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Key Issues in RAs Planned Independent Tetra Audit

Reston 20/20 Committee


July 10, 2016
The independent Tetra audit task force, to be selected soon by a special committee composed of the
four Reston Association Board Governance Committee (BGC) members and three Reston residents, will
have a challenging task reviewing the Tetra (Lake House) debacle. They will have to determine why and
how RA negotiated and paid roughly twice the market price of the Tetra property, then over-spent its
Tetra renovation forecast by nearly three-fold, and did so without prior RA Board budget approval.
As a result of RA decisions surrounding the Tetra property, RA members are now paying an additional
$78 per household or the equivalent in lost RA services (a roughly 16% loss in services) or capital reserve
drawdowns for overpaying for the Tetra property and renovation cost overruns.
If RA proceeds with the full $1.2 million in Tetra grounds improvements, the acquisition and renovation
of the Tetra property will cost more than $2.9 million in excess costs (vs. a market purchase price for
Tetra of $1.3 million, $250,000 in budgeted interior renovation costs, and $9,000 in budgeted grounds
improvementsa total of $1.56 million), a total excess acquisition and renovation capital cost to each
RA member household of more than $130 in assessment fees, lost services, or unplanned RA reserve
drawdowns, not counting expected operating losses.
By comparison, the Property Purchase Fact Sheet pro forma financial report noted that the total cost per
RA household would be between $2.57 and $4.55 per year in 2018-2010 with no prior impact on
assessment fees or services.
Reston Association (RA) 1 has long been criticized for lack of transparency and autocratic decisionmaking. Tetra is just the latest and most costly example that will financially saddle RA homeowners for
decades. It is critical that the Tetra audit task force identify the root causes and propose reforms to
ensure that such mistakes never happen again.
To assist that task force, we have identified eight key issues that we believe it needs address and resolve
in review of the Tetra situation.
Key Issue #1: Origination and Negotiation of the Tetra Purchase Deal.
Background: The first RA members heard about the proposed purchased was in the January 2015 RA
Board meeting when, after an Executive Session to discuss the matter, the Board voted to approve an
agreement in principle with Tetra Partners to purchase the Tetra property.
Questions:
1. How did the discussion between RA and Tetra Partners originate?
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In using the abbreviation RA in this statement of key Tetra issues, we refer to both members of the RA Board
and the RA staff unless we otherwise distinguish between the two.

