SUPPORTING EXPLANATION FOR SPECIAL ASSESSMENT

BOARD MEETING APRIL 22, 2015

INTRODUCTION

As the Resolution reads, the Finance Committee is seeking approval of a $175.00 Special

Assessment to support the cash demands on the Reserve Fund. With the importance

for financial stability, predictability and soundness of the Reserve Fund, I would hope

and encourage us to focus on the Reserve Fund's financial strength today, not the

anxieties of issues surrounding the restoration of the Lakes Golf Course.

The purpose of my presentation is not to convince you to vote one way

or another, but rather to provide you with information by which you can make an

informed decision. At the March Board meeting, we discussed the technical aspects of

the Lakes restoration project, which lead to the approving of a contract to the

Wadsworth Company.

Today, I want to talk about the financial aspect and the impact on

the Reserve Fund. I will focus first on sources of monies flowing to the fund, and

secondly the golf restoration expenses, golf maintenance equipment replacement costs

as well as the repair and replacement costs for HOA assets.

Keep in mind that this is a cash flow presentation for the year of 2015 only, and does not

speak to the actuarial concepts associated with reserve funding.

REVENUES

The revenues follow the original Financial Plan of August 2013. The

sources and uses of funds with the exception of the increase in the amount of the

Special Assessment, from $125 to $175 are essentially the same.

The annual assessment for the operating year of 2015 is $1,750. There are 4019 homes

owner lots in IronOaks. Included in the $1,750 is $433.50 dedicated as a contribution

to the Reserve Fund. Typically, most associations should be setting aside 15% to 40%

of their assessment towards funding reserves. IronOaks is setting aside 25% of the

annual assessment. If the Resolution passes the combination of the two, annual and

special assessment, increases the percentage of contributions to 32%.

The second line depicting a $100,000 contribution can be confusing. When

the August 2013 plan was written, it was proposed that $50,000 per year was to be

expensed against revenue and transferred to the Reserve Fund. By doing this, an

accounting Principal was unintentionally violated. The principal is called the Matching

Principal which means that expenditures (expenses) used to generate revenue are

charged (matched) to the revenue it generated. Since the proposed expensing of

$100,000, in this case two years, had nothing to do with generating revenue but was

intended to be transferred to the reserve as equity, it played no role in generating

revenue and, therefore not eligible as an operating expense. It is the same tax

application for us as individual tax payers under the tax code. We as individuals are not

permitted to expense the purchase price of say 100 shares of Intel stock from our

earnings and lowering our taxable income. Since the 2014 operating budget

SUPPORTING EXPLANATION FOR SPECIAL ASSESSMENT

BOARD MEETING APRIL 22, 2015, was already in place when the error was recognized, we disallowed the transfer of$50,000 from golf operations to the Reserve Fund for the year 2014, as was originally called for in the financial plan. When the 2015 budget was prepared, $24.88 ($100,000).

divided by 4019) was included in the $1,750 assessment to cover the two years, which

brings the plan back in balance.

The third line is the proposed special assessment of $175 requested by this resolution.

The monies will be deposited in the Reserve Fund to be used to cover expenditures that

will be detailed next in this explanation. The $175 represents a $5 increase over 2014

Special Assessment.

The original financial plan was crafted with a $125 special assessment, but rising project

costs and essential work currently scheduled to be done but not recognized back in

August of 2013, has caused the assessment to escalate by $50. The special

assessment follows the original plan crafted in 2013, although at a greater amount. The

plan calls for two more years of special assessments dealing with catch-up but planned

capital expenditure demands on the Reserve, and is always subject to approval by the current

Board at that time.

The total Revenue line from the three sources is $2,545,562.

EXPENDITURE CLAIMS ON RESERVES

There are essentially three expenditure activities with claims on the above revenue; the

Lakes 9 hole golf restoration, the replacement of golf course maintenance equipment

and repair, and replacement of other HOA assets. Lets look at the Lakes restoration

project first.

The first line is the repair and replacement of bunkers. The $139,144 represents the

projected accrual of assessment monies contributed to the reserve fund. The $63,791

is my best estimate of that portion of the total Wadsworth contract dedicated to the

bunker repair and replacement. The difference between the two numbers represents an

over accrual of $75,353. This is my estimate.

The next item is controllers and sprinkler heads. We have been accruing $667,942 into

the reserve fund. The contractor bid that portion of the the job for approximately

$625,000. The difference between these two numbers is an over accrual of $42,942.

