54°Clear

Op-Ed: RA’s Lake House Financial Fiasco

by RestonNow.com — May 25, 2016 at 11:30 am 33 Comments

The Lake House/Credit: RAThis is a commentary from Reston resident Terry Maynard. It does not represent the opinion of Reston Now.

As RestonNow readers know by now, RA has at least a $451,000 budget shortfall in its operating income and capital investment for renovations of the Tetra property to bring it up to County code and other standards that make it usable for its intended purposes.

If I am reading the Board of Directors and Fiscal Committee agenda packages for this week correctly, the so-called Lake House Working Group is asking for an additional $428,000 for renovation of the property in addition to the $259,000 —  increasing the projected renovation costs by 165 percent — apparently budgeted for Tetra property renovations this year although it is unclear that the previous sum was ever approved by the Board of Directors. (See the “Lake House” presentation to be given to the Board in the agenda packet, p. 11.)

That’s a total of $687,000 in renovations to be put into a building that, at a $2.65 million purchase price, was already a $1.5 million above fair market value. So if the supplementary capital budget is approved, through this year RA will have spent $3.35 million for a building worth about one-third of that. And that will probably not be the end of what of the investment needed to make the Tetra property usable.

At the risk of overusing a catchphrase, this is Tetragate with all that suffix implies. Everything about the Tetra purchase effort is wrong — and some of it possibly illegal — from the initial RA proposal to purchase the Tetra property through this week’s request for nearly another half-million dollars just to fix what’s wrong at Tetra.

The Tetra Referendum Information Guide (the voter’s guide) forecast that total “capital improvements” needed for the property would be the $259,000 to be spent this year. According to the guide, RA based that forecast cost figure simple-mindedly on an $80 per square foot cost (3,125 SF) plus $9,000 for work on the grounds. It is left unsaid why RA thought $80/SF would be enough to fix the Tetra fiasco.

No doubt one of the reasons RA thought the forecast that $80/SF would be sufficient is that RA implicitly assumed it would receive the building in good condition, yet in a RestonNow op-ed at the time of the referendum, I noted the poor condition of the building. In fact, RA told the appraisers to assume “deferred maintenance has been corrected.” By whom, the tooth fairy? This is the fantasy world RA and the Board of Directors was selling Restonians a year ago.

Instead, now the residents of Reston find themselves likely tagged with up to a $700,000 bill to bring the building up to standards and re-design its interior for RA needs. That’s a cost of more than $220 per square foot — a nearly three-fold increase in the now-estimated cost of renovating this growing money pit. It is also a cost of more than $30 per RA household this year.

How is RA going to hide that renovation cost and say the Tetra project did not affect RA assessment fees next year? What programs, staff, etc., will have to be cut to pay the Tetra bill? Already RestonNow reports early season swimming pool hours are being reduced. What’s next?

RA, specifically CEO Cate Fulkerson in her interview with RestonNow, attributed the huge capital renovation shortfall to unexpected operating revenue losses caused by the Tetra Group’s early departure.

Aside from the fact that the $428,000 request for added funds is for the capital fund for Tetra renovations, not the operating fund where Tetra’s revenues would have been recorded, RA’s mismanagement of the lease arrangement with Tetra was absolutely spectacular on so many levels.

Moreover, even if Tetra had remained another full year, the funding deficit now would still be some $300,000–more than double the total forecast (and possibly budgeted) costs of all required Tetra renovations.

Moreover, Fulkerson tries to save the Tetra effort and herself by saying “she scaled them (the renovation costs) down in an effort to save money,” according to the RestonNow article. Wow, she scaled them down from $1  million dollars to a mere $687,000 when RA and the Board told the community that the total cost would be $259,000.

Instead of a four-fold budget overrun, we are now looking at less than a three-fold overrun. That’s chutzpah; it is not responsible budget management. I doubt her household runs the same way, but now she, RA, and the Board are spending other people’s money — so who cares?

