Marina Residence -Board/Management Position Statement 2006

 
1. Members were told that the Marina Project would not obstruct views.

· Preservation of present views has been a major concern for the Board and Royal Resorts. The Board and Royal Resorts have done everything that was possible to minimize any change in the views.

· For Marina Project to make economic sense, there must be a sufficient number of units built and a balancing of all relevant concerns and factors.

· Past statements were accurate at the time made, and the intent and the Board’s commitment to members have not changed. However, you may not be aware that the Resort did not obtain a building permit for the original design of 6 stories (developed between 2000 and 2005).

· In obtaining the building permit from the Antillean government, changes were made to the original design, in accordance with the government’s requirements, in an effort to preserve views of Simpson Bay from Billy Folly Road and to change the flat roofline of the original design to a stepped design in order to allow views of Simpson Bay over the different levels. Since the number of units needed to be preserved in order to make the economics of the Project work, the height of the building at some points had to be increased to 8 stories.

· The Board asked Royal Resorts to analyze the economic feasibility of amending the building plan and permit to try and accommodate comments raised by some members, and Royal’s analysis is set forth immediately below. It is the Board’s and Royal’s joint conclusion that any such amendment is not economically feasible, assuming such deviation from the issued building permit would be accepted by the government, which seems unlikely given the government’s criteria mentioned above.

· Financial Impact of Amending the Marina Project. Changes to the Project are estimated to result in US$150-200K in professional fees, additional financing/interest expenses for any delays (approximately US$180K per month, estimated at 6-9 months), and there is no guarantee that the amended design will be granted a building permit. This results in a range of US$1.23M to US$1.82M in additional costs from changes.

· This will also result in higher AMFs overall for all members. The increased costs will also negatively affect the profitability of the Marina Project and the future incomes/cash flows and the long-term fiscal plan for the Resort. Thus, any amendment to the building plan is not a viable option since it impacts the cash flow projections from the Project in a materially adverse way.

· In response to a question raised about the effect if the top 6 or 8 units are eliminated (on floors 7 and 8), the Project will lose approximately US$8M in revenue. The Project fixed costs will need to be spread against a smaller number of units. A ROUGH estimate is a net cost of US$2M to US$4M. Thus, the elimination of units is not a viable option since it impacts the cash flow projections from the Project in a materially adverse way.

2. Why does the Resort need to build/do anything?

· You may not be aware that the Marina Project is the only viable option to improve the financial stability and solvency of the Resort. The major source of income comes from the yearly AMFs. As many members have opted not to pay, we currently do not have enough funds to run the Resort without a bridge loan. The income from vendors is not enough to cover the shortfall.

· Current Fiscal Situation. The current annual budget for operations at the Resort is approximately US$10M. The Resort has outstanding debt for operating purposes of approximately US$6.5M. This is comprised of approximately US$4M of unsecured PCIP debt to members and US$2.5M of secured debt for operations. The Resort also has a secured construction loan outstanding from the same lender of US$8.5M for the Marina Project, which is projected to be repaid from the Marina Project proceeds. Therefore, the total debt of the Resort is approximately US$15M. In addition to this, the Resort’s needs for capital expenses, including common areas, systems and unit renovation will be at least US$8M.

· Last Year’s AMF Increase was Part of the Long-Term Fix, Not the Entire Solution. Last year, the Board approved a 15 year plan to restore the financial condition of the Resort. This plan included an increase of approximately 20% on the 2006 AMF and increases of 3% in each of the years 2007 through 2010 to gradually liquidate the current yearly operational cash flow deficit of approximately US$2.5 million. The remaining PCIP debt of US$4 million is projected to be paid off in the years 2012 to 2014, which is the time when the distributions of profits from the Marina Project are projected to start. The total distribution of profits from the Marina Project are estimated at US$8 million. In addition, in the years 2006 to 2020, the Resort projects to undertake capital investments in the existing buildings costing approximately US$16 million and to create reserves by the year 2020 of US$1 million. Therefore, the current fiscal situation at the Resort is consistent with the projections for the long-term financial planning at the Resort. Furthermore, the percentage of members who have not paid their 2006 AMFs is currently 5.3% of the total billing, better than the 6% budgeted as uncollectible for the year 2006 (which was based on historical numbers).

