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Lake Forest Finances
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12/05/2005 A Discussion of Depreciation
There are a couple of broad classes of things on which a business can spend money. One is referred to as an asset and the other is referred to as an expense item. For example, if the business buys some printer cartridges, paper, soap and items like that, it can expect to use them up pretty quickly. When the power bill or water bill comes due, the business has to spend more money. These kinds of purchases are classed as expenses. The money spent on those takes away from the resources (cash) that the business has available. On the other hand, if the business buys a tractor or builds a new building, that kind of item is expected to be around for years. So, rather than identify the purchase as an expense, it is classed as an asset. Cash is an asset. Buildings, tractors, trucks, ovens and so forth are considered assets. One way to look at it is to consider that, if the business has $100,000 in cash (an asset) and buys $1,000 worth of fertilizer (an expense) , it now only has $99,000 in assets since that fertilizer can be expected to have been spread out and gone pretty soon. On the other hand, if the business buys a $10,000 tractor (an asset), the business still has $100,000 in assets. The form has just changed from being all cash to being part cash and part tractor. Here is where depreciation comes in. That tractor will wear out over time. The building wears out over time. The golf course irrigation system wears out over time. As the asset wears out and loses value, that wear is considered an expense. It is referred to as depreciation expense. It is not cash. It is loss of value due to wear or age. When a piece of equipment is bought or a new building is constructed, the accounting department will make a judgment on the life of the item and schedule an amount to record each period as depreciation of that item. That way they can show how much the expense of wear and tear applies to a specific period, such as a year. It would not be correct to claim that $10,000 for a tractor as an expense this year, if the organization will be using it for five years. A more accurate method would be to write off tractor expense at a rate of $2,000 a year, since it would be used all those years. That is depreciation. When the entire $10,000 purchase has been depreciated at the rate of $2,000 a year, the tractor is said to have been expensed out or written off. In other words, according to the books, it has no value. Now let us discuss how we should look at depreciation. As of September, Lake Forest had $174,665 in depreciation expense. That number represents the amount of wear or loss of value that some of our assets have had to this point in the year. It is not cash. The business did not spend that much money. Some of it may have been spent years ago, when a piece of equipment was purchased. It represents the total depreciation of all assets of the association. Usually management is most interested in "cash flow". Did we receive more cash than we spent and do we have enough cash on hand to take care of business? In other words, can we pay our bills and make payroll? Depreciation expense, since it is not cash, has little, if any, affect on this. So, often if a manager finds that he or she has money left over after paying all the bills, things are good. What do we care about depreciation? Well, for one thing, if we have excess revenue over expenses AFTER depreciation, that would mean that we have excess cash available to buy new equipment or build new buildings. Otherwise, we would have to borrow money to make those purchases. In other words, we would have money available to do things besides pay our bills. So, if given a choice, we want to have excess revenue after depreciation. For most of the last decade, Lake Forest has had excess revenue AFTER depreciation. However, last year Lake Forest had excess revenue over expenses before depreciation but showed a deficit after depreciation. As shown above, so far this year the same can be said. Should we worry? Well, certainly we should be concerned. However, there may be legitimate explanations for both of these years that might help to explain why. Last year, for example, the Board of Directors spent thousands of dollars on appraisals, surveys and studies to make sure that the membership knew what was at stake when the vote came to give away some of our amenities and sell others. That expense had an impact. This year several hurricanes did considerable damage in Lake Forest. And yet, after much of that money has been laid out to repair the damage, we are only showing a small deficit for the year. While we do not know what the actual numbers will turn out to be, it looks like we might have an excess before depreciation at year's end but a small deficit after depreciation. This deficit might be something along the lines of $30,000 or $40,000 out of an eventual $2,500,000 in revenue. This is not really bad. Another thing to consider when talking about financial reports and depreciation is what they say about the value of the organization. Frankly, they do not say much. The financial reports tell us how well the organization is being managed. If we are consistently showing an excess, then we are managing well. And, a well managed organization does represent some value. However, the financial reports do not tell the whole story. They do not tell us what the organization is worth. Consider this. Around 1995 Lake Forest built two brand new hard surface tennis courts for about $50,000. While the writer does not know how accounting decided to depreciate that new asset, it would be reasonable to assume that they might have chosen to depreciate it out over ten years. That would mean that about $5,000 of depreciation each year was for those tennis courts and by now they would have been completely expensed out. Does that mean those tennis courts are worth nothing now? Of course not! At this point our financial reports tell us that Lake Forest has about $2,000,000 worth of assets. Part of that money spent last year was for appraising the Yacht Club. It was appraised at $3,500,000. What gives? Why do our financials say we have a couple of million dollars worth of assets, when just one of them was appraised at nearly twice that? Because the accounting value of the association is not the market value of the association. Lake Forest amenities are considered by most to be worth anywhere from fifteen to twenty million dollars! These are assets that belong to people who own homes in Lake Forest! So, let us try and tie all this up in a nice package.