And the Tetra operating budget/outlook for 2016 is all over the place. Here is what I can find on operating revenues and expenses leading to net operating income/loss for the Tetra property in 2016:

  • The voter’s guide above anticipated $100,096 in facility revenues (net of program costs and including the rent back fiasco with Tetra) and expenses of $45,011 for a net operating income of $55,085 in 2016.
  • The so-called “Board Approved” budget for 2016 created on November 20, 2015, shows operating revenues of $105,110 and operating expenses ballooning to, get this, $203,364 for 2016. That’s a reported net operating loss of $98,254 in 2016 to be offset by a drawdown of Comstock’s $650,000 donation. What this document is saying is that (a) RA and the Board did not know of Tetra’s planned departure six weeks later or hid that fact in its budget approval process and (b) somehow found an additional $158,353 in operating expenses for 2016 which, because they are operating expenses, one would presume would carry on through 2017 and beyond. The only potentially legitimate explanation for the huge expense increase is including mortgage payments ($183,000 per year) as an operating expense, but neither the principal nor interest portion of the mortgage payment should be part of operating income. The alternative is that RA and the Board are really trying to hide one-time capital costs of Tetra’s renovation as operational expenses.
  • Then, in February 2016 (and other early 2016 meetings), the Lake House Working group reviewed a “DRAFT 2016 Lake House Budget.” (Wait, I thought the budget was “Board Approved” in November per above. Oh, never mind.) Anyway, that “DRAFT” budget anticipates $174,262 in operating revenues (and that is without Tetra lease income!) less a little over $7,139 in programming expenses for net facility revenues of $167,123. Other operating expenses total $71,465 leading to a “planned” net operating income of $95,658.
  • The latest incarnation of the operating budget in this week’s Board agenda package (p. 7) shows the “2016 Plan” (not the budget? a plan we’ve never seen?) calls for operating revenues of $58,000 and expenses of $62,000 for a net operating loss of $4,000. It also refers to a “Referendum” operating budget that foresaw a $20,000 net operating profit this year.   As detailed above, the only “referendum” pro forma we saw called for a $55,085 operating profit this year.

So how much does RA really expect the Tetra property to generate in operating income in 2016 now that we are more than one-third of the way through the year–+$55,000, -$98,000, +$95,000, -$4,000, or +$20,000???

From all indications, RA and the Board of Directors are playing a three-card monte con game with Restonians assessment fees, shifting revenues and costs to whatever category best fits their argument at the moment. In fact, I challenge RA to explain fully all the above budget/plan operating income inconsistencies in a manner reasonably consistent with generally accepted accounting practices (and there are others but this op-ed is already too long).

The entire Tetra project smacks of misfeasance if not malfeasance and, in my opinion, those responsible should be held accountable and measures taken to prevent further financial abuses. But none of that can occur unless and until the RA Board of Directors takes the time to examine thoroughly what has happened and, in particular, does not sweep the matter under the rug again by rushing immediately to approve the $428,000 budget supplemental that is being put before it for the first time this Thursday.

In this regard, I strongly support the recommendations laid out in a Reston 20/20 blog post published on Monday. To summarize, it states:

  • The RA Board of Directors should not approve the $430,000 budget addition request by the Tetra Working Group until a full independent investigation of the causes of the massive cost overruns has been completed by a panel of Restonians. No RA staff members, Fiscal Committee members, or members of the RA Board who served on the Board last year should be on the panel. It should have full access to RA financial records and communications about them.
  • Those senior RA staff members who played a significant role in the development of the referendum pro forma statements should not receive a performance award for 2016–nor should they have for 2015. At the minimum, this includes the CEO, CFO, and C/PRC plus other senior RA staff at the Board of Directors discretion.
  • Going beyond Tetragate to the broader picture, the RA Board of Directors must make public immediately the RA Annual Financial Report for 2015 and the auditor’s statement on that report. If they can not be produced immediately, RA needs to issue a full public statement on the causes of the delay and the adjustments that are required. These reports are now two months overdue and, according to recent information, may not be available to the Board (much less Restonians) before the June Board meeting.

Corporations worth hundreds of billions of dollars with billions in assets all over the world and hundreds of thousands of employees can produce an annual financial report in less than three months, not the six months RA is taking for what should be a routine annual task. The greater the delay, the greater the belief that something is seriously wrong with RA’s financial policies and practices.

As this op-ed highlights, nothing happening now in Tetragate ameliorates those concerns about the way RA and the Board are handling our money.

  • Mike M

    OK, problem, huh?

    Let me put on my County Board of Supervisor’s hat since they are really smart about solving “unexpected shortfalls.”

    OK, Got it! How about a Reston meals tax! You don;t mind paying an extra dollar for that burger do ya? What are you? Unsuccessful? You can afford it! I said so. We are an “elite” community here, dontchaknow?

    My RA thinking cap told me to shut down all the pools and double down with a purchase of the “historic” API facility.

    Don’t call me a whiner. Call me, Mike Solution!

