As RestonNow reported, two weeks ago RA CEO Cate Fulkerson told the RA Board of Directors that renovations for the interior of the Tetra building were more than $428,000 over the budget used to sell the Tetra purchase to Restonians in last year’s referendum, nearly tripling the original $259,000 budget allocated for that purpose.
To add fuel to the costly fire, the RA Board of Directors moved forward approving a $430,000 Tetra budget increase without examining causes or remedies, other budgetary shortfalls, future spending requirements, or likely cost recovery, much less holding those accountable who were responsible for the inaccuracies leading to this gross cost overrun.
Unfortunately, a more thorough cash flow analysis shows the hole is much deeper than so far reported by RA (and we still lack significant cost information). For those of you who don’t want to read all 2,000 words of this post, here are the key points:
- Not counting the Tetra subsidy of $275,000 for external repairs, the Tetra budget will be $624,640 over budget by year-end. That’s $28-$30 per RA household; not an absence of impact on assessment fees as reported in RA’s Pro Forma Financial statement in RA’s referendum marketing “Property Purchase Fact Sheet” no matter how cleverly disguised by cuts elsewhere in RA spending.
- As a result, the entire Tetra effort will be in the hole more than $562,000 by year-end versus the Pro Forma Financial statement’s prospective surplus of more than $208,000.
- Still uncompleted repairs, particularly improvements to Tetra’s grounds, and the need for new furnishings will add to the growing cost next year and beyond.
- By the end of 2020—the final date presented in RA’s Pro Forma Financial in the Voter’s Guide—RA will probably be more than one-million dollars in the hole, costing Restonians $40-$50 per household instead of the $10-$12 projected by RA.
- Beyond that timeframe, a published pre-referendum analysis showed that RA will not operate Tetra in the black until 2048 using RA’s own assumptions and other conservative ones the beyond 2020 endpoint of RA’s Pro Forma Financial statement.
- In fact, it is unlikely Tetra will ever be profitable given RA’s track record of recovering less than 27% of the costs on all the other facilities it operates from swimming pools to the Nature House. Our assessment fees pay the other 73% of those costs.
- An independent, realistic, and thorough re-examination of Tetra’s costs and prospects should be conducted by some entity other than RA and, until that is completed, work on Tetra should stop.
Now on to the many ugly details.
- Such an examination would probably conclude that the most cost-effective way to cope with this situation is to tear down the building and turn it into a nature area—even if we would still be paying off a promissory note.
As shown in spreadsheet appended to this post (including explanatory notes) based on official RA reports, the Tetragate budget through this year is more than $624,640 over budget, not the $428,000 RA reported to the Board two weeks ago. That’s a cost of $28-$30 per RA household, not the no impact forecast of the RA Pro Forma Financial statement. Half of that nearly $200,000 extra expense is the $100,000 in Tetra rental income budgeted for 2016 that disappeared with the previous Tetra property owners in December.
The rest of the added $200,000 overrun comes from bits and pieces large and small.
The biggest chunk may be the “unbudgeted cost of $39,467” discovered in a footnote in the unaudited Fiscal Committee 2015 year-end report. That “unbudgeted cost” may (or may not) include the $16,414 in loan costs and recordation taxes listed as “Acquisition Costs” in the Financial Pro Forma that was used to sell the Tetra deal and was a driver of RA’s 2015 and 2016 Tetra budgets.
That’s an added loss of $23,035 unless, of course, the “unbudgeted costs” are in addition to the budgeted $16,414 in which case another $40,000 should be added to the overrun. For the moment, we’ll give RA the benefit of the doubt. Still, we wonder how much “unbudgeted” RA staff time and money was spent putting together the Voter’s Guide, including its outrageous Pro Forma Financial statement.
For no readily identifiable reason, real Tetra promissory note payments for 2015 appear to have been $15,000 (a month’s payment) greater than shown in the original Pro Forma Financials. We just read the promissory note.
The other cost overruns are just chump change with you and me being the chumps.
The bottom line, as they say, is that instead of being $208,000 to the good by the end of this year as the RA Pro Forma Financials project, the Tetragate fiasco will put RA more than $562,000 in the hole—and the hole will get deeper in the future.
Even with one million dollars spent repairing Tetra by year-end, including Tetra’s $275,000 subsidy, the renovations will not be complete. What about the property grounds? An RA-prepared spreadsheet supporting the just approved $430,000 in additional capital expenditures includes an entry early this year of $11,000 for “Property Park Concept Planning.” (For the record: It is not clear that RA staff shared this spreadsheet with the Board. It was not in the publicly-shared “packet” for the Board meeting two weeks ago.) So we should have a plan soon to improve the grounds that already exceeds the total RA’s Pro Forma Financial originally allocated for a capital improvement of “$9K on initial grounds maintenance.”
That’s real “initial grounds maintenance”—not a new “concept,” not a new “plan,” not a new “park” as stated in the RA spreadsheet. As a WAG (the budget-building approach RA’s CEO said RA used in its Pro Forma Financial statement—waving a wet finger in the air), the actual grounds renovation could add another $50,000 - $100,000 to the overall cost of the Tetra property in the next year or so. When will RA choose to disclose the projected cost of that exterior effort and other needed, but so far deferred and undisclosed, Tetragate costs?
