The Virtues of a Failed LLC

The consequences of a failed LLC are fairly obvious.  There are some unknowns about our services and amenities, and importantly, several neighbors who risked their money in order to pursue an enviable dream will lose all of their investment.  There would be nothing to celebrate if these substantial, personal losses materialize.

However, at the risk of being perceived as insensitive, it seems like a reasonable and prudent exercise to look ahead and consider the potential benefits of bankruptcy.

If the LLC becomes insolvent, one possible outcome returns the resort to Glen.  If this occurs, everything changes in a way that could be for the betterment of the community.

Let's put our "Glen hat" on  for a few moments, and imagine what the resort might look like through this eyes:

• First on his mind will probably be the loss of monthly income (about $7k/mo), so he will have an interest in restoring all or part of that income.  
• Second, his $1.2M promissory note will not be paid in full in 2014, as hoped.  Therefore, selling the golf course will probably be his highest priority.  It may not be easy to do in this economy, so he might have to make the best of the situation until he can sell.
• Glen doesn't have a house or condo here anymore, and he only lives in WA part of the year.  He will likely want to limit his presence here, and limit his liabilities and responsibilities.   In order to improve his chances of selling the resort, it is in his best interests to:
• Keep the resort in good condition
• Avoid possible lawsuits
• Glen will need an on-site resource to manage the resort business since he probably won't be able to do it himself.  I'm guessing the most likely candidate would be Mike Olmstead, and this in itself would improve the ambiance of the resort.  His promotion and empowerment, combined with the goodwill he has earned throughout the community, would likely bring a level of honesty and integrity that the community is yearning to see.  This will result in a level of community support that the LLC has not been able to earn.

I don't think Glen will be doing anything for free, but there are a couple of factors that likely make him a more cooperative partner than the current LLC:

1. He wouldn't have investors, so he wouldn't have to worry about ROI; or potential suits related to fiduciary duty.  Decision making would be much easier for him, and would give him total flexibility in negotiations.
2. Glen won't have a debt-holder, so he would have the flexibility to negotiate without limits.  
3. Because he'll want to minimize his liabilities and responsibilities, he might be willing to work more cooperatively in creating a new services model.  The fixed price model isn't a good fit for our circumstances, because it means that one side always loses, i.e. unpredictable weather conditions make it impossible to guess actual costs one year in advance.  We abandoned the pay-as-you-go model because the costs weren't being managed.  We need a new model, but the current LLC is not a cooperative or trustworthy partner, because it has taken advantage of the community on several occasions (see other articles n this blog).
4. Because a lawsuit with the community would delay his ability to sell the resort, and because Glen's nature is nothing like the current LLC managers, he isn't likely to take risky actions against the community.

Obviously, the loss of income could be an issue for Glen and he might choose to push some limits in order to recover that income.  I seriously doubt  that our costs can return to historically low levels.   But there's no doubt that Glen's interests and constraints are substantially different from the current LLCs, and these differences work in favor of building a better and more cooperative relationship between the resort and the CA.  Economic optimization would eventually follow.

The Investor Dilemma
The LLC might pull a rabbit out of its hat, but we know it has been struggling to pay its monthly bills for quite some time.  It may continue to hobble all the way up to 2014, but when it gets there, there's no clear path to paying off Glen's note.  And on the road to 2014, the community will have to defend itself against the LLCs continued effort to force all owners to bear the cost of its own tragic business mistake.  My take on recent communications is that the longer this LLC survives, the more aggressive its intrusion will be into our lives, and the more their plans look like a bailout.

In any investment, the investor has to "know when to hold'em, and know when to fold'em."  How long will the LLC hobble before we investors accept that our LLC investment is unrecoverable?  At what point will we realign our priorities to protect our  "other KG investment?"  How many more rate increases will we tolerate before our property values take a hit?  How much longer are we expected to sympathize with the annual explanations for financial instability?  Will LLC actions eventually cause irreparable harm to the community?

Arguably, the LLC is a failed experiment, and the resort purchase might be the worst thing that has happened to Kahler Glen.  The purchase of the resort would not have been pursued by experienced entrepreneurs, because it was clear from the beginning that

• more than 2/3 of the owners didn't have any desire to participate in the purchase, 
• 1/3 of the owners didn't provide enough money to cover the bulk of the cost--many included in this group were cajoled into investing,
• simple math shows that the resort's profit margin has never been robust enough to absorb the resulting debt burden.  

The resort purchase has divided the community--a distant dream has become a present day nightmare.  Imagine if the resort was owned by an outside company right now.  Would we be divided in our desire to fix voting powers?  Would we be divided in resisting a resort that is trying to force the community to pay its bills?  Probably not. 

If and when the LLC throws in the towel, it won't be the end of the world.  More likely, it'll be the beginning of a rebuilding process that will result in a stronger, more independent community association that has a more productive and cooperative relationship with the resort.

Given that we are on the cusp of unavoidable, major changes at KG, the questions we all have to ask ourselves are "what future do we want to begin creating for ourselves?  And "how can each of us help?" 
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