Whistler Pique Article – Digging a Little Deeper

BAW4.2There was a story in the Whistler Pique this week by Braden Dupuis covering an owners dispute at the Nita Lake Lodge but more importantly identifying the flaws in the Whistler Phase 2 real estate model when the City doesn’t administer it’s own covenant.

We thank Braden and the Whistler Pique for bringing media attention to this story and we hope there is subsequent coverage that digs a bit deeper.

While there are many disputes at Whistler that involve project economics, this situation involves more fundamental flaws.  It reveals how Whistler knowingly not only leaves investors vulnerable to predatory behavior and catastrophic losses at its projects, but enables them.

The Whistler Pique article represents 3 different points of view;

1) Our group of owners who believe property and contract rights have been violated by a predatory investor who unilaterally appointed himself manager for his own financial benefit.

2) The investor/manager who says that he has done nothing but try try to save a hotel from financial ruin and justifies his actions using the Whistler covenant.

3) The City, who even though it’s their covenant that is enabling this behavior, says they don’t want to get involved.

By way of additional background, we are all owners who invested and bought units in the Nita Lake Lodge almost 10 years ago. We all loved Whistler and thought the notion of owning units that we could use occasionally but also rent might be a fun way to have a place at Whistler. This is the bread and butter model at Whistler – it’s the experience they sell to people from all over the world and it’s the way they fund development of the resort.

However in 2011, the previous manager, a gentlemen named Ram Tumuluri, ran into financial difficulty and began negotiating with Michael Scholz, a Vancouver investor and former lawyer, to become a partner with him in managing rental of the units and an owner of 50+ rooms at the Nita Lake Lodge (this project has a total of 77 rooms).

We never fully understood the full extent of their relationship, but suffice to say it ended badly between the two. As a result In December 2011, about six months after they began working together, Mr Scholz abruptly announced that he was taking over management of the front desk.  Shortly thereafter, he entered into an agreement to assume the Rental Pool Management Agreements from the previous manager.

Who was this investor? Why did he think he should unilaterally assume the front desk operations? Why was there no independent selection process or consent of any of the other owners?  And why, if the previous manager was unable to continue operations in an alleged emergency, would he not agree to the appointment of a bankruptcy trustee, or other third party to help administer the situation?

Michael C. Scholz is a Vancouver investor and former lawyer who was previously sanctioned by the BC Law Society for Trust Fund violations, not to mention a man who had been sued by his own mother over a real estate dispute.

The Nita Lake Lodge is a major Whistler project (we were told it cost about $90MM to build) and as any real estate expert will tell you, if there’s a need for a management transition at a project like this, the customary and right thing to do is to set up an orderly process to solicit the best long term leadership and deal structure going forward.

Now, to the many arguments Mr Scholz has made to the Whistler Pique and others justifying his behavior;

1) I had to take over management to save the hotel.

Why would any unit owner think it was their job to take over a hotel’s operation to save it? And then just go ahead and do it without consulting or receiving the consent of other owners? Shouldn’t all owners come together and conduct an bidding process to select the best manager for the property?

We suspect there are other unhappy unit owners at other Whistler projects, perhaps the Four Seasons, the Westin, the Hilton…….would it ever be acceptable for a unit owner at one of those projects to say “I’ve decided I don’t like how the hotel is being run so I think I should become the hotel operator,” then unilaterally appoint themselves hotel manager? Some how, we don’t think so.

2) The Project economics didn’t work.

We are quite sure that real estate projects like this often have financial difficulty.  BC, unfortunately, has it’s share of strata hotels that needed some adjustment in their model.  However, this process shouldn’t be decided by one aggressive owner who also fancies himself a hotel manager. The job of reconstituting the overall budget and the changing of the rental revenue structure is one that all owners should participate in. If a model needs to be changed to make the project run more effectively, that’s the move.  But that should be a process where all possible hotel management options are invited to bid on the project and submit proposals based on economics they believe to be viable, and then owners agree on a selection.

