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RESTON ASSOCIATION

Review of the Tetra/Lake House Project

Prepared by StoneTurn Group LLP
February 28, 2017
Table of Contents

I. Background........................................................................................................................................... 4
II. Procedures Performed .......................................................................................................................... 5
III. The Association Policies and Procedures ............................................................................................. 6
A. General Governing Policies and Processes ....................................................................................... 7
B. The Process for Capital Expenditures ............................................................................................... 9
C. The Budgeting Process .................................................................................................................... 10
D. Procurement and Payment Controls .............................................................................................. 11
E. The Process Governing Additions to the Existing Property ............................................................ 11
F. The Voting and Referendum Process.............................................................................................. 11
IV. Timeline and Description of Relevant Events .................................................................................... 12
A. The Property Acquisition ................................................................................................................ 14
B. The Comstock Funds ....................................................................................................................... 19
C. The External Renovations ............................................................................................................... 20
D. The Internal Renovations ................................................................................................................ 21
V. Observations and Suggested Process Improvement Recommendations ......................................... 23
A. General Governing Policies and Processes ..................................................................................... 25
B. The Process for Capital Expenditures and the Budgeting Process ................................................. 26
C. Procurement and Payment Controls .............................................................................................. 28
D. Additional Observations.................................................................................................................. 29

Exhibits:
Exhibit Description
Exhibit A Documents Obtained
Exhibit B Individuals Interviewed
Exhibit C Tetra Referendum Ballot
Exhibit D Tetra Referendum Information

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Attachments:

Attachments Description
Attachment 1 2010 Tetra Appraisal.pdf
Attachment 2 Easement.pdf
Attachment 3 February Email Correspondence.pdf
Attachment 4 September Email Re Insurance with Attachment.pdf
Attachment 5 April 2014 Email Regarding Proposed Deal.pdf
Attachment 6 Letter of Retention, Appraisal.pdf
Attachment 7 Draft Referendum Schedule.pdf
Attachment 8 BOC Meeting Minutes.pdf
Attachment 9 Executive Session Materials.pdf
Attachment 10 Draft Executive Session Materials with Proposed President Comments.pdf
Attachment 11 Board of Directors Minutes January 2015.pdf
Attachment 12 Pro Forma Financials January 2015).pdf
Attachment 13 January 22, 2015 Email Regarding Pro Forma.pdf
Attachment 14 Tetra Appraisal.pdf
Attachment 15 February 2, 2015 Tetra Pro Forma.pdf
Attachment 16 Email with Draft LOI.pdf
Attachment 17 February 9, 2015 Board Minutes.pdf
Attachment 18 February 9, 2015 Draft Tetra Pro Forma Financials.pdf
Attachment 19 February Fiscal Committee Materials.pdf
Attachment 20 February Fiscal Committee Minutes.pdf
Attachment 21 Signed LOI.pdf
Attachment 22 Draft #6 of the Tetra Lake House Referendum Question.pdf
Attachment 23 Draft #7 of the Tetra Lake House Property Referendum Factsheet.pdf
Attachment 24 February 26 Board of Directors Minutes.pdf
Attachment 25 March 26, 2015 Board Minutes and Attachments.pdf
Attachment 26 Contract of Sale.pdf
Attachment 27 Upload Logs.pdf
Attachment 28 Intelliscan Contract.pdf
Attachment 29 April 2015 Board Minutes.pdf
Attachment 30 Brown's Chapel Agenda.pdf
Attachment 31 CEO Talking Points.pdf
Attachment 32 May 11 2015 BOD Special Meeting Minutes.pdf
Attachment 33 May 18, 2015 Fiscal Committee Minutes.pdf
Attachment 34 Access Commitment Letter.pdf
Attachment 35 June Fiscal Committee Minutes.pdf
Attachment 36 Settlement Statement.pdf
Attachment 37 Office Lease.pdf

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Attachments Description
Attachment 38 Comstock Proffer.pdf
Attachment 39 Comstock February Letter.pdf
Attachment 40 February 5, 2015 Tetra Pro Forma.pdf
Attachment 41 March 2015 Comstock Executive Session Materials.pdf
Attachment 42 April 2015 Comstock Executive Session Materials.pdf
Attachment 43 May 28, 2015 Agenda Package.pdf
Attachment 44 May 28, 2015 Minutes.pdf
Attachment 45 June 25, 2015 Agenda Package.pdf
Attachment 46 June 25, 2015 Minutes.pdf
Attachment 47 Executed MOU.pdf
Attachment 48 Criterium Proposal and Client Authorization.pdf
Attachment 49 Criterium Report.pdf
Attachment 50 April Fiscal Committee Materials and Minutes.pdf
Attachment 51 Amendment to Contract of Sale.pdf
Attachment 52 Oseth Contract.pdf
Attachment 53 November 2015 Oseth Requisition.pdf
Attachment 54 January 2016 Oseth Requisition.pdf
Attachment 55 Cresa Contract.pdf
Attachment 56 CFO Presentation.pdf
Attachment 57 Internal RFP.pdf
Attachment 58 July 2015 Board Minutes.pdf
Attachment 59 Intec Contract.pdf
Attachment 60 Operating, Repair & Replacement, and New Capital Budgets.pdf
Attachment 61 Decmber 2015 Board Minutes.pdf
Attachment 62 February 2016 BOC Minutes.pdf
Attachment 63 February Oseth Invoice.pdf
Attachment 64 March 2016 BOC Minutes.pdf
Attachment 65 Paladino Agreement.pdf
Attachment 66 April Working Group Materials.pdf
Attachment 67 April Oseth Invoice.pdf
Attachment 68 May 2016 BOC Minutes.pdf
Attachment 69 May 2016 Agenda Package.pdf
Attachment 70 May 2016 Board Minutes.pdf
Attachment 71 May Oseth Invoice.pdf
Attachment 72 July Oseth Invoice.pdf
Attachment 73 Internal Renovation Tracking Spreadsheet.pdf

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I. Background

On January 26, 2017, Reston Association (the Association) engaged StoneTurn Group LLP (StoneTurn) to
assist in a review of the processes and internal controls that were followed by the Association related to
the purchase and the renovation of the Tetra/Lake House (Tetra, the Property Acquisition).

Specifically, StoneTurn, was requested to:

1) Review the accuracy of budgets and other information provided in the referendum for the Tetra
purchase by the Association to its members and the Board as well as the process used to
prepare those documents;
2) Review the steps taken for the acquisition, planning, repair, and renovation of Tetra to assess
whether appropriate financial, budgeting, accounting, and project management controls were
followed; and
3) Make recommendations for revising, modifying and/or supplementing the processes, internal
controls, and governance procedures of the Association.

The Association is a private, not-for-profit, community service corporation. The Association provides
services and programs similar to that of a municipality; however, Reston is not incorporated as a city or
town. Reston is zoned as a planned community and encompasses approximately 11 square miles with a
population of more than 60,000 residents. The Association is one of the largest community associations
in the country, and is responsible for:

• The design, use and maintenance of covenants for properties located in Reston;
• The maintenance of open spaces, parkland and recreational facilities;
• Environmental protection; and
• The educational and recreational programming and activities which promote the peace, health,
comfort, safety, and general welfare of its members and the value of their property.

The Association is governed by an elected, nine-member Board of Directors and as a steward of Reston
is responsible for maintaining the quality of life in Reston, chiefly by caring for and administering the
community’s assets, the real property. The Association therefore provides parks, trails and recreational
facilities, provides a variety of educational and recreational programing, and seeks to protect Reston’s
natural beauty and environment including the maintenance of over 1,300 acres of open space.

The Association is managed by and supported by a staff of approximately 90 full time employees,
supplemented by over 300 seasonal employees.

The Association’s revenue is primarily derived from annual assessments on properties, though it also
obtains revenues through fees for recreation programs and for the use of community assets such as the
building on the Tetra property.

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On May 11, 2015 the Association announced the affirmative results to the Tetra Property Purchase
Referendum authorizing the Association to purchase the 3.47 acre and Lake House building known as
the Tetra property and to borrow up to $2.65 million to make the purchase.

On July 23, 2015 the Association closed on the Tetra property and entered into a loan agreement with
Access National Bank for $2.65 million to purchase Tetra. The loan is secured by the homeowners’
assessment revenue accounts receivable balance and requires the Association be in compliance with
certain financial covenants.

