2018 Fall WS Newsletter
Fall Issue 2018
Aloha Waikiki Shore owners and welcome to the Fall edition of the Waikiki Shore News. The Board thought it best to focus this issue on two important matters – the status of the renovation plans for the first-floor retail and our current financial situation. Jon Gilbert’s article, First Floor Renovations – The Next Steps, is a must read and contains extraordinarily important information for all owners who want the MacNaughton development plan to succeed. Terry Block’s article about our 2019 budget provides an honest and realistic assessment of our current financial situation and presents the recommendations of the Finance Committee along with a link to the 2019 Waikiki Shore Reserve Study.
As you may know by now, an owners’ poll was recently taken, and the returns showed that an overwhelming number of owners preferred the MacNaughten commercial renovation plan over the other two options – “do nothing” or “self-fund and self-operate.” Out of 72.85% of owners responding, 80.05% cast their votes for the MacNaughton master lease proposal. This overwhelming owner response is what the Board needed in order to move forward with the redevelopment of the first-floor retail space.
As we have reiterated on numerous occasions, your voice is what matters and whatever you, the owners, want for the first-floor retail area, we, as your Board, will try to implement. You have now spoken, and accordingly we will devote our energies to make the MacNaughton plan a reality. But this cannot be done by the Board alone. We will need your continued engagement to overcome certain legal hurdles that are outlined in vice-president Jon Gilbert’s article, First Floor Renovations - The Next Steps. The opportunity to make significant improvements to our building are well within our reach and this moment may not reoccur for the foreseeable future. As the saying goes – “A great opportunity is seldom presented and is easily lost.”
At our July Board meeting, a number of exciting developments for the Waikiki Shore were discussed. Our Secretary, Carol Laechelt, has been working on developing a Waikiki Shore website. She, along with Ted Simon, have made significant progress. This website will allow owners easy access to Waikiki Shore documents, forms and further allow a more effective way of communicating between and among owners, the AOAO Board and the office. Our newest Board member, Mark Shorter, has taken the lead to oversee the building’s facilities and coordinate directly with the building manager. Currently, Mark is compiling an Emergency Procedures Manual and a Building Facilities Manual. These two building handbooks will substantially improve our safety and operational procedures.
Currently, Eric Goetz is on personal leave. In the interim, we are very fortunate to have Randy Alho step in to take over the responsibilities of building manager. As many owners know, Randy worked at the Waikiki Shore for over 7 years doing the job that Castle Resorts Kenny Ching currently performs and in fact was Kenny’s predecessor. Not only does Randy know the building extremely well, but also he is very well known and respected by many Waikiki Shore owners. A prime example of his leadership was demonstrated by his excellent management of the building’s Hurricane Lane preparations. His effectiveness and spirit of Aloha are wonderful additions to our community. Finally, the Wowland lawsuit is currently scheduled for trial in January 2019. The good news is that the AOAO is receiving almost $8000 more a month from Sun’s Up, which took over Wowland’s beach front location.
Finally, I want to thank all owners who have recently contacted Board members with questions, suggestions and ideas regarding the first-floor renovation options. We, as a Board, encourage this type of open communication, because it allows us to be accessible and transparent in the way we manage Waikiki Shore’s business which hopefully results in making us better Board members and more responsive to owner concerns.
Bob Warren, Unit PH-1 – AOAO Board President
As you may know by now, an owners’ poll was recently taken, and the returns showed that an overwhelming number of owners preferred the MacNaughten commercial renovation plan over the other two options – “do nothing” or “self-fund and self-operate.” Out of 72.85% of owners responding, 80.05% cast their votes for the MacNaughton master lease proposal. This overwhelming owner response is what the Board needed in order to move forward with the redevelopment of the first-floor retail space.
As we have reiterated on numerous occasions, your voice is what matters and whatever you, the owners, want for the first-floor retail area, we, as your Board, will try to implement. You have now spoken, and accordingly we will devote our energies to make the MacNaughton plan a reality. But this cannot be done by the Board alone. We will need your continued engagement to overcome certain legal hurdles that are outlined in vice-president Jon Gilbert’s article, First Floor Renovations - The Next Steps. The opportunity to make significant improvements to our building are well within our reach and this moment may not reoccur for the foreseeable future. As the saying goes – “A great opportunity is seldom presented and is easily lost.”