· Possibility of Assessment. One consideration is assessing members as a means to address the Resort’s current fiscal situation. The total base of intervals paying AMFs is approximately 17,500. By way of example, if an assessment of US$1,500 is levied per interval, we project (based upon historical figures) that 15-35% of members will not pay the assessment and their memberships will need to be foreclosed. This results in approximately 11,375 to 14,875 intervals paying the assessment which yields US$17M to US$22.3M. This yield plus the current AMFs collected from these intervals (which would also need to be increased - see item immediately below) does not fully cover the sum of the current annual operating budget, the outstanding operating debt, plus the Resort’s needs for capital expenses. Further, this scenario will produce very unhappy members and an increased downwards spiral due to ever increasing AMFs (primarily due to empty units and increased financing expenses), additional defaults/foreclosures and added difficulty in selling foreclosed units. Accordingly, an assessment is not considered as a viable option.

· Possibility of Increasing AMFs. An increase of at least 20% to 30% per interval would be necessary in order to address the Resort’s current fiscal situation. If we use an average AMF of US$700 per interval, this means an increase to between US$840 and US$910. This would be in addition to the assessment described immediately above. We project that 15-25% of members will not pay the AMFs and their memberships will need to be foreclosed (as compared to the current default rate of approximately 6%). This results in approximately 2,625 to 4,375 intervals NOT paying the AMFs which means the Resort loses US$2.2M to US$3.98M per year. This scenario will produce very unhappy members and an increased downwards spiral similar to what happens with a large assessment (note that Pelican’s AMFs are already among the highest in the Caribbean). Accordingly, increasing AMFs to the range necessary to close the fiscal gap is not considered as a viable option.

· Build the Marina Project. This option was agreed upon by the Board in July 2005 as the most viable way for the Resort to raise funds to meet the ongoing operations budget, fund capital improvements and a reserve, and repay existing debt.

· Resort has already invested US$1.5M in labor, materials and contractors for the Marina Project (sunk costs).

· The Board has carefully looked to all other viable sources of income in order to meet the cash needs of the Resort, and will continue to do so.

· If the Marina Project is not built in accordance with the current plans and designs, or is not built at all, due to litigation brought by some members, it is likely that the Resort will need to close since it will be unable to meet its operating and debt obligations. In this case, all members will lose their units and rights. Over 200 families of employees at the Resort will also lose their jobs.

3. How are members who may be losing views going to be compensated?

· The building plan represents the best possible balancing of all relevant factors. Given the land topography, the Marina Project will block views of the Marina Plaza and waterfront where boats are docked (to the left of the Croton and D Buildings). However, this has been the case even under the prior building plans from 2000 to 2005.

· It is not possible to “compensate” any members.

· You are probably aware that the costs of “compensating” some members are borne collectively by all members of the Resort. The Board must, therefore, balance the interests of all members in fulfilling their duties and determining what is best for the Resort and all members as a whole.

· You are also probably aware that the same analysis applies if some members choose to pursue litigation. The legal costs will be borne collectively by all members of the Resort, and as stated previously, this could very well close the Resort and result in a loss to all members.

4. Under the current building plan, what units are going to have their views affected?

· The Board has been told by Royal that, to the best of Royal’s ability, they estimate that 10 units in Croton will have full blockage: C1B, C2B, C3B, C4B, C5B, C6B, C7B, C8B, C9B and C10B.

· There will be 13 units in the Croton and D Building with partial blockage: D17, D18, D19, C1A, C2A, C3A, C4A, C5A, C6A, C7A, C8A, C9A and C10A.