Following the Property Acquisition the Association commenced the contemplated external renovations
and developed a design plan with the Lake House Working Group and then commenced the internal
renovations.

On July 31, 2015 the Association received a signed Memorandum of Understanding (MOU) from
Comstock Reston Station Holdings, LC (Comstock) detailing payments to be made in consideration for,
among other items, naming rights to the building on the Tetra property. These funds were used by the
Association to offset the operating costs of Tetra.

II. Procedures Performed

After discussion with the members of the Tetra Review Committee who were designated by the
Association Board of Director’s to oversee the StoneTurn review, we performed the following
procedures:

• Obtained and analyzed the Tetra Referendum Voting Materials including the factsheet and the
contract of the Counting Agent.
• Obtained an understanding of the governing documents in place at the Association and
reviewed all documented policies and procedures relating to the Property Acquisition
maintained by the Association.
• Obtained and reviewed meeting minutes pertaining to the Property Acquisition including those
of the Board of Directors, the Board Operations Committee (the BOC), the Fiscal Committee,
and the Brown’s Chapel community meeting. Where available, we also watched the videos of
the relevant portions of those meetings.
• Obtained and analyzed all documents pertaining to the Property Acquisition, and any available
drafts, presented by Association staff at each of those meetings.
• Obtained and analyzed the documents, and available drafts, pertaining to the purchase of the
Tetra property including the Letter of Intent (LOI), the property purchase agreement, and the
loan documents.
• Obtained and analyzed the February 2016 appraisal supporting the purchase price and all
documents contracting for the service or providing instruction to the appraiser.
• Obtained and analyzed all available budgets for the external and the internal renovations, any
budget to actual reconciliations and any support maintained by the Association.

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• Obtained and analyzed all documents supporting the amounts expended on the exterior and
interior renovations including bids, contracts, purchase orders, and invoices.
• Obtained and analyzed all available versions and updates to the pro-forma financials for Tetra
with any available supporting documentation.
• Obtained and analyzed evidence detailing the dates upon which materials related to Tetra were
made available to the members.
• Obtained and analyzed the documents around the initial Comstock proffer as well as the final
MOU with Comstock.
• Obtained and analyzed all legal invoices pertaining to the Property Acquisition.
• Obtained and analyzed the Tetra bank account statements for the period August 2015 to
December 2016.
• Held discussions with Association staff, members of the Board of Directors (current and former),
and Association Land Use Counsel.

A detailed listing of the Documents Obtained and the Individuals Interviewed1 are attached as Exhibits A
and B to this report.

We received cooperation and would like to thank the staff of the Association, the current and former
Directors, Land Use Counsel, Legal Counsel and the Association Members who provided assistance and
enabled us to complete our work in the timeframe allotted.

III. The Association Policies and Procedures

The Association is governed by four key documents:
a) The Deed of Dedication is the legal document that created the Association, amended in 2006 by
the First Amendment to the Deed of Amendment to the Deeds of Dedication of Reston, (the
Deed) defining the rights, responsibilities, and obligations of all Association Members;
b) The Articles of Incorporation (the Articles) which designated that the Association would be
governed by a Board of Directors;
c) The Bylaws (the Bylaws) which set out the governing regulations for the administration and
management and management of the association; and
d) Board Resolutions, Rules and Regulations which are adopted by resolution of the Board of
Directors. As of the date of our report there have been 89 Board Resolutions approved in the
following areas:
• Assessments and Finance;
• Designed Review and Covenants Administration;
• Use and Maintenance Standards;
• Covenants Enforcement and Insurance;

1
The listing of individuals includes only those were directly involved in the Tetra purchase and subsequent
renovations as a member of the Association’s staff, as a Director or as Land Use Counsel.

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• Common Area Rules and Regulations;
• Elections and Referenda;
• Board and Association Operations;
• Member Rights;
• Committees; and
• Land Use.

In addition to the Association governing documents the Association has provided us with the Employee
Handbook as of August 2014 2 which includes policies for Association staff on Business Ethics and
Conduct as well as on Conflicts of Interest.

It is our understanding that the Governance Committee of the Board of Directors has been working on a
Code of Ethics but that as of the date of this report such a code has not been adopted.

As described below, there are no documented internal control processes or procedures maintained by
the Association, though there are control processes and procedures in place.

We have summarized the policies provided that were relevant to our analysis below. Specifically we
identified policies and processes in the areas of:

• General governing policies around Codes of Conduct and Ethics, including Conflicts of Interest,
Authorization of the CEO and Delegation of Authority and the Use of Executive Sessions;
• The Process for Capital Expenditures;
• The Budgeting Process;
• Procurement and Payment Controls; and
• The Process Governing Additions to the Existing Property
• The Voting and Referendum Process.

In order to confirm our understanding of the relevant policies we provided these summaries to both the
CEO as well as the Association’s Legal Counsel. During the course of our analysis we received
documentation of additional policies and procedures but as they were not directly relevant to our
analysis we have not summarized them here.

A. General Governing Policies and Processes

As stated above, our analysis of these policies was limited to those in place around the Codes of Conduct
and Ethics, including Conflicts of Interest, the Authorization of the CEO and the Use of Executive
Sessions. Following is a summary of our understanding of the relevant policies in place for the
Association.

2
We understand that the employee handbook was updated in September 2015 but only to fix grammatical and
typographical errors.

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i. Code of Conduct and Ethics/Conflicts of Interest

The Bylaws require that all Directors, Officers and members of all committees established by the Board
of Directors must adhere to the conflict of interest provisions of the Nonstock Corporation Act, Section
13.1-871 which is further defined by the Association’s Board & Association Operations, Resolution 6;
Conflict of Interest & Statement (the Board Conflict Resolution). This resolution requires that Directors
who may have a material personal or economic interest, either directly or indirectly, in a matter to be
considered by the Board must disclose the possible conflict before voting on the matter. The resolution
defines an indirect interest as a material personal or economic interest that will benefit any immediate
family member of the Director; an entity served by the Director or an immediate family member as a
board or committee member, officer, trustee, partner or employee; or any entity where the Director or
an immediate family member has a material economic interest either directly or indirectly as an owner,
creditor, consultant, lawyer, accountant or independent contractor. The Board Conflict Resolution
defined a material economic interest as one with a fair market value exceeding $500 in any of the prior
three years. The resolution specifies an immediate family member as a spouse; either a natural,
adopted or related by marriage child; a parent; a grandparent; a grandchild; a natural, adopted or
related by marriage sibling; any other family member who resides in the same household or is financially
dependent upon the Director; or anyone sharing living quarters with the Director in circumstances
resembling a marital relationship. Any Director who has a disclosed conflict of interest is allowed to
participate in the discussion of the matter and to vote on the matter but no action shall be taken
without an affirmative vote of a majority of the disinterested Directors.

The Board Conflict Resolution further requires that if a Director becomes aware of a contract to be
executed by the Association where the Director has a material personal or economic interest they must
immediately disclose the interest to the President of the Board or the CEO of the Association and the
contract shall only be executed after approval by an affirmative vote of a majority of the disinterested
Directors.

On an annual basis, prior to the May Board of Directors Meeting the CEO is to provide each Director a
copy of the Board Conflict Resolution and Directors are asked to complete a Conflict of Interest
Statement. The Board Conflict Resolution also requires that the Association’s Departmental Directors
and Officers complete and execute a similar list.

The Employee Manual states that the Association strives to conduct itself in an ethical and legal
manager and expects all employees to conduct business in accordance with the letter, spirit and intent
of all relevant laws and to refrain from illegal, dishonest or unethical conduct. The manual prohibits any
employee from directly or indirectly participating in or unduly influencing in any way any arrangement,
process, agreement or other activity that could result in personal benefit to the employee, or an
immediate family member, at the expense of the Association. The handbook does not preclude
engagement of relatives and close friends in business arrangements but does require notice to the
Association in advance.

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ii. Authorization of the CEO

The Bylaws provide that the Chief Executive Officer (the CEO) has the authority, along with the President
of the Board of Directors, to execute all deeds, contracts or other documents on behalf of the
Association.

