What would happen if we default?

This forum is for the open, and courteous discussion of the major decision facing S. B. Residents. Specifically, what are the pros and cons of defaulting or gifting the Shelter Bay Company enough money to pay the back rent and committing us to continue paying it in the future.

What would happen if we default?

Postby sysadmin » Mon Apr 07, 2008 7:42 pm

What we do know and don’t know about the option of defaulting?

Hindsight about buying this for-profit company is a lot clearer than foresight, in this situation.

If we look at Shelter Bay Company, it has annual income of approximately $409K from subleases and $285K from marina income. On the other side of the books it owes $6.2 million in back rent and $1,358,000 in rent each year for the next 5 years. So in the next 5 years it needs to pay out approximately 13 million dollars and has an estimated income of around $3,470,000 for a shortage of $9,520,000, minus reserves on hand of approximately $900,000. At the 2013, 2023 and 2033 master lease adjustments it will become even further in the red. To sum that up its income is about a quarter of what it owes. Any prudent owner of a company in this position would be looking at filing bankruptcy.

Who owes the money? A recent document from the Board of Director’s states “Shelter Bay Company owes the master rent, Shelter Bay Community, Inc. our homeowners’ association, is not a party to the master lease. The community is the sole shareholder (owner) of the Company. Individual members of the Community, whether leaseholders or fee simple owners, are not shareholders of the Company and also are not parties to the master lease.” It would seem that as sub-lease holders you do not owe the debts of the Shelter Bay Company.

If Shelter Bay Company defaults

1. We know that the marina will be managed by the Tribe. We know that the marina docks are getting to the end of their useful life and major expenses in maintenance are necessary soon. We know that dredging is needed soon and it could cost in the area of 4 million dollars. We don’t know if the Tribe would operate the marina in the same rent structure as it is now, but what else would they do with a marina?

2. We know that our subleases are protected and have been approved by the Bureau of Indian Affairs and that the Tribe would become our direct landlords. According to Judge Jordan “ I do agree that if there is a default under the Lease that the subleases would not be canceled and that the Tribe as lessor would not retake possession of the subleased land. The Tribe would become the landlord under the subleases and it appears would be only entitled to the sublease payments from its new tenants. This result was clearly contemplated under the lease and protects both the lessor and sublesses if there is a default by the lessee.”

3. We know what each of us would owe for our sublease up until 2044. We would each owe our lease amount plus an increase every 10 years based upon the Seattle CPI (it was 34% last time).
The average annual lease amount is now $472 Using the 34% increase described above, from 2003 until 2044 the average total cost is approximately $34,447. (compare this number to item 1 below)

4. We don’t know if our current no-cost sublease for the common community property would continue under a bankruptcy of Shelter Bay Company? If not, it would take some negotiations to establish a new value for the common land that we would all pay as part of our assessments.

5. We do not know if the Tribe would push the Company into bankruptcy or would be willing to negotiate some other settlement, perhaps one that would give them a reliable stream of money and the opportunity for sublease extensions purchased as a group for those who wish to purchase them. A bankruptcy judge might try to break the normal “corporate veil” protecting the assets of the Shelter Bay Community. We do not know enough to speculate on this at this time.

6. We do not know what the Tribe would charge to transfer your lease to a new owner. Shelter Bay Co. now charges $250.

7. We suspect that lease extensions after 2044 would be available similar to how they are in Pull and Be Dammed, available on an individual basis. In reality, this is what will likely happen if we don’t default.

8. We do not know if defaulting will have any effect on your ability to sell or the value of your home. Some feel that the value may increase with such a favorable sublease, others feel that the neighborhood would go completely to hell, lowering your value. It seems likely that continued litigation and an “unclear 10 year renewal Lease condition” would not be good, so a final new long term settlement might be desirable.

If we voluntarily gift the money owed from the Shelter Bay Community to the Shelter Bay Company to pay its dept.

1. We know the master rent for 2003 to 2013 has been determined to be $1,358,000. On the average the 870 sublesses would each pay $1,561 per year for that ten-year period. Over the total amount of your sublease (2003 to 2044), a conservative estimate of the total cost to each sublessee, based upon a 3% land value increase per year, would be $128,038. A more realistic estimate, based upon land values doubling every 10 years, might result in each sublessee paying approximately $284,102 in rent by 2044.

2. We know we will be protected from the possible risks in items 4, 5 and 6 above. Therefore, by paying Shelter Bay Company’s debt we are buying PROTECTION for Shelter Bay Community at a considerable cost to all members.

3. We know that the “Tribal Boats” will not be allowed to moor in the Marina, and that we will continue to own and manage it. Again, PROTECTION is what you are buying.

The 1st question to each of you: Is it worth the additional costs to you to buy the protection of the Master Lease and for Shelter Bay Co. to continue to own the Marina? Second, do you want to gain more information and perhaps some independent legal advice before voting on this issue?

Please comment and add your thoughts on this topic.
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Re: What would happen if we default?

Postby hawkeye » Tue Apr 08, 2008 10:25 pm

If I understand correctly what you are saying with regard to future costs, you might want to check your math.

Lease fees are fixed for each 10-year period. The current average lease fee of $472 is good until 2013. Using a 10-year CPI of 34%, the average fee would increase to $632 for the period 2014-2023; $847 for 2024-2033; and $1,135 (not $34,447) for the final 10-year period ending in 2044. So, we are really looking at three increases in the lease rates from 2013 to the end of the lease in 2044. Another way to look at it is to use (1+0.34)^3=2.406*$472=$1,135 for the final 10-year period.

