December 2019
Dear Fellow Virgin Grand Villas Owner:
As your owner-elected directors of the condominium association for Virgin Grand Villas at The Westin St. John Resort Villas (the “Resort”), we recently participated in three Board meetings. During the first two, we approved the 2020 annual budget. In the third meeting, on November 11, the three directors appointed by the developer, Westin St. John Hotel Company, Inc. (the “Developer” which is a subsidiary of Vistana Signature Experiences, Inc. (“Vistana”) which in turn is a subsidiary of Marriott Vacations Worldwide Corporation) voted, over our vigorous objection and dissent, to use our entire operating surplus and most of our reserves for future common area expenses, a total of $1,377,959, to remediate mold damage discovered in September in 21 units. These units, along with one other later identified unit, are currently out of service for a total of 22 units. We are writing to update you on recent developments.
Damage to units and dispute about responsibility for the cost of repair
In September, on-site engineering was made aware of mold in several Virgin Grand units. Westin Vacation Management Corporation (the “Management Company”) hired two companies to investigate. The companies reported that there were different problems in different units, but the mold was being caused by water damage resulting from condensation on the chilled water pipes for the HVAC system. It is believed that the contractor that worked on the reconstruction after Hurricane Irma may not have properly sealed off the areas where those pipes were located from the dwelling spaces, causing condensation as the hot moist air from outdoors touched the pipes, and that the contractor that installed the new HVAC system and ducts may not have properly sealed the joints between sections of insulation, causing condensation at those joints. Twenty-two units, including all six of the units in Building 43, three units in Building 44, three units in Building 34, three units in Building 33, three units in Building 32, three units in Building 31 and one unit in Building 41were so contaminated by mold that the Management Company has removed them from service. Many other units also had visible mold or water damage, causing the environmental consulting firm that the Management Company hired to anticipate removal of damaged drywall or ceilings in some other Virgin Grand units (while giving priority to remediation of the 22 uninhabitable units).
The Management Company solicited bids from two contractors. One contractor, Interstate Restoration, has offered to repair those 21 units for a minimum of $1,377,959, plus the additional time and materials cost associated with any damage that cannot be seen until drywall is removed. The 22nd unit was not included in the initial quote. In addition to those unknown costs, there will be the cost of environmental testing after the work is performed, and the cost to repair the other units that are not considered highest priority. It is the opinion of your owner-elected directors that the total cost could be significantly higher. The Management Company has acknowledged that it does not know the actual entire financial exposure, but rather only estimates at this time.
Some of the costs of repair and remediation may eventually be recovered through insurance claims, or claims (including possible litigation) against the contractors that worked on the property after Hurricane Irma and the contractor that installed the new HVAC systems and ducts. But in the meanwhile, repairs and remediation will require a substantial layout of funds.
In our opinion, the Management Company should bear this entire cost, at least initially, and the Association should assign to the Management Company all claims it has for insurance reimbursement and against the contractors for breach of contract or negligence. The basis of our opinion is that the Association and its owner-elected directors had nothing to do with the rebuilding project and that management: selected the contractors; drafted the specifications for the work to be done; supervised the reconstruction and the installation of HVAC equipment; and engaged a third party Manhattan International Construction Company, Ltd. to assist with such activities, as well as make inspections to determine completion of the requested work in accordance with the applicable contract documents.
The Management Company, however, was of the view that the Association should pay for the buildings to be repaired. In the interest of moving forward promptly to repair and remediate the damage, as well as mitigate any financial impact to the Association, the Management Company proposed that it would be willing to consider (a) a split 50-50 of the immediate remediation costs with the Association, (b) that the Association and Management Company would jointly select a third-party expert to review who is responsible for the damage, (c) that the ultimate remediation costs would then be allocated based on the expert’s report, and (d) the 50% of the immediate remediation costs provided by the Management Company would be repaid to it from any proceeds from insurance and/or from the contractors that worked on the buildings (either through the Association’s litigation or a settlement of claims) and based on the expert’s report. As we understand it, the Management Company believes that it undertook the post-hurricane repair work and the installation of the new HVAC systems on behalf of the Association and was not negligent in supervising that work and, therefore, the owners should pay for repairs attributable to bad work by the contractors and seek compensation from the contractors or from insurance.