The Bylaws require that the CEO prepare a biennial budget and upon approval of the budget by the
Board of Directors has the authority to disburse the sums appropriated.

iii. The Use of Executive Sessions

The Bylaws detail the procedures for meetings of the Board of Directors and state that executive session
may be used in accordance with the Virginia Property Owner’s Association Act (the POAA) and the
Nonstock Corporation Act. Specifically it is our understanding that the relevant provision of the POAA
states in Section 55-510.1(C) that “The board of directors or any subcommittee or other committee
thereof may convene in executive session to consider personnel matters; consult with legal counsel;
discuss and consider contracts, pending or probable litigation and matters involving violations of the
declaration or rules and regulations adopted pursuant thereto for which a member, his family members,
tenants, guests or other invitees are responsible; or discuss and consider the personal liability of
members to the association, upon the affirmative vote in an open meeting to assemble in executive
session. The motion shall state specifically the purpose for the executive session. Reference to the
motion and the stated purpose for the executive session shall be included in the minutes. The board of
directors shall restrict the consideration of matters during such portions of meetings to only those
purposes specifically exempted and stated in the motion. No contract, motion or other action adopted,
passed or agreed to in executive session shall become effective unless the board of directors or
subcommittee or other committee thereof, following the executive session, reconvenes in open meeting
and takes a vote on such contract, motion or other action which shall have its substance reasonably
identified in the open meeting. The requirements of this section shall not require the disclosure of
information in violation of law.”

B. The Process for Capital Expenditures

A capital asset is defined in the Deed as “…Common Area or property components that have a useful life
of more than three years, including but not limited to swimming pools, tennis courts, community
buildings, lakes, pathways, parking areas, multipurpose courts, ballfields, tot lots, vehicles, and other
equipment owned by the Association.” Common area refers to all real property and improvements
thereon owned or leased by the Association for the common use and enjoyment of the Members.

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The Deed requires that a single capital addition, or capital improvement, where the aggregate
construction cost is in excess of $369,000 (as adjusted) 3 requires a vote of the members. Any other
single capital addition, or capital improvement, below the stated threshold may be made by the Board
of Directors. The information provided to the members for any vote must include a five year statement
of projected operating costs including only incremental operating costs.

The level of required approval for transactions is further defined by the Land Use Resolution 2; Process
for Considering Additions, Alterations and Improvements to Common Area (the Common Area
Resolution) 4. This resolution specifies that Improvements required to maintain the capital assets
without changes (such as roof replacements) do not require approval beyond the approval of the Board
in the budgeting process. Any additions or expansions below the threshold in the Deed require the
Association to hold one, or more, Community input meetings and requires the Board to approve the
final concept plan and the budget, if it was not a previously budgeted item. Any additions or expansions
in excess of the stated threshold in the Deed require a referendum vote in accordance with the Deed.

C. The Budgeting Process

The Deed requires that the Board of Directors approve a budget on a biennial basis containing both the
estimates of the amounts required for general operations of the Association as well as capital
expenditures and maintenance.

Assessment & Finance Resolution 1; Biennial Budget Development Process (the Biennial Budget
Resolution) specifies that the biennial budget shall be presented as three budgets; one drawn from the
Operating Fund, one drawn from the Capital Asset Acquisition Reserve Fund and one from the Repair
and Replacement Fund. It further states that monies presented in each budget shall not be used for
proposes other than for which the funds were designated with the explicit authorization of the Board.

After the biennial budget is approved by the Board of Directors the CEO shall, prior to the beginning of
the second year, suggest any amendments to the budget for the second year which must also be
approved by the Board following at least one public hearing.

The Assessment & Finance Resolution 3; Repair & Replace Reserve Fund requires that the Association
shall conduct a study every five years to determine the amount required to repair, replace and restore
Capital Assets which shall be translated by staff into a 10 year forward looking forecast and used in the
preparation of the budget.

3
The threshold was defined by the Deed, dated August 2006, to be $369,000 adjusted each year by the percentage
change in the Employment Cost Index, Civilian Workers, Compensation, 12-Momth Percent Change, Not Seasonally
Adjusted (ECU10001A) between the current year and the most recently published index available 30 days prior to
the beginning of the next fiscal year.
4
This resolution was adopted by the Association at the January 22, 2015 Board of Directors meeting.

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D. Procurement and Payment Controls

The Assessment & Finance Resolution 7; Purchasing and Procurement requires that any purchase
greater than $5,000 requires two written quotations/bids from competitive sources, to the extent
practicable, and must be supported by a purchase order signed by the Department Director, the CFO
and the CEO.

The Assessment & Finance Resolution 10; Budget Amendments states that when a service is
commissioned by the Association through a contract or purchase order the budgeted dollars to pay for
that service will be automatically encumbered. It further states that in cases of emergency, the CEO is
authorized to commit up to .5% over the annual budgeted Operating Fund expenses or Repair and
Replacement Reserve Fund expenditures though any such amounts must be reported to the Board of
Directors at its next meeting. In the event that a cost center produces fee revenue and the fees exceed
the budgeted amounts due to additional services being offered the CEO is authorized to exceed the
budgeted direct costs to provide the additional services provided the gross margin is the same.

E. The Process Governing Additions to the Existing Property

The Deed provides procedures that must be followed in order for the Board of Directors to add property
to the Association Deed. Specifically before any additional real estate is submitted to the Deed and
subjected to the jurisdiction of the Association the Board of Directors must give notice to the members
and conduct a hearing. Once that has occurred the property may be added to the Association Deed
with the written consent of the owner of the property and a two-thirds vote of the Board of Directors
during a meeting in which a quorum is present 5.

F. The Voting and Referendum Process

The Deed states that no substantive votes will be conducted at Annual or Special Meetings but shall
instead be held via a referendum process which may be performed either by mail, electronically or at
polling places in Reston. The administration of the process including the determination of the method
and manner of voting, the form of the ballot, the wording of the questions and the deadline for the
return of ballots is at the discretion of the Board of Directors. The Deed contains a requirement that
prior to a referendum vote the Board of Directors is required to conduct a public hearing on the matter
to be decided. With respect to additions to the common area, a referendum vote shall not be
considered to have met quorum requirements unless ten percent of the members entitled to vote

5
Land Use Resolution 3: Membership Options for Adding New Development to the Association was not adopted
until September 2015, after the MOU with Comstock was authorized by the Board of Directors and executed.

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participate. The Deed requires that notice of the referendum must be provided to all members entitled
to vote at least ten days, but not more than fifty days, prior to the referendum.

The Election & Referenda Resolution 6 (the Referendum Resolution) states that the Board is required to
conduct the public hearing(s) and based on the comments received from the members must vote to
approve the proposed questions, to modify the proposed questions or vote not to conduct the
referendum. The Referendum Resolution states that the individual ballots, including the names of the
members that vote, are considered secret and confidential and shall be kept confidential by the
counting agent. The results of the referendum provide authorization to the Board of Directors to take
action but does not bind them to do so.

IV. Timeline and Description of Relevant Events

We compiled the various documents that we have reviewed into a timeline format and analyzed them
to assess whether the documents presented sufficiently comprehensive and consistent information.

The Tetra Referendum Ballot (the Referendum) put forward to the Association members contained
three separate authorizations; an authorization to purchase the Tetra property, an authorization to
renovate and repurpose the existing building and land, and an authorization to borrow up to $2.65
million to finance the purchase. In discussions with members of the Tetra Review Committee and
Association members two other components of the transaction were identified as being of potential
concern; the use of the Comstock funds to offset the Tetra costs and the budgeting and oversight of the
external renovations.

The Tetra Referendum Information (the Factsheet) provided to the members provided, among other
items, the following information:

• If acquired, the Association would focus primarily on renovating the building’s interior to
accommodate indoor community and recreations uses and would not expand the building
footprint.

• The negotiated purchase price for the property is based on an independent appraisal performed
for the Association and reflects the appraised value of $2.65 million.

• The $2.65 million is the maximum purchase price based on the building being in good or better
condition with no significant deferred maintenance being evident and that a building inspection
will be performed by the Association to determine the condition of the building.

• The Association had an independent appraisal performed because of the unique character,
nature and existing use of the property. The appraised value, and the Association’s LOI, both
assume needed roof and HVAC repairs/replacements will be made and paid for by the seller
prior to conveyance to the Association. The appraised value is based on a detailed study of the
sale and rental of other small office buildings/condos and the sale of zoned but unbuilt
restaurant sites in the Reston market area.

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• The Association hired Criterium Engineers to perform an inspection of both the exterior and
interior of the building and that the findings of the inspection will be used to determine, among
other items, what adjustments to the purchase price, if any, should be made.

• To finance the purchase the Association would obtain a loan from a local bank.