Speaking of WAGs, the same detailed RA spreadsheet used to build the just-approved budget supplemental has an entry of $20,000 for “furniture” purchases this year. What furniture? The building will need a large amount and diversity of furniture and equipment (electronic equipment is budgeted separately) to serve the multiplicity of uses envisioned for it from weddings to daycare. $20,000 just won’t get you there. RA could limit its expenditures on furniture to just $20,000 this year—to get the daycare off the ground with mini-chairs and tables for starters--and spend more, quite possibly doubling that sum, next year and beyond.
Another added cost for this year not disclosed in the Pro Forma Financial statement or the recent capital addition is the cost of utilities this year. According to RA’s Pro Forma Financial statement, RA shouldn’t be paying anything this year for gas, electricity, and water because Tetra should be paying for these utilities under the lease terminated in December 2015. Nope, now we are paying those costs which will be about $10,000 this year using RA’s estimating methodology.
With just these added, but as yet undisclosed Tetra costs, the $624,000 shortfall deficit we will find ourselves in by the end of the year, and RA’s forecast cumulative cash flow deficit of $250,000 in 2020, we are likely to find ourselves approaching a cumulative Tetragate hole of one-million dollars by the end of the decade—four times that projected in the RA Pro Forma Financials. That will require an added $40-$50 in annual assessment fees for every RA member household in Reston over the next four years.
And that brings us to the greatest unknown about the future: How much net income will RA actually generate from programs and activities held at the Tetra facility and, in particular, how much of Tetra’s continuing costs will be covered by revenues generated by programs operating the Tetra facility?
RA’s Pro Forma Financial statement projects a rosy future with Tetra programs generating a net operating income of more than $82,000 in 2018 and growing steadily (at the assumed 3% inflation rate) thereafter. Still, with mortgage payments, the property will operate at a more than $100,000 loss from 2018 through 2020—the far end of the Pro Forma Financial—with that loss shrinking slowly as forecast operating income grows.
Even if income grows are RA projects, RA will continue to operate Tetra in the red well beyond the time it has to re-finance its mortgage in 2025 at who-knows-what interest rate, plus closing charges. In a RestonNow op-ed on April 20, 2015, I provided a chart that showed RA would operate Tetra in the red until 2048—and that was extrapolating from everything RA said in its pro forma and using conservative cost forecasts to cover gaps in the Pro Forma beyond 2020! Presumably, Restonians will make up for that continuing shortfall through additions to their annual assessment fees.
What is worse is that RA has a horrendous record of cost recovery for all its facilities from swimming pools to the Nature House, much less making a profit. There is little chance that Tetra will ever pay for itself, much less contribute to RA’s net income.
In preparing for the most recent RA budget season, Larry Butler, Chief, RA/PRC, presented the Board with a briefing that spoke to cost recovery among RA’s various facilities at its July 30th meeting. What an ugly picture he presented.
The bottom line is that RA recovers only 26.9% of its costs for all its various facilities. The other 73% of the costs are covered by our assessment fees. In its benchmarking, RA ranked itself second to worst in cost recovery among Arlington County (the worst), Vienna, City of Fairfax, and the FCPA. Based on this record, why should we believe Tetra will ever even break even, much less be an RA profit center easing our growing assessment fee burden?
How did this happen? Why is the RA Board in the position now, less than a year after buying Tetra, of realizing suddenly—or at least begin to share with RA members—that virtually everything they and the RA staff told us about the cost and revenue prospects for Tetra is untrue or, at best, extremely unrealistic?
A number of Restonians, including myself, pointed out the many faults in the pre-referendum financial work RA did, the horrible condition of the structure, the limits on alternative construction and uses, and the grotesque sales price prior to the signing of the Tetra agreement. Yet the RA Board, staff, and outside legal counsel failed miserably to do their due diligence on assessing and reporting fairly the limited prospects of the Tetra property. Instead, they turned themselves into a marketing machine of misleading and inaccurate information to sell Restonians on the referendum.
Reston needs to re-examine every element of its anticipated Tetra facility program costs and revenues (as well as other operating and capital costs) in a realistic and systematic manner. In so doing it must use explicit and publicly shared assumptions fitting the now limited allowable Tetra hours of use and the planned re-configuration of the Tetra facility. RA needs to present the results to Restonians and before the next RA budget preparation cycle in a revised and more realistic pro forma financial statement running to at least 2025 when Tetra faces re-financing and including a full report on what has happened and recommendations for handling future such investments.
Such an examination must be thorough, realistic, and independent—which means it must be conducted by someone other than RA, possibly by a committee selected by, say, the Reston Citizens Association’s (RCA’s) Board of Directors. If such a re-examination of the Tetra purchase and use is conducted, a highly unlikely event in my expectation, I wouldn’t be surprised if its conclusion is that the most cost-effective way to proceed with Tetragate is to tear down the building and turn the property into a natural area even as we continue to pay off the promissory note.
In the meantime, until the RA staff, the RA Board, and the Reston public knows the true costs of moving forward on Tetra, work on its renovation and programming should stop. We are just pouring money down a rat hole that we are unlikely to ever recover.
That is the ugly financial truth of Tetragate.