2. Who initiated the dialogue between RA and Tetra Partners concerning the property?
3. Who participated in the discussions with Tetra Partners prior to the January 2015 Board
meeting?
4. When were all Board members informed of the ongoing negotiations with Tetra Partners?
5. Why did RA not release information concerning the negotiations to its members before January
2015?
Key Issue #2: Selling the Tetra Purchase Agreement.
Background: From the moment the RA Board agreed in principle to purchase the Tetra property, RA
provided only positive information about the benefits of the Tetra acquisition. Besides the Property
Purchase Fact Sheet and a two-page Board Tetra Vote Flier urging a yes vote, this included a
community meeting at Browns Chapel and several op-eds by RA Board members in RestonNow, among
other actions. There was no RA critical, let alone, balanced analysis of the need, price, costs, revenue
opportunities, condition, or other important issues in the acquisition of the property, only a one-sided
sales pitch calling for RA voter approval in the referendum.
Questions:
1. Besides the information RA provided the public, what information did RA possess on the true
need, market value, physical condition, renovation costs, revenue opportunities, and other
information about the Tetra property?
2. When, why, and how did RA choose not to present a balanced picture of the pros and cons of
the merits of purchasing the Tetra property in the information it shared with the public?
3. What was the legal, moral, and ethical basis of this (#2) decision?
Key Issue #3: The Tetra Purchase Price.
Background: For reasons still unknown, RA agreed to a price of $2.65 million for the Tetra property
when the County assessed its as is market value at $1.20 million as of January 1, 2015. RA paid for a
property assessment for the assumed use of the building as a restaurant that was also assumed to be in
a good repair. The appraiser set the value of the property as a restaurant (with 6,930 SF of space, more
than double the buildings current size) at $2.65 million although the appraiser also put its value as an
office building property at $1.30 million. Another appraisal by the same appraiser for RA in 2010 also
led to similar valuations at slightly lower prices due to market conditions and inflation. Neither of the
appraisals noted the constraints on building additions at this site due to the Chesapeake Bay Resource
Protection Area (RPA) legislation and regulations nor the extensive RA easements over most of the
property limiting parking or other expansion. Other than the owners insistence that RA pay $2.65
million for the property, it is unclear why that price was agreed to by RA given the two appraisals.
Questions:
1. Other than the sellers reluctance, why did RA agree to pay $2.65 million for an assumed
restaurant use in a non-existent building that was more than twice as large as the one that
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existed and would almost certainly not have been permitted by the County due to the RPA?
Who participated in reaching the preliminary agreement?
2. Why did RA give instructions to the appraiser to appraise the property (a) as a restaurant, a
purpose for which it was not zoned, (b) at a size (6,930 SF) more than double the size of the
existing structure, and (c) as if it were in good condition? Who gave those instructions?
Key Issue #4: RAs Projected Tetra Renovation Costs during the Referendum.
Background: In publishing the Property Purchase Fact Sheet for RA membership as background to the
referendum, RA provided a pro forma financial statement for the first five years of RA ownership of the
Tetra property. In preparing that fact sheet, RA provided a forecast was that the renovation and
repurposing of the interior of the Tetra building would cost $250,000 based on an estimate renovations
would cost $80/square foot. The same fact sheet put the cost of renovating the grounds at $9,000.
Rather than $250,000 for interior renovations (and $9,000 for grounds work) as laid out in the pro
forma, RA staff told the Board of Directors in a May 2016 briefing entitled, Updates Lake House
Operating & Capital Budgets, May 2016, (see p. 17) that renovation costs for the Tetra property had
nearly tripled to $687,131, including more than $9,000 just for planning costs for the grounds work.
RA has not disclosed whether other interior renovation, repairs, or repurposing will be required in the
next few years.
Questions:
1. Why did RA use $80/square foot as basis of its interior renovation forecast?
2. Who made this estimate and how was it made?
3. What role, if any, did the property assessment and the property condition report RA conducted
have on the estimated cost of interior repairs, repurposing, and renovation?
4. What assumptions about the condition of the Tetra property and the costs associated with its
re-purposing as a community facility (vice existing office space) were used in making that
estimate?
5. What additional repairs, renovation, or repurposing costs are anticipated for the Tetra building
through 2020 and beyond?
Key Issue #5: The Absence of an RA 2016 Tetra Renovation Budget
Background: The RA Board never did approve a capital budget for the repair and renovation of the Tetra
property in its regular autumn 2015 budget cycle nor did RA staff propose one. The apparent reason for
this is that RA was not yet aware that Tetra Properties did not intend to continue to lease the property
in 2016 as permitted in the purchase agreement. In fact, RA assumed that Tetra Properties would
continue to lease and occupy the property through 2016.
That said, during a presentation to the Board in May 2016 entitled Updates Lake House Operating &
Capital Budgets, May 2016 (pp. 20-25 of the RA Board meeting package), the RA CEO pressed the Board
for an additional $430,000 capital budget above the pro forma estimate of $259,000 to meet anticipated
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renovation costs of $687,131. The Board approved the addition although, again, it had never
approved a base renovation budget of $259,000.
A July 2016 draft RA Capital Projects Dashboard (pp. 37-38) to be presented to the RA Board
Operations Committee (BOC) on July 11, 2016, appears to affirm that RA had never approved a 2016
budget line item for Tetra renovations. In fact, it does not even acknowledge the $430,000
supplemental budget approved by the Board in May.

At the bottom of the first page of the two-page spreadsheet, the last entry on the dashboard
indicates that RA spent $503,507 on Tetra (Reston Lake House) that had not been budgeted.
This sum may be linked to the 2016 Lake House Budget (p. 99 of the Board meeting packet)
update the CEO presented to the Board at the June 2016 Board meeting, although that
spreadsheet indicates RA expected to spend more than $616,000 on Tetra by the end of June
2016.
At the bottom of the second page of the spreadsheet, Tetra (Reston Lake House) is listed as an
add-on for which no funds have yet been budgeted. In fact, it shows no plan to budget for
Tetra capital improvements as a budget line item.

Our reading of these RA documents is that (a) the Board has authorized the spending of $430,000 for
the renovation of the Tetra property (May 2016 Board meeting), (b) the RA staff has spent $503,507 on
those renovations (per the Capital Projects Dashboard), and (c) the RA staff intends to spend $687,131
on Tetra renovations (per the May 2016 CEO update to the Board) by the end of 2016.
Questions:
1. By what legal or other authority did the RA staff spent any funds on the renovation of the Tetra
property in 2016 prior to the May 2016 addition of $430,000 Tetra budget item?
2. What has been the unofficial role of the Board or Board members in supporting the RA staffs
expenditures on Tetra renovations in the absence of its approval on the 2016 budget?
3. Who participated in the decisions to make agreements and spend RA funds on the renovation of
the Tetra property without Board approval?
4. What are RAs intentions in approving funding for the balance of the renovations it plans (and
apparently has signed agreements) to carry out this year?
5. What is the cost per RA household of the Tetra renovation costs this year?
6. If the RA Board intends to approve full funding for 2016 Tetra renovations ($687,131 per RA
staff), where will those funds come from?
7. What RA programs, personnel, or other activities will be cut to accommodate the additional
funding of Tetra renovations (which we estimate at $259,000 or more)?
8. What renovations does RA intend to budget in 2017 and beyond? What will be the impact of
those renovations on RA assessment fees?