• The Association intends to use $650,000 from developer contributions to off-set expenses that
will be incurred to renovate, repurpose and maintain the property once obtained. The pro-
forma financials show a receipt of $650,000 in the year 2015 and an expenditure in the year
2016 of $259,000 in the line entitled “Capital Improvements”. There is a footnote on this line
stating “Alternatively, this can be funded from Repair and Replacement Reserve; renovation
complete by 6/30/2017.”

• Association staff had developed a “conservative rental and programming plan” to project
revenues from the use of the property. A chart was included detailing the revenue by seven
different categories which aggregated to $122,605 of “Total Potential Revenue”. The Base Year
Assumptions chart states that Facility Program Revenue is $123,000 “per RA staff projections
net of program costs” and states that the “annual increase of income” is 3%. The pro-forma
financial statements state that they include programming revenue beginning in July 2017. The
numbers provided for “Facility Revenue (net of program costs)” are $65,246 for the six months
of programming in 2017 (annualized this amount would be $130,492), $134,405 for 2018,
$138,438 for 2019, and $142,591 for 2020. The numbers used in the pro-forma financials reflect
the initial figure of $123,000 escalated by 3% per year.

• For the years 2015 and 2016 the pro-forma financials contain leaseback revenue of $41,707 for
the five months of 2015 and $100,096 for 2016. The pro-forma financials state that “Property is
leased to current tenant at $32/sqft through 12/31/2016.”

• The pro-forma financials contain operating costs of $18,280 for the five months of 2015,
$45,011 for 2016, $44,771 for 2017, $51,577 for 2018, $53,125 for 2019, and $54,718 for 2020.
The Base Year Assumptions chart details the components of these amounts and provides the
basis for the assumptions and states that the “annual increase of expenses” is 3%. The
numbers used in the pro-forma financials reflect the initial figures, adjusted according to the
footnotes, escalated by 3% per year.

The Referendum and the Factsheet are attached as Exhibits C and D to this report.

Below we have separately presented the significant events from our analysis of: 1) the Property
Acquisition, 2) the use of the Comstock funds, 3) the exterior renovations, and 4) the internal
renovations. We have presented them separately in order to more easily assess their compliance with
the Association’s policy requirements. In order to assist the reader of this report we have referenced,
and attached, key documents used to prepare this analysis.

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A. The Property Acquisition

We understand through discussions with several individuals that the Tetra property had been of interest
to the Association for some time and possibly as long as since the Association was converted from a
developer-managed association to a member-managed association. In fact, we note that the
Association contracted with a real estate appraiser as early as 2010 as they were considering the
property at that time. (See Attachment 1: 2010 Tetra Appraisal)

In addition to maintaining green space in Reston it is our understanding that the appeal of this property
was unique in that it was sandwiched between two parcels of Reston Common Area. The Association
had negotiated in 2003 an ingress and egress easement of Tetra in exchange for sharing of the property
costs for landscaping and snow approval. We understand that the easement was required to facilitate
members moving along trails between the two parcels of Reston Common Area. (See Attachment 2:
Easement)

In January 2013 the owner of the Tetra property contacted the Association about the easement and
concerns regarding lack of payments under the easement as well as concerns that the property was
being used by members beyond the easement (i.e. members walking on the patio to look at the lake,
etc.). As a result in late 2013 and into 2014 the Association and their Counsel were engaged in
negotiations with the owner of the property which ultimately resulted in the Association adding the
owner of the property as an additional insured party on its General Liability policy in September 2014.
(See Attachment 3: February Email Correspondence; Attachment 4: September Email Re Insurance with
Attachment)

It is our understanding that in early 2014 the Association was contacted by a commercial property
owner about the possibility of entering into a joint venture with the Association to purchase Tetra.
Under the proposed venture, the commercial property owner would purchase the portion of the land
with the existing office building structure for $2,280,000 plus closing costs and Association would
purchase the portion of the property to which it already had an easement for $420,000 plus up to
$40,000 in closing costs. It is our understanding that the potential joint venture partner determined
that the property would not meet his needs and the discussions ceased in mid-2014. (See Attachment 5:
April 2014 Email Regarding Proposed Deal Structure)

We understand that in mid-October 2014 the owner of Tetra approached the Association directly to
inquire as to whether the Association would be interested in purchasing the property.

In early December 2014 an appraiser was contracted to prepare an appraisal of Tetra. We understand
that the selection of the appraiser was made by Land Use Counsel and that the client instruction to the
appraiser was provided by Land Use Counsel. The retention letter with the appraiser is dated December
4, 2014 and was signed by the CEO on December 12, 2014. The retention letter called for the report to
be submitted by January 12, 2015. (Attachment 6: Letter of Retention, Appraisal)

On January 8, 2015 the Association provided the Tetra property owner with a second draft outlining a
possible Referendum Schedule. We understand an earlier version of this document was provided to the
property owner in December 2014 though we have not seen these documents. (See Attachment 7:
Draft Referendum Schedule)

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On January 12, 2015 during a meeting of the Board Planning Committee (a committee now known as the
BOC) the President of the BOC moved to adjourn into executive session to discuss Contractual Matters
with legal counsel. It is our understanding and the recollection of several participants that the matter
discussed in that executive session was the potential purchase of Tetra. Neither the Agenda packet nor
the minutes specifically reference Tetra. (See Attachment 8: BOC Minutes January 12, 2015)

The January 22, 2015 Board of Directors agenda contained the item “Proposal for Addition to Reston
Association Property – North of the Dulles Toll Road”. We understand that this item was the discussion
of the potential acquisition of the Tetra property. During this meeting the Directors adjourned for an
executive session that lasted an hour and fifty-six minutes 6 where we understand the potential purchase
was discussed. Upon returning to open session a presentation was made to the members regarding the
proposed purchase of Tetra which included:

a) A statement that over a year ago a third party had approached the Association to purchase a
portion of the Tetra property but that the third party had dropped out of discussions and that
Tetra was available for the Association to purchase.
b) An overview of the property provided by a member of the Association staff.
c) A description of the property with respect to the Reston Master Plan Phase 2 and the proposed
uses for the property and an overview of the appraisal process for the property by Land Use
Counsel.
d) A presentation of hypothetical pro-forma financials for the property by the Chief Financial
Officer 7 (the Prior CFO).
e) An outline of the member referendum schedule that would be required to purchase the
property was presented by the CEO and Legal Counsel.

At the close of the discussion the Board unanimously passed a motion to “…1) approve the action of
sending the issue of purchasing the Tetra Property located at 11450 Baron Cameron Avenue, Reston, VA
20190 to referendum amongst Reston Association Category A and B Members; 2) adopt the proposed
schedule for the conduct of the referendum; 3) appoint Intelliscan as the independent counting agent to
receive and tabulate the results of the Tetra Property Purchase referendum; and, 4) authorizes the CEO
in coordination with legal counsel, to negotiate a Letter of Intent (LOI) to be reviewed and approved by
the Board on during at Special Meeting to be held on Monday, February 9, 2015.” (See Attachment 9:
Executive Session Materials; Attachment 10: Draft Executive Session Materials with Proposed President
Comments; Attachment 11: Board of Directors Minutes January 2015; Attachment 12: Pro Forma
Financials January 2015 8)

• The Pro Forma Financials presented at the Board meeting appear to have contained an assumed
loan value of $2M though we understand that internally it was always believed that the
purchase price would be higher than $2M. An email from the Prior CFO dated the morning of

6
We have included the length of the various Executive Sessions in this report; as there are no minutes of Executive
Sessions that is the only indication of the meeting topics and process.
7
In early 2015 the CFO of the Association resigned and the current CFO was hired. The current CFO started with
the Association in April 2015.
8
We have been provided with multiple versions of a Tetra pro-forma as of January 2015 although the earliest is
dated January 25, 2015, after the January 22, 2015 Board of Directors meeting. We have attached that version
here though we have no way to confirm that it is the version that was presented.

