Finance Committee Update Report

January, 2011

Dear MKL Resident,

We thought it would be a good time to give you an update regarding the activities of the MKL Finance Committee (FC), including what has happened since the July, 2010 Special Meeting, a new proposal by the FC, and how the FC plans to go forward. In Appendix A, we’ve provided some Questions and Answers that further explain the FC’s new proposal, and the FC’s rationale in advocating it.

A Refresher

The FC identified an estimated $650,000 ($65,000/yr) of capital maintenance projects that will need to be done at MKL in the next decade. See Question 1 (Q1) in Appendix A for more discussion on these cost estimates.

The FC proposal of July 2010 to pay for these maintenance items included a Membership Fee in the MKL Association for new lake residents, a decrease in property taxes by conservation-easement of some Lakeshore properties, and using $260 of the current roads fee, beginning in September 2012. All these monies would be put into conservatively managed Reserve Funds and dispersed only on capital maintenance projects in the 2012 – 2021 timeframe.

The membership fee proposal was voted on at the July, 2010 Special meeting and, while garnering about 60% of the votes, failed to achieve the necessary 67% (2/3) super-majority. At the meeting a number of residents said that they were not adequately prepared to consider these proposals, and volunteered to form a Subcommittee (SC) to study them further, and report back to the FC. The vote to tax-abate a number of properties was deferred.

The SC met a number of times, produced a document listing options which might be considered to meet the capital financing required during the 2012–2021 timeframe, and held a community-wide meeting on Nov. 3 for MKL residents to discuss the options and straw-vote on them. The meeting was attended by about 33 MKL households and produced a number of straw-vote results, which are given in Appendix B.

A New (Modified) Proposal from the FC

The straw votes on Nov. 3 (see Appendix B) confirmed a number of community preferences the FC had believed to be true:

- The community does not want to sell land.

- The community is willing to tax abate lots.

- There is a majority interest in instituting an Association Membership Fee.

- The community prefers reserving funds to borrowing for capital maintenance.

Based on these indications the FC has modified its July proposal to include the following elements:

- Institute a smaller, fixed-amount Association Membership Fee - 1 year’s total dues (Lakeshore + Association) and spread out the payment of such a fee from a new resident in 4 payments.

- Tax abate ALL property except 2 lots (i.e., the ball-fields)

- Continue ALL of the current roads fee ($400/yr/household)

Here’s a comparison on how much each proposal would raise yearly (figures rounded and approximate):

ß---------------------July, 2010 Proposal-----------------------------àß---------------------------January, 2011 Proposal------------------à

Revenue Source	Amount	Yearly Contribution	Amount	Yearly Contribution
Membership Fee	1% of sale	$30,000	1 year’s dues	$12,400
Land Abated	16 Lots	$10,000	All lots except ball fields	$16,000
Road Dues Used	$260/house	$25,000	$400/House	$38,000
Total		$65,000		$66,400

How this Proposal Reflects the MKL Community’s Indicated Preferences

- Membership Fee:

The membership fee in this proposal is a fixed fee and substantially smaller than that previously proposed. The amount is one year’s combined dues (Lakeshore + MKL Assn, currently $3100)) instead of the previous 1% of sale price (roughly $7500 on average). This change accommodates the community’s interest in having a membership fee (the July 2010 meeting garnered 60% in favor of a fee), but makes the amount less onerous on a new member, and treats all new members identically.

The FC heard from a number of residents that they believed that a percentage-of-sale-price membership fee would lead to a reduced net sale price of property at MKL. A fixed fee correlated to the current dues disassociates the membership fee from the purchase transaction of the property. To further disassociate the payment of the membership fee from the sale of the property, the FC proposes that the membership fee be structured as a supplement to Association dues, and be paid in 4 installments over the 4 billing periods subsequent to the purchase of property at MKL. Each billing period would collect an extra $775 (25% of $3100) from the new owner. No charges would be assessed at closing time, and the regular Association dues mechanism would be used to collect the supplement.

To address the concern that a membership fee might be unfair to a member who sells soon after buying, the FC proposes that a buyer-turned-premature-seller only be responsible for membership fee payments for those billing cycles which occur during the period in which the seller owns the property. For example, if the property is sold after two billing cycles, the departing member only pays for those two cycles (totaling $1550). A new member who purchases a “prematurely-sold” residence pays a full membership fee.

The membership fee:

· Would not start until 12 months after its approval.