At our July Board meeting, a number of exciting developments for the Waikiki Shore were discussed. Our Secretary, Carol Laechelt, has been working on developing a Waikiki Shore website. She, along with Ted Simon, have made significant progress. This website will allow owners easy access to Waikiki Shore documents, forms and further allow a more effective way of communicating between and among owners, the AOAO Board and the office. Our newest Board member, Mark Shorter, has taken the lead to oversee the building’s facilities and coordinate directly with the building manager. Currently, Mark is compiling an Emergency Procedures Manual and a Building Facilities Manual. These two building handbooks will substantially improve our safety and operational procedures.
Currently, Eric Goetz is on personal leave. In the interim, we are very fortunate to have Randy Alho step in to take over the responsibilities of building manager. As many owners know, Randy worked at the Waikiki Shore for over 7 years doing the job that Castle Resorts Kenny Ching currently performs and in fact was Kenny’s predecessor. Not only does Randy know the building extremely well, but also he is very well known and respected by many Waikiki Shore owners. A prime example of his leadership was demonstrated by his excellent management of the building’s Hurricane Lane preparations. His effectiveness and spirit of Aloha are wonderful additions to our community. Finally, the Wowland lawsuit is currently scheduled for trial in January 2019. The good news is that the AOAO is receiving almost $8000 more a month from Sun’s Up, which took over Wowland’s beach front location.
Finally, I want to thank all owners who have recently contacted Board members with questions, suggestions and ideas regarding the first-floor renovation options. We, as a Board, encourage this type of open communication, because it allows us to be accessible and transparent in the way we manage Waikiki Shore’s business which hopefully results in making us better Board members and more responsive to owner concerns.
Bob Warren, Unit PH-1 – AOAO Board President
First Floor Renovations Update - The Next Steps
Jon Gilbert, Unit 1302 - AOAO Board Vice-President
On behalf on the Board, I would like to thank the almost 73% of Waikiki Shore owners who responded to the recent poll designed to help guide the Board as to how best to renovate our first floor. As calculated by AOAO Secretary Carol Laechelt, 80% of those responding expressed a preference for Option 3, entering into a master lease with The MacNaughton Group, in exchange for at least an $8 million capital investment at no cost to Waikiki Shore owners, and guaranteed income that rises over the term of the lease. Approximately 15% of owners preferred Option 1, which would maintain the status quo while maximizing income, while about 5% of owners favored Option 2, which would require a $6 million investment by owners and self-management of the project and commercial areas. While the Board recognizes there are strong feelings among the minority of owners who favored Options 1 or 2, we hope that all owners will support the overwhelming majority who favor Option 3, the MacNaughton Plan, as an exciting renovation opportunity that will benefit all of us.
Owner’s Perspectives
The consensus in favor of Option 3 comes from different groups across the spectrum of Waikiki Shore owners. These are some of the comments that owners have shared with us:
"As apartment owners of the most strategically valuable condominium in Honolulu, we must address the dated ground floor presentation covering the reception area and various lease holder operations. With the MacNaughton Plan, we have a complete upgrade opportunity at no cost to us and with no real ongoing management responsibilities and the costs they would incur. This is indeed a wonderful opportunity which will add value for all our owners." (Noel Holyoake, Apartment 1300)
"As owners of Waikiki Shore unit 200 we are very pleased with The MacNaughton Group proposal for the renovation of the first level bringing in a semi-upscale restaurant to replace the food stands. We would like to thank the Board members and committees who worked so hard to make these positive upgrades to Waikiki Shore possible." (Jeff and Donna Jarrett, Apartments 200, 705, 706, 805)
"Since leading Waikiki Shore's successful effort to acquire the ground floor in the early 2000's, I have been advocating for the renovation of the facilities to help upgrade our building and our apartment values. The MacNaughton Plan is a good plan to give us a first-class upgrade with a reasonable income guarantee. I urge all the owners who have supported my efforts over the years to cast their votes to support the MacNaughton Plan. (Richard Elliott, Apartment 1100)
"The MacNaughton Group recently developed Park Lane at Ala Moana as one of the most upscale Honolulu properties in terms of quality construction and price per square foot. Just knowing they are interested in investing millions of their own dollars to renovate and manage our first floor is very exciting and an opportunity we hope we don't miss. Without any capital out of our pockets and no management headaches, MacNaughton will greatly improve our curb appeal, lift our property values, and create a better visitor experience with much nicer amenities. We like that the MacNaughton Plan will create a world class location, bringing tourists to their new top tier restaurant and shops. Based on their other top notch projects, they have the expertise, resources, and ability to get it done as timely as is possible in Hawaii. As full time residents who use the Diamond Head walkway, shower and surfboard racks, we are very pleased with the concessions MacNaughton agreed to in order to maintain our privacy. Finally, as owner/residents since 2006, and having owned both a studio and a two bedroom apartment in the vacation rental market, we view The MacNaughton Group plan as a great opportunity for Waikiki Shore residents and guests alike." (Michael and Wendy Newman, Apartment 1312)
What Happens Next
In order to proceed with the owners' preferred Option 3, we need to conform our legal documents, including our 1994 Declaration of Condominium. Our Declaration was written prior to the last remodeling of our lobby which changed the layout of space, and prior to 2008, when the Hawaii legislature adopted Section 514B which becomes mandatory for the Waikiki Shore as of January 1, 2019. Among other things, adopting Section 514B now will lower the owner approval threshold for the MacNaughton Plan from 75% to 67%. And owners must also approve aspects of the MacNaughton Plan including certain common areas being included in the lease, such as portions of the lobby (but not to include the front desk which will remain in AOAO control), a portion of the Makai Diamond Head walkway, guest parking after 5 pm, and conversion of 2 basement parking stalls into pedestrian stairways to access the shops via the Ewa walkway.