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the Board Meeting states that “…My recommendation is that I present a cost example based
upon a $2M loan. If we publicly present $2.5M, that may imply to Bill and others that we are
willing to go that high. Our purchase price is dependent upon the appraisal. If the appraisal
comes in at $1.8M, then I don’t think we would be able to bridge the gap to $2.5M.” (See
Attachment 13: January 22, 2015 Email Regarding Pro Forma)

On February 4, 2015 the appraisal performed by The Robert Paul Jones Company, LLC of the Tetra
property was provided to the Association. The appraisal states that the purpose of the appraisal was to
estimate the “as is” fee simple market value, assuming that restaurant uses are permitted and that any
deferred maintenance has been corrected. The value, as of January 23, 2015, was determined by the
appraiser to be $2.65 million; the sum of the value of the existing office with supporting land ($1.3
million) and the value of an excess floor area ratio of 6,930 ($1.35 million). (See Attachment 14: Tetra
Appraisal)

• Draft Pro Forma Financials prepared by the Prior CFO dated February 2, 2015 were adjusted to
assume a purchase price of $2.65 million. (See Attachment 15: February 2, 2015 Tetra Pro
Forma)

On February 5, 2015 the CEO emailed the Tetra Property Owner a draft of the proposed LOI and a
summary of the appraisal performed. (See Attachment 16: Email with Draft LOI)

On February 9, 2015 Tetra was discussed at a Special Meeting of the Board of Directors in open meeting
and in an Executive Session (which lasted an hour and thirty-eight minutes). We understand that during
the Executive Session the Directors discussed and were provided the opportunity to review the
appraisal, the draft LOI, a draft of the proposed Referendum Question and Factsheet and an overview of
the proposed pro forma financials. The proposed Referendum Question and Factsheet and an overview
of the proposed pro forma financials were further discussed in the open session and member comments
were solicited. During the meeting the Directors voted unanimously 9 to “…to authorize the CEO, in
coordination with legal counsel to finalize the letter of intent for the Tetra property based on the
contractual terms discussed during executive session, which includes setting the purchase price at $2.65
million, which is based on an appraisal performed for the Association. Purchase of the property will be
contingent upon successful negotiation of a final contract, approval by the membership by referendum
and financing.” (See Attachment 17: February 9, 2015 Board Minutes; Attachment 18: February 9, 2015
Draft Tetra Pro Form Financials)

On February 23, 2015 the Fiscal Committee met with the CEO and Prior CFO to discuss the assumptions
and related pro-forma financial statements to be included in the Tetra Lake House Property Acquisition
Factsheet. The Committee requested that the assumptions and financial statements reflect the scenario
where the Tetra Lake House Property is leased back to the current owner for 18 months. The Committee
also recommended additional units forecasted to be added to Reston Association over the next five
years be footnoted on the financials but not incorporated into any calculations with the exception of the
Harrison Apartment units as the Residential Use Permits were issued prior to the end of 2015. (See

9
The vote was unanimous for those Directors present. One Director participated via telephone in a portion of the
Executive Session but had left the meeting prior to the vote being taken.

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Attachment 19: February Fiscal Committee Materials; See Attachment 20: February Fiscal Committee
Minutes)

On February 25, 2015 the LOI was signed by both the Association and the Tetra Property Owner. The
LOI provides for a purchase price of $2,650,000 and a leaseback provision from the date of Settlement
through December 31, 2015 with two options to renew for six months each. (See Attachment 21: Signed
LOI)

On February 26, 2015, in a Board of Directors Meeting, the first public hearing specific to the proposed
purchase of Tetra was held to discuss the proposed purchase. During this hearing members of the
Association staff and Land Use Counsel provided overviews of the latest draft of the referendum
question and the factsheet. In addition the Directors held an Executive Session lasting approximately an
hour and forty-six minutes where it is our understanding that they discussed the factsheet, the status of
the loan negotiations, and the LOI. Following the Executive Session the Directors voted unanimously to
“…approve the letter of intent (LOI) dated February 25, 2015 for the Tetra property based on the
contractual terms discussed during executive session contained in the LOI and authorize CEO to execute
the LOI.” (See Attachment 22: Draft #6 of the Tetra Lake House Referendum Question; Attachment 23:
Draft #7 of the Tetra Lake House Property Referendum Factsheet; Attachment 24: February 26 Board of
Directors Minutes)

On March 26, 2015, in a Board of Directors Meeting, the second public hearing specific to the proposed
purchase was held. The Directors held an Executive Session lasting an hour and twenty-seven minutes
where it is our understanding the Directors discussed the Comstock proposal as well as the status of the
loan negotiations. The Directors present voted unanimously 10 to “…1.) Adopt the proposed schedule
for the Reston Association Board of Directors to consider adding to the Reston Association the
aforementioned Property, including public hearing dates; and, 2.) Authorize the CEO, in coordination
with Legal Counsel, to further negotiate terms and conditions for such addition of the Property to the
existing properties under the parameters discussed in executive session, including but not limited to
conditions for the payment of $650,000 in July 2015; and for the naming rights of the former Reston
Visitors Center, also known as the Tetra Property if the pending referendum for the purchase of the
Tetra Property proves successful.” The CEO then presented an overview of the latest draft of the
referendum question and the factsheet. Following the presentation, a majority of the Directors present
voted to approve the Proposed Tetra Property Purchase Referendum Question and Factsheet 11. The
Directors then reconvened an Executive Session lasting an hour and forty-two minutes where we
understand terms for a conditional purchase contract were discussed. Following a return to open
session the Directors heard from members who requested that they be provided with the appraisal and
the proposed contract. Following the discussion the Directors present voted unanimously to approve
“…the conditional purchase contract for the Tetra Property, which meets the terms and conditions in
the Letter of Intent (LOI), and authorize the CEO to execute the contract on behalf of the Association.
Further, direct staff to release appraisals received by the Association upon execution of conditional
purchase contract and such other documents as appropriate; and, further to identify dates in April to
hold at least one community meeting to give members an additional opportunity to comment.” (See
Attachment 25: March 26, 2015 Board Minutes and Attachments)

10
Directors Sanio and Graves, were not in attendance.
11
Director Chew voted against approving the Question and Factsheet and Directors Shannon and Muir abstained
from the vote.

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On March 27, 2015 the Contract of Sale was signed by the Association and the Tetra Property Owner.
(See Attachment 26: Contract of Sale)

On March 27, 2015 he Contract of Sale and the 2015 appraisal were made available to the Association
members on the Association website in the News Release section. On March 30, 2015 the 2010
appraisal was also posted to the Association website in the Development section. (See Attachment 27:
Upload Logs)

On April 13, 2015 the voting period for the Referendum began. The Association contracted with
Intelliscan to be the Counting Agent for the Referendum. (See Attachment 28: Intelliscan Contract)

On April 15, 2015 at a Board of Directors the Communications Plan was presented to the members. In
addition, the Directors held an executive session lasting thirty-nine minutes where it is our
understanding that the status of the loan negotiations and the status of the Comstock addition was
discussed. (See Attachment 29: April 2015 Board Minutes)

On April 21, 2015 a Community Meeting was held at Brown’s Chapel to discuss the proposed purchase
and terms with the community and to answer any questions raised. (See Attachment 30: Brown’s Chapel
Agenda; Attachment 31: CEO Talking Points)

On May 5, 2015 the voting period for the Referendum ended.

On May 11, 2015 at a Special Meeting it was announced that the Association members had voted in
favor of the Tetra purchase and the Directors passed a motion to “…to authorize the CEO to pursue a
loan upon terms and conditions favorable to the Reston Association to finance the purchase of the
Tetra property consistent with the referendum and the purchase contract.” The Board also announced
that they would be setting up a Working Group to provide staff with community input into the
development of a concept plan for the new property. (See Attachment 32: May 11, 2015 Special meeting
Minutes)

On May 18, 2015 at a Fiscal Committee meeting the CEO stated that Access National Bank had been
chosen to finance the purchase and that a Commitment Letter would be forthcoming. In addition the
CEO stated that the planned closing date was to occur before July 31, 2015 and that renovations and
repairs would begin immediately after closing. (See Attachment 33: May 18, 2015 Fiscal Committee
Minutes)

On June 15, 2015 at a Fiscal Committee meeting the CFO informed the committee that Access National
Bank had issued the Commitment Letter. (See Attachment 34: Access Commitment Letter; Attachment
35: June Fiscal Committee Minutes)

On July 23, 2015 the closing of the Tetra property purchase occurred and an Office Lease was executed
in accordance with the leaseback provision. (See Attachment 36: Settlement Statement; See Attachment
37: Office Lease)

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B. The Comstock Funds

In May 2010 the Fairfax County Board of Supervisors approved the Comstock proffer which stated, in
part, that up to a maximum of $300,000 shall be payable directly to Reston Association as a “public
parks” contribution and that Comstock would negotiate in good faith to pursue the joinder of its
individual residential units into the Association. (See Attachment 38: Comstock Proffer)

We understand through discussions with Association staff and Directors, that the negotiation of the
terms of the Comstock arrangement which had been outlined in the May 2010 proffer had not been
finalized and the amounts to be paid under the proffer were not fully defined. We also understand that
following the initial discussion with the Board of Directors on January 22, 2015 that the CEO approached
Comstock to gauge their interest in supporting the purchase of Tetra and began negotiations to both
finalize additional terms under the proffer as well as to negotiate the payment of funds in advance of
the occupancy of the Comstock property in exchange for the granting of naming rights to Tetra.

