Flawed Math and Flawed Logic

We continue to find that the Board and RML use VERY flawed math and logic to justify many of their actions.  It is not clear if they do this out of ignorance or as a way to deceive and manipulate the owners of Deer Ridge.

The Email

Maybe you can tell by reading the following email that was sent to Vic and Joe:

From: Robert
To: Deer Ridge Mountain Resort
Subject: Management Company Issues
Date: 12/29/2005 4:19:31 AM

Joe and Vic, 

We have several issues with the content and attachments you sent in your email to us on December 21:

•  Firstly, we never received, during our due diligence investigation prior to our purchase at Deer Ridge, a copy of the March 22 letter and ballot that was sent to owners.  We apparently received all other communications to owners that was sent in 2004 and up to July 2005 but did NOT receive a copy of the March 22 letter and ballot.  We see this as a material omission in providing us with adequate disclosure - especially since we had specifically requested a copy of ALL correspondence that was sent to the owners for the two years prior to our prospective purchase.

•  We see the ballot that was sent to the owners as severely flawed by significant bias and the resulting vote as a vote AGAINST implementation of the management company prime time excise tax versus the board interpretation that it was approved by the owners.

•  The ballot only listed the two options that RML wanted and did not even include an option for there to be no change - let alone other options that would not place a burden on the owners.  Write in ballots always have less response - but even in this case 15% of the returned ballots voted against the two proposals of RML.

•  Only 28, or 37% of all owners at Deer Ridge, voted in favor of the "market survey"...not even a majority of all owners and certainly NOT a mandate.  Plus, it was couched in terms of only being a survey not a binding vote.

•  We believe that the bias in wording and the limited choices contributed to even this high a vote by the owners.  We notice on the Owners' Forum at the web site that others have had substantial objections in the past to management's bias in tone and wording with prior ballots, surveys and correspondence to owners...and we see this ballot's bias resulted in a flawed result.

•  It was not clear that the "survey" was sent to all owners or just those in the rental pool.  Since the actions and fees of RML affect ALL owners via the marketability of their units, ALL owners should have a direct up or down vote on this issue, including the option of NO change.

We hereby request that this bias be stopped and only a fair and even-handed approach be used with regard to all correspondence, "surveys" and votes in the future.

As bad as the March 22 ballot was, the accompanying spreadsheet that implied a potential loss of revenues of $76.000 to the management company is GROSSLY FALSE, MISLEADING AND DECEPTIVE and not at all reflective of rental realities:

•  Just because prime time days were used by owners does NOT mean that the management company would have been successful in renting ALL of them for ALL of those nights.  This is what your spreadsheet assumes!  This is especially nonsensical on a property that suffers from an economic occupancy of less than 40%!

•  Last time I looked, the average economic occupancy of the property was around 38% year round and much less than 100% even during prime time.  So, to use a spreadsheet that assumes 100% economic occupancy is fraudulent!

•  In fact, the only way that the projections in your spreadsheet would be meaningful is to only show loss rental ONLY for those prime time days that all non owner used units of the same type were 100% occupied for that day.  This analysis has to be done on a daily basis for every unit type, for each and every day in all prime time parts of the calendar.  Otherwise, the management company still had unused inventory of units and were not negatively impacted by even a single dollar by the owners using their own unit.

•  Of the 651 prime time nights used by owners, my guess is that less than 20% of those nights would meet the 100% occupancy criteria above.  If that estimate is correct, then the total loss of revenue would have only been about $15,000 TOTAL ....with half of that due the owners and the other $7,500 due as incremental management fees....certainly not the loss of $75,000 that was shown in the misleading spreadsheet.

•  The owners obviously had made their choice to lose their portion of this rental income when they decided to use their units during prime time.....so the ONLY issue is that the management company would have lost an extra $7,500 for the whole year for ALL the owners who used their units during ALL prime time for the whole year! 

All in all, this is a very small number...and THIS is the number that the owners should have seen in the analysis without the specious and wholly misleading spreadsheet that was sent.

You used the same flawed logic in your analysis in your email to us:

•  You wrote, "I'd like to illustrate the effect that A-202's 29 days of usage (in October 2005) had on the management company. First a few facts, the average daily rate for the 1BR's during October was $93.94. The average number of nights the 1BR's were rented during October was 19. 19 nights X $93.94 per night equals $1784.86. The management company lost 50% of that total or $892.43. The bottom line is, the management company was out almost $900 with no way to recoup the lost income."

