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Subject: Subsidies to Non Residents of HOA
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DennisW7
(California)

Posts:12


07/01/2016 4:22 PM  
My HOA ownes and operates a restaurant and bar in our community that is open to both residents and non residents. These facilities operate at a loss year after year. The loss is obviously made up by our HOA dues. As a result, the non residents are receiving food and beverages at a subsidized rate. We owners in the HOA are paying for this subsidy. My question, do HOAs have the authority to use HOA funds to subsidize the good and services consumed by non residents?

Your thoughts would be greatly appreciated.

This is an HOA in California.
LarryE3
(Colorado)

Posts:39


07/01/2016 4:50 PM  
Dennis,

I assume that the bar / restaurant is (or at least should be) a for-profit business?
If so, then it really shouldn't matter if the customer is a member or non-member. The real focus should be on how to make the business profitable.
DennisW7
(California)

Posts:12


07/01/2016 6:32 PM  
Hello Larry. Actually our HOA is a not for profit organization and the BOD views the restaurant/bar facilities as an amenity similar to the tennis courts, pickle ball courts, fitness center, etc. The only difference is the restaurant/bar facilities are open to the public while all other facilities are for the exclusive use of the residents.

As such, the BOD has no interest in making a profit, and they would be happy if it just broke even. Last year these facilities lost $130,000, all covered by the dues paying members of the HOA. So, HOA members subsidized the non resident customers of our restaurant/bar facilities. Here is another interesting story, despite losing $130,000 last year, $70,000 was expended on bonuses to mostly management of the F&B business line. Amazing!

Dennis
TimB4
(Tennessee)

Posts:17830


07/01/2016 7:25 PM  
The membership can vote to close due to the losses.

Gather support and have it placed on the agenda at the annual meeting.
I'd suggest an amendment that defines these entities as income generation vs. an amenity to be maintained by the Association.
Utilize the cost savings per individual owner to gather support.
DennisW7
(California)

Posts:12


07/01/2016 10:34 PM  
Thanks, Tim. But I am curious if an HOA can use dues paid my members to subsidize the food and beverages of non residents?
LarryE3
(Colorado)

Posts:39


07/02/2016 7:22 AM  
Dennis,

I would think that the members can spend their money anyway they would like. I assume members can bring in guests to enjoy your other amenities, so in some way you are already subsidizing non-members since they don't contribute to any maintenance costs for those amenities. One thing you could do is to have member and non-member costs in your restaurant/bar. $130K loss and a $70K bonus.... I'm in the wrong line of work!
TimB4
(Tennessee)

Posts:17830


07/02/2016 7:44 AM  
Dennis,

Are you in a golf community?

Is the Association still under control of the Developer?

How many lots are in your Association?
I ask because a $200K loss divided amongst 200 lots ($1,000 per lot) is different then $200K loss divided amongst 2,000 lots ($100 per lot).
JamesG11
(Florida)

Posts:118


07/02/2016 8:19 AM  
I can't comment on what CA law does and does not allow, but the HOA membership is under no obligation -- absent a contractual commitment made for a fixed period of time that has not yet run -- to continue loss-generating activities.

I suspect that if the governing documents placed prospective homeowners on notice of the fact that dues would be used to -- among other things -- operate a restaurant and bar, then you are stuck with what the governing documents prescribe.

In any event, this is an issue on which you need to seek the advice of an experienced community association law attorney in your area of CA. A sharp attorney can often find loopholes in the governing documents not evident to mere mortals... ;-)

MarkM31


Posts:0


07/02/2016 8:52 AM  
It's not really subsidizing non residents, it is subsidizing people who eat at the restaurant. A resident who never eats in the restaurant is out of pocket much more than a member who eats there three times a day.

Another aspect is what, if any, other ammenities are rolled up with the restaurant. For instance if you had a pool, restaurant, bar, golf course and valet parking all operating in one complex but as seperate line items it would be unfair to be angry if the first four showed a profit of hundreds of thousands while the valet parking operated at a net loss.

So the bigger picture is always nice for us to know, but it may be time to raise the rates at the restaurant. Such a place should operate at a profit or much closer to break even than it is now doing.
NpS
(Pennsylvania)

Posts:4216


07/02/2016 3:32 PM  
Some costs are variable. Some costs are fixed.

The variable costs can be eliminated if you close the business. The fixed costs may not go away when you close the business.