In early February 2015 Comstock provided the Association with a Letter summarizing their
understanding of the negotiation at that point. (See Attachment 39: Comstock February Letter)

• Draft Pro Forma Financials prepared by the Prior CFO dated February 5, 2015 were adjusted to
include developer contributions of $300,000 in 2015 and $350,000 in 2016. (See Attachment 40:
February 5, 2015 Tetra Pro Forma)

As stated above, on March 26, 2015 during the second public hearing the Directors held an Executive
Session lasting an hour and twenty-seven minutes where it is our understanding the Directors discussed
the Comstock proposal as well as the status of the loan negotiations. The Directors present voted
unanimously 12 to “…1.) Adopt the proposed schedule for the Reston Association Board of Directors to
consider adding to the Reston Association the aforementioned Property, including public hearing dates;
and, 2.) Authorize the CEO, in coordination with Legal Counsel, to further negotiate terms and
conditions for such addition of the Property to the existing properties under the parameters discussed in
executive session, including but not limited to conditions for the payment of $650,000 in July 2015; and
for the naming rights of the former Reston Visitors Center, also known as the Tetra Property if the
pending referendum for the purchase of the Tetra Property proves successful.” A document detailing
the typical process for adding properties to the Association was provided in Executive Session. (See
Attachment 41: March 2015 Comstock Executive Session Materials)

As stated above, on April 15, 2015 at a Board of Directors meeting the Directors held an executive
session lasting thirty-nine minutes where it is our understanding that the status of the loan negotiations
and the status of the Comstock addition was discussed. A document detailing the timeline of the
Comstock negotiations was provided to the Directors during the Executive Session which stated that
Comstock had heard of the Association’s “…interest in purchasing Tetra Building and offers to assist as
part of ongoing negotiations to join…” the Association. (See Attachment 42: April 2015 Comstock
Executive Session Materials)

On May 28, 2015 the first of two public hearings was held with respect to the Comstock funds and
materials provided in advance of the meeting detailed the terms of the negotiation including that both

12
Directors Sanio and Graves were not in attendance.

19 | P a g e
the initial proffer amount of $300,000 plus an additional $350,000 were to be used in the purchase of
Tetra in exchange for naming rights. There were no member comments with respect to the proposal.
(See Attachment 43: May 28, 2015 Agenda Package; Attachment 44: May 28, 2015 Minutes)

On June 25, 2015 the second public hearing was held. Materials provided in advance of the meeting
included a summary of the arrangement as well a draft of the Comstock MOU. Other than a request to
summarize the terms of the MOU there were no member comments received. The Directors voted to
“…authorize the CEO to finalize and execute, on behalf of the Association, the Memorandum of
Understanding (“MOU”) with Comstock consistent with the RA Board’s discussions and the public
hearings held.” (See Attachment 45: June 25, 2016 Agenda Package; Attachment 46: June 25, 2016
Minutes)

On June 26, 2015 the Association executed the MOU with Comstock. The MOU was not executed by
Comstock until July 31, 2015. (See Attachment 47: Executed MOU)

C. The External Renovations

On March 11, 2015 the Association received a proposal from Criterium Engineers (Criterium) for a
property condition assessment and on March 19, 2015 the CEO signed the proposal to authorize the
work. (See Attachment 48: Criterium Proposal and Client Authorization)
On April 6, 2015 the Association received the Final Property Condition Report from Criterium which
estimated repairs needed at $244,464 current dollars. (See Attachment 49: Criterium Report)
During the April 20, 2015 Fiscal Committee Meeting the CEO provided an update on the loan term
details and discussed the study performed under the Contract of Sale which had revealed that the
property had approximately $250,000 in needed repairs, the costs of which were to be deducted from
the purchase price per the agreement. (See Attachment 50: April Fiscal Committee Materials and
Minutes)

On April 24, 2015 the First Amendment to the Contract of Sale was signed stipulating that $275,000 of
the purchase price would be held in escrow for the purposes of performing repair and/or replacements
to the HVAC System, roof, rafter, beams, trusses, skylight, window repair, paving repair, and corrections
of restrictive covenants not in compliance as of the date of the Amendment. (See Attachment 51:
Amendment to Contract of Sale)
As discussed above, at the closing of the Tetra purchase on July 23, 2015, $275,000 was placed into
escrow for the required maintenance repairs.
On October 21, 2015 the Association signed a contract with Oseth to perform the restorative
improvements to the Tetra property in an amount not to exceed $268,065 and the work commenced.
(See Attachment 52: Oseth Contract)

• This contract was increased in November 2015 by $2,340 and again in January 31, 2016 by
$12,610. (See Attachment 53: November 2015 Oseth Requisition; Attachment 54: January 2016
Oseth Requisition)
On November 17, 2015 the Association signed a contract with Cresa to perform project management
services for both the interior and exterior renovations to Tetra. (See Attachment 55: Cresa Contract)

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The work was completed in January 2016 in the amount of $307,568.43 13. (See January 2016 Oseth
Requisition at Attachment 54)

D. The Internal Renovations

On February 25, 2015 the Prior CFO prepared a presentation detailing the assumptions included in the
pro-forma financials for Tetra. This analysis included Capital Improvement costs for the property
estimated at $80 per square foot or $250,000. (See Attachment 56: CFO Presentation)
As discussed above, the final amount included in the Factsheet for internal renovations was $259,000
and the Association does not have any documentation supporting this amount beyond what was stated
in the Factsheet itself; “per RA staff – estimate $80/sqft plus $9k for initial grounds maintenance.”
As stated above, on May 11, 2015 at a Special Meeting it was announced that the Association would be
setting up a Working Group to provide staff with community input into the development of a concept
plan for the new property.
On July 16, 2015 Cresa Project Management, on behalf of the Association, issued a Request for Proposal
to architectural firms for the interior renovations. (See Attachment 57: Internal RFP)
On July 30, 2015 at the Board of Directors meeting during the Discussion of Biennial Budgets a revised
pro-forma was presented for Tetra (page 69 of the presentation) as “Overall timing has changed with
current tenants only staying through December 2015, Pro-forma had rental income through December
2016 with current tenants. Therefore an impact on renovation and ramp up and timing of start of
recreational programs and a change in timing of related expenditures.” The presentation was not
provided in the Agenda package but was attached to the meeting minutes. (See Attachment 58: July
2015 Board Minutes)

On October 28, 2015 Intec was selected as the architectural firm and a contract was signed by the
Association to retain them. (See Attachment 59: Intec Contract)
As stated above, on November 17, 2015 the Association signed a contract with Cresa to perform project
management services for both the interior and exterior renovations to Tetra.
At the November 19, 2015 Board of Directors meeting the biennial Operating, Repair and Replacement,
and New Capital Budgets were approved for fiscal years 2016 and 2017. The revised pro-forma for
Tetra presented on July 30, 2015 was included in this budget as was the statement that the timing had
changed as the current tenants would only be staying through December 2015. We note that the
internal renovation estimate does not appear to be included. (See Attachment 60: Operating, Repair &
Replacement, and New Capital Budgets)

13
The variance between this amount and the $275,000 escrow provided by the seller was included in the Internal
Renovation overrun numbers presented to the Board of Directors in May 2016. We were not able to completely
correlate the amounts charged by Oseth to the amounts estimated by Criterium due to differences in the
descriptions but we did note that certain items (such as the skylight) were more expensive than anticipated while
others (such as the HVAC) were not completed. Additionally there were items not anticipated at the time of the
escrow that were incurred including approximately $20,000 in fees to Cresa for Project Management services and
$11,000 in fees to Intec for design services.