The future is bright. 11/23/2005 Concerning the pools, as of the end of September the operational deficits at the pools were $68,000. Now considering that Lake Forest makes up nearly half of Daphne's approximate 18,000 population that only leaves 9000 people outside of Lake Forest less the good folks of Timber Creek who have their own pools less the people who are not interested in going to pools at all and it leaves a small number to make up the deficit much less generate any additional income for the other amenities. And as with the other amenities, I believe it is illegal for a non-profit private club to sell the rights to a single amenity, that is why we have the non-owner memberships. Sorry, but unless I've missed something the pools are not the answer. I would also like to point out that since making 2 of the 3 pools no fee they get more use and enjoyment from the membership than any other amenity that we have. I would suggest that all 3 be no fee next year, as the one fee pool gets very little use, while the other 2 can become overcrowded at times. To the newcomer to the area, the statement about the unwillingness to pay a nominal amount for the fee pool goes to the reality of Lake Forest. According to the 2000 Census the demographics of Lake Forest are:
Respectfully, from your willingness to increase your own fees and dues, I have to surmise you are most likely outside of these demographics. I understand everyone making comparisons to what they think are similar situations but I would suggest to you that the demographics of Lake Forest do not support increased dues and fees. With only about 150 annual golf memberships, and the over $200,000 in delinquent maintenance fees, the argument against increased dues and fees is further substantiated. Please refer to the Webmaster's description in the F&B discussion page of how the original developer promoted the subdivision, and the difficult times that ensued after the developer sold the amenities to the LFPOA. Then realize that, according to Census figures, Lake Forest grew from 1990 to 2000 by 43.63% and that currently approximately 1 in 5 households are rentals. This growth has substantially changed the makeup of Lake Forest, and in my humble opinion has not been addressed by any LF Bd of Directors. Meaning, just as I am hypothesizing why there is so little use of the amenities by the members, so have many past and present Boards done the same. Albeit, I have done some research to support my opinions, and would suggest that the current Board invest some time and minimum expense to see what the members actually do outside of Lake Forest to see if there are things we could implement cost effectively that would improve participation by the members. Preferably new ideas as opposed to ideas that have proven not to work in the past, and have been very expense failures. A good anonymous survey in a monthly billing with a separate unidentifiable envelop for returning would be a good way to collect information that would allow Lake Forest to better serve it's membership. Questions such as: How many in your household, ages, etc.? What type of entertainment do you enjoy? How often do you eat out a month? What types of eating establishments do you frequent. Do you belong to the YMCA, Daphne Physical Fitness Center in the Civic Center ($12 per month), or any other fitness type establishment? How often do you frequent the 19th hole, yacht club, Bayview Lounge, etc? As far as the condition of the amenities, for their age and occasional neglect over the years (not recently) they appear fine. However, in terms of operational usefulness and energy efficiency(as of the end of Sept 05 utilities for all facilities were at $163.000), they are a typical architectural nightmare, good looks no functionality. This goes for both the clubhouse and the yacht club buildings. You are absolutely correct in your assessment of the need for "first class facilities" to raise property values. These type facilities are achievable, and a very feasible idea is out there, but due a lack of ability to reach a large number of the otherwise disinterested members, recent past events by the dissenting few, and the vocal few who resist change of any kind, the idea has not progressed like it should. If you care to hear the details let the Webmaster know and I can forward them to you. Glad you're enjoying your decision to live in the largest and prettiest neighborhood in Alabama.
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Over the years there has been an ongoing debate about the financial state of
Lake Forest. Part of that discussion has revolved around depreciation
and what it means. We have heard association treasurers say that our net
revenue before depreciation is one amount and after depreciation some other
amount. For example, in the December 2005 Spectrum, the financial
report says that for the year to date as of September 30th, 2005 our net
excess revenue before depreciation is $146,679 and after taking $174,665
away in depreciation, the net excess revenue is ($27,968). Just
exactly what does that mean? Did we bring in more money than we spent
or not? Well, according to that paper, through September 30th, Lake
Forest had income of $1,897,162 and expenses of $1,750,469. That sounds like we brought in more
money than we spent. So, what is this depreciation number?