You might want to compare the income against the cost of food and staffing to get a better picture on whether eliminating the business would actually eliminate the loss that your records are showing.


Sikubali jukumu. Read all posts at your own risk.
DennisW7
(California)

Posts:12


07/02/2016 3:38 PM  
Thanks, Mark. The restaurant and bar are part of our Food and Beverage Business Line, which also includes catering. No other amenities are included.
DennisW7
(California)

Posts:12


07/02/2016 3:39 PM  
Good suggestion, James.
DennisW7
(California)

Posts:12


07/02/2016 3:40 PM  
Tim. We are in a golf community for seniors. It is Sun City Lincoln Hills, with about 6800 homes and 11-12,000 residents.
DennisW7
(California)

Posts:12


07/02/2016 3:46 PM  
NpS - Our food and beverage business line pays no fixed costs. There is no charge for the value of the space, no charge for utilities, no charges for maintenance of the facilities, no insurance charges. They only cover the cost of food, labor, and miscellaneous expenses. In 2015, food costs were 34 percent of revenue, labor costs were 60 percent of revenue, and misc. costs were 15 percent of revenue. Simply amazing for sure to lose that much money, and they are on track to lose about $200,000 this year.
NpS
(Pennsylvania)

Posts:4216


07/02/2016 4:40 PM  
Posted By DennisW7 on 07/02/2016 3:46 PM
NpS - Our food and beverage business line pays no fixed costs. There is no charge for the value of the space, no charge for utilities, no charges for maintenance of the facilities, no insurance charges. They only cover the cost of food, labor, and miscellaneous expenses. In 2015, food costs were 34 percent of revenue, labor costs were 60 percent of revenue, and misc. costs were 15 percent of revenue. Simply amazing for sure to lose that much money, and they are on track to lose about $200,000 this year.



Do you break out:
1. Food
2. Alcohol
3. Catering

Sikubali jukumu. Read all posts at your own risk.
DennisW7
(California)

Posts:12


07/02/2016 5:11 PM  
food,non alcohol, liquor, wine, and beer costs are identified under separate line items. Costs for catering are not. Revenues for catering, bar, and restaurant are separate line items, but labor costs and misc expenses are simply combined. As such, you can never determine which of the three are making money or losing money.
NpS
(Pennsylvania)

Posts:4216


07/02/2016 5:28 PM  
Just a comment on what you've described -

You've attempted to draw the line between residents and non-residents. I don't think this is the right approach.

Your staffing costs are probably the same whether or not you allow non-residents.

Therefore, when thinking about non-resident patrons, you should probably consider only the 34% food/beverage cost. That's probably profitable business for you.

Your real problem is that you don't do enough business to cover your staffing costs.

Industry standard labor costs usually run 30 to 35 percent of sales. 10 percent of that amount often goes to management.

Looks like you would have to double your sales at current staffing levels for the business to be viable.

If that's not feasible, pursue shutting it down.


Sikubali jukumu. Read all posts at your own risk.
DennisW7
(California)

Posts:12


07/02/2016 5:44 PM  
Agree, NpS. Labor costs are so high above industry standards it is beyond belief. The best approach many in the minority want to see happen is to contract the facilities out for them to run as a for profit enterprise. Closing down is not an option due to the significant size of the facilities. Here is a link to our HOA web site and you will see what I mean. There is also a link to our restaurant, Mederians.

http://suncity-lincolnhills.org/

http://www.meridiansrestaurant.com/

NpS
(Pennsylvania)

Posts:4216


07/02/2016 6:16 PM  
Beautiful facilities. Nice menu - maybe under priced but I don't know the market.

Lots of hours = high staffing costs. Lots of options = management complexity.

Renting it out could be an option.

Another option is changing the manager's comp plan to create incentives for bringing in new business.

I'd probably try the latter approach first. (Easier to readjust if you change your mind later).

Goal 1: Get more heads coming in. Residents/Non-Residents shouldn't make a difference.

Goal 2: Get more dollars per person seated. A good manager should know how to do this.

If you don't have these metrics now, put it on the manager to start measuring them.

You should know how many people show up each day for each service type.

Another option - Shift the some of the responsibility for the shortfall onto the golf club. Require the golf club to bring more business into the restaurant.