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On December 17, 2015 Board of Directors meeting the Tetra Working Group presented an update which
included a statement that the tenant would be vacating the space on December 31, 2015, that the
interior renovations would need to be completed by mid-April 2016, and presented a proposed space
design. Though the presentation materials were not provided in the Agenda package they were
provided as an attachment to the Board of Directors meeting minutes. The presentation indicates that
an update will be provided in the February Board of Directors meeting. (See Attachment 61: December
2015 Board Meeting Minutes)
On February 8, 2016 at the BOC the CEO presented on the status of renovations to the Tetra property.
Architectural plans for the interior renovations had been finalized in mid-January with the Tetra Working
Group and were expected to be commenced in mid-February. At the time of the meeting the
Association staff stated that they were finalizing the construction budget. (See Attachment 62: February
2016 BOC Minutes)
The Application and Certificate for Payment through February 29, 2016 from Oseth Group for the
internal renovations indicates a contract date of March 1, 2016, an original contract sum of $584,283
and a total completed balance of $70,396. The Association has not located the contract for this work
and was unable to obtain one from either Cresa or Oseth Group. We note that the March invoice,
discussed below, provided a different contract date and a different original contract amount for the
same work and it is possible that the scope of work was not set at this date. The work performed as of
February 29th included demolition, millwork, drywall and floorcovering. (See Attachment 63: February
Oseth Invoice).
During the March 7, 2016 BOC Meeting the CEO provided an update on the internal renovations and
stated that the initial cost estimate, which included undertaking all LEED building certifications, was just
over $584,000. The CEO stated that the Association staff found the initial price to be unacceptable and
had directed Cresa to rework the budget to reflect a phased approach to obtain LEED certification and
that the final renovation budget was anticipated to be available at the end of March. The CEO stated
that the demolition of the space was completed and that the building was ready for renovation. As
there was no BOC meeting in April the BOC directed the CEO to provide a final budget for the facility at
the May meeting. (See Attachment 64: March 2016 BOC Meeting Minutes)
On March 8, 2016 the CEO signed an Agreement with Paladino & Company, Inc. to provide a LEED. (See
Attachment 65: Paladino Agreement)

On April 27, 2016 the Lake House Working Group met to discuss revisions to, in part, review the interior
renovations and budgets. The refined budget prepared for the Board to consider in the May 2016
meeting contained aggregate interior renovations costs of $625,493. (See Attachment 66: April Working
Group Materials)

The Application and Certificate for Payment through April 30, 2016 from Oseth Group indicates a
contract date of March 11, 2016, an original contract sum of $453,866 and a total completed balance of
$259,257. (See Attachment 67: April Oseth Invoice)
On May 9, 2016 at a BOC Meeting the draft of the Tetra Lake House Operating and Capital Budget
Update was reviewed. The aggregate interior renovations costs included in the budget were $603,970.
(See Attachment 68: BOC Minutes)
On May 26, 2016 at the Board of Directors Meeting the Lake House Working Group presented the
activities of the Board and the CEO presented the revised operating and capital budget assessment. The

22 | P a g e
aggregate interior renovation estimate presented was $687,000. The Directors voted, by a vote of six to
two, to “…direct staff to allocate $430,000 from the 2016 Operating Fund to the Lake House Fund to
cover the capital cost overrun related to building renovations for Lake House.” (See Attachment 69: May
2016 Agenda Package, Attachment 70: May 2016 Meeting Minutes)
The Application and Certificate for Payment through May 31, 2016 from Oseth Group indicates a
contract date of March 11, 2016, an original contract sum of $453,866, change orders of $44,393 and a
total completed balance of $446,944. (See Attachment 71: May Oseth Invoice)
The Final Application and Certificate for Payment through July 31, 2016 from Oseth Group indicates a
contract date of March 11, 2016, an original contract sum of $453,866, change orders of $56,093 and a
total completed balance of $504,459 14. Documents maintained by the Association show that the total
cost of the interior renovations was $691,432. (See Attachment 72: July Oseth Invoice; Attachment 73:
Internal Renovation Tracking Spreadsheet)

V. Observations and Suggested Process Improvement Recommendations

The estimated numbers contained within the pro-forma financials presented in the Factsheet have not
been realized. Specifically:

• The revenue from leaseback ended on December 31, 2015 instead of December 31, 2016, a fact
that was first communicated to the Board in July 2015 and we understand was likely due to the
death of the prior owner of the property during the voting period.

• Though the actual Operating Costs have been very consistent with the estimates, the estimated
revenue has not materialized. The pro-forma financials estimated that in the year of
renovation, 2017, programing would begin in July and would result in revenues, net of program
costs, of approximately $65,000. The renovations were actually performed in 2016 and actual
revenues, net of program costs, for the year ended December 2016 were approximately
$32,000 15.

• The internal renovation costs contained within the pro-forma financials were $259,000 and the
actual cost of construction has aggregated approximately $590,000 16. As the Association does
not have detailed support for the original estimate we are not able to compare the actual costs
incurred on a line by line basis to the estimate though it is apparent that the input of the Lake
House Working Group, which occurred after the purchase, expanded the design for the
renovation which resulted in additional expense. Additionally the Association has incurred costs
for the exterior repairs above the escrowed amount, costs related to park concept planning,

14
The remaining balance of $5,500 does not appear to have been charged.
15
Pre-payments for After School and Camp programs were collected starting in May 2016 even though we
understand that the Lake House was not officially opened until August 2016.
16
Included in this number is the costs changed by the construction firm ($504,459) as well as costs incurred for
permits, architects, a project management firm and the LEED consultants.

23 | P a g e
furniture, signage, and other miscellaneous costs of approximately $101,000 that were not
contemplated in the initial pro-forma financials.

Our analysis found a number of areas that can be improved to prevent a recurrence of the budget
overrun experienced on the Tetra renovations. Additionally, we have made observations that we
believe will increase transparency and provide a more robust process that can be relied upon by the
Board of Directors, the Association and its members. In summary we found that:

• This was an unusual transaction for the Association; we understand that the Association had
never purchased property before and the nature of the project, an interior renovation, was
different from any project previously undertaken by the Association.

• There were no written internal control policies and corresponding processes for the Association
staff to rely upon as they went through the transaction.

• The practice of the Association to seek member input via a Working Group on required design
elements after the estimate has already been compiled and included in a budget makes it highly
likely that estimates will be fundamentally flawed. That said the estimation process for the
internal renovations of Tetra as we understand it was not performed in a manner that could
have yielded a reasonable estimate and was not documented.

• The internal control processes of the Association are not sufficient to account for funds when
they are contracted or encumbered, but instead track expenditures only as they are paid. The
encumbrance process is an important aspect of controlling spending commitments.

• The internal control processes, including those for Conflict of Interest tracking, procurement,
and invoice payment, among others, are not sufficiently robust to ensure compliance with the
Association policies and our analysis has found multiple instances of required documentation
not being maintained.

We note that the CEO of the Association has acted regularly throughout the process to improve the
policies and processes as either ambiguities were found or it was evident that the processes required
improvements. For example, (i) the Land Use Resolution 2; Process for Considering Additions,
Alterations and Improvements to Common Area was adopted in early 2015 to clarify the authorization
of the CEO and the Board to act; (ii) remediation was begun in early 2016 to establish additional
processes for capital projects, and; (iii) as deficiencies in the internal renovation estimation process
were encountered, the CEO decided to forego her bonus and salary increase as well as those of another
staff member directly involved in the internal renovation estimation process.

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Any control environment encounters weaknesses and deficiencies from time to time; the processes by
which these are identified, addressed and remediated, including an appropriate “tone at the top” that
proactively implements corrective actions is important.

Below we have provided our detailed observations and specific recommendations so the Association can
continue to enhance its policies and processes.

A. General Governing Policies and Processes

The Association governing documents generally provide only a general framework of controls and
processes. Even in those instances where there are specific policies detailed there is no defined process
to ensure that the policy is being followed. For example, the Association Conflict of Interest policy
requires an annual certification; however there has been no internal process in place to ensure that the
certifications are appropriate, approved, obtained, reviewed for issues and maintained. Our analysis
found that certain of these certifications had not been completed at the time they were required.

Recommendation 1: Policies should be established, documented, and then reviewed and
updated on an annual basis. All updates to the policies should be tracked within the policy
itself.

Recommendation 2: For every established policy internal written processes should be
established and “owners” of the internal processes should be identified. We recommend
that these internal processes include both the procedures required to execute the policy (a
preventative control) as well as procedures that will verify that the process has been followed
properly (a detective control).

The Association currently does not have a comprehensive Code of Conduct or Code of Business Ethics
though we understand that one is currently in development by the Governance Committee. These
Codes are generally considered to be cornerstone documents for an effective internal control
environment.

