Kiahuna Plantation
Association of
Beachhouse Owners (AOBO)
Pool/Fitness Center
Status Report
Aloha Fellow Beachhouse Owners:
As you are aware, the Association has been attempting to
move forward with our project to build a new onsite pool/fitness center and to
complete the much needed improvements to our maintenance yard. The onsite pool
received historic approval from the majority of Beachhouse Owners last year as
well as a bank commitment to lend us funds for construction. An important part
of this process is obtaining the consent of the landowners (Knudsen Trust) for
the necessary construction activities. The terms of our master land lease
require that we obtain this consent, and that we pay for any reasonable legal
fees and costs incurred by the landowners as necessary for them to provide the
required consent.
In October of last year, we received a “Cease and desist”
order from the landowners’ attorney directing us to stop all activity on this
project until they have completed their review and given us consent to proceed.
Consequently, the project has been idle for approximately 10 months.
The process of the landowners conducting their due diligence
will probably become quite costly and be very time consuming. They have
indicated that in addition to their legal counsel, they will require a number
of consultants to review all of the documentation we have provided and will
probably require additional information from us.
At this point, they do not like the location we have
selected for the pool and it seems unlikely that we will be successful in
obtaining their consent without resorting to litigation. This litigation will
be very expensive and most likely take several years to resolve.
In January of this year, John Horwitz representing the
Knudsen Trust and I began to discuss potential alternatives that would allow us
to avoid the lengthy and expensive legal battle. John has offered the
Association a long-term agreement for membership to the Poipu Beach Athletic
Club (PBAC) as an alternative to our building of our own onsite pool in the
Baseyard. The Board of Directors has been working with John for several months
to make this PBAC offer as attractive and risk-free as possible for the
homeowners.
The terms of the PBAC proposal are as follows:
1.
The agreement would be between the AOBO and PBAC
and would supersede the current agreement that is in place with the two major
rental programs;
2.
The agreement will provide a long-term contract
(three years with repeating three-year options) for the duration of our land
lease;
3.
The agreement will provide for a specified dues
amount ($175 for three years and 2%
annual increase after that)over the term of the agreement;
4.
The agreement will remain in force if PBAC is
sold or taken over by another operator.
5.
If we enter into this agreement the landowners
will provide consent for us to continue our project to improve the baseyard
without including the pool component;
6.
If we enter into this agreement we will also
withdraw our request for consent to build a pool onsite and table the pool
portion of the project indefinitely.
Some things that the Board is concerned about if we elect to
enter into this agreement are:
1.
This will be more expensive than the current
projected cost for our onsite pool. Using the rates in the agreement and the
current onsite pool estimates, it is projected that the PBAC agreement will
cost approximately $1.1 million more over the first 10 years. This equates to
approximately $30 per month per unit.
2.
Entering into this agreement will require us to
still be dependent on a third party operator to provide our pool and fitness
amenity. This will leave us susceptible to the PBAC going out of business,
being sold to other operators who may have different business priorities that
conflict with ours, and other issues such as deteriorating quality of the
facilities, etc.
3.
This will still require our guests to cross
Poipu Rd to use a pool.
We are now at the point where the Board needs to make a
decision as to what course of action we are going to take. The alternatives we
have along with their respective pros and cons is as follows:
1.
On-site
Pool/Baseyard Project - Continue with our attempt to obtain the landowners’
consent to build the Pool/Baseyard Project as it is current designed and has
been approved by the vote of the homeowners;
a.
Pros –
i. Location
- This alternative will give Kiahuna homeowners a pool and fitness center on
the property;
ii. Operational
control - We will not be dependent on a third party operator to maintain the
quality of the facility and we will have control over things like hours of
operation, staffing levels, amenities, etc.
iii. Cost
- This alternative is estimated to be less expensive than the PBAC alternative
over time. The projected cost savings over the first 10 years are in the range
of $700,000 - $1 million (including costs of legal process to obtain
landowners’ consent).
iv. Exclusivity
- An onsite facility would be for the use of only Kiahuna owners and guests.
The PBAC will be open to entire Poipu community. This may result in issues of
capacity and/or conflicting priorities.
b.
