TBMA president and webinar host Shep Altshuler recently welcomed Gary Porter, president of Facilities Advisors International, and Alex Krakovsky, chief executive officer of Lemonjuice Capital Solutions (pictured above from left), to a webinar focused on roster reconciliation, clearing title, and financial sustainability analysis. Following is an edited transcript of the conversation:
Roster reconciliation
Altshuler: Today, we’re looking at roster reconciliation. For effective resort communications, you’ve got to know who your real owners are, where they are, and the methodology for reaching those owners. If you don’t have an up-to-date roster, it makes communications very challenging, maybe near to impossible. Alex, what does the term roster reconciliation really mean?
Krakovsky: Roster reconciliation is reconciling the association records in land records—recorded deeds—as well as addresses and contact information for owners. If the association does not reconcile its roster, then things may happen with deeds, sales, or transfers that don’t get reflected on association books and records over time. Over many years, that snowballs and becomes a big problem.
Altshuler: When managing data at the resort level, it’s dynamic, people are moving, they’re changing physical and e-mail addresses frequently. Just keeping up with these changes of address and changes of ownership can be a time-consuming and complicated process. How often are those contacts changing, and why is it incumbent upon the resort to stay on top of the process of maintaining the records?
Krakovsky: The biggest problem is when association records diverge from land records, from the recorded deeds. That really accumulates and snowballs and then creates many, many issues. To keep on top of the land records, most are available online, so you can look up the deeds and make sure the records match, so that all the deeds and transactions at the resort are known, so you’re not surprised by a tidal wave of problems in the future.
Of course, owner addresses and contact information need to be looked up. Many associations just ask owners to update their information. If that’s not possible, especially if owners stop paying or if you see a transfer that has not been reported to the association, skip tracing tools are available and companies will do skip tracing for you.
Sometimes, looking up information in the white pages is the simplest way to confirm someone’s contact information and/or whether they’re still living.
A lot of tools are available online that didn’t exist 20 years ago. They should become part of the management process.
Altshuler: A property-management company would have these resources available. For a self-managed resort, modules exist within the property-management software to help maintain and update information as opposed to relying on paper for tracking.
Krakovsky: If you have good property-management software, you can attach a deed and track the title change from the developer to the current owner. Sometimes that becomes a process. If it hasn’t been done for decades, that process becomes overwhelming and somebody with a little experience needs to review the deeds. The resort needs to get on top of that, and make sure they know who really owns and where there’s cloud on the title, so it can be dealt with when needed. Whether they sell a week or the whole property, any cloudy titles need to be addressed.
Altshuler: If the situation requires owner response or even to vote, you need them to respond to something. You need them to pay a maintenance bill. You need them to acknowledge and do something. You need some kind of interaction. Unclean records create delays and complications.
Krakovsky: We’ve had situations where we received reports that a week is now owned by a company called Timeshares No More, Inc., but no deed has been transferred. If we just accepted that report, we would be billing Timeshares No More, Inc., instead of the owner, instead of telling the owner, “Hey, that never happened, so you are still responsible for the maintenance fees.”
Clearing titles
Altshuler: Let’s move on to the issue of clearing titles. Alex, what is a title search?
Krakovsky: Title search is a process by which you confirm that the current owner is the title holder of the property and there is no possibility of anyone challenging that title. It involves checking every deed that preceded the current owner, to make sure that everything was prepared correctly and there are no other liens on the current owner, including tax liens or other claims.
A lot of it should be done as part of the roster reconciliation, but certainly other liens and so-called clouds also need to be added on top of roster reconciliation.
Clear and cloudy titles
Krakovsky: I can give you some examples of clear and cloudy titles. In the chain of title—several transactions between the developer and current owner—there could be a transfer where the husband signed the deed but the wife did not. Or there was a mistake in the name, or a mistake in any other part of the deed, or the notary section of the deed. Sometimes notaries make mistakes. If that happens, then you have a cloudy title and the possibility of somebody coming in and saying, “Hey, I own or have a claim on this property.” Then, even though the risk is low, title insurance companies don’t want to deal with any risk, so the title insurance company will not insure the title.
Any time the association or reseller sells the deed, it’s important that they actually check the title to ensure that everything is clear and clean because it could come back to them, as they often guarantee the deed themselves.
With sunset provisions, if property is to be sold, the title must clean. Keeping it clean over the years is better than trying to get everything done at the very end. It’s complicated because it really does require a lot of meticulous searching of every transaction, of every lien, of every encumbrance, and also a review of deeds. Every deed really needs to be reviewed to ensure that it’s properly prepared and matches the preceding deed (the derivation deed).
As for available tools and services, the most basic is really the land records of your jurisdiction. Very often these land records are online. Title companies or management companies can conduct these searches and provide good information, and suggest how to fix and clear a cloudy title.
If you don’t have a system in place, it could cost you a lot of money, either when you need title insurance for sale of the property or sale of the deed, or if somebody comes back and says, “Hey, I tried to resell this, and I tried to get title insurance and it turns out that that you sold me a cloudy title.” Now the onus is on you to fix it or pay damages.
