On October 25, 2017, the Waikiki Shore Board of Directors met with all members present. Also in attendance were over 15 owners. This was the third Board Meeting since the March Annual Meeting and has allowed owners and the Board alike to meet, discuss and share with one another ongoing Waikiki Shore issues.

Waikiki Shore Fall Update
Bob Warren, Unit PH-1 – AOAO Board President   

First, I want to thank all the owners who have volunteered to serve on the various committees that we established at our March Board meeting. The Construction Guidelines committee, the Finance Committee, the First Floor Renovation Committee, the House Rules Committee have all benefited from Waikiki Shore owner participation and collaborative dialogue. The Contractor Guidelines committee has completed its work and others remain fully engaged. I am also pleased to report that as promised the Contractor Guidelines and House Rules committees established a process whereby owners are able to review and comment on prospective building rules before they are made final. In this way, all owners have input in the way our building operates.

The security review conducted in June by Randall Mack presented a number of building vulnerabilities. The primary concern was the first-floor retail’s open access from the beach to the front doors of the building. At the June Board meeting, I indicated that I would adopt Mr. Mack’s recommendations that the wall which once separated the retail area from the lobby be restored and that the glass doors be returned to their original location. This has been accomplished. In the short term, the Board is reviewing ways in which we can let visitors and guests alike know about our retail space and its various retail offerings without impacting adversely our building’s security.

At the October Board meeting, the House Rules committee, under Carol Laechelt's leadership, submitted a draft of its revised House Rules to the Board. These draft House Rules will be sent to owners for their review and comment. Also, Carol Laechelt and Terry Block are currently working on revisions and updates to the Waikiki Shore’s Employee handbook.

The Wowland Litigation  
Bob Warren, Unit PH-1 – AOAO Board President   
 
The AOAO By-laws state that “each director shall owe the Association a fiduciary duty in the performance of such director’s responsibilities.” (Art. III, Sec. 2)

Following our recent newsletters and E-blasts, we have received inquiries about ongoing legal and related issues confronting the AOAO in 2017.  The AOAO is currently involved in civil litigation with Kyeong O, doing business as Wow Land, which is located beach front on the first-floor retail space. Ms. O’s filed her complaint against the AOAO in the First Circuit Court of the State of Hawaii on September 8, 2017.
 
In sum, Ms. O’s action alleges a breach of a purported ten-year lease with the AOAO (“the Elliott lease”) and asks for monetary damages.  The only signatures that appear on the Elliott lease are the signatures of Richard Elliott and Ms. O.  The AOAO believes that the Elliott lease is null and void for a number of reasons based upon Hawaii law and the AOAO’s governing documents. Furthermore, in May 2017, Ms. O provided the current Board with a signed termination and release of the ten-year Elliott lease in which she agreed that the Elliott lease was null and void and she agreed to return to a month-to-month arrangement.  Nevertheless, on September 8, 2017, she initiated the current litigation.  The AOAO has tendered this matter to our D&O insurance carrier and counsel has been assigned by the carrier to defend the AOAO. The AOAO Board believes that this matter is without merit and will mount a vigorous defense.
 
The Elliott lease was supposedly executed on March 1, 2017 – three weeks before the 2017 annual Association meeting.  The Elliott lease was not prepared or reviewed by the AOAO’s attorney at the time, Mr. Ekimoto, and was not filed on site in the AOAO’s office as was the practice with all other Association tenant leases.  The Elliott lease with Ms. O, unlike the other tenant leases, provided for a term of five years at a total fixed monthly rent of $3500 which included all taxes and fees and it also contained an option, only exercisable by Ms. O, to extend the lease for an additional five years. The very existence of the purported lease also conflicts with assurances given by Richard Elliott at the March 29th Board meeting that all tenants except Subway and DYC (Beach Services) were on month-to-month leases. Several current and past directors who were serving on the Board when the Elliott lease was purportedly executed have subsequently been asked whether they knew anything about the Elliott lease. All have denied knowledge of its existence.
 