Both of these amendments must be approved by paper ballot which will be distributed by email and regular US mail over the next few weeks. It is imperative that all owners complete and send back the paper ballot (although our attorney advises that an emailed or faxed scan of the completed ballot will be acceptable). The Board cannot proceed to lease negotiations nor can MacNaughton start the detailed design and construction process (which entails significant expense on their part) until we have signed approvals from at least 67% of the ownership.
Following the official paper balloting process, the AOAO will engage a qualified real estate attorney (to be determined) to negotiate the drafting of the actual lease. We are just beginning the process to look for the right attorney. If you have had successful dealings with a qualified commercial real estate attorney in Hawaii, please reach out to the Board at AOAO@waikikishore.com with your referral for consideration.
The goal is to complete the official balloting and lease negotiations by the end of the year, so that the design, permitting and construction process can begin in 2019.
To summarize: In the near future, you will be receiving a paper ballot in the mail seeking your "yes" votes to enable the MacNaughton proposal to proceed. Your prompt response will help keep the MacNaughton plan on schedule, and every owner's "yes" vote is vitally important. The ballot will include 2 questions: (1) do you approve adoption of Hawaii condominium law section 514B, and (2) Do you approve the planned renovations to the the common areas to be included in the MacNaughton lease? A description of the renovations and common areas affected will be included in the ballot packet. The Board encourages a prompt "yes" vote on both questions in order to proceed.
Seizing The Opportunity
As owners, we have come a long way together in this process since early 2017. The First Floor Committee was formed in April, 2017, a formal Request For Proposal was sent in June, 2017, 6 qualified responses were received in August, 2017, a comprehensive Business Plan was circulated to all owners in January, 2018, and a spirited Owners Forum was held after the annual meeting in April to discuss and debate the pros and cons of various options. The Board is particularly grateful for the owners who raised genuine and valid concerns about some of the preliminary details of the MacNaughton plan that enabled us to negotiate improvements in the Plan for all of our benefit.
The owners have spoken with their clear preference for The MacNaughton investment and Master Lease, and now is the time to proceed with the project. We all want to enjoy the benefits of new and upgraded facilities, for our property and rental values to increase, and for Waikiki Shore to reclaim its place as one of the most premier properties in Waikiki.
We have been reminded by long-time owners and former Board members of the consequences of inaction at a critical opportunity point. In the 1970’s, Waikiki Shore owners were presented the opportunity to purchase the beach front land under our building for approximately $1.5 million. The Board was unable to muster the votes needed due to owner apathy and lack of responsiveness. Less than twenty years later the owners reluctantly agreed to purchase the land for $26 million. The parallels to our situation today are apparent. Only one of the RFP respondents, The MacNaughton Group, responded with an offer that includes a substantial investment of over $8 million towards our renovations, plus thoroughly negotiated income payments that will escalate over the term of the lease and allows us to share in further profits from midway through the lease. Not responding to the upcoming official ballot does a disservice to all owners, and potentially delays or even jeopardizes the unique opportunity that is before us.
On behalf of the entire Board and the strong consensus of owners, we ask all owners to be prompt in returning a “yes” vote when the formal ballots are distributed. We all want to bring our beloved Waikiki Shore up to the exciting and even more valuable future that it deserves.
Let’s get on with it!
Budget Time 2019 Has Arrived!
