Posted By Dan Kanyr
“….As protection against SGCC bankruptcy, a provision was included in the SGCC Lease Agreement allowing the SOA to purchase SGCC (land, facilities, amenities, etc.) for $1 prior to bankruptcy.”A quote from the Somersett Board of Directors (BOD) summary communication to SOA homeowners on the lease agreement signed with SGCC.
Page 8, Section IV-8 SGCC Lease Agreement states: “In the event SGCC intends to file for BANKRUPTCY under any chapter, SOA shall have the first right of refusal to prior to SGCC filing for BANKRUPTCY to purchase the SUBJECT PROPERTY for $1. If SOA elects to purchase SUBJECT PROPERTY there shall be no additional requirement for SOA to reimburse any SGCC member for any reason, including initiation payments…”
The preceding may sound good, but it is not what it seems. In reality it offers nothing of value to the Somersett homeowner. In this Article, I will review: 1) the validity of the communication; 2) the legality of the $1 option; 3) the value of the option; 4) who really benefits from this clause; and 5) property values.
1) The BOD Communication
The BOD wants homeowners to believe their interests are protected by the $1 option. This is far from the truth. The option offers no security to SOA. The Quitclaim Deed transferring the golf course real property to SGCC only allows for use as an 18 hole championship golf course. Otherwise, the title to the real property and all water rights reverts to Blake Smith’s Somersett Development Company (SDC).
I asked the BOD where is the “security”? I got two answers. 1) SOA could use the option to block an undesirable buyer. and 2) to paraphrase Blake Smith : if you don’t think it is any value don’t exercise the option. I can always take back the land and sell it to developers and sell the water rights.
The SOA BOD grossly misrepresented the $1 option when they communicated with members. The communication leaves the impression SOA is secured by the SGCC real estate. In fact, SOA would only get the right to operate an 18 hole championship golf course that by that time had gone bust twice.
2) Legality of the $1 Option
SGCC is owned by its equity members who each signed contracts defining their interests and how they can be sold, transferred, etc. It is doubtful the SGCC has the legal authority to wipe out each equity member’s share. Did SOA check the legality of this clause?
3) The Value of the Option
When SDC negotiated early turnover of the SGCC to the Equity members in August 2010, SDC agreed to underwrite $450,000 of SGCC operating deficits for 2010, $200,000 in 2011 and nothing beyond, as well as transferring $1,000,000 in the escrow account for the clubhouse. These monies have proven to be insufficient to offset SGCC’s actual operating deficits, as it has been reported that the SGCC’s operating deficit for 2011 was ~$685,000. So the option for the SOA to buy the club is not for $1, but rather a potential negative $685,000/year as it would subject the Somersett homeowners to fund all SGCC operating deficits. How would this be accommodated? Only through increased homeowner assessments.
4) Who benefits from this clause?
The $1 option benefits only SDC and SGCC. It offers more harm than good to SOA members. The clause misleads homeowners into thinking they have real security. Consider the two alternatives from the SOA’s viewpoint.
Bankruptcy: The court would appoint a trustee to either re-organize SGCC or liquidate the SGCC assets. SGCC land would revert to SDC under the Quitclaim Deed. Vendors and others owed money by SGCC would be re-paid at some % of their claim. SDC could then contract with a golf management company to operate a public course, sell SGCC as a golf course, sell the land to developers (with a zoning change), or deed the land to the city as a public area, etc.
Sale to SOA prior to Bankruptcy: The clause leaves open the door for SGCC members to seek an enhanced subsidy agreement from SOA or an outright sale where equity members are paid for some or all their interests. SOA finances would be stretched by SGCC’s substantial negative cash flow. The option clearly helps SGCC equity members, not SOA. Also SDC has a financial interest in sustaining the SGCC. SGCC pays the taxes and maintenance on the course which otherwise be SDC’s responsibility. SDC’s financial interest in the land costs it nothing. In this market SDC is unlikely to find a buyer for the land except at the most distressed prices so SDC is not in a hurry to get the course back.
5) Property Values:
Much has been said about the drop in property values if the golf course closed. This was prominent in the D’Andrea discussions. Prior to the real estate collapse, golf course lots commanded significant premiums. Even in this down market a golf course lot is a positive. What if SOA acquired SGCC as an amenity for its members? In my opinion, property values in Somersett would likely plummet. Why? Potential Somersett home buyers would be limited to people who wanted to join a country club. Home buyers would be required to pay for an SGCC membership whether they wanted it or not. They could buy in other communities without the cost. If SGCC membership were so desirable, SGCC would not be groveling for new members at ever lower prices.
In conclusion, the $1 option is a bad deal for SOA.