The AOAO believes that it has suffered significant financial losses as a result of the Elliott lease and related matters.  Due to the ongoing litigation, I am unable to provide all the facts and circumstances related to the legal action, but by way of background, in November 2015, the commercial space that is now occupied by Wow Land, together with two storage spaces, were being rented to a long-term tenant for $8950 a month.  In late 2015, Richard Elliott terminated the lease of the tenant who was paying the monthly rent of $8950.  In contrast, the same commercial location was then rented to Ms. O for $3500 per month. To put this reduced rent into a proper context, in 2007, this very location was being rented for $7500 a month.
 

Secretary's Update
Carol Laechelt, Unit 808

Over the past seven months a number of ad hoc committees have been working on updating our lower level governing documents. First and foremost, I want to thank those who have volunteered to assist with this process. One of my goals was to provide more transparency and inclusion in how our building operates.

The first committee updated the Contractor Guidelines. Committee members included owners, professional general contractors and our building manager who must implement and coordinate any renovations in the building.  Mahalo to Paul Best, Jay Henry, and Ken Stephens for their valuable contributions to making the guidelines understandable and fair.  Having general contractors on the committee provided us with their perspective on working in our building. We also connected with other condominium managers both in Waikiki and the Diamond Head area to learn their best practices in the renovation process. The draft Contractor Guidelines were provided to all owners for a 30-day review and the final version adopted by the Board of Directors in October.

The second committee updated the House Rules. Our committee members included owners who rent their unit out via vacation rental pool, owners who rent their units out on their own, and owners who do not rent their unit at all. Mahalo to Brenda Chapman, Val Haney, Terry Jones and Mark Shorter for giving their time and invaluable input into updating the rules we all live by at the Waikiki Shore.  The House Rules draft is ready for a 30-day review and is provided here. Please send any comments to Hazel at aoaowshore2161@gmail.com by January 4, 2018.

First Floor Renovations Update
Jon Gilbert, Unit 1302
 
Since we last reported in July, the First Floor Renovations Committee has received and analyzed six thoughtful responses to the Request For Proposal sent in June. The Committee received responses from the two leading commercial brokerages in Honolulu, Collier’s and CBRE, as well as two smaller brokerages, The Beall Corporation and Fidelibus Properties. The final two proposals were from well-known Hawaii developers, Avalon Development Company and The MacNaughton Group.

As reported at the October Board meeting, the Committee is grateful for the thoughtful effort and advice from each of the companies. We are certainly better educated about the costs, likely benefits and financial returns from redevelopment of our retail areas. The RFP process has provided the Committee and owners insight and recommendations from the best retail experts in Honolulu, all at no charge to the AOAO. The Committee looks forward to sharing the written Business Plan with the Board in advance of the January Board meeting, and thereafter with owners.

As a result of the RFP process, we have learned that a quality renovation of the First Floor will cost significantly more than the $1.5 million estimated by the former President. This “ballpark” estimate is over 5 years old, and it was never substantiated by a contractor’s written bid. Estimates obtained during the RFP process range from $3 million to over $8 million, depending on the scope and quality of the project. The Business Plan will analyze the return on investment to make sure any recommended investment is justified by increased returns to the AOAO. At least one of the RFP respondents has offered to fully capitalize the renovations in exchange for a long term lease.

Most of the experts have recommended that we improve pedestrian access to the shopping areas in order to create the foot traffic that will generate higher sales and higher rents. The consensus is that we should construct one or two stairways from the busy Fort DeRussy walkway that will generate the desired footfall without compromising the security of our apartments. We also heard from several respondents that a quality beachfront restaurant will add cache and increased foot traffic, which will in turn attract better retail shops and higher rents. The Committee is mindful of the concerns of lower floor residents and, if any restaurant concept is to move forward, will recommend strict controls to minimize the impact on residents.

The Committee has learned that the current configuration of the First Floor minimizes rather than maximizes the rentable square footage we can offer tenants. Out of a gross floor area of 8,400 square feet within the Commercial Apartment 1, only 3,300 sq.ft. Is currently rentable. RFP respondents have envisioned preliminary renovation plans that would increase the rentable square footage to between 5,000 and 7,000 square feet.

Finally, the Committee has commissioned a study from CBRE to estimate the impact of a complete renovation on owners’ rental and resale values. This report, due in mid December, will compare similar renovation projects in Waikiki and give an expert’s view of potential increases that are likely from a complete renovation of the Commercial and Common Areas of the First Floor.

