would no longer announce the results.  There were three problems with this remedy.  First, the process still allowed election officials to know how each member voted.   That is not legitimate even if the inspectors had no interest in how a member voted.  Second, it was still possible to discern how a member voted.  If C put a mark at the top of the tally page, it would have been for the incumbent.  Similarly, a vote near the bottom would be for a write-in candidate.  Again, the secrecy of the ballot was not protected.  Third, with no announcement of the vote, an independent tally was not possible.  The entire accuracy of the voting relied on C who was putting down marks like “ IIIIIIIIIIIII” across a page.  C could have tilted the election one way or another.  

Here is the way the election should have been run.  The law gives the inspectors authority to verify the member’s information and signature on the outer envelope prior to the meeting where the ballot will be counted.  At this point the first sealed envelope containing the ballot should be separated from the signed envelope.  The inspectors would then count the ballots and secrecy would be preserved.