•  Firstly, again, my goal is NOT to maximize the management company's income...it is to maximize our enjoyment of our mountain home with the management function ONLY to generate income when we DON'T want to use our own unit.

•  Your numbers erroneously assume that, incrementally, our unit would have also been rented out for EVERY one of those 19 nights in October you quote in your analysis.  How many of those 29 nights we used our own unit in October were EVERY available 1/1 unit rented?

•  Unless EVERY one of the non owner used 1/1s were rented for a particular night, then there was ZERO loss of revenue to RML for us using our unit for that night!

•  Likewise, now you want to charge us to use our own unit.  You want to charge $25 a night for all 29 nights we used, or an excise tax of $725...even though the average was only 19 nights!

•  Additionally, let's assume that 6 of the 1/1s were used in October by owners enjoying the use of their unit at the prettiest time of the year at Deer Ridge.  How deep was the demand for 1/1 units?  In other words, if 6 owners were using their units and you did have some of those nights where ALL of the non owner used units were in fact 100% rented, was the demand FOR THAT ONE NIGHT sufficient to fill 1 of the 6 owner used units?  2?  All 6?  How many of those nights were there sufficient demand to use all of them, assuming that all the other non owner used units were rented?  An accurate and appropriate analysis would take this count into effect also.

•  Bottom line is that the March 22 "survey" ballot was false and the accompanying analysis so severely flawed and deceptive that the results of the "survey" are completely meaningless.

Since the misleading spreadsheet was SO misleading and the "survey" SO biased, I hereby request that the same spreadsheet be redone properly, except this time taking the 100% occupancy on all available inventory approach discussed above into account.  Let's see if my estimate of 20% was correct or not...and let's see exactly how much the management company might have lost in 2005 from owners actually using and enjoying their unit.

In the meantime, we hereby make the demand of the board and of RML that this $25 a night "excise tax" be immediately reversed and negated on all RML agreements.

We future demand that a new vote of ALL owners be taken with this new proper analysis along with me being able to include in the mailing a dissident's view so that ALL owners have an opportunity to understand the real facts.

With regard to the management company's "survival", I suggest the board immediately investigate the following:

•  Instead of penalizing the owners for using their own units, how much would be saved by cutting back one member of the maintenance or office staff?  What if the staff was reduced by two?

•  My near three decades of experience as a CEO and management consultant, and over 15 years running a property management company, has shown that virtually EVERY organization can reduce staff by 10% without dramatically impacting the operation of the business. 

•  While it may seemingly be easier to over staff a management operation to cover every possible contingency, it does not appear that RML can afford that luxury without severely penalizing the owners.  I believe it is time for a very through audit of the management company and its underlying tactics, strategy and operating costs.

•  Based on the most recent 2006 budget estimates I have seen for RML, the total payroll costs is estimated at $428,100 a year or nearly $36,000 a month.  This represents about 49% of the estimated $880,000 of revenue that RML is currently projecting to receive in calendar year 2006.   A 10% payroll adjustment would save RML almost $43,000.  A 20% payroll reduction would save RML almost $86,000 a year.  THIS is the way to make the management company numbers work...NOT penalizing and excessively taxing the owners with "excise taxes" and management fees that are 25% above market standards.

•  Even a less than 2% adjustment in personnel costs would certainly cover the projected $7,500 actual prime time loss to the management company from abolishing the "excise tax" from owners enjoying the use of their own condo.

•  I suggest that the board investigate what is required in RML expense adjustments so that the management company only charged the industry standard 40% vs. the current 50% management fee that is a burden to all owners.

•  It appears from the proposed 2006 budget that the 50% management fee to owners will generate $500,909 to the management company.

•  This means that the income from a 40% management fee would be $400,727.

•  The projections show a RML profit of $30,778 for the year with the 50% management fee.

•  Therefore, for RML to charge the industry standard 40% at break even would require payroll and other expenses to be reduced by $69,404 for the year.  ALL of this could be completely covered with only a 16% reduction in payroll...or a combination of payroll reduction and other cost savings.