The Management Company’s proposal has some merit, but we did not think we could accept it. We did not think that we had authority to bind owners to paying, upfront, three-quarters of a million dollars for repairs of damage that we had no part in causing, given that eventual reimbursement from the Management Company, insurance or litigation against the contractors was not assured. We, therefore, turned down this proposal.
At a special conference call meeting of the Board of Directors on November 11, one of the Developer-appointed directors moved to spend, for the first phase of this work, the Association’s entire operating surplus of $1,066,826 (net of $30,000 motioned by the owner-elected directors to retain Association counsel), as well as $311,133 of the contingency fund for future contributions toward our share of repairs and replacements in common areas of the resort, such as the tennis courts and pool. This action effectively wipes out the entire operating surplus and common area contingency funds until an insurance or other reimbursement can be received, which is not a guarantee.
We strongly suggested that the Developer-appointed directors should recuse themselves from voting on that motion, because they had a conflict of interest, since, in our opinion, the Management Company or its affiliates pays the salaries of the three Developer-appointed directors and was at fault for not supervising the work properly. The three Developer-appointed directors declined to recuse themselves, and they voted to spend that money from Association funds. We voted against the motion, which carried 3-2. This was the first time in ten years in which the Developer-appointed directors and the owner-elected directors did not reach a decision by consensus on a significant issue.
We fear that the elimination of our surplus and common area contingency funds will necessitate, in the future, an increase in maintenance fees, particularly since we can anticipate that the Management Company will also, and again, vote to use Association funds for the additional costs of repair, including repairs to and remediation of units other than the 22 high-priority units. In addition, we now have no cushion for unanticipated operating expenses, such as increases in the cost of electricity and insurance.
We note that the first motion was made by us to use $30,000 of the operating surplus to retain an independent attorney, who would report only to the owner-elected directors, to undertake a fact-finding review of the contracts and actions taken by management to assess a possible claim against the Management Company for inadequate supervision of the reconstruction, and for breach of fiduciary duty of the three Developer-appointed directors who are employed by the Management Company as a result of their vote to take the funds for the work from the Association’s budget while the owner-elected directors believe that the fault could well lie with the Management Company. The Developer-appointed directors took the view that they were acting in the best interest of the Association by using Association funds to get the 22 units back on-line promptly. The Developer-appointed directors did recuse themselves on the vote to retain counsel to explore a claim against the Management Company or against the Developer-appointed directors, so that motion did carry, 2-0.
General Manager dismissed
In September, the Management Company dismissed the Resort’s General Manager, Sam Hugli. The Management Company regards this as a confidential personnel matter and would not share with our Board, or any of the other Association boards the reasons for its action. The Management Company has appointed Eugene Martin as the new General Manager effective January 1, 2020. We have been assured that if you have problems at the Resort that Service Express cannot quickly resolve, calling Extension 5000 will continue to get you directly to a voicemail for the General Manager.
Maintenance fee increase for 2020
Although not unexpected post-hurricane, we very much regret that maintenance fees are going up by 9.4 percent (an
average of $206.94 per unit week – less for smaller units and more for larger units) and that we anticipate additional increases for the next year or two. All of the increase results from matters beyond the control of either the Virgin Grand Board or the Management Company. Here is an explanation of why maintenance fees are going up this year, and the next section will deal with what we can expect in the future.
- By far, the largest part of the increase results from additional insurance premiums, particularly for property insurance at resort destinations. The risk management company that the Management Company uses believes that effective June 1, 2020, property and terrorism premiums will go up by 30 percent, and other insurance premiums will go up between 5 percent and 10 percent; these increases have been factored into the 2020 annual budget. Insurance premium increases account for $150 of the average $207 increase. We would like to point out that we have been told by the Management Company’s Risk Management department representative that insurance costs globally have increased due to the many natural disasters, including in large part the ongoing fires in California.