Understand that there are peripheral construction activities surrounding these two

events that could be added to the line item cost. This is my best estimate and certainly

subject to challenge.

The next line item is what I call other work. There is a three page collection of

construction activities, all with a stated bid price, some of which are deferred

maintenance, reconstruction of the 2nd green with its severe deterioration of railroad

ties, mobilization, staking and layout, drainage, tee construction, taxes, etc. None of

SUPPORTING EXPLANATION FOR SPECIAL ASSESSMENT

BOARD MEETING APRIL 22, 2015 which is considered an addition or embellishment to the course. All expenditures are to be used for the Lakes restoration.

It should be noted that when the golf component list, which is a part of a reserve study,

was developed back in January 2013, the only items considered for inclusion, besides

golf maintenance equipment, were the bunkers, controllers, sprinkler heads and the

pump station. These four items certainly do not make up a golf course, but that was all

that was included in the study. All of which are visual above ground items and

considered capital assets. No peripheral course components, such as t-boxes, greens,

fairways, etc. were included in the study. The Reserve specialist took the position of

including line item capital asset replacement method, rather then considering the

restoration as a project, ignoring peripheral costs associated with a total project that are

typically included in the project cost.

As was brought up last Board meeting, Wadsworth Golf Construction Company

has agreed to complete the work under a fixed contract for $1,114,600.

The next line item is the pump station. This contract has been let for $132,883 to

Precision Irrigation, Inc. The pump station contract and the Wadsworth contract brings

the total hard costs of the restoration to $1,247,483. The total soft costs or consultants

fees of $103,600 brings the total project cost to $1,351,083.

Next the golf superintendent has presented requests in his annual budget for $343,065

for the Replacement of golf maintenance equipment separate from the Lakes

restoration. This represents 11 pieces of equipment to be replaced in 2015. The

Reserve Fund has been accruing and receiving contributions for these anticipated

expenditures.

Total projected golf expenditures for 2015 is $1,694,148. Projected assessment

revenue is $2,545,562 leaving a cash flow surplus of $851,414 before recognizing HOA

repair and replacement expenditures. Once the HOA projected expenditures of

$669,265 is expensed to the Reserve Fund, the remaining surplus for the year is

$182,149.

POLICY NON-COMPLIANCE

Reserve Fund Policy states "Reserve Funds shall be used only for the replacement of

specific components identified in the Board approved Reserve Study". (Paragraph F-9)

During the March 20th Finance Committee meeting, when a unanimous vote was

approved to assess the membership a $175 special assessment, the committee

members were reminded that the component list, relative to the Lakes restoration

project, was limited to restoring the bunkers, replacing the pump station, sprinkler heads

and controllers only, with planned contributions of ($991,703) being accrued into the

Reserve Fund for these items. This is obviously less then the total contracted cost of

$1,351,083. The fund was essentially underfunded by $359,380 SUPPORTING EXPLANATION FOR SPECIAL ASSESSMENT BOARD MEETING APRIL 22, 2015. Another resolution covering this underfunded issue was presented at the Board Meeting.

CONCLUSION

When the financial plan was written 20 months ago there were four(4)

 objectives imbedded in the document. One (1), we wanted to incorporate the golf

assets, which at that time were not subject to any reserve provisions, into the the

existing HOA reserve component list, creating one Reserve Fund; two (2), we wanted to

restore the 45 holes of golf over a four year period; three (3) we wanted to replace the

the worn out golf maintenance equipment; and four (4) we wanted the percent funded to

return to the 70% level by 2023.

Since the crafting of the plan, the reserve has consistently improved in financial

strength. If this resolution passes, the percent funded will increase from 47.4% in 2013

to 53.8% in 2015, a 6.4% improvement. The Reserve Fund concept is not a static

document. Some years it will drop in percentage funded while other years it will

increase. It is a long term journey, not a short term plan, to maintain and replace the

long term useful lives of HOA assets.

Robert Nordlund, an acclaimed national authority on reserve methods, has stated that

"If an Association has a Reserve Fund 50-60% funded, there is only a 5.5% chance that

the association will be unable to fund reserve projects" We are at 50%.

Coupled with $6.4 million as of February 31, 2015 in liquid assets, along with the broad

diversification of assets, the Association's financial risk remains minimal. The action

being suggested today does not in any way increase the risk or diminish the financial

strength of the Association's current reserve Fund. We continue to be in a strong

financial position while continuing to implement the 2013 plan. The fund will increase by

$182,149.