ANNUAL MEMBERSHIP MEETING –
July 10, 2010
Member Q&A
Questions & Answers – Bridge Report
Note: MA indicates the question was answered by another member of the quorum, not by a Board member.
Q: Do we lose any rights going through USDA?
A: Not that we know of at this time. With both, whether it’s the Mutual of Omaha or the USDA, we would need some outside counsel to assist us. We have used local attorneys down here in Shelton and Belfair and we have had some interviews with a law firm, Barker Martin, in Seattle that does a lot of Association business. I also asked Denise ------ who does work with the management trust services about any attorneys she might know in the local area, looking towards perhaps Tacoma. It’s important that the attorney that we hire is going to have to look at a number of issues. The issue that you stated for example is one of those. We haven’t hired them yet because right now the loans have not been approved but we’re going down that path so questions like yours can be answered right on point.
Q: It sounds like to me we’re proceeding and that this is the only option that we have. As I understood from our Informational Meeting, this is not a fixed rate loan, the 6.25% interest, and that they’ll re-evaluate the interest rate every five years. Currently the interest rates on the market for mortgages are at a fifty year low, we’re looking at 4% for fifteen years, 4.235% for 30 year. Are other options going to be looked at? Is a survey going to be done to determine whether members would prefer to pursue funding on their own and is this a done deal that this is our only alternative? I can not go along with a 6.25% fluctuating loan without the USDA in it and from what I understand that’s not a guarantee because we’re a private island. Does everybody agree that this is the way we’re going?
A: Right now, this is for your information, we’ve gone to a number of lending institutions which have actually declined to work with us. Their interest right now is 6.25%. This is a construction loan on a bridge - it’s not a mortgage on our homes so you do have a difference on that. Right now, neither loan has been agreed to; we’re not asking you to agree to any loan at this point. We’re trying to develop this information so we have it so you can make a decision. We’ve looked at other areas, we’ve looked to establish bonding and we just thought that was not going to work. We talked to a number of people and that would be really expensive, so we pushed that to the side. Right now the best way would be to go into the financial area. Your issue with the USDA with the private island, that’s going to be an issue; that’s another reason why we’re going to hire an attorney so we’re going to look at this. There are a number of issues that I have to admit are just beyond our own scope of knowledge, so we’ll hire an attorney so we can answer these questions. When we come to you and say we have financing and we need your approval, we’ll have all these questions answered; as the questions come up, we’ll get them answered.
Q: It’s not really a question. Just to explain to everybody about these different rates, I’ve done this with another community in Kitsap County. You look at and compare rates like we’re looking at right now, like 6.25% versus you can get a mortgage for 4.5 or 5%. This is commercial paper that we have to get out there; you can’t compare those kinds of rates because somebody that’s willing to loan us money for a bridge… how many people actually own part of that bridge? When we built a house for a community, we had to go get commercial paper because it’s an entirely different critter.
Q: I understand the interest rates but the alternative would be to issue a one time assessment and let members go out on their own and get their own money.
Q: The question was raised at the Informational Meeting that if the Association goes out and gets a loan, are we all responsible for that loan through the entire term of that loan? That’s another issue.
A: You’re right about that. Basically, when we put the contracts together when we get the loan, each lot will be responsible for about $20,000. Whether a lot owner wants to prepay the loan, or do it through the life of the loan, whether its 15 years or 40 years, you’ll be responsible for it. We have to work the issues out; if you sell your lot, what happens to that obligation, and that’s an important issue. Once again, it comes back to the lawyers; we’ve got to really figure that out and it’s the same thing with assessments on it.
MA: I think I can answer that question a little bit better because I’m an Association Manager and I’ve worked with ---- and the people they’re looking to get the financing from. To answer your question, they have to get the construction loan up to the point it is built and then after that it’s converted to the long term at a fixed interest rate. At the end of that term (this is how it works with Associations) all owners will have the right to go out and pursue their own financing to pay their assessment off. If that happens, then you will not be part of a loan; your lot will not be included. If you don’t come up with the money by the deadline date, then you will be folded into that loan and until that’s paid you will be part of the loan and responsible for that.
