NOTE 1 – NATURE OF THE RENTAL POOL LEASE OPERATION AND AGREEMENTS
Overview - The Innisbrook Rental Pool Lease Operation (the “Rental Pool”) consists of condominiums located on the premises of the Innisbrook Resort and Golf Club (the “Company”, “Resort” or “Innisbrook”), which are leased by their owners (the “participants”) to Innisbrook for the purpose of making such units available for resort accommodations. Salamander Innisbrook, LLC, as owner and operator of the Resort, administers the Rental Pool.
The Rental Pool operation is highly dependent upon the operations of the Resort, and likewise, the Resort is also dependent upon the continued participation of condominium owners in the Rental Pool. Additionally, the Rental Pool and Resort are both impacted by the general economic conditions related to the destination resort industry.
Rental Pool Agreements - The Rental Pool operates under the provisions of a Master Lease Agreement (the “MLA” or “Agreement”), which commenced on January 1, 2002 and expired December 31, 2011, replacing all lease agreements previously in existence. On September 10, 2009, a letter of agreement was signed extending the MLA two additional years, expiring December 31, 2013.
Under the terms of the Agreement, each owner may elect to participate in the Rental Pool for the following year by signing and executing an Annual Lease Agreement (the “ALA”).
Under the Agreement, the Resort pays the owner a fee equal to 40% of the Adjusted Gross Revenues. Adjusted Gross Revenues are defined as Gross Revenues less agent’s commissions, audit fees, occupancy fees when the unit is used for Rental Pool Comps or as a model, linen replacements and credit card fees. Each participant receives a fixed occupancy fee, based upon apartment size, for each day unit is occupied. After allocation of occupancy fees and the payment of general Rental Pool expenses, the balance is allocated proportionally to the Participants, based on the Participation Factor as defined in the Agreement. Additionally, occupancy fees are paid by the Resort to Participants as rental fees for complimentary rooms unrelated to the Rental Pool operations. Associate room fees are also paid by the Resort to Participants for total room revenues earned from the rental of condominiums by Company employees.
As part of the Master Lease Agreement, the former Resort owner, GTA-IB, LLC, had agreed to reimburse Rental Pool participants in the MLA for up to 50% of the actual unit refurbishment costs, plus interest at a rate of 5% per annum on such amount, beginning in 2002, so long as the minimum participation threshold as defined, is maintained. Salamander Innisbrook, LLC assumed the refurbishment obligations under the Agreement when it acquired the Resort on July 16, 2007. As of December 31, 2009, these obligations were paid in full.
In addition, the Company agreed to provide a refurbishment reimbursement to the respective condominium owners for units placed into the Rental Pool during 2005. The owners of these units are reimbursed for up to 25% of their refurbishment costs, plus interest at 2.5% per annum.
Nature of Accounts and Fund Balances - The Rental Pool consists of the Distribution Fund and the Maintenance Escrow Fund. The Distribution Fund’s balance sheet primarily reflects amounts receivable from the Company for the Rental Pool distribution payable to Participants and amounts due to the Maintenance Escrow Fund. The operations of the Distribution Fund reflect the calculation of pooled earnings, management fees and adjustments, as defined.
The Maintenance Escrow Fund, which is managed by the Lessors’ Advisory Committee (“LAC”), reflects the accounting for certain escrowed assets of the Participants and, therefore, has no operations. It consists primarily of amounts escrowed on behalf of Participants or amounts due from the Distribution Fund to meet minimum escrow requirements, fund the carpet care reserve and maintain the interior of the units. The Innisbrook Rental Pool Trust was established on February 1, 2002 to create a Trust, which holds certain assets maintained in such escrow accounts.
Maintenance Escrow Fund Accounts - The MLA provides that 90% of the Occupancy Fees earned by each Participant are deposited in the Participant’s Maintenance Escrow Fund account. Beginning in 2011, by mutual agreement between the LAC and the Resort, until it is determined that the fund requires replenishment, both the occupancy fee (Paragraph 7.3 of the MLA) and the carpet care reserve (Paragraph 1.6 of the MLA) deposit amounts will be 0%. This account provides funds for payment of amounts that are due from Participants under the Agreements for maintenance and refurbishment services. Should a Participant’s balance fall below that necessary to provide adequate funds for maintenance and replacements, the Participant is required to restore the escrow balance to a defined minimum level. The MLA provides for specific fund balances to be maintained, by unit type, size and age of refurbishment, as defined in the Agreement. Under the MLA, a percentage of the Occupancy Fees are deposited into the carpet care reserve in the Maintenance Escrow Fund, which bears the expenses of carpet cleaning for all Participants. This percentage is estimated to provide the amount necessary to fund carpet cleaning expenses and may be adjusted annually. The amounts expended for carpet care were approximately $17,870 and $31,455 for the years ended December 31, 2011 and 2010, respectively.
The LAC invests the maintenance escrow funds on behalf of the Participants and in compliance with restrictions in the Agreements. The Lessors’ Advisory Committee consists of nine Participants elected to advise the Resort owner in Rental Pool matters and negotiate amendments to the lease agreement. Income earned on these investments is allocated proportionately to Participants’ Maintenance Escrow Fund accounts and paid quarterly.