We are all owners of the First Floor. Each of us owns a share of the lobby, the commercial retails areas, and the beach. We all deserve a say in the redevelopment, and all of us should ultimately be proud of these more public areas of our property. When the Business Plan is completed in late December, the Board and owners will have greater insight than ever before into the pros and cons of various redevelopment plans that will enable us to make the best informed decision.

The First Floor Renovations Committee would like to thank owners for their patience, and looks forward to a healthy dialogue early in 2018 about the various options presented through the RFP process. Some of the plans we have seen are very exciting and would bring dramatic upgrades to our First Floor property.  We can’t wait to share them with you in January. A few years ago, this potential would have seemed unlikely, or even impossible. Now, at Waikiki Shore, the best is truly yet to come.

Treasurer's Update
Terry Block, Unit 1216 & 1218
 
On November 16th, I emailed an update to you about the current state of Waikiki Shore’s finances. In case some owners may have missed it, I wanted to take this opportunity to repeat much of what I previously reported about the actions taken by the Board at its October meeting and update the numbers as of the end of October. Importantly as well, I would like to provide you with the factual background and the resulting financial realities that drove the Board’s decisions.

I am delighted to tell you that Cash and Cash Reserves have risen from $159,000, at its trough, to over $252,000 on October 31, 2017, of which $20,000 is restricted (security deposits). We have been able to accomplish this by increasing average monthly rental revenue of $52,000 during the January-April period to about $63,000 per month during the May-November period. In August I explained our plan to execute this revenue enhancement, and I am pleased to tell you that it is working! I believe that we can achieve a “break even” year, or even a slight operating profit, for the first time in four years.

In October we worked hard to propose a realistic, fiscally responsible budget for 2018. This began with a first draft budget composed by Hawaiian Properties that suggested a 10.25% increase in HOA fees, proposed as necessary to balance the budget and adequately fund reserves. After taking a closer look at the Hawaiian Properties draft and getting more input from our Resident Manager, the Finance Committee and I developed a revised budget that required only a 3-5% increase in fees to cover operating costs and capital expenditures. The Board, after reviewing this information and recommendation, voted to increase HOA maintenance fees 3% (about $10 per month for a one-bedroom apartment), effective January 1, 2018.

Some of you may wonder why this increase is necessary in the setting of increased revenues from the first floor. Please understand that we will barely break even this year, despite increased retail revenues. Our retail clients can only tolerate so much in rent increases.

We are also being impacted by unforeseen legal expenses as a consequence of a March 1, 2017 alleged lease improperly bearing only the signature of our former Board President and no other Board officer in contravention of Waikiki Shore’s by-laws. Bob Warren has explained this in his article, but I need to emphasize that these inexplicably one-sided rental arrangements have actually cost us over $225,000 in estimated rental revenues, as of this date.

Equally important, our expenses, like yours, continue to rise. Our cost of labor and supplies slowly increase each year, along with our insurance costs which increased over 15% last year; given the recent hurricanes, we face the real possibility that FEMA will increase our flood insurance premiums substantially again. And even with this budget, which has limited contingency allocations, we will have a net contribution of approximately $15,000 to our Reserve Fund. At this time our Reserve Fund is severely depleted, far below the recommended 50% funding, which should be a concern to all of us, and will be a point of discussion at the next Annual Meeting.

Finally, I want to debunk, once and for all, the myth that HOA fees have not increased for over 20 years. In March 2007, the Board imposed a Special Assessment in the amount of $2,611,589. This amounted to over $16,000 for the average one-bedroom apartment. The Board explained that this measure was needed to avoid a 43% increase in maintenance fees. Indeed, functionally this created a more than 50% increase in fees over the last ten years, when amortized over the period encompassing 2007-2017. I certainly would not criticize this assessment, as it allowed the AOAO to offset about $150,000 per year in operating costs related to interest on outstanding loans. But unfortunately, as operating and capital costs have increased during the past decade, our operating margins and cash reserves have dissipated…and we are left with the same maintenance fee structure that was insufficient in 2007. Our goal is to manage the AOAO operations in a fiscally responsible fashion. The Board does not believe that special assessments are an appropriate method to fund ordinary increases in operating expenses. But we need to get our fiscal house in order so that we never need to confront a situation that would necessitate one.