October 12, 2006
Dear Atrium Members:
By now, you should have received your annual maintenance fee assessment along with a letter regarding the special assessment fee. We would like to provide additional information to better clarify the purpose of the special assessment as well as the increase in the basic maintenance fees. We have outlined the following information that should help you better understand our intentions.
1. Developer and Management Companies – As the developer and manager we can assure you the sole purpose of these funds are to place the Atrium Resort on solid financial footing and to make significant improvements in a 13 year old building. All funds are held in accounts for the Atrium and used exclusively for the operations, repairs and improvements of the resort. The only compensation to us is the management fee for overseeing the timeshare, hotel and general operations and for providing accounting, administrative and owner services.
2. Maintenance Fee Increase – when we purchased the remaining inventory at the Atrium, the need to increase the maintenance fees became very clear for several reasons:
a. Until the past few years, the prior management was able to generate significant rental revenues (the resort operations continues to receive all rental income) on unsold intervals that subsidized the overall resort operations. As the resort has neared sell out (especially the winter season), the rental revenues decreased but the maintenance fees collected on those sold intervals were much lower. This created a structural deficit. Likewise increased transcation fees with our credit card processor has also created this deficit.
b. To compensate for this structural deficit, prior management funded the deficit each year but repaid itself from the next year’s income. This cycle continued as Festiva advanced the resort $300,000 in 2005 and was repaid in February. For 2006, Festiva has already advanced $235,000 and anticipates advancing another $170,000 before year end. We are not inclined to continue this cycle of advance and repayment and believe the increase in maintenance fees should resolve it.
3. Special Assessment - Upon assuming control of the Atrium, we met with the general manager to discuss her needs, concerns and property issues. After many months of conversation and property inspections, we received an itemization of improvements and other requirements of funds. The broad issues were safety and structural repairs, room décor and lack of reserve funds. We made the decision to assess a one-time fee based on what was right for the entire membership base. Some of our reasons are as follows:
a. The resort, as noted above, has lived with a structural deficit for many years and has never maintained a reserve fund for unexpected expenses. In addition, the resort does not carry hurricane insurance as the building is concrete and equipped with hurricane shutters. After weighing our options, we believe that a reserve fund is necessary to deal with the cleanup of a natural disaster or any other unexpected expenses. With the general manager, we believe a minimum reserve fund of $500,000 (3 years of insurance premiums) is required. This will be accomplished through the special assessment.
b. As stated above, not having reserve funds has cost the membership this year. Electricity is extremely expensive on the island but the resort is able to save $240,000 annually by using a generator. Unfortunately, the resort only had one generator in operation and when it crashed in February, six months passed before a replacement was located and installed. Without a generator the operating cost of the resort increased by $120,000 for just that six month period. We will invest almost $200,000 of the special assessment to acquire a backup generator and upgrade a dated electrical system. This will ensure that the resort will always have an energy efficient system with significant long-term cost savings.
c. New televisions were acquired on a long-term lease based on certain revenue projections being obtained. Those projections are not being met and the lease payments are a burden to the operations. We will be using the special assessment to pay off this item eliminating the long-term burden. The cost of this payoff is approximately $150,000.
d. Working with the general manager, we have discussed a number of room and building issues that will need to be addressed in the near future. These include updating the water purification system, completing the kitchen renovations, furniture replacements, exterior painting and repair along with many other areas. The general manager worked with local and U.S. companies and has documented the most critical needs for guest comfort and safety as well as needs for updating the appearance of the resort rooms and common areas. She has provided a detailed report covering over $2 million of needed improvements. If 100% of the special assessment is received, all improvements will be made. If less, the areas will be done in order of priority beginning with safety followed by comfort and general improvements.
We hope this letter provides more clarity for the purpose and intent of the general maintenance fee increase and special assessment. We hope that after much of the improvements have been made to the property, you will agree that it was money well spent.
Chief Executive Officer
Herbert H. Patrick, Jr. CPA