  • restonresident

    Well written Mr. Maynard. I fully support an independent panel to investigate this fiasco.
    Please send this op-ed to the Connection and the Washington Post

  • MJay

    Do you think now is the time to begin circulating a petition pursuant to the bylaws to remove each board member who played a role in this debacle (to include supporting the nebulous referendum sales job). Then a new board will go about cleaning up this mess.

    Once the board is replaced, among my initial goals before really getting down to business of reigning in the RA’s current scope are 1) remove the CEO if she doesn’t resign; 2) begin a search for an RA in-house attorney and staff as I believe this can cut the legal bill in half from 600k to 300k while still being effective; and 3) go line by line, employee by employee and start cutting and prioritizing.

    If we get a group capable of initiating the petition drive, I’ll happily shed my internet anonymity and get to work.

    • restonresident

      Great idea. I have not looked at the by-laws, what exactly do they say about a petition?

      • MJay

        The petition for removing the board members for cause is codified in the Deed of Dedication section III.5(d)(1). Basically, we need to get signatures from 10 percent of the members in each relevant district. The “cause” is the Tetra debacle.

        It certainly would be easier if the current board members just resigned, but that appears unlikely. If we want to take back our Association and put it in the hands of responsible stewards of our money, we are going to have to take matters into our own hands.

        • Jamie MacDonald

          I’ll sign.

        • John Farrell

          Several of the members who voted for this fiasco are “at large” so a recall petition will require 10% of all members.

        • copeland shellon

          I live very close and will sign and help with signatures. Need a sheet that gives facts short and to the point.

        • David Nassau

          Do it. This is an outrageous misuse of our dues.

  • Restontimes

    Longest OpEd I’ve ever seen…

    I gave up reading this poorly written piece half way through. I’m sure there’s an attempt to make point, haven’t a damned clue what it is.

    Please do not Mr. Maynard on point for this cause. He’ll put most people asleep before they have an opportunity to take interest.

    I do agree, this matter needs to be looked at carefully.

    • restonresident

      I must disagree, it’s very well written and comprehensive.

      Even if you only read the first few paragraphs you should still be able to see that the issue is that RA is $451,000 over budget on the Tetra property. The overrun is twice as large as the original budget.

    • Terry Maynard

      Actually, RT, I wrote a longer one a few weeks ago. You must have missed the opportunity.

      The key reason this op-ed is long is that Restonians and the Board need to see the details of what’s behind the soft-toned, but soon unmet reassuring promises about the Tetra project.

    • Dodge

      Hard to take your criticism of of his writing skill seriously when you didn’t finish the piece, and included a blatant typo in your own response.

  • Sue E

    Thank you for writing this op-ed. I agree that an independent panel to review Tetra is called for. This is complex and serious enough that a review panel probably should include outside legal counsel in addition to Restonians. I don’t know if these issues arose from incompetence or malfeasance or poor legal and financial advice (or all three), but I don’t have much faith in RA senior staff or Board. The question is how do Restonians move forward to see that the Tetra mess is reviewed and addressed.

    • restonresident

      I must disagree, it’s very well written and comprehensive.
      Even if you only read the first few paragraphs you should still be able to see that the issue is that RA is $451,000 over budget on the Tetra property. The overrun is twice as large as the original budget.

      • restonresident

        my reply is to Restontimes. Pardon the error

  • LakeNewportLady

    Does anyone know why the loan on this property seems to be an ARM? If we are owning it forever wouldn’t a 30-year fixed make more sense?

    • cRAzy

      Just another stupid RA decision to sell the project by giving the appearance of lower mortgage costs. Watch you assessment in 2026!

    • John Higgins

      None of us were privy to the loan negotiations, but under the circumstances (debatable loan-to-value) ratio, this is one of the few aspects of the whole Tetra deal that seems reasonable. This was a commercial loan; unlike home mortgages, 30-year financing is not generally available. I was unsettled by the concept that RA will have to renegotiate at the term of this loan (I think it is 10 years) and finance the balance at whatever the rate is at that time. But on the whole, not a bad deal. Note, that last phrase refers to financing only.

      • edgyone

        Really? when we have record low financing rates not locking in a fixed rate loan seems like a good decision? If there is no other way I don’t know, but if there was a fixed rate option that shows how blind they are.

  • Lake Anne Fan

    Before we summarily execute RA Board and senior staff, it would be best to have a competent independent panel investigate the Tetra matter from its origins through the financial maze confronting RA and the community today.