- The second largest part of the increase (nearly $46 of the average $207 increase) results from bad debt – maintenance fees not paid by owners who have been locked out of their units and from whom we are trying, through liens and foreclosures, to recover their unit-weeks so that they can be transferred to maintenance-fee-paying owners. Owners of about 153 unit-weeks are in default for more than one year’s worth of maintenance fees.
- The third largest part of the increase is attributable to increases in wages and benefits for the employees of the Resort. Most Resort employees live on St. Thomas and take the ferry to work every day. Hurricane Irma resulted in a mass exodus of the St. Thomas labor pool and, in addition, the Ritz-Carlton St. Thomas is paying premium wages and benefits. In order to keep a labor force at our Resort, the Management Company has had to maintain wage and benefit parity with the Ritz-Carlton St. Thomas and other St. Thomas hotels. About $28 of the average $207 increase is attributable to this factor.
- Another $23 of that average results from the fact that, for the first time, the Management Company is charging owners of the four Resort condominium associations for the utilities consumed by the common, non-commercial areas of the Resort. This includes electricity to light the walkways, water for the lawns, fuel for the laundry and so forth. The Management Company will continue to pay a percentage of the utility costs, but Virgin Grand (with about half of the units on the Resort) will pay about 45 percent. This charge is being phased in over three years, so there will be another average $23 increase for 2021 and a final $23 average increase for 2022.
- Management fees (10% of the budget under our contract with the Management Company, which we understand is standard for the timeshare industry) are going up by an average of $31 per unit week.
- The balance of the increase is from miscellaneous factors that are also beyond our control, such as a 16.63 percent increase in the rate charged by the electric company, effective in June 2019.
- On the other hand, we were able to keep the increase in maintenance fees to 9.4 percent (down from a 15.4 percent increase that management initially proposed) by making two adjustments. Without these two adjustments, the average increase per unit week resulting from the factors listed above would have been $339.89:
- First, we reduced the annual funding for our replacement reserves by an average of $70 per unit week. Reserve funding remains healthy at the moment, due in part to the extended lives of equipment replaced after the hurricanes, but we will have to increase replacement reserve funding in the next few years to make up this loss to expected reserve funding levels.
- Second, we had a small operating surplus for 2019, and we devoted an average of about $43 per unit week of that surplus (a total of $200,000) to the insurance deductible for future hurricanes. We know that there will be another hurricane sooner or later, so we can’t cease funding for this contingency any time soon.
- In addition to that transfer of surplus, the 2020 annual budget includes $138,000 to continue to build up the insurance contingency fund at the contribution level we have set for ourselves in the past. In fact, our final deductible expense for Hurricane Irma is expected to be about $1.0 million. Fortunately, we had built up the fund over the past several years to $2.7 million, so we have not needed to levy a special assessment.
Expected future increases
Unfortunately, we can expect additional increases next year and probably in 2022 as well:
- Even if there is no increase in the rate for property and terrorism insurance, we expect that the insurance companies will assess the property at a much higher insurable value than in the past, bringing the property value more in line with its market value, and raising the premium we have to pay.
- We will experience two more years of phased-in costs for utilities attributable to the common areas, as explained above.
- We will have to replenish the replacement reserve funds, because we reduced our annual funding this year, as explained above, to keep the maintenance fee increase to a level below 10%.
- For the reason described below, we have to continue to fund the special insurance contingency for the property insurance deductible so that we can ride out the next hurricane. Next year, we are targeting the usual contribution from maintenance fees of about $338,000 rather than the $138,000 contributed from maintenance fees under the 2020 annual budget.
- As explained above, we no longer have an operating surplus to cushion us against surprises or from the anticipated costs described above, and we no longer have a reserve for common area expenses. So in the future, any unanticipated costs will have to be built into maintenance fees. In addition, we have no idea what the cost of repairs to the non-priority units will be. The Association may recoup some funds from claims against the contractors or from insurers, but that is speculative.
