Is a New SGCC Agreement Necessary?

Somersett United
Somersett United

To date the Somersett Owners Association (SOA) Board of Directors (BOD) has declined to provide Somersett Country Club (SGCC) financial data in support of the proposed new agreement with the SGCC. They consider it irrelevant to the decision on how one should vote. Somersett United does not agree with this assessment, believing it important to one’s decision-making process. Therefore, following is a summary of SGCC financial data obtained from IRS Form 990 submittals, except for 2014, which represent projections.

SGCC Table

Notes:

  1. Year the Developer (Somersett Development Company) accomplished early turnover to the SGCC Equity Members. Operating loss (Revenue less Expenses) was $560K.
  2. First year SGCC was run entirely by Equity Members. Operating loss was $628K.
  3. In late 2011, the Developer controlled BOD voted to divert $15/month of homeowner assessments to the SGCC via a “Lease Agreement” in exchange for some SGCC access amenities of questionable value. Agreement was to run for three years starting in January 2012 with optional 3 and 4 year renewal periods. In 2012, the SOA revenue erased SGCC’s operating loss resulting in a +$32K net gain.
  4. Existing agreement stayed in place, which again erased the SGCC’s 2013 operating loss resulting in a +$104K net gain. Equity member monthly dues reduced from $425/month to $395/month.
  5. In mid 2013, a complaint was generated by the Nevada Real Estate Division questioning the legality of the existing agreement. Complaint filing was placed on hold to give parties time to negotiate a new agreement to be voted on by all homeowners. Agreement has not yet been finalized.
  6. Reports are the SGCC has acquired approximately 90 new equity members in 2014. Per the SGCC website, new memberships cost $2,500 and monthly dues are $300 for first year, $350 for second year and $395 for third year. Without any additional equity memberships, this would result in a membership revenue increase of approximately $364K in 2014, $378K in 2015 and $427K in 2016. This does not take into consideration any increase in SGCC revenue derived from their provisional memberships, which purportedly equal the equity memberships (i.e., over 400 total equity and provisional memberships).
  7. 2014 year to date financials are not available and represent projections only. However, given the new member trend for the SGCC, one can easily project a break-even scenario without SOA revenue from the existing Lease Agreement. The new member revenue in addition to the SOA revenue guarantees the SGCC a healthy operating profit.

Editorial Comment:

In 2011 there was a fear that if the SGCC continued to lose money, it could face bankruptcy and close up shop, hence the real purpose of the existing Lease Agreement was simply to subsidize the SGCC’s operating losses (albeit it without a homeowner vote) and assure financial viability. There was also the fear (the go brown syndrome) that closure of the SGCC would have a negative effect on property values. However, given the new membership trend it would appear that the SGCC is now reaching financial stability without the Lease Agreement revenue. That is, the new membership revenues offset the revenue currently being provided by the SOA under the existing agreement. Therefore, what would the primary purpose be for any new agreement?

For the SGCC, under the proposed new agreement, they would get $2.75 M from the SOA, from which they intend to build a clubhouse. Yes, they would give up ownership of the SGCC land, but lease it back for $1000/year, a minor expense. The lease term is for 50 years with two 20 year options Therefore, assuming the SGCC continues to operate successfully under their own venue (the most likely scenario given their current trend), it makes absolutely no financial sense to purchase the SGCC land under these circumstances. The assertion that purchase of the SGCC land is necessary to protect property values by having control over what happens to the land if the SGCC goes under becomes a moot point. Given this, it would appear that the primary benefit would be to the SGCC in that the SOA would provide funding, without any payback, for the SGCC to build a clubhouse, with perhaps a few hundred thousand held in reserves for whatever.

Bottom line, the SOA BOD owes it to their association members to fully disclose SGCC financial and membership data. Additionally, what projected expenses the SOA would incur, and its impact on homeowner assessments, to maintain the SGCC land in the event of a default. Only then, can one make an informed decision regarding risks and benefits (or lack thereof) associated with the proposed new agreement.

Somersett United welcomes any comments on the above data and conclusions.