· Would not apply to a resident moving within the community. The Association would receive a membership fee from the new-to-MKL resident of the house a current member vacates.

· Would not apply to children of residents who inherit and occupy their deceased parents’ home.

- Land Abatement

The community hasn’t sold a buildable lot in 35 years, and the majority of community members do not want to sell land to fund capital improvements (see straw result #2 in Appendix B.). The straw-polled sentiment of the community seems to be so against any land sales that the FC is hard pressed to imagine a scenario in which the community would vote by the required 2/3 super-majority to approve the sale of a buildable lot. The FC has concluded that paying taxes of $32,000 per year on its lots is a significant misuse of dues by Lakeshore.

Primarily because it believes that buildable lots will not be sold at MKL, the FC proposes conserving ALL land EXCEPT the ballfields. The ballfields would continue to be used as a repository for dredge spoils and thus save MKL residents an estimated $40,000 for trucking dredge to a remote site (even after paying taxes) over 25 years. If the community at a later time wants to sell property, the ballfields would be available. Secondarily, the FC believes that a proposal to abate only some lots would founder on the actual selection of lots – that is, the community could not agree by a 2/3 super-majority vote on an actual list of lots to be abated.

Note that the FC is unsure how much tax relief conservation easing these lots will yield. In the past we have gotten taxes completely eliminated on lots like those adjacent to the club house, but are unsure what will happen this time. We have used 50% tax reduction as an estimate. We are investigating the matter and will be seeking as large a reduction in taxes as is feasible.

- Road Fee

Included in the current yearly dues is $400 for roads upgrades/maintenance. As there is substantial roadwork needed in the next decade, the FC proposes that all of the $400 be continued. Continuing this fee accommodates the community’s interest in funding some of the required revenues out of dues (see straw result #1 in Appendix B).

- CAVEATS:

· These plans are a model of revenues and expenses over ten years and should not be taken as exact numbers. As mentioned earlier, the costs of future maintenance are estimated, and the timing of various maintenance activities could differ from the assumptions of the FC.

· Regarding revenue from membership fees, the number of new memberships is estimated at 4/yr. This is 90% of the 20-year historical average of 4.4 houses per year sold at MKL.

· For this plan, the FC assumes that conserved land will have its tax reduced by 50% (but we hope for substantially more).

What’s Next?

Since the FC has a goal of instituting the Capital Reserve Program in the first half of 2011 (no additions to the reserves would happen until 2012), it would like to vote on a proposal early in the year. To this end, we will have an Inform Session as part of the Jan. 28^th annual meetings in order to get a sense of the community’s support for the proposal. If the community supports the proposal, we will be able to proceed with a vote at a special meeting in March. If the support is not there, the community must decide how we will pay for the projects to maintain our infrastructure. Ultimately, if no agreement can be reached with adequate lead-time, the FC recommends that a series of assessments be made in order to pay for the capital maintenance projects.

What You Can Do to Help

We would appreciate your contacting us to share your thoughts so that we can be as inclusive of community views as possible. Also, please share with us any concerns you have so that they can be addressed.

Whatever proposal is put to a vote will need a 2/3 super-majority to affect dues, a membership fee (which is a form of dues), and land sales. The 2/3 super-majority is a high hurdle and requires compromise and community-wide support.

The FC has obtained advice from our legal council and believes that our current proposal remains comfortably within the realm of NJ real estate and homeowner association laws. If you disagree or know of any legal, financial or other impediments to the new proposal we would appreciate hearing from you soon, so we will have time to research them and modify the proposal, if needed. Here is FC member contact information:

Rick Barrett: 973-425-1414, ribarrett@aol.com

Lori Denson: 973-425-8995, densonlori@yahoo.com

Terry Dwyer: 973-723-4452, terry.dwyer48@gmail.com

Davor Gjivoje: 973-425-1450, dgjivojejr@networldinc.com

Austin Godfrey: 973-425- 6491, aegodfrey@verizon.net

Bob Yingling: 973-425-1192, robert.yingling@gmail.com

Appendix A

Questions and Answers

Q1: Why is so much money needed? How did you arrive at those figures? Might it be less?

A1: The money is slated for capital projects costing more than $10,000. The largest components of our projected future capital expenses are road paving (50%), water system repair (30%), dredge-work(16%) and clubhouse repair (4%). These are not emergency situations, with the possible exception of certain water system components, but they are very important capital projects required to keep MKL’s infrastructure in good shape. Given the extended timeframe we are looking at, the figures are estimates with +/- 20% accuracy.