Key Issue #6: RAs Projected Tetra Operating Income and Costs.
The Property Purchase Fact Sheet included a pro forma financial statement for the years 2015-2016 that
included significant operating revenue, first, from rental of the property to Tetra through 2016 and,
second, from RA programs to take place in the facility. Revenues have fallen short already by more than
$100,000 because of Tetra Partners decision not to exercise its option to remain in the building through
2016the only revenue anticipated from the Tetra property as of the time of the referendum and
publishing of the Fact Sheet.
Despite having lost that rental revenue, RA staff now forecasts the Tetra property will generate more
than $175,000 in High Level (definition unknown) revenues (achieving a net operating loss of $4,000)
through the balance of this yearas a result of expedited completion of the buildings renovationand
over $388,000 High Level revenues next year (more than a $50,000 net operating profit), nearly
double the amounts forecast in the Voters Guide last year. These forecasts were prepared by RAs Lake
House (Tetra) Working Group (LHWG).
A revised 2016 Tetra operating budget was approved by the RA Board in its May meeting based on the
latest LHWG forecasts although the Board was shown only the net operating income figures. It does not
show the revised operating revenue or expense projections, and none of the assumptions or
methodology that went into calculating those revenues and expenses.
Questions:
1. What was the methodology, including assumptions, market analysis, capacity utilization
estimates, comparative market rental rates, etc., used in the development of the Voters Guide
to forecast RA program revenues and costs through the next five years? How reasonable was
this approach? Who made these forecasts?
2. What change in methodology, including assumptions, market analysis, capacity utilization
estimates, comparative market rental rates, etc., was used in the development of the revised
program budget revenues for 2016? How reasonable was this approach? Aside from the early
completion of Tetra renovations, why were these changes made, how were they made, and
who made them?
3. What is the best and latest estimate of RA program revenues and expenses at the Tetra facility
through 2020?
Key Issue #7: RAs Projected Tetra Exterior (Grounds) Renovation.
Background: The pre-referendum RA Property Purchase Fact Sheet put exterior (grounds)
improvements at a total cost of $9,000. Recently, at the direction of RA, the Lake House (Tetra) Working
Group (LHWG) proposed a series of grounds improvements without costing them. A consultant
subsequently said the improvements would cost $1.2 million. RA has not decided which of these many
improvements, which ranged from added parking to a new dock, to proceed with or how to pay for any
of them as of this writing.

Questions:
1. How did RA arrive at an estimate of $9,000 for exterior grounds work? What assumptions about
the condition of the ground and the propertys re-purposing as a community facility were used
in making this estimate? What other factors were considered in this estimate? Who made this
estimate?
2. Why did RA give the LHWG instructions not to consider the cost of proposed grounds
improvements in its work? Who gave these instructions?
3. When and what grounds improvements does RA intend to proceed with?
4. How does RA propose to pay for improvements the LHWG has proposed?
Key Issue #8: Authority to Commit and Spend RA Funds and Timing of Disclosure
Background: At the June 2016 RA Board meeting, the CEO provided a detailed table entitled 2016 Lake
House Budget Report (p. 99 of the BOD Meeting Materials) which showed both capital expenses and
operating revenues and expenses through May and projected through the end of the year. The capital
portion of the table (the bottom half) showed actual payments through May for exterior construction,
consultants for interior construction, permits and expediting fees, general contractor, furniture, and
IT/AV costs totaling more than $258,000, including more than $9,000 for property park concept
planning.
According to the June budget report table, RA planned to pay for more than an additional $400,000 on
capital improvements to the Tetra structure in June 2016, driving the CEOs May 2016 request for an
addition to the Tetra budget of $430,000. At the June RA Board meeting, the CEO subsequently
identified the source of funds for $400,000 of the $430,000 (p. 139 of the BOD Meeting Materials)
needed to augment the Tetra renovation budget. She promised to identify the remaining $30,000 in
July.
A separate table in the June RA Board meeting presentation (p. 138 of the BOD Meeting Materials)
appears to show a series of 2016 agreements or contracts with various providers along each row of the
table. In each case, these agreements were apparently reached by February 2016 since payments to
most of them were made that month with arrangements to backload most of the payments until June
2016.
If this analysis is correct, RA knew that the renovation of Tetra was going to cost much more than the
$259,000 allowed not later than March (the contract with the general contractor alone totaled $504,000
with the first payment made in March), the height of the RA Board election season. It is not clear who
knew the extent of the cost overrun and when until the public was first informed at the May 2016 RA
Board meeting.

Questions:
1. When did RA know that the capital budget for Tetra renovations was going to substantially
exceed the amount laid out in the Property Purchase Fact Sheet ($259,000), and who knew that
information?
2. Why was the Board and public not informed of the massive cost overrun at the time this
overrun became evident and who made that decision?
3. What role did the ongoing RA elections play in deferring public and official Board notification of
the massive cost overruns and who was involved in those discussions?
4. By what authority did RA sign agreements/contracts for $687,000 in Tetra renovation work
when it knew there was not budget for Tetra renovations, and who and how was that decision
made?
5. Who is responsible for signing the agreements/contracts for 2016 Tetra renovation work?