Q: I just want to make sure I understand this. Thank you for sharing that information because that’s really what I think hit home for a lot of us at the Informational Meeting is that it became very obvious that we had a potential issue that needed to be resolved right away and that is that as an Association, if we take on a loan obligation is every member responsible for that obligation until its end. You’re saying that we’re obligated as an Association until the construction ends and then everything is re-evaluated, whatever the amount of interest that’s accrued to date etc. is one big bucket so right now we’re looking at $3.6 million, let’s say its $4.2 million. Now we’re all going to have to then make a vote at that time again or it’s automatically divvyed up and you can pay your share and that’s that. The interest doesn’t continue to accrue?
A: I don’t believe that we’ll have another vote on this.
MA: It’ll just be X amount that you’ll have to pay at that time and if people pursue to go on with the loan then whatever is paid up front by owners will be then refigured for all the rest of the lot owners to divvy up that amount. So if the loan is $5 million and lets say 20 lots pay up front, that’s going to decrease that loan, so then that loan will be divvyed up by the remaining lot owners; the interest rate on the loan, they’ll be tied to it.
Q: And that’s fact?
MA: That’s absolute fact.
Q: That’s what I’ve been looking for is absolute fact.
MA: I’ve been an Association Manager for six years and that is the situation and how it always goes when you go from a construction loan, at the end of the construction loan you have the chance to go out and get your own financing to pay that X amount of whatever the assessment is. If you choose not to do that, or you do not pay it by the deadline date, then you’re rolled into that loan and that’s divvyed up by whoever didn’t pay.
Q: Who will be responsible if the remaining lot owners don’t pay?
MA: Unfortunately the Association will bear that cost. That’s the drawback and the risk of the economic time that we’re in. Believe me I manage ten Associations and I’ve got about 20 foreclosures, which is a lot. It’s a big burden on the Association but there’s not much that anybody can do about it right now.
Q: I think we all realize that we need some kind of an assessment on each lot. I think it’s the easy way to just look at and just divide it by the number of lots. I think we all agree that some members are going to benefit more than others and I’ve been thinking hard on a way that would be more equitable. I think we’d all agree that we all need to pay something down per month, per lot, and that’s only fair, but I think that with that we could take advantage of new technology, a wi-fi enabled security toll gate which could be assessed a certain trip value. We’re doing something quite like this at the -----Yacht Club where I’m the past Commodore and still serve on the Board. We’re a 250 member club. Much like Treasure Island we have similar assets and roughly similar annual budgets and we are right now looking at a wi-fi enabled security fence and gate, same thing, where we would be able to control the security and be able to send the amount of…be able to spread the cost a little better for who it benefits. I would like to be able to put a proposal together and submit that to the bridge financing committee. No matter how we get the money, ultimately it’s up to us how we pay for the bridge.
A: We have no objections to anyone coming through with suggestions. After the last meeting, Denise came up to me and offered to help; same with your suggestion, whether it’s good, bad, or not, we should consider and talk about it. We’d do that with anyone that has an idea. We have not signed off on any financing at this point. We can not sign off on any financing until we get your approval. Once the financing is ready to go, we’ll bring it back and explain the pros and cons of both. This right now, again, we’re pursuing to start our Phase II at the same time we’re taking a parallel track to find the financing.
Q: What I’m really unclear about is what is the obligation for the lot versus the owner? I plan on selling my place within the next five years, so when I go to sell is that $20,000, or if I’m obligated to a 40 year loan at whatever it is, am I going to have to cash that out before I transfer ownership to the new folks? Most of us are going to sell our property within the next 40 years, so if we have a huge obligation it may be as somebody suggested earlier, be better to cash it out ourselves. Or if it’s an obligation of the Association and it’s like part of your Dues or something like that, that’s a different thing, but I think those things have to be really looked at and it’s not what we want, it’s what the lenders will approve when I go to sell my lot. Is this a lien against the Title and if it’s a lien against the Title of my individual property for 40 years, I can see some property transfer issues. All of that has got to get really clear really fast before I’m going to vote for anything.