The FC considered hiring outside engineering firms to do the physical inventory of to-be-maintained capital assets, but upon reflection decided that for a first go there was local expertise available (e.g. the town engineer was consulted regarding the average life of asphalt roads, the history of dredging was used as a guide to how often the parts of the lakes need to be dredged, etc.) and thus to forego the expense.

Q2: How big are the reserves going to be?

A2: Over the 10 years we will spend more than we take in, so we should wind up a bit lower than where we began. Here’s a table showing the approximate size of the reserves throughout the period:

Year	Ending balance
2011	$80,000
2012	$62,000
2013	$76,000
2014	$119,000
2015	-$96,000
2016	-$179,000
2017	-$125,000
2018	-$71,000
2019	-$17,000
2020	$37,000
2021	$40,000

These figures assume $65,000 per year are put into the reserves, except in 2012, where we assume only $32,500 are put in. The figures are rounded to the nearest thousand and don’t include any earnings or borrowing costs for the reserve system. We start with about $80,000 already reserved (yes, we have reserves now!). The reserves build until 2014 when a large paving project in 2015 causes them to go negative. The reserves gradually recover, going positive in 2020, and winding up at about half of where they began. The 2015-2019 cash flow problem can be solved either by:

- using short term bridge loans

- delaying projects until sufficient funds are available

Note that delay is possible for the roads and dredging projects, but may not be possible for certain water company projects (e.g., resident impacting leaks).

Q3: Isn’t Lakeshore giving away our common assets (i.e. land)? What happens if there’s an emergency and we need money?

A3: Lakeshore hasn’t sold a buildable lot in 35 years, and it appears that community sentiment is overwhelmingly against selling lots for capital improvements. Regarding emergencies:

· Lakeshore and the Association now carry large liability policies (approximately $15 million dollars) protecting against many harmful events.

· In the event of a large adverse financial impact, it’s likely that the value of the lots would plummet.

o Who wants to buy at the lake if the dam is washed away (there is no lake!)?

o or an earthquake has fractured all the water system pipes (we’re trucking in water)?

o The property, which in good times may take a substantial period to sell, would either not be sellable or would have to be drastically reduced in price to be sold. Then, its supposed utility as an emergency hedge would have vanished.

· Holding onto the land comes at a price … about $38,000/year. Some argue this is a small price to pay for “keeping options” open. The MKL community has been paying for such options for 35 years without exercising them. This approximates at least $1.4 million (2010 dollars: $38,000 x 35 years, earnings on funds not included) to “keep options open”. The FC believes this is not a good use of the community’s dues. Rather, the FC believes it is better to use these dollars on capital maintenance projects.

· No matter what scenario one comes up with (paying for a disaster, building a new amenity), 1/3^rd of the community can block a sale. Right now it seems that about 90% of the community is against selling.

· Finally, one might argue that conserving the land increases the value of the already developed lots at MKL. Everyone likes privacy and natural beauty, and having it assured allows sellers to tell potential buyers that MKL will remain as it is. In this sense we aren’t giving away common assets, we’re using them to enhance the value of our private assets. The FC believes that this enhancement will benefit not only owners of properties adjacent to common lots, but, to some extent, all properties at MKL.

Q4: Don’t we need the property as collateral if we need to borrow money?

A4: No. In our most recent borrowing transaction (to repave the roads) the bank didn’t want the land as collateral. It wanted us to raise dues, and for the bank to have a first call on those dues (i.e. the bank gets paid before any other expenditures). In other words, the bank didn’t want a “lien” on our land, but instead it wanted a “lien” on our dues and on our ability to assess dues, when necessary.

Appendix B

Following are questions which were straw-voted at the Nov. 3 SC meeting. Verbatim minutes of this meeting can be found on the MKL web site, along with much other information on the work of the FC and SC.

1. Should dues be used to fund all or part of the capital reserves?

Yes = 26    No = 7

2. Should land be sold to fund all or part of the capital reserves?

Yes = 5  No = 29

3. Should lots be put into easement, with tax savings being used to fund all or part of the capital reserves?

Yes = 33  No = 3

4. Should we put ALL lots into an easement to fund capital reserves?

Yes = 18  No = 16

5. Should a percentage membership fee be used to fund part of the capital reserves?

Yes = 18  No = 15

6. Should a flat membership fee be used to fund part of the capital reserves?

Yes = 9  No = 21

7. The option of borrowing instead of reserving was raised but received virtually no support.