Cons –
i. Initial
Cost - This alternative will probably require the AOBO to enter into a lengthy
and expensive legal process to obtain landowner consent. This process will
likely take several years and will costs several hundred thousand dollars in
legal fees and other related costs. The legal fees are factored into the
potential costs savings listed as a pro above;
ii. Risk
- There is significant risk associated with the legal process. There is no
guarantee that we will prevail. Our legal counsel has advised us that they
think we have a strong case, but there is no legal precedent for this type of
case in Hawaii, and the courts can be very unpredictable. If we do not prevail
in court, we will have incurred the full legal costs (both ours and the landowners') and will be in the same
position we are in today.
iii. Time
– The legal process could take several years. We will not be able to resume
construction of our onsite project until the legal process has been concluded.
If we opt for this alternative and prevail in court, it may still be as long as
five (5) years before we actually have an onsite pool in operation;
iv. Quality
of Facility - Our onsite facility will probably not have as many amenities as
the PBAC currently has.
2.
PBAC
Agreement - Enter into an agreement between the AOBO and the PBAC and table
our pursuit of the onsite pool;
a.
Pros –
i. Time
– This alternative can be implemented quickly.
ii. Baseyard
approval – The landowners have indicated that if we opt for this alternative,
that they will support our effort to complete the improvements in the baseyard;
iii. Cost
– While more expensive over time, this alternative will be less expensive over
the first several years. Also, with the stipulation of a 2% annual dues
increase at PBAC, the costs are planned and predictable;
iv. Quality
of facility – The current PBAC facility is larger and provides more amenities
than the onsite facility is planned to provide. It has received a positive
response from the owners and guests that have used it;
v. Option
to resume pursuit of onsite pool if necessary – If we opt for this alternative,
we are electing to “Table” our pursuit of the onsite pool. We are not agreeing
to abandon it forever. The landowners understand that if conditions change in
the future we may act to resurrect the effort to build a pool onsite.
b.
Cons –
i. Cost
– While less expensive initially, this alternative is projected to be much more
expensive over the longer term by an amount projected to be in the range of
$700,000 - $1 million over the first 10 years, and dramatically more expensive
after that as the onsite pool financing becomes paid off;
ii. Dependency
on the third part operator – With this alternative we will still be dependent
on a third party to provide the pool/fitness amenity for us. This has been a
significant problem for the Kiahuna owners in the past and has resulted in the
loss of the amenity on more than one occasion;
iii. Availability
– The current PBAC business strategy includes hosting multiple special events
during which some or all of the club facilities will be unavailable for Kiahuna
owners and guests. The exact number of these events, and their restrictions on
Kiahuna use is unknown at this time, but it could be substantial;
iv. Sale
of PBAC – While the intent of an agreement between the AOBO and the PBAC is to
stipulate that the agreement will remain binding upon any new operators for the
PBAC is sold or otherwise transferred, there is an element of risk associated
with the changes that may occur over the longer term. Things like future real
estate development adjacent to the PBAC may greatly impact the tenor and
quality of the experience at PBAC for Kiahuna owners and guests;
v. Location
– Electing to go with this alternative will still require our guests to cross
Poipu Rd for access to the pool amenity. Poipu Rd. is getting busier every year
and the increased real estate development in the immediate area will only make
this situation worse.
3.
Maintain
Status Quo – As with most choices,
there is always the option to do nothing;
a.
Pros;
i. No
action required on the part of the AOBO. The PBAC access remains under the
purview of the rental agents and we continue with what we have;
b.
Cons;
i. Cost
– No contractual cap on costs of PBAC;
ii. Dependency
on rental agents – The current PBAC access is provided by agreements between
PBAC and the rental agents. Neither of those parties acts solely in the interest
of the homeowners and by necessity the rental agents’ decisions are driven by
the profitability of their rental operations. Recent history has shown that the
rental agents have used PBAC as a competitive tool to gain a competitive edge
over other Kiahuna rental programs and this has resulted in a divisive rental
market and negatively impacted rental performance on the property.
It is critical that any decision the Board makes reflects
the priorities of the majority of the AOBO members. Therefore, you will be
receiving an online survey similar to the one that was used recently for the
property management procurement in an effort to capture your preferences and
priorities for this decision. When you receive this survey, please take a few
minutes to respond so that we can be sure to include your response as we make
this important decision.
Aloha,
Your Board of Directors
Posted by Randy Danto Nordstrom
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