Sikubali jukumu. Read all posts at your own risk.
JohnC46
(South Carolina)

Posts:11641


07/02/2016 6:28 PM  
You are not just subsidizing non residents, you are subsidizing everyone. Make it profitable or shut it down.
DennisW7
(California)

Posts:12


07/02/2016 6:29 PM  
Very good suggestions, NpS. Much appreciated.
NpS
(Pennsylvania)

Posts:4216


07/02/2016 8:10 PM  
Be sure to let us know what you do and how it works out.

Sikubali jukumu. Read all posts at your own risk.
TimB4
(Tennessee)

Posts:17830


07/03/2016 4:03 AM  
Posted By DennisW7 on 07/02/2016 3:40 PM
Tim. We are in a golf community for seniors. It is Sun City Lincoln Hills, with about 6800 homes and 11-12,000 residents.




Ok. With golf communities, it is often the responsibility of the Association to maintain. This tends to become more difficult if there aren't enough golfers (hence the likely reason to open the club).

200K loss divided by 6800 lots = less then $30 per year per lot to have those amenities.

Members who utilize the facilities likely don't see that as a big issue.
Members who see the big picture see it differently.

NP offered good suggestions.
JohnC46
(South Carolina)

Posts:11641


07/03/2016 5:58 AM  
Dennis

You might start asking around other Sun City locations as to how they handle food and beverage. I know in Sun City Hilton Head, F&B are contracted out to a Chicago based F&B Group. I believe they pay Sun City to lease the facilities thus they are a profit center for Sun City.

DennisW7
(California)

Posts:12


07/03/2016 7:39 AM  
Well said, Tim.
DennisW7
(California)

Posts:12


07/03/2016 7:40 AM  
I will look into that, John. When the subject of contracting the facilities out comes up, they always tell us it is impossible to do and we will lose all control.
TimB4
(Tennessee)

Posts:17830


07/03/2016 7:54 AM  
Posted By DennisW7 on 07/03/2016 7:40 AM

When the subject of contracting the facilities out comes up, they always tell us it is impossible to do and we will lose all control.




You will lose some control.

Having the control appears to be costing the Association $200K per year.
Might be worth seeing what the loss would be if someone else had control.

Note: You can add into any lease that members of the Association receive a discount.
NpS
(Pennsylvania)

Posts:4216


07/03/2016 8:23 AM  
Who runs the golf clubs?

Sikubali jukumu. Read all posts at your own risk.
LarryB13
(Arizona)

Posts:4099


07/03/2016 9:37 AM  
Dennis,

The crux of the problem is that the amount of loss per home is about $2.50 per month. You are in an upscale 55+ development and you seem to be the only person worried about this loss. Being well past 55 myself, I know that no matter how much a loss like that bothers me that I would rather accept the loss and live my life in peace instead of fight over it for the rest of my life. I am not arguing that you are wrong to care; I am just saying the loss is so minuscule that you are going to find few allies.

JamesG11
(Florida)

Posts:118


07/03/2016 10:11 AM  
Good points shared by Tim and Larry.

My personal/philosophical take on this issue, FWIW: since this is obviously not an emergency/urgent situation, time is your friend and not your enemy. Therefore, take adequate time to recruit and appoint a special committee comprised of successful businessmen and women -- including as many as you can find who have backgrounds in the restaurant/bar industry -- and methodically investigate alternatives to the status quo.

Consider how other local and state restaurants/bars with similar local demographics operate, and learn from their experiences - both positive and negative.

Consider as well a substantial number of nationally/regionally established franchises offering a comparable menu (I don't know your demographics, but there's a wide spectrum of them to evaluate: Chili's, Applebee's, Friday's, Outback Steakhouse, Bonefish Grille, Longhorn's Steakhouse, Olive Garden, etc.) and take the time necessary to find out whether any/some/all of those options would likely prove both a community-supported and cost-effective option (including, of course, a successive polling of your community ownership and residents as the options are narrowed down over time and as initial polls are completed).

Explore as well the possibility of contracting with an owner-backed entity -- assuming there are any owners who are interested in owning/operating such a restaurant/bar business -- who might offer some unique offerings, e.g., karaoke nights, live music nights, comedy nights, poker nights, bingo nights, trivia nights, family movie nights, etc., that might have additional appeal to your community.

Obviously, the effectiveness of this process will be dependent upon the number and calibre of volunteers willing to serve on the committee, as well as the realistically viable options in your geographic market (for example, there will be far more options to choose among in a greater metropolitan area vs. a smaller, more isolated market).

Just my 2 cents...

Good luck!
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