Letter of Intent Frequently Asked Questions Question 1: At the CC&R information meeting we were told the proposed amendments were required to authorize the BOD to purchase, annex or lease real property. At the Letter of Intent meeting I believe I heard the BOD president say a CC&R amendment was not required for vote and passage of the proposed purchase agreement with the SGCC. Please clarify the apparent conflict between these two statements. Answer 1: This issue was addressed at both of the meetings referenced in the question. If approved, the proposed CC&R modifications make permanent changes to existing CC&Rs that will apply to the current and all future Boards unless homeowners vote to change these CC&Rs again in the future. These changes clarify the Board s authority to purchase, annex or lease property and establish specific criteria for when a homeowner vote is required to allow the transaction. (The current CC&R s do not specify any dollar amount that requires a homeowner vote.) If approved, the new CC&Rs would apply to all future transactions of the types specified. The proposed new deal with the SGCC is a stand-alone package. If passed, the homeowner vote would approve the proposed deal and authorize the Board to put that specific deal in place. Homeowner approval would apply only to the specific deal that is put to a vote. The approval would not make any permanent changes to the CC&Rs or apply to any other agreements. Question 2: Is there a chance the purchased property could be taken from the SOA if the loan payments are not made? Answer 2: No. The proposed loan will not be a mortgage. None of the purchased property or water rights will be pledged to secure the loan. Banks lending to homeowner associations focus on the association s overall financial strength and its ability to collect assessments in order to make loan payments. Preliminary discussions with banks indicate that qualifying for such a loan should not be a problem for the SOA, especially because the expected loan payment is less than the $15/unit/month already built into our current assessments to pay for amenity access. Thus, we expect to be able to secure the required loan without having to increase current assessments. Question 3: What will the SGCC do with the $2.75 million, and why is this use not specified in the Letter of Intent? Can the SGCC just distribute this money to its equity members? Answer 3: This question is not really relevant to the SOA. When you bought your house or car, did you ask the seller what they were going to do with the money? Would you forgo buying the house you wanted at an attractive price because the sellers wouldn't do what you wanted them to do with the proceeds? The ultimate question that is relevant to all SOA members preparing to vote is this: Is $2.75 million a fair price to acquire the land, the water rights, the water supply infrastructure, and the developer's reverter rights to ensure that the SOA will never lose control of the land throughout our community and to ensure it and the Canyon 9 course will never go brown.
Nevertheless, SGCC representatives have indicated that they intend to use the money received from the sale of their property for the Country Club's business purposes. This includes funding its future operating and capital needs with the key objective of building a permanent clubhouse. The SGCC is a non-profit corporation, and we have been told that its Articles of Incorporation prohibit distribution of income to its members. Having negotiated this agreement at arm s length, it would be no more appropriate for the SOA to try to dictate what the SGCC must do with its proceeds than it would be for the SGCC to put requirements or restrictions on what the SOA must do with the land and water. Question 4: Why is the lease rent set at only $1000.00 per year for 50 years? Answer 4: As the Letter of Intent states, the lease payment will escalate over time. However, the more important part of this question is: Why was the rent payment set at $1,000.00 to begin with? It is important to remember that all of the provisions in the Letter of Intent were negotiated as a whole. It is not appropriate to focus on one provision without considering the impact of others. We did discuss other rent levels during the negotiations. We could have gotten the SGCC to pay a higher rent, but we would have had to agree to a higher up front purchase price or some form of ongoing financial support of the country club by the SOA. In the end we decided it was in the SOA's best interest to keep the price paid ($2.75 million) as low as possible and not to assume further obligations to financially support the SGCC. Also, to the extent that a low rent payment provides a better opportunity for the SGCC to succeed, they will remain responsible to pay for all of the upkeep, maintenance, and repair of the golf course. This arrangement will accomplish the SOA's objectives of keeping the golf course area green and at no further cost to SOA members. Since the SOA is not receiving any income from the SGCC now, we are not giving up anything by setting the rent low. Question 5: 2400 SOA property owners are being asked to enter into $2.75 million debt for 20 years to save the golf course for the exclusive use of 116 golf club equity members, in exchange for the ability to play the course 4 times a year. How is this equitable? Answer 5: This question reflects a fundamental misunderstanding of the proposed deal. From the SOA's perspective, the primary and most important objective of this deal is to protect the integrity of Somersett by making sure that the golf course land does not revert back to the developer to build additional houses or be sold to a third party, neither of which would be subject to Somersett rules and assessments, or simply left to go brown. Another key objective is to gain ownership of the water supply infrastructure that is necessary in order to water the SOA's Canyon 9 short course. The SOA owns water rights sufficient to water the Canyon 9, but most of those rights draw from the Truckee River. The river intake structure, pumps, pipeline, and all the other infrastructure needed to bring that water from the river to the C-9 is currently owned by the SGCC. The SOA does not currently have the legal right to enter, access or operate any of this property. If for any reason the SGCC fails to operate, we face a substantial risk of not being able to maintain and losing our own short course that all SOA members can use. The SOA can neither predict nor control whether the SGCC will be successful years into