A: As I’ve said, we’re giving you the status of our financing and to raise some other issues. This issue is already down on our list of issues and we’ll be talking to the attorney about that. If you sell your property, do you have to pay your assessment or does the assessment transfer over with your property? That’s an issue….
Q: Or am I obligated for any interest for 40 years that I’m going to have to cash out when I transfer my property?
A: At this point we don’t believe so and the issue is like with the other gentleman talking about putting up the toll gate; one of the issues I mentioned about the USDA, it cannot be a totally private island. That’s an issue and it comes down to 40 years at 4.5% interest versus 15 or 20 at a higher interest rate.
Q: Two quick questions. One, correct me if I’m wrong, my understanding is that standard Homeowner’s Association Dues are not tax deductible. Is there any way we can wrap this loan into a package that would be tax deductible on the individual income tax? Has that been considered?
A: No, not at this point so it’s something we can write a note about it and try to find out about it but we don’t think so.
Q: Another statement of caution – Morina where you’re stating absolute facts, a lot of these questions coming up sound like we need to address them to an attorney in real estate, income tax, Homeowner Association law so as you propose going to an attorney maybe the thought of a separate meeting where you could ask these questions of an expert would be a better way to go.
A: We did ask the attorney when we met with them if they would come to one of the meetings. I’m not the lawyer, I’m not going to practice law in front of you but I don’t totally agree with both Morina’s question and the response saying it was actual fact – don’t believe it. We’ve got to talk to the attorney; it’s as simple as that. These meetings are to raise questions and Morina’s question was a good question, Denise’s answer was a great answer, but we want to make sure that we’re adhering to the laws of the state of Washington.
A2: All these questions that you’re bringing up are questions that we have preliminarily discussed with the attorney. We’re not prepared to talk about all the particular details; we’re not there yet and we won’t be there until we get a commitment letter from a lender. We’d be spinning our wheels and wasting money until we get that. Once we have that, the Board is certainly aware of all the comments that have been brought up out there and the attorney is also, so as Mike just said, when that time comes, there will be a Special Meeting and I’m not prepared to verify what was said here today because I’m not an attorney either, but we will have legal counsel, he will be at a meeting, and prior to that meeting we’ll have addressed many of these things and take you through it. So a lot of these questions, these ‘what if’ questions that we have, we know generally how it works, but the absolute specifics – we know we’re looking for a construction loan; at the end of the construction loan you know the cost of the bridge, all your total costs, you divide it by 251 – if someone wants to pay up front, fine, the loan goes down; or over the course of the next five years, if somebody wants to pay it down, there will be provisions to pay it off. So all of these issues, we’re not prepared to talk about today.
A3: I hate to say this, but as Roger says if you prepay it you still may be liable if twenty people don’t pay. I mean the Association is going to be liable for the loan and we are the Association.
MA: Just to clarify, you’re absolutely right, nothing is fact. Everything is based off lending and you know from your own personal finance areas with refinancing or trying to get a mortgage to buy a house, lenders are more critical than they’ve ever been before so the key thing here is if we can get the financing and there are going to be a lot of hoops that the Association is going to have to jump through to get the financing. But in my experience, what I can say is fact of the two properties that have completely redone new siding, new windows, new gutters, new fascia, that’s how it worked: The construction loan went to the end of the construction project, we estimated what the assessment was going to be, we even charged out two years in advance a monthly amount to try and get to that amount or to get that knocked down some way so that we had a down payment and then when we got to the end, everybody’s unit was revalued because now they were of more value because everything had been brought up and then they could go out and get the loan and if they got the loan they would not be included in the loan package. If they are included in the loan package then all I can say about selling is that if you are under that loan and you haven’t paid it that’s something you can work out between the buyer and you.
Q: I think it will be the Title Company.
MA: Exactly but it’s also in your purchase and sale agreement how you work it out though. I don’t believe that when you get a loan….