With regard to your use of 3% per year increase in land value to arrive at $128,038 per lot due in 2044, this to needs to be looked at more closely. The value place on the land for 2003 was $19.4 million, of which the master lease is charged 7%, or $1,358,000. Looking ahead 30-years (not 40 years) to the final lease increase in 2033, the final, or last, lease charge would be computed as follows:

(1+.03)^30 = 2.427 2.427 * $ 19.4 million = $47.09 million 7% of 47.09 million = $3,296,222 divided by 870 lots = $ 3,788 per lot (not $ 128,038 per lot)

Also, considering that land values might double every 10-years, this is a 7% annual growth rate over 30 years. The final 10-year (2034-2044) lease rate would be:

(1+.07)^30 = 7.612 7.612*19.4 million = 147.68 million 7% of 147.68 = 10.337 million divided by 870 lots = $ 11,882 per lot (not $ 284,102 per lot).

Perhaps I read your analysis wrong, and, if so I apologize in advance for "checking the math". Thanks for providing this discussion forum. The site should prove to be an excellent way to discuss the issues.
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Re: What would happen if we default?

Postby sysadmin » Wed Apr 09, 2008 7:14 am

You might be completly correct on the RATE of increase, the numbers I was trying to show were what would be the total costs paid by an "average" resident under the current sublease structure and under the proposed buy out of Shelter Bay Companies debt. I will leave it to others who are specialist at math to further calculate what the average person will pay each way for the remainder of their sublease. My point is that it is a considerable amount of money if we go down that road, and such a decision should be made with a lot of thought and information.

Thank you for your comment and welcome to the discussion.
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Re: What would happen if we default?

Postby jdootson » Wed Apr 09, 2008 10:16 am

I was not speaking to the cap on the sub leases, but to the fact that the landlord can charge whatever they wish in the way of fees. Thanks for the input.
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Re: What would happen if we default?

Postby Deecubed » Wed Apr 09, 2008 12:31 pm

This is a question, not a comment ... After attending all four town meetings in February related to the arbitration outcome, I heard several folks ask this same question, and were summarily dismissed by those answering. What about repealing arbitration, and going for a different number? I understand that "honoring" the outcome pf the arbitration counts for a great deal, but now that the deed has been done, and folks are doing the math [thank you all for your very real math examples], the $19.4 million outcome is way beyond the scope of the average resident in Shelter Bay. And I know it would cost SB more money for attorneys, etc. But wouldn't some of the $$$ recouped [reworked numbers by a repeal] be more acceptable than defaulting, and, in the end, an easier bullet to bite?

I know, I know, all the "logical" responses made by the Board and the Management of SB, that by accepting the current arbitration, "good will" is not lost. Good will is fine, if it doesn't undermine my future financial situation, by honoring this extremely expensive "solution." It could be said that sublessees, in spirit, want to make the debt good, but in reality, by repealing, rather than defaulting or financially ruining hundreds of folks [vis a vis potential loss in value of real estate, etc] could be an option to consider, and still maintain a modicum of good will for NOT defaulting, and show the good will we currently have to make right for mistakes made by others in the past.
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Re: What would happen if we default?

Postby daduehning » Wed Apr 09, 2008 1:25 pm

I would like to add my two cents to DeeCubed's comment regarding the Board's position that we "honor" their commitment to accept the arbitration decision. Remember that our board wears two hats, one acting on behalf of Shelter Bay Company and the other acting for Shelter Bay Community. Some might even argue this is a conflict of interest. They had to wear the Company hat while negotiating on the Master Lease, because that lease is owned by Company. The Board reminds us of this fact every time we ask why the Community wasn't informed on the status of negotiations. They reply that it was Company business, implying that the Community had no right to know. Remember, our Board was silent for most of a month even after the arbitration decision. We had to get the details from Channel Town Press and SV Herald. Now the Board puts on their Community hat and tells us that we should feel morally committed to honor their agreement to accept the arbitration value. Why should I feel morally committed to honor anything that I had no say in or information about, especially when the debt is now owed by Company, in which I have no direct ownership nor obligation to pay funds to save it from insolvency?
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Re: What would happen if we default?

Postby Bligh » Wed Apr 30, 2008 2:17 pm

I second Dadeuhings comment.
The apparent secrecy by this board is not tolerable.
Someone propose a more permanent solution so we do not have to suffer from
this again and again.

1) Propose X lease payment for each 10 period. Put in parameters such as "Plus y amt if inflation outside of z % over 3 years" and Minus Y amt if less than z % over 3 yrs"
2) Propose 45 yr lease plus one year after lease payment made. This would get rid of buy/sell problems in the future.
3) Analyze cost to improve and repair Marina and the resulting cost per slip. Determine cost to private slip owners for dredging etc.
Please somebody draw up a plan that makes sense and we will get 20% of SBC signatures to remove board if necessary.
Does anyone know the "average" cost for a land lease? is it 7% per annum?
Isn't that better than having to pay that amount for the land? It should be better. We don't own the appreciating asset.
7% seems a little high to me. We could be borrowing that at 6% or so.
Am I missing something in this evaluation?
I am not an accountant.
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