Terry Block, Unit 1416 & 1418 - AOAO Board Treasurer
Over the past year we have tried to explain the financial difficulties that Waikiki Shore is experiencing due to historically low Cash and Cash Reserve balances, low operating margins despite increased commercial revenues, and the imminent fiscal cliff related to deferred maintenance in a 60 year-old building. Now is the time to address these issues before we fall off that cliff.
This past Spring, we engaged Armstrong Consulting, Inc. to perform a professional Reserve Study to analyze future capital needs, the first one in over 10 years. They surveyed the property with our Resident Manager and presented us with a first draft. After further input from Eric Goetz and Mark Shorter, the Chair of our Facilities Committee, they produced the final report, which is attached. The bottom line is that we will need to expend over $5.1M in current costs, equivalent to $6.8M in future costs (assuming 3%/year inflation), over the next 20 years. Unfortunately, many of the expenditures are needed in the next 2-3 years, so mere increases in HOA fees alone will not assure solvency nor cover these costs. Accordingly, Armstrong has recommended a $1,000,000 Special Assessment in 2019. Their calculations conclude that we will also need sizable yearly increases in HOA fees over the next 5-10 years, which we hope will obviate the need for future additional special assessments
As of July 31, 2018, the Association had a total of $204,181 in Cash and Cash reserves. We expect to improve our balance sheet by the end of the year, but some of the deferred maintenance issues hit us head on in August. Numerous plumbing problems popped up. They included the need to replace all nine of our 120-gallon hot water storage tanks which were leaking or severely corroded (not surprising considering their age), leaks and advanced corrosion in the main water line, and leaks from couplings in the hot water heating elements. These costs of over $30,000 were expected in 2021-23, not 2018. This will not likely be the last of our “surprises” from our 60-year-old building. Based upon the Reserve Study and our very low cash reserves, the Finance Committee has recommended to the Board that it implement Special Assessments totaling $1,000,000 in 2019. This recommendation will be discussed at upcoming Board Meetings.
Additionally, after reviewing the above data with the Finance Committee, we will be proposing to the Board a 10% increase in HOA fees for 2019. This will equate to a $15/month increase for a studio, $31/month for a one bedroom, and $41-45/month for the two bedroom units. Of course the penthouse, second floor and Oceanside units will vary a bit based on square footage. This increase should allow us to cover our operating costs and contribute over $100,000 in 2019 to finance capital expenditures or build reserves. I know that this is not good news, but I hope we have prepared you for this with my quarterly communications and the Treasurer’s Report at the Annual General Meeting.
This past Spring, we engaged Armstrong Consulting, Inc. to perform a professional Reserve Study to analyze future capital needs, the first one in over 10 years. They surveyed the property with our Resident Manager and presented us with a first draft. After further input from Eric Goetz and Mark Shorter, the Chair of our Facilities Committee, they produced the final report, which is attached. The bottom line is that we will need to expend over $5.1M in current costs, equivalent to $6.8M in future costs (assuming 3%/year inflation), over the next 20 years. Unfortunately, many of the expenditures are needed in the next 2-3 years, so mere increases in HOA fees alone will not assure solvency nor cover these costs. Accordingly, Armstrong has recommended a $1,000,000 Special Assessment in 2019. Their calculations conclude that we will also need sizable yearly increases in HOA fees over the next 5-10 years, which we hope will obviate the need for future additional special assessments
As of July 31, 2018, the Association had a total of $204,181 in Cash and Cash reserves. We expect to improve our balance sheet by the end of the year, but some of the deferred maintenance issues hit us head on in August. Numerous plumbing problems popped up. They included the need to replace all nine of our 120-gallon hot water storage tanks which were leaking or severely corroded (not surprising considering their age), leaks and advanced corrosion in the main water line, and leaks from couplings in the hot water heating elements. These costs of over $30,000 were expected in 2021-23, not 2018. This will not likely be the last of our “surprises” from our 60-year-old building. Based upon the Reserve Study and our very low cash reserves, the Finance Committee has recommended to the Board that it implement Special Assessments totaling $1,000,000 in 2019. This recommendation will be discussed at upcoming Board Meetings.
Additionally, after reviewing the above data with the Finance Committee, we will be proposing to the Board a 10% increase in HOA fees for 2019. This will equate to a $15/month increase for a studio, $31/month for a one bedroom, and $41-45/month for the two bedroom units. Of course the penthouse, second floor and Oceanside units will vary a bit based on square footage. This increase should allow us to cover our operating costs and contribute over $100,000 in 2019 to finance capital expenditures or build reserves. I know that this is not good news, but I hope we have prepared you for this with my quarterly communications and the Treasurer’s Report at the Annual General Meeting.