A: Let’s move on. This is going to get carried on too far. If you have questions you can submit them to Mike or the others and then the questions will be submitted, otherwise we’re going to have this meeting go on for two days.
Q: Wait a minute. This is a member meeting – that’s why we’re all here.
A: The problem is that we don’t have the answers that you’re looking for; they need to go into an attorney – that’s the end result. The questions about property and selling properties, I don’t think anybody up here is qualified to answer those, but we do know that we have to go to an attorney to get the answers and that’s what we’re doing.
Q: I understand some of the Board members have gone to an attorney.
A: No. We talked to an attorney only to see what the attorney can provide us as far as service but we didn’t ask specific questions – they’re going to come up with a response as to what they can provide.
A2: We do know that both lenders we’re talking about do not put blanket liens on everybody’s property – we know that. The Association has to have the right to assess, and with assessments we have to have the right to lien so if somebody doesn’t pay, you can go after them. The USDA wants a lien on the bridge. Omaha does not. Until we get there and go through this process, we do know that much from those two lenders, but there will not be a lien on your Title.
A3: What was your question?
Q: My understanding was that some Board members did go see an attorney.
A: We did. We went to see an attorney to see if they could qualify to work on this. The attorney we had, when you were President of the Board, was not qualified to work on….
Q: That’s what I’m asking for. What was the outcome of that meeting? No money lost, nothing gained.
A: The issue is we went to find out if they had experience with Association business. That’s what we are and we’ve got a lot of issues, like the gentleman next to you, he’s concerned about whether he sells his house, sells his property or whatever, he’s going to move out in five years. We’re trying to find these answers; we’re trying to identify all the issues so we can talk about them.
Q: So how can we be asking for another assessment to move to Phase II without more of this funding situation resolved?
Q: Of the Phase II budget for $206,412 what’s included in that?
A: Exeltech Consulting will be doing Project Management, Environmental Evaluation and Permitting, and Bridge and Roadway; Baseline, the surveyors, will be doing additional surveying that will be needed; GeoEngineers will be doing more geotechnical work that has to be finalized for the final on the bridge; it includes the consultant doing storm water – the storm water runoff on the bridge that has to be designed. It comes up to $206,412.
Just to clarify one issue about one of the questions you were asking; we were not charged anything by the attorney. We were fact finding; we were asking how they worked. We talked about a lot of issues and a lot of them that were brought up here today that we put down and talked to them about so that they could respond and give us some idea with an engagement letter (which we have not signed), what it was going to cost us to get through this process. That was one issue. The other issue was whether we felt that they had the background in Associations and knew what they were doing and by the way they were recommended by the Bank of Omaha because they do a lot of Bank of Omaha work – that’s how we got there. So at this point, we just got a response with their engagement letter and their outline on Thursday and the Board has not discussed it. The Association has paid nothing because we have not engaged them at this point.
Q: What are they asking? The attorney, what is his bottom line?
A: It’s hourly. Attorneys will give you a budget range based of the scope – they have to do an opinion letter. The opinion letter is in regard to whether or not the Association and our Bylaws are set up such that we have the right to assess and we have the right to lien and we are in first position on lien rights. They have to give an opinion letter to the lender. We will not engage them until we are very close to…we have our initial application in to the Bank of Omaha, they came back with a response requesting additional information that was required; Linda gave them documents about this thick in response and I believe they have everything they need. We think we’re in a four to six week period where they will issue a commitment letter. This is for a construction loan; they will do long term but this is for a construction loan. The Dept of Agriculture does not do construction loans, so if we get the Dept of Agriculture loan, we will use Omaha for construction and the permanent long term loan would be with the Dept of Agriculture. If everybody pays their $20,000 there is no loan at the end of that, but we don’t anticipate that happening. If half of you pay, it will be $2.5 million. You can’t determine that until you get there, but you have to have all your loans, your permanent and your construction because your construction lender will not put a dime out unless they know they have someone that’s going to take them out. Even if it’s Omaha, they proposed that they will do a long term – that is not our primary goal because of the cost of that. But we anticipate that in four to six weeks we will have a commitment letter from Omaha. What that commitment letter will do is they’ll say we’ll do the loan, they’ll provide the interest rate they want; an opinion letter from the attorney; they’re going to want to know our operating procedures of how we’re going to collect the assessments – are we going to pay monthly, quarterly, annually – what we’re going to do if somebody doesn’t pay. You think you’re concerned about your neighbors not paying, the banks are even more so because they’re going to say whatever it is it’s going to be by the numbers because it’s going to be in the loan documents. So, we’re not there yet. When we get to where we feel that we’re very close to that point, then we’ll get the attorney, we’ll start the process, but to do it prematurely we’d be spending a lot of money on attorneys but we don’t have anything to talk about.