Deed vs. title
Altshuler: What is the distinction between a deed and a title?
Krakovsky: Those two are separate. A deed is a document that’s recorded in land records. It’s a contract indicating a transaction, that this property was sold from John to Fred. With very few exceptions, your state or county maintains land records. They don’t guarantee that deeds represent clean title—that what was sold had a right to be sold and has no issues. Title is literally the owner’s and/or any other person’s right to the property. That includes possibly a mortgagee’s right to the property, the association’s rights to the property, or some other person’s right to the property whose interest was not properly sold or properly transferred.
I can write a deed to Gary tomorrow for a week somewhere that I don’t own. Gary can go record it. Now he has a deed, but obviously he doesn’t have title to the property.
A deed is not a title. The title search says who has claim on the property and who has ownership of the property, so that when the property is transferred, it is clear exactly what you’re transferring. Just having a deed doesn’t cut it—and that is where the confusion arises in many of these situations where thousands of interests in real property are combined into one property.
You need good lawyers who understand and can address the issues. A full search needs to be conducted and a strategy needs to be developed and planned to clear any clouds or issues, especially if the roster has not been reconciled.
Financial sustainability analysis
Altshuler: Next, we’ll discuss the use of a financial sustainability analysis to plan for a resort’s future.
Porter: Financial sustainability analysis is a long-term cash-flow projection. Based upon the information at hand, it tells us what kind of money will be available in the future and what kind of costs we can expect.
All of the preceding conversation directly impacts the revenues that flow through to the association. Many times when I ask, “Why aren’t all of these intervals performing?” the answer is, “We don’t even know who owns them.”
You need to act on this. You need to know who your owners are, who actually has title. I may have some reserves that are collecting maintenance fees even when a cloudy title exists because of that husband and wife situation where somebody may have died, and there could be a cloudy title, but the person could still be paying.
But the ones that really become a problem are when they’re transferring to another party, and all of a sudden, they get lost in the shuffle somewhere. The resort no longer knows who the legal owner is, who it should be billing. The resort isn’t collecting maintenance fees, and that directly impacts the association’s financial condition.
Resorts need to look at what actions to take to raise revenues. A lot of resorts say, “If we’re not collecting maintenance fees, we need to collect rental income.” So, over the last four or five years, many resorts’ rental revenues increased significantly—until last year. Due to the pandemic, a lot of rental revenues just never got collected.
A third party’s role
Porter: Who is qualified to conduct a financial sustainability analysis? Management company staff can gather all the information, put it together, and create that initial analysis. Many times, I get involved when they come to me saying, “We need an independent third party to look at this.” The board may not want the management company to advise on what the next action should be, and the board may have its own biases, so it’s often important to have a third party look at it and tweak things.
When I’m involved in this process, I look at the fixed costs, the variable costs, and the revenue sources that come into play. Last year was a perfect example of how these things interact. Because of the pandemic, a lot of resorts shut down. Their variable costs were reduced significantly, but the fixed costs never go away. Also, the variable revenue sources dried up, meaning rental revenues dropped—to zero in many cases.
Fortunately, because of the timing, most of the 2020 maintenance fees were collected before the pandemic really hit, at least for resorts operating on a calendar-year basis. We collectively held our breath to see what would happen to the 2021 maintenance fees. So far we haven’t seen any significant impact. People have been paying the maintenance fees with the expectation that the resorts would resume operations in 2021.
When to analyze
Porter: Most resorts don’t look at the financial sustainability analysis until it’s too late. It happens when they’re in trouble, and when they recognize that they need to sort out their financial affairs and determine what action to take.
The analysis should take place long before that, when the resort is performing well, so it can identify the fixed costs, variable costs, revenue sources, and the trigger points when they may need to consider alternative actions.
Many of these resorts were established 30 or 40 years ago, with a certain set of facts, but the dynamics have changed. A resort may no longer work well, partly because of changing population dynamics—the aging of the first owners, and now the second set of owners may have very different needs and desires—and the aging of the resort’s physical facilities.
In my reserve-study practice, we look at deferred maintenance, and what kind of costs will be involved in the future. As we take over reserve studies from other folks, we often see missing components. Most folks fail to consider that the most expensive component in a resort is not the roof, the parking lot, or even the furnishings, fixtures, and equipment inside the unit. It’s the plumbing inside the walls, under the slabs, under the common areas out there.
When you hit the 40- or 50-year mark in the building, those costs suddenly become very significant and potentially very near-term costs. They have an extremely long life, anywhere from 40 to 60 years. Nobody has looked at them, but in an older resort, they must be considered. I’ve worked with 10 resorts over the last decade or so that had to completely or partially replace those very expensive components.
Do we have enough revenue coming in to take care of these things, or do we borrow—and then do we have enough revenue to service the loans?
Reporting, analysis, and actions
Porter: The kind of report generated is a cash flow analysis. The methodology may be different depending upon the resort’s status. For a resort that is performing well, a standard cash flow analysis will suffice. For a resort that is “circling the drain” with too much deferred maintenance, too many non-performing intervals, then we switch to a breakeven analysis. What costs must we not ignore? What costs must we pay? And what revenue sources do we use to get there?