•  What increase in total economic occupancy is required for the management company to break even with current expenses with 40% of actual rental income for 2005 excluding the $25 prime time night excise tax?  In other words, if the average economic occupancy of the whole property averages 38% for the year, how much does this number need to rise in order for it to cover the $69,404 of excess cost in the RML operation?

•  Approximately how many non-Deer Ridge units, homes, condos, tee pees, etc. would the management company need to manage to break even with 40% excluding the $25 prime time night excise tax?  In other words, have the management company go hustle for business like any other business is required to do and NOT just keep raising the taxes on the captive audience of Deer Ridge owners!

•  How much would be saved if various components of the management operation were outsourced, such as reservations or maintenance?

In order to help you with this analysis, please provide me via email:

•  A list of all personnel on the management company payroll for 2005, with names, job title, W-2 total compensation for 2005

•  A detailed general ledger for RML showing ALL line items for the management company operation for YTD 2005 and all of 2005 as soon as it is available.

•  A summary of all solicited and unsolicited management proposals by outside management companies received during the past 24 months.

The point is that THESE are the avenues for RML to investigate and pursue instead of simply continuing to tax the owners of Deer Ridge.  While I am sure it is MUCH easier just to send out an arbitrarily modified management agreement to the owners, the management company SHOULD be focusing their efforts on doing what is necessary to improve THEIR operation and THEIR business.   

Again, the management company is operating under the very flawed logic of believing that the success of the management company is the most important thing to those buying a condo at Deer Ridge.  In the eyes of the owners, there is no such thing as "excessive over usage during peak time" that you mentioned in your letter.  The fact that you continue to see it as "excessive" stresses the point that you do not view the management operation the way it is viewed by the owners.  

As stated before, the numbers for Deer Ridge do NOT work as an income property.  Owning a unit at Deer Ridge is a guaranteed loss - irrespective of purchase price or mortgage level!   

As a consequence, continuing to view it as an income property operation makes no sense. Therefore, those owning there are doing so ONLY in order for them to enjoy their time there.  Prime time IS prime time because THAT is when it is most desirable for most folks to be at the property.  This includes owners.  If the management company cannot make money with owners using their own units without paying an excise tax, then the management operation needs to be either made to work within the numbers or go out of business with us subcontracting the management to one of the two dozen plus management companies in the Gatlinburg area that knows how to be profitable with the industry standard 40% management fee. 

With regard to Joe's letter to me, the attempt to charge me as an owner for getting management information is seen as a spurious attempt to control a dissident's view being expressed to the other owners of Deer Ridge.  As a consequence, please just fax me all the March 22 ballots that were returned so that your staff does not have postage or copying requirements.  That way, all they have to do is take your copy and stack them in your fax machine. 

With regard to not being willing to provide me the mailing label information of all owners, again, I see that as yet another attempt to control a dissident view being expressed to the owners of Deer Ridge.   

As a consequence, we will produce letters to all owners at Deer Ridge with the letters from me already sealed in individually stamped envelopes with our return address already printed on the envelope.   We will mail you these 83 envelopes in one package and you can have one of your people stick on the mailing labels while they wait for the phone to ring.  We will have sufficient bounce back information in the envelope to know if, indeed, the envelopes were, in fact, mailed to all owners. 

Joe's concern is that so many of the units have dropped out of the rental pool over the past few years, thereby impacting the RML income source.  That fact should be seen as a major clue that the exorbitant fees and arbitrary taxes and controls by RML are unacceptable to an ever increasing number of owners.  Now is the time for RML to realistically adjust their own house, control THEIR expenses and start offering an economically viable approach to the realistic use of the property by their owners - even in prime time. 

We are determined to see that ALL the owners are treated fairly and that none of us are soaked with supporting the management company's current cost structure through an "excise tax" or above market management fees.

Robert & Janet

A-202 

cc:  Deer Ridge Website - Owners' Forum

Follow Up

I took the time to develop an Excel Spreadsheet that would have taken someone at the management office a few hours to complete.  The completed Spreadsheet would have shown us EXACTLY how much RML might be actually losing from owners using their own property.  However, in spite of having the form readily available to them and in spite of it taking very little time to complete, Joe and Vic refused to complete the spreadsheet since they KNEW their math and their logic, that was the basis of the ridiculous excise tax letter to owners, would be exposed by my analysis.  

You can download your own copy of my spreadsheet by clicking: Excel.