I want to make one last comment on ‘why are we doing this’ or ‘why are we proceeding with $206,000’. If we push this back, your interest rates – I don’t know, your guess is as good as mine. A year from now they may not be 4.5% with the Dept of Agriculture. Your guess is as good as ours, but we feel it’s probably as low as its going to get. A year from now if the economy picks up (or basically two years because if we miss the window next summer, you’re two years out) the rates could be higher. So, the reason we’re asking for the $206,000 is to be in a position to have a permit; if we don’t get the funding we’re not going any further – you have to sit and wait. If we do get the funding, we can move and take advantage of it. If we have the permit, we can extend from 18 months to 24 months – there’s a window on all your permits. It’s going to be up to the membership and why we’re pushing it is if we can save 10% on $4 million, that’s $400,000 in construction costs. If we could save 1% on interest, that will make a difference. We recognize there are people on fixed incomes, we recognize there are people who want to prepay it, and we will give our best effort to accommodate everybody to give you the options. When we get there, the attorney will come – it won’t be us – you can talk directly to the attorney.
Q: But until we get an answer from legal that says whether or not each property is legally obligated for the life of any loan that the Association takes out, that has got to get answered.
A: Before we obtain a loan, before we go forward, you the membership will have a meeting to discuss it, to vote on it, to approve it or disapprove it. If you have other ways of financing that you’d like us to look at, present those to Mike and we will look at those, we will present them to the attorney for your answers. That’s about the best answers we can give you; we don’t have the information right now.
Q: I just have a suggestion on obtaining the attorney for the Board and I’m going to submit my questions in writing to you because I think that’s probably the most efficient way to do it about my own ‘if I paid it this way or if I paid it that way’. When you seek an attorney I would hesitate to seek an attorney that the lender is actually recommending. I understand they have knowledge of the area however there are attorneys (and I’ll look around too and maybe we can all help on this) who have expertise in a certain area of law, but with a lender they can actually negotiate and not someone the lender is recommending; I just…that raises my hackles for some reason.
A: Your comment is very valuable and really, let’s put it this way – we’re here as the Board, but we’re with you. I mean we’re not a paid Board; we’re here as members of the island, we live on the island. We had a banker here, Dan Doyle, he’s one of our neighbors and he’s working on the financing and he’s a big help, and comments like that there, it’s a real big help. We’re not signing contracts yet with an attorney; we’re going to get your questions answered, but we’re also going to build our bridge so the value of our houses does not fall down. We want a good place to live for ourselves, for our children and our grandchildren. Maybe we’re not getting the dots quite correct as we’re doing it, but we’re going to have all the answers. This Phase II is a necessary function that has to be done and we want to get it done, we want you to vote on it. We’ll talk to the attorney, we’ll look at other attorneys; if anybody else has a suggestion for an attorney, please give it to us. We need recommendations for the USDA and also Mutual of Omaha. We’re asking people like Wes ------ who has some political connections. If anybody here knows some politicians, we need politicians. We’ll write the letter for you because it helps; the USDA goes on a series of points so if we get a letter from Norm Dicks supporting our project, it adds up to some points. We’re trying everything we can to get this thing done the best way, to have the best bridge possible, at the best possible cost to all of you.