The recommended actions are based upon the results. I’ve referred a couple of resorts to Alex because they are circling the drain. They’ve reached a point of diminishing returns, not bringing in enough revenues to meet needed expenses, so it’s time to consider other actions. Alex and his company look at the real-estate value—the highest and best use of a property. It depends on where a resort is in its timeline.
Preparing that financial sustainability analysis is really the key concept in determining when to take action and what action to take.
Altshuler: Objectivity is important. It’s easy to have a desire and try to squeeze the numbers to fit the desire, but you need professional outside objectivity, through the use of a professional auditor who might work with a board member who happens to be a CPA, but that board member has an interest in the property itself from another perspective. Tell me a bit about the objectivity barrier.
Porter: I think it’s very important—and a board member, even with the financial qualifications to perform such an analysis, also has an inherent bias. Many board members prefer to keep the status quo even as projects age and deferred maintenance builds up. They say, “We want to keep the maintenance fees as low as possible. We want the resort to continue as it is.” But somebody like me, looking at it from a reserve perspective and a financial perspective, perhaps as an auditor, I can look at it and say, “I see a dead-end street here, and action needs to be taken. The sooner that that action is taken, the more benefit all of the resort’s members will receive.” So yes, objectivity is important.
Altshuler: But it could be a positive analysis, that the resort is in a good market. It’s got high demand. It’s got good reserves, it’s meeting budget expectations. So it could be positive sustainability, it doesn’t have to be all negative. I’m sure you see plenty of resorts on the plus side of this equation. Would you agree?
Porter: Actually, I think that’s right. A far greater percentage are performing well and can continue operations well into the future.
We do see a few resorts that have let things slip. They tend to be older properties, and conversion properties. When I look at them, I see a potential for a dead-end street, which may be years in the future—but a lot of these resorts happen to be sitting on some very valuable real estate. Thirty years ago, they grabbed a great location, but the physical facility is no longer desirable in our current environment.
Processes and new solutions
Altshuler: Within TBMA, I’m talking to quite a few recently-elected board members—some within the past few months, some within the past year or two. They inherited a bad situation, but they ran for the board because they saw the problems, and they’re looking toward the future.
While we’re on this topic, I want to flip the conversation over to Alex. Processes don’t happen overnight. Some can take a significant time—several years—if you’re dealing in the short term with a situation of deterioration and sustainability. Can you put into perspective what some of these processes might be, to eventually restructure, repurpose, or re-imagine the resort? If you have a sunset provision coming down the road, that also affects the resort’s future. Some boards may not be paying attention. Time constraints exist, so time is of the essence.
Krakovsky: Sunset is actually a good opportunity for resorts to ask, “What is best for the resort? What is best for the owners, and where are we?” Unfortunately, I have seen some boards say, despite the sunset and deferred maintenance, “We’re gonna kick the can down the road because we just don’t want things to change.”
Well, things have changed. Time changes things. The board needs to honestly ask what is best, and have conversations with professionals. Gary can give a good perspective on the finances and the physical condition of the property. It’s a good way to start asking the question, “Should we change?” Is there room to think about re-imagination, changing the way we approach this, maybe selling the property, or maybe changing the way the timeshares are structured? Maybe it should be quarters, maybe it should be tens. Maybe our declaration needs to change.
Even after deciding what should change, the process to get there doesn’t happen overnight. Whatever you’re going to do with the property, however you’re going to redirect and improve the property, clearing title is important—and that could take time. That’s why resorts need to start preparing for sunset, regardless of what they’re going to do.
The other part of the process is getting to the point where you can make the legal change, whether to sell the property, or restructure. And that may require voting or maybe even a percentage of owners signing some kind of agreement. Maybe not all owners, maybe 60 percent or 80 percent; that would require some legal analysis as well. Without clean title, of course, you don’t know who’s supposed to vote and who’s supposed to sign.
Sometimes it may take asking a court for a decision. Sometimes it may take working with a title insurance company to get their input into the process. If you want to sell the property, it could take two or three years of preparation. If properties are sunsetting in 2024 or 2025, they should start thinking about it now.
Altshuler: I know of resorts with multiple buildings thinking that they may want to operate the property as a hybrid, and that will affect the governing documents. What do state statutes provide? All those require research.
You must work with competent counsel and your professional advisors through all these processes. Some of these resorts are operating under documents that are 30, 40, or more years old, and need updating.
Porter: Just as many Florida resorts have sunset clauses, some resorts in the Palm Springs, CA, area and in Hawaii are on leased land. Those leases expire; they’re fairly long-term, 20, 30 years out, but that raises another question from a sunset perspective. What happens when you no longer continue on a lease? There’s an element of uncertainty. It has been raised to us on the reserve study side, when we say, OK, we’ve only got 20 years left on a lease, but do we reserve for a roof that’s going to be added 30 years from now?
The answer is, I don’t know, it depends on whether you renew the lease. Other options may be out there that we just don’t know about at this point.
For more information connect with:
Facilities Advisors International LLC
Lemonjuice Capital Solutions