    HOwever, I do fear there may be other shoes yet to drop. For example, what are the Association’s plans to generate revenue at Tetra/Lake House? I understand the hours of the building’s use will be sharply limited by neighbors’ demands, including no use on holidays like Memorial Day, July 4th, etc.
    Furthermore, given the deficits Mr. Maynard mentions, RA staff is considering rental rates of $250/hour or more, prices that could exclude community organizations, non-profits, homeowner groups, thus leaving us with a facility with revenue deriving mainly from high end-corporate affairs, and possibly wedding receptions. Not so much the genuine community place I would prefer…..

    • edgyone

      A criminal investigation should be carried out. It is unbelievable that anyone would be so stupid as to pay triple what a building is worth and not get a kickback. Money has to have changed hands, someone needs to find it. Otherwise, this is the dumbest group of people ever to sit on a board.

  • Arl Transplant

    You think this is bad? Arlington recently spent over a million dollars on a single bus stop. And they’re building about twenty more! They’ve “sugarcoated” it by saying the other twenty will cost only around $600K apiece.

  • Lisa

    There is an RA Board of Directors meeting on 5/26 and this topic is on the agenda.Anyone can attend the meeting. “7:45 pm Lake House Working Group Status Report & Revised Operating and Capital”

    Budgets

    • Terry Maynard

      Several people have requested that the Board move this topic up on the agenda and give it more time. While I don’t know if the Board will, you may want to arrive when it starts at 6:30PM. Arriving when it begins will also give you the opportunity to make your remarks (pro or con) directly to the Board since they are an order of business.

      Regrettably, I am out of town and won’t be able to attend.

  • Chuck Morningwood

    RA should cut their losses on this dawg. I say, sell it to Hooters. It would make a great place to eat wings.

  • Dodge

    sigh, let me get my pitchfork, hang on…

  • Restontimes

    While I agree this matter needs to be addressed by the Reston board and staff, may I suggest prioritizing your efforts on Special Tax District #5. The RCC — specifically its board — appear to be oblivious to budgets, operating funds, and the concerns of our community.

    At present the STD #5 tax rate for Restonians is $.47/100 of every $100 assessed real estate value. For a home with an assessed value of $300,000 the burden to the homeowner is over $1400 per year. This does not include the additional fees paid by residents for any programming they may choose.

    This is a tax that is placed on top of our existing Fairfax County tax bill. The total tax bill we pay is effectively $1.1137/100 assessed real estate value. This is exorbitantly more than any of our counterparts in the county, such as McLean which is $.22.

    I thank Tammi Petrine for these numbers and agree with her — Restonians are getting the shaft.

    I might add, many of the present RCC board members face major conflict of interest concerns as they sit on multiple boards — boards of RCC’s strategic partners.

    I doubt most Restonians understand the who’s, what’s and why’s of the RCC. I suggest the community put a concerted effort into shining a light on this matter.

    • Guest

      Restontimes really doesn’t want us to look into the Tetra boondoggle. “Look over here, not there,” he yells.

      • Restontimes

        By all means look at the Tetra matter. But, given the issues and the limited interest of the community (low turnout on anything), choose battles with items that have significant impact if they continue unchecked. Tetra is something that needs to be addressed, yes. But the relative community dollars associated with STD #5 and it’s RCC are hugely significant in comparison. And now we’re hearing of a new Tax District associated with infrastructure…where does it stop with the county.

    • Leila Gordon

      I just want to correct the math and understanding of RCC Board of Governors roles posted here from Restontimes. The SD 5 assessment on a property valued at $300K would be a total of $141. (Not $1,400 – off by a decimal point, but the difference is pretty significant.) The difference between the RCC and MCC rate is 2.5 cents per hundred dollars of assessed value. For the hypothetical $300,000 homeowner, that would amount to a difference of $75 per year or $6.25 per month. The scope and breadth of the two agencies’ programs, services and facilities are different and reflect the different characteristics of the two communities that are served.
      RCC Board of Governors’ members are assigned liaison roles to other Reston or county organizations that have mission relationships to RCC. This is how the Board remains in touch with our partner agencies and non-profits in the community. For some RCC BOG members, their involvement with the non-profit or county entity includes service on a board. None of the RCC BOG members nor the board members of these other organizations receives compensation in fulfilling their roles; county and the various organizations’ Conflict of Interest policies apply to them in whatever role they fulfill.

    • Sue E

      I agree with your concern about Small Tax District 5, and the tax is, as you say, more than twice that of McLean. But, just a correction: the tax is .047. A homeowner whose house is assessed at $300k pays $141 not over $1400.

  • Yyyyy hhhhuu

    Remove the board. Prepare a suit, review for criminal fraud referral.

×

Subscribe to our mailing list