Q: I’d like to thank the Board for everything they’re doing, there’s going to be a lot of controversy through this and I sure appreciate the people who are giving their time and volunteering. Roger, you went through the content of what we will get for the special assessment that is on the ballot that we’re voting on today. I assume the output from that, these reports, we the Association will own, as far as the environmental impact and that. The reason I make that comment is that regardless of how the funding turns out, regardless of how the vote turns out, this is information that we own so that when we do replace our bridge, we do have a plan forward, it’s information that we need – it’s not lost cause, what we’re paying for in this special assessment that we’re voting on today. We need it to go forward, but its data we have to be able to go forward however we go forward.
Q: I just wanted to say it should be possible for your attorney to structure the assessment so that it goes on the cost basis for our property, so that when we do go to sell, it’ll reduce our capital gain potential that we owe to the IRS so if they’re careful about how they structure these documents we can include this assessment.
A: That’s a good point and before we actually sign off with the attorney…we’ll sign the engagement letter, but we’ll bring his firm in so they can answer all these questions and we’ll give you all adequate notice to say that we’re having a special meeting, it’s with our attorneys so everybody be prepared with these questions. Roger says its an hourly charge – it might be a few hours we’ve got to pay for, but it’s money worth while to satisfy any concerns you may have; there’s a lot of legitimate concerns and that’s one way we can try to do it.
Q: Are you guys aware that when we accepted Phase I, that the next phase was supposed to cost us three to five percent? It is now costing us 5.7% to go to Phase II. Are you aware that Phase III was supposed to cost us another 3.5 to 5% and that is also factored in at 5.7% already?
A: I guess in answer to your question, we’re not going to be able to satisfy everybody with all the questions that you have today. I want to remind you of one thing that Roger mentioned up front – the bridge is not really being repaired. All we’re doing is we’re shoring up some of the problems with the bridge; the rotting is still continuing. We are going to be paying for repairing that bridge from now until the time we get a new bridge.
Questions & Answers - Following New Business, Special Assessment
Q: Is there a rule that the county will only allow you to go so far on repairing the bridge and after that they say that’s enough?
A: Yes, there’s a letter in the file from the county about this project. On a progressive basis, once you reach 60% of the structural components on the bridge, you’ve got to bring it up to county code which requires a 22 feet driving lane. So if you put a million dollars into the bridge, when you reach that 60% level they’re going to say you have to bring that bridge up to code and you can’t expand a 10 foot lane to 22 feet. You would have to tear it down. So every dollar you spend on this bridge between now and year ten (we spent about $345,000 last year)….you won’t have a bridge and then you’ll be faced with the same problem except you’re going to pay more money than what we have projected here.
Q: But we’re grandfathered in.
A: We can repair it until we reach 60% because it’s grandfathered in. At 60% it’s not the county it’s the international building code that comes into play. You can be grandfathered in all you want, but you still have to extend that bridge to a 22 feet driving lane which you just can’t do. You’d spend twice what we’re talking about here trying to mess around with an old bridge.
Q: Where are the costs for those permits that we also need to have paid for by the time we go to construction. Where’s that money going to come from?
Q: The Board has talked about that. We anticipate the additional costs for permits; the county estimates our plan check permit will be $14,000 and our final permit cost would be another $10,000. So when we go in for that in the fall, if we’re successful with getting the lender in place, we may have that, or we may have to come back to the members. I think we’ve got room within our ARF. It’s an issue that’s on the table at this point.
Just one thought on where that could come from, I don’t see us going over $189,000 on Phase I plus $5,000 for environmental permits, so now we are at about $194,000. The membership approved $225,000 last November so basically I think the surplus there could be applied for the additional permits for Phase II.
Q: That remainder stays in the bridge fund?
A: Linda, can we use that for permits?
A: We approved $225,000 for Phase I and if some of that were moved into Phase II, that’s not how the vote was taken, so I think it would take another vote.
A: Maybe that’s a question we ought to ask. The question is there is $25,000 to $30,000 that is budgeted. How we access it and use it is another question.
END