Concern about owners who have special sensitivities to mold or compromised immune systems
The Management Company has assured us that no owners or guests will be housed in the 22 most damaged units until they are made fit for occupancy. A remediation company hired by Management Company has not suggested that units other than those 22 should be left unoccupied until repaired, even though some of them have visible microbial growth or water damage. The remediation company advised one of us that it did not test the mold to see what species it is, so we do not know the degree of its toxicity. We are concerned that, although those units may be suitable for occupancy by most owners, they may be dangerous for those who have special sensitivity to mold spores or who have compromised immune systems. We recommend that such owners notify the Resort of their health conditions when making or confirming reservations. Please note that this is a suggestion resulting from an abundance of caution on the part of the owner-elected directors; the Management Company’s view is that we follow the recommended protocol suggested by the environmental consulting firm that it consulted.
Future property insurance deductible
Another bit of unfortunate news is in regard to property insurance. The property insurance policy in place during Hurricane Irma limited the exposure under the deductible clause to a total of $10 million for all the Vistana properties. As a result, the maximum deductible for the entire Resort would have been $2.2 million for a “named” tropical storm or hurricane, which Irma was. Our Association’s portion is expected to be finalized at about $1 million, which we had accumulated in our insurance contingency fund.
However, beginning in 2020, the insurance companies will no longer provide that limiting clause, so our maximum exposure will be 5 percent of the total insurable value, which will be computed in the coming months. That figure could be as much as $5 million. After paying for our share of Hurricane Irma’s deductible, our fund will have only about $1.6 million, and we will have to continue to build up the contingency fund for many more years than we originally anticipated.
On a happier note
After so many years of good news, including essentially stable maintenance fees, constant Resort improvements, and successful rebuilding after Hurricane Irma, we are sorry that this report could not be more positive. However, there is some good news to report. The tropical storm or category one hurricane that hit the island this fall caused only beach erosion and a few fallen trees.
After many delays attributable to the USVI government, the Management Company expects that the Lemongrass Restaurant will be operational by next summer. Although the Sales Gallery has discontinued Monday cocktail parties for owners and guests, there will be a bulletin board (probably in the centrally located registration office, near the fitness center) on which owners can advertise for bring-your-own cocktail parties or potluck meals at which they can meet other owners who visit at the same time each year.
- The tennis courts and all-purpose court (pickleball / basketball) are fully operational except for lighting.
- The lights in the pools in buildings 41 through 44 have been repaired.
- The Kids Club will reopen this fall.
- New sand for the beach is expected soon.
- The lock and spring on the door of the freecycle shed are being replaced.
- Larger tables will be provided for the pool villas’ decks, so that more occupants of those villas will be able to dine outside.
As your owner-elected directors, we have suggested to the Management Company that it establish some kind of secondary market for unit weeks so that financially distressed owners can sell their unit weeks and the Association can bring maintenance-fee-paying owners into the Resort. That would reduce maintenance fees. For the first time, perhaps because of the Management Company’s new ownership structure, the Management Company agreed to consider the idea and did not immediately reject it.
Owner posting board
As you know, for about ten years we have had an owner posting board, accessible from the Vistana website, on which owners can voluntarily register and then exchange unit weeks with each other and rent or sell unit weeks to each other. The site is hosted by a third-party provider. It does not require a moderator, because there are no possibilities for narrative entries, but from time to time Vistana did a small amount of maintenance to the site such as updating the vacation calendars and periodically verifying the site is working properly. For legal reasons, neither Vistana nor the Management Company can no longer provide direction to or interface with the third-party provider. We need a tech-savvy volunteer from among the owner community who would take over this role for the next few years. It involves a very minimal time commitment but might require a phone call or two a few times a year to the provider. If you have had web management experience and would be willing to take on this responsibility, please write to us.
Annual meeting
Your Association’s annual meeting will be held at the Resort on March 2 at 9:00 a.m. We look forward to seeing many of you there.
Larry Pelletier
larrypelletierx@gmail.com
Philip G. Schrag
phil.schrag@gmail.com
the 2020 meeting will be after receiving this news. I left after almost three hours and it wasn't done. One guy complaining about not getting daily free coffee took up a bunch of time. I'm not going to find out, I think I'll just head to the beach. Although I think I'll be able to listen in even if I'm at Maho(It got kinda loud last time.)