the future. What this deal does is protect the future integrity of Somersett regardless of what happens to the Country Club. If the SGCC thrives and is successful, it will add value to the whole community, and the green belt throughout Somersett will be maintained at no additional cost to SOA members. If the SGCC does not survive, all the land and water reverts back to the SOA. Should that happen, SOA members will be able to decide at that time whether they wish to maintain the golf course for resident use or convert it to another form of green space. The fact is that if we do not secure the water rights, even if the SGCC or the developer gives us the land outright, the SOA would not likely be able to afford to water that much land to keep it green in any form without a substantial increase in assessments. The decision to repay the loan over 20 years was made consciously. Regardless of what happens with the SGCC, this deal will benefit the Somersett homeowners for many years to come. For that reason we felt it is appropriate that the cost of this deal is not borne just by the current homeowners. Structuring the repayment over an extended period ensures that future homeowners, who will definitely realize some of the benefits of this deal, will also contribute to paying for it. Also, as Somersett builds out, the monthly cost of servicing the loan will be automatically spread out among more homes. This will help ensure that this deal, which can be paid for without increasing the current assessment, will represent a proportionately even smaller piece of the assessments in the future. These considerations make the deal more equitable for current homeowners. In light of the facts that each Somersett unit owner will be able to play the championship course four times per year, and also has the right to partake as a nonequity member if they wish, this deal in no way saves the golf course for the exclusive use of 116 equity members. Question 6: Who cares if the golf course goes brown? We live in a desert. Answer 6: There are many reasons why all Somersett owners should care about this. The golf course snakes through a substantial portion of our community, and keeping it green provides substantial benefits. It provides an importantly fire break. If the approximately 220 acres of green golf course area were covered with sage brush and other dry growth, the fire danger throughout Somersett would increase substantially. Water from golf course ponds has already been used by Nevada authorities to help battle nearby wild fires, and maintaining those ponds may someday be needed to battle fires within Somersett. The SOA has no say in maintaining those ponds or keeping them full if we do not own the land and water rights. Further, the grass plays an important function of filtering water that runs off into our various ponds and creeks. Also, healthy greenery substantially reduces the amount of dust and dirt blown around our community and helps control erosion. The neighboring Northgate property clearly demonstrates that when a previously green property is left to go brown, it does not just revert to its original desert state. It also tends to foster nonnative plants, including noxious weeds. Also, keep in mind that the SGCC owns all of the water supply infrastructure needed to bring water from the SOA's Truckee River water rights into Somersett in order to irrigate our Canyon 9 course. If the SGCC fails or dissolves for any reason, the SOA does not have the legal right to access SGCC (or developer property if it reverts) in order to water
our own golf course. Finally, the green space of the golf course provides an important aesthetic element of our community. Somersett was designed from the beginning as a golf community, and the greenery enhances many of the beautiful views we see. Many residents have reported receiving positive comments about the look of Somersett from visitors, real estate agents, and prospective buyers. Question 7: Why hasn t a return on investment (ROI) analysis been done for this deal? Answer 7: A ROI analysis is not appropriate for this transaction. The ROI analysis anticipates that the land, water rights and water supply infrastructure are being purchased with the intent to either sell them again to make a profit or use them to generate income, again with the intent to make a profit. This transaction is not motivated by either of these scenarios. The motivation for this deal is to ensure that the properties acquired cannot be developed, operated, or sold outside the control of the SOA. A cost benefit analysis is a more appropriate analysis for evaluation of the proposed deal. A simple cost benefit analysis shows that the $2.75m purchase price for the greenway, water, and infrastructure is justified in order to protect overall Somersett property values. Using $300k as the average Somersett home price means that there is approximately $750m of property value within the community today. Independent studies have shown that there is a positive impact on property values when in proximity to urban parks, greenways and/or golf courses ranging from 1% to more than 20%. Paying $2.75m to protect the integrity of the community and to protect property values provides a benefit of between $7.5m and $150m aggregate value, much more than the proposed price of this deal. Please note that this is a conservative analysis because the average value of a house in Somersett is currently above $300,000, and the benefit to the community will increase substantially as the final 1,000 units are built. http://www.massland.org/files/measuringimpactparksonpropertyvalues.pdf Question 8: What constraints or conditions have been placed on the land with regard to how it can be used if it reverts to the SOA? Answer 8: The SOA has not accepted or agreed to any constraints or conditions as to what it can do with the land, water rights, or infrastructure. Question 9: If the SOA takes ownership and if the Golf Course fails, what will it a) cost to operate it as a public golf course, or b) cost to maintain as green space? Answer 9: Any answer to this question at this time would be purely speculative. If this deal is approved by the homeowners, there would be no costs to the SOA past the initial purchase price to operate and maintain the golf course, as the SGCC will bear all of those costs. The SGCC will continue to bear the operations and maintenance costs per the agreement for as long as it maintains its lease.
In order to answer this question if the land reverts to the SOA, one would have to predict how long the SGCC will continue to operate, which could be anywhere from a few years to multiple decades. One would also have to make multiple assumptions, including future labor and material costs for golf course and landscaping maintenance, and whether homeowners would vote to continue operating it as a golf course after it reverts to the SOA or keep it as a green belt. If maintained as a golf course, would the SOA operate it directly or hire an operating company, would play be opened to the public or kept as a SOA amenity, how many rounds per year would be played, what level of greens fees and cart fees would be charged, what maintenance standards would be set, and so on. If the land is converted to a green belt, how much and what kind of additional landscaping will be done, will any of the land be used for other amenities, and other such questions. Because of the large number of assumptions that would have to be made, any answer to this question would be speculative.