Recommendation 3: Establish a comprehensive Code of Conduct for both the Association
Board of Directors and staff.

The Association governing documents allow for the use of Executive Sessions and we understand that
there are many instances where they are appropriate to protect the interests of the Association. We
discussed the use of Executive Sessions with all of the Association’s Directors and not one was able to
identify any instances where they felt that the discussions held in Executive Session could have been
held in an Open Session without damaging the interests of the Association. In fact, several Directors
specifically recall specific instances where a Directors would point out that the conversation had started

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to include areas that could be covered in Open Session and recalled that the discussion was immediately
redirected to the specific contractual issue the Executive Session was convened to discuss.

Our analysis of the items discussed in the Executive Sessions was significantly hampered by the absence
of any meeting minutes and retained packages of information presented and discussed. Though the
minutes reflect all approved actions taken by the Directors once they returned to Open Session there is
no record identifying what information was considered in reaching the recorded vote nor have files
been consistently maintained by the Association of all materials provided to Directors in the Executive
Sessions.

Additionally the concerns expressed by many of the members we interviewed have centered on the lack
of clarity in the process undertaken by the Association Staff and Board as they evaluated the Tetra
purchase.

Many institutions release minutes of Executive Sessions after a prescribed time period has passed or the
underlying issues are resolved. We believe that it is possible to supplement the documentary record of
the Association without compromising the interests of the Association. This could take many forms
from maintaining an agenda of the topics discussed and the documents reviewed to preparing minutes
that could be made public after the later of a set period of time or the conclusion of the contractual item
discussed.

Recommendation 4: Consider adopting a policy that will provide greater transparency to the
considerations undertaken in Executive Session.

B. The Process for Capital Expenditures and the Budgeting Process

The Deed provides a specific threshold of aggregate cost above which a vote of the members is required
prior to the execution of the contract. The Association staff have not proactively calculated the
threshold on an annual basis to ensure that the requirement is well known and understood. Though we
understand that the Association has not previously entered into significant contracts for capital
expenditures, the aggregate cost of the Tetra Internal Renovation ultimately exceeded the threshold
and it is not clear that fact was recognized and considered by the staff.

We do not know whether the internal renovation should have required a separate specific vote of the
members as the renovation, albeit it at a lower amount, was already included in the broader Tetra
Referendum Factsheet. Additionally, the language of the Deed does not contemplate a situation where
a project is originally estimated to be below the threshold and then is either expanded or otherwise
results in an amount that is above the threshold. We suggest that this could be clarified by including a
“measurement date” concept for both initial estimates and increases in contract values.

The BOC was made aware of the internal renovations overrun at their March 2016 meeting but the full
Board of Directors was not notified until their May 2016 meeting. Though the BOC is tasked with
deciding which items are presented to the full Board of Directors it is not clear to us why this was not
immediately communicated.

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Recommendation 5: Establish a process whereby the threshold is calculated and included in
the budgeting documents. Establish a procedure at the estimation of Capital Projects to
compare the aggregate estimated cost of a project to the threshold.

Recommendation 6: Clarify the existing policy to provide guidance for situations where a
project expands or where an estimate is found to be insufficient. This should include
guidance on when an overrun should be brought to the attention of the Board of Directors as
well as guidance on the appropriate process to follow when the revised amounts exceed the
threshold.

The Association does not currently maintain a long term, three to five year, Capital Plan including all
proposed additions, maintenance projects and enhancements. We understand that this is currently in
the process of being considered and prepared by the newly formed Capital Projects Group.

Recommendation 7: Prepare a long term Capital Improvement Plan and update it on an
annual basis.

We understand that the Association has historically prepared estimates for capital projects before
soliciting input from Working Groups on the design requirements and that the process used for Tetra
was not unique in that manner. Therefore, estimates have frequently been prepared without a clear
understanding of the nature and scope of the proposed project and accordingly are ultimately not
directly comparable to the amount ultimately incurred. Though this occurred previously, we
understand that the size of the Tetra internal renovation project coupled with the addition of significant
design elements (including LEED Certification requirements, the expansion of the bathrooms, and the
moving of the kitchen) resulted in a significantly more material cost increase than had been experienced
in the past.

The estimate for the Tetra renovation was further complicated but the fact that the standard method
used by the Association staff for estimating projects was not possible. The Association has previously
prepared estimates using the historical cost of a similar project as a starting point for the estimate. This
was the first internal renovation that was performed by the Association and therefore the estimate
could not be compiled in the manner historically used. The estimation process used by the Association
staff and the assumptions used were not documented and maintained and we are therefore unable to
fully analyze them.

Additionally, it is not clear to us as to how a reasonable cost estimate could have been made prior to
documented design specifications.

Though the Association has not yet developed written policies and procedures around capital
expenditure project assessment and estimation, it has this year moved to implement a more formal
process including the development of a defined process to vet proposed projects, define design
requirements, estimate the cost estimates and establish milestones as well as the development of
templates to monitor a project from proposal to completion. Though we recognize the work performed

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to date is significant we recommend that the Association establish written policies and procedures for
this area.

Recommendation 8: Establish written policies and procedures for the evaluation and
management of capital projects which should include: 1) a requirement to specify the design
in advance of the estimate or budget being prepared; 2) a requirement to identify and
disclose the key assumptions including in the estimate or budget; and 3) a requirement to
maintain the documentation supporting the estimate or budget.

The Association does not currently have a process to ensure that as funds are encumbered they are
tracked against the approved budget. The current processes record amounts as invoices are received
and moneys expended. The Association does not have controls in place that would prevent the
contracting of an amount in excess of the budget.

Recommendation 9: Establish a process to ensure that purchase orders and contracts cannot
be issued without encumbering the funds and ensuring that the approved budgeted amounts
are sufficient.

Recommendation 10: Establish a quarterly or semi-annual review process where the
aggregate amount of encumbered amounts plus estimates of all amounts remaining to be
contracted are compared to the annual approved budget.

C. Procurement and Payment Controls

The Purchasing and Procurement Resolution requires that any purchase greater than $5,000 requires at
least two written quotations, “to the extent practical”, and must be supported by a purchase order
signed by the Department Director, the CFO and the CEO. Our review of the Tetra transaction found
that this control was not effective. For example, there were no bids provided for the internal
renovation but a decision was made to continue using the contractor who had performed the external
renovation. Further there was no executed contract for the interior work that could be located.

There was no effective control in place to ensure that the purchasing requirements had been adhered to
prior to an invoice being paid. Additionally, there was no effective control in place to ensure that the
invoiced amounts matched the terms and conditions of the contract and purchase order.

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Recommendation 11: Revise the resolution to remove the language stating the policy is only
required to “the extent practical”. In the event that written quotations are deemed not to be
necessary require that a memorandum be prepared and approved detailing the reasons and
authorizations for the decision.

Recommendation 12: Develop a process to ensure that prior to an invoice being paid they are
matched and agreed to properly approved contracts or purchase orders. This should include
an analysis of the aggregate amount paid under any to ensure that the invoice is within the
approved terms.

D. Additional Observations

The Association does not have a clear or central document retention policy and procedure. We
obtained documents from various employees and directors based on their individual retention
decisions.

There is no clear standard as to the documentation required to be maintained to support transactions.
For example, the appraisal of the Tetra property was a key document in this process and yet there are
no documents available that set out the instructions to the appraiser regarding the assumptions to be
used or the effective date of the appraisal. In fact it does not appear that any member of the
Association had any direct communication with the appraiser.

In addition, certain documents presented at the Open Sessions of the Board Meetings were not
prepared in time for the Agenda Package and were provided at the Board Meeting but were not
attached to the Meeting Minutes or separately maintained by the Association.

Recommendation 13: Establish a formal document retention policy specifying the nature of
the documents required to be maintained which should include specific requirements for
financial documents, documents presented to either the Board of Directors or a Board
Committee, etc.

The Association does not currently track or record proffered amounts, and any restrictions on them,
until it is clear that they will be collectible in the near term.

Recommendation 14: Establish a procedure to record and track all proffered amounts and
any restrictions on such amounts.

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The Association does not currently analyze or test loan covenant compliance, but instead relies on the
auditor to perform the calculation as part of the annual audit.

Recommendation 15: Establish a procedure to analyze likely annual covenant compliance at
interim periods but no less frequently than semi-annually.

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