By the way……when you own more than 50 rooms out of a total of 77 and you are also the manager, it means that on about 70% of the rooms…….you get 100% of the total transactional revenue. It doesn’t matter if the share is 50/50, 60/40, 70/30 …….a unit owner who is also the manager gets both sides of this room rental transaction, therefore 100%. And since most of the common area expense and basic utilities are paid for by our strata fees and all of the other revenue (like food and beverage) goes to the manager at this project anyway, the revenue share paid to those owners under the RPMA who have not signed on to this manager is now likely less than 5% of the entire hotel operations. So this managers “economics don’t work” argument is simply a red herring for someone who simply wants to manage and control a hotel project himself.

If we had the data, we would of course be speaking more precisely about this project’s finances.  However, despite requests for proper financials from the new manager, reporting has been poor.

We have NEVER received an audited set of financials statements in over 2 years.  The manager argued that was too expensive for him to do. That alone is a red flag, and should disqualify someone from managing a major project, especially when the whole argument for their management is that only they can “rescue” a project from previous challenges.

3) The RPMA’s were terminated due to previous managers insolvency.

This one is really wacky. This investor actually took over and assumed the Rental Pool Management Agreements (RPMA) from the previous manager (the gentleman we thought was first his partner before their falling out). If he didn’t like the agreement then why did he assume it?

Some months later…..once he was able to call a vote of the strata, this manager tried to use his majority role on the strata to retroactively terminate our RPMA’s.  His argument was quite technical.  There’s a provision in project agreements that allows owners terminate an insolvent manager.  This investor argues that even though he assumed the deal from the previous manager in order to get the desk, the provision allowed him to terminate the deal he assumed because the previous manager was insolvent. How do you retroactively terminate a deal you have already assumed?

All that said, the whole notion of this manager either assuming or terminating the RPMA’s proved to be meaningless anyway because he rented out owners rooms for periods amounting to more than a year when he paid us nothing anyway.  Keep in mind that this is the same guy who is wondering why we don’t want him as manager now. Why would you ever work with a manager who uses your room and doesn’t pay you and doesn’t provide you with regular monthly or annual audited financials?

As you’ll see elsewhere on this blog, he’s also now changed locks on owners’ units who won’t accept him as manager and locked those owners out of their own property.  Owners haven’t been able to access their property since September, 2013.

4) I’m selectively suing those who don’t accept my terms

Owners who insisted that a bidding process for new management take place, have been threatened for some time with lawsuits by Mr Scholz. Several owners simply grew tired of getting threatened, and starved of any income, and acquiesced under the pressure.

Mr Scholz has just launched a new lawsuit against the remaining owners alleging claims and damages that if they had any merit at all would likely apply to all the other owners in the project. However, the only owners that are getting sued now are those who refuse to accept his new management terms. An interesting and telling strategy.

5) The Whistler covenant says there must be a single manger, therefore it must be me

Why must it be him? Why not a professional hotel management company selected in the proper bidding process conducted and approved by all owners and then approved by Whistler (which is actually a requirement of its covenant)?  Shouldn’t Whistler prefer that to what it has at this project?

As we’ve worked through this for two and a half years, we’ve come to appreciate this is more a story about Whistler than we originally realized.

Whistler markets itself to the world as a world-class resort.  It promotes the development of these projects, and its City government sets up rules for how they’re supposed to work.  It is not an exaggeration to say Whistler recruits and depends on outside investment to build its resort, but once its built, they head for the hills.

There are almost 5000 Phase 2 units in Whistler including the Four Seasons, Pan Pacific, Hilton and many more (here is the list). Our main concern is how the City of Whistler attaches covenants to Phase 2 properties, allows abuse like the kind described above to occur, and then when asked to restore some semblance of order, disappears into a state of evasive intransigence (which seems to be a theme these days around Whistler land use) and says, it’s not our business.

Here’s the part that’s most astounding.  This manager is basing his conduct entirely on Whistler’s covenant.  If he couldn’t claim that protection, he couldn’t lock owners out. Whistler can release the covenant by a simple vote, but it appears they are so afraid of getting involved, that they will allow an obviously horrific situation to continue.

Since we launched this blog, we’ve learned about other projects in Whistler, and it’s clear now that Phase 2 comes with a lot of issues.  Some have suggested to us the whole Phase 2 model needs an overhaul.  We hope not, and we think, with good management ar projects and proper leadership within the RMOW, it could still work.  But If Whistler won’t help us in a situation as bad and as blatant as this, it likely means they won’t help you.

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