Hopping Green & Sams
Attorneys and Counselors

MEMORANDUM

TO:

FROM: DATE: RE:

Board  of Supervisors
Poinciana Community Development District Board of Supervisors
Poinciana West Community Development District Michael C. Eckert
October 5, 2018

Past Negotiations of Asset Sale and Purchase Agreement

At the last joint board meeting, several supervisors inquired about creating a list of major benefits that the Poinciana Community Development District and the Poinciana West Community Development District (collectively the "Districts") received through the extensive negotiations of the Asset Sale and Purchase Agreement ("PSA") with Avatar Properties, Inc. ("Avatar"). It is my understanding that supervisors were concerned because some people have been spreading misinformation in the community that the Districts simply accepted Avatar Properties Inc.'s ("Avatar") offer to sell the amenities without negotiation. Nothing could be further from the truth. In fact, there were twenty-two (22) versions of the PSA before the Districts approved it. Those twenty-two (22) versions reflect the back and forth negotiations between the Districts and Avatar. Below is a summary list of just some of the major benefits the negotiations yielded for the Districts and their residents. Note that this list does not include the countless language changes designed to protect the Districts which were implemented through negotiations.

Purchase Price

The purchase price was negotiated in an amount to ensure that construction of new performing arts center and wellness center would be accomplished  without  materially raising amounts residents currently pay.

The purchase price initially sought by Avatar was reduced as a result of the Districts' insistence on creating an operating reserve for the amenity budget and creating a capital reserve for the amenities being purchased and the new amenities proposed to be constructed. Prior to 2018, there were no such reserves in the club budget and no plans to create such.

Avatar proposed the Districts agree to a price certain and assume the liability for any increases in the bond interest rates. The Districts  instead  required  Avatar  to bear the  risk of interest rate increases. As a result, if interest rates rise, the purchase price  will  be  required to be reduced or the transaction will not close. Depending on the amount of the interest rate increase, this may result in a reduction of the  purchase  price  by  several  million dollars.

Avatar proposed the Districts pay a traditional portion of the closing costs. The Districts instead required that Avatar pay all closing costs. This amount is estimated at $600,000 and reduces Avatar's payment from the proceeds of the transaction.

Assessment Structure

Under the Club Plan, Avatar does not pay operations and maintenance fees relative to the properties that it owns. Avatar similarly did not want to pay amenity operations and maintenance assessments ("Amenity  O&M  Assessments")  on  its  lands.  This  structure was not acceptable to the Districts.  Negotiations  resulted  in  Avatar  agreeing  to pay  its full Amenity O&M Assessments relative to its lands which is  a  significant  amount annually. These assessments were estimated at $1,650,000 in 2017 for that year, but are anticipated to decline each year as more homes are sold by Avatar.

If requested by the Districts, Avatar is now required to pay all of its Amenity O&M Assessments in advance. Avatar is also required to pay its  amenity  debt  service assessments ("Amenity Debt Assessments") in advance, if requested by the Districts.

Through negotiations, the Districts can require Avatar to post a surety bond  or letter  of credit equal to 18 months of Operation and Maintenance Assessments ("O&M Assessments") on its lands and lots. In 2017, this amount was estimated at $2.5 million.

Financial and Existing Debt Matters

The Districts insisted that Avatar enter into a funding agreement instead of the Districts assessing the residents to pay the costs for the attorney fees, engineering fees and inspection costs associated with the inspection of the amenities, special assessment process, bond validation process and bond sale process. The Districts are only required to repay such monies advanced by Avatar if: 1) bonds are actually issued, 2) the bonds are issued before April 20, 2021, 3) bond counsel states bond funds can be used for such reimbursement, and 4) bond funds are sufficient to be able to make such reimbursement.

Avatar proposed to sell the amenities subject to existing liens, including the outstanding debt assessment liens of the Districts on the amenity facilities. The Districts insisted that

Avatar pay off the ex1stmg 2017 PWCDD debt assessments and 2012 PCDD debt assessments in the approximate  amount  of $400,000  prior  to or at closing.  This ensures the Districts are not required to repay bondholders these  amounts  from  resident assessments.

Construction, Management, Operation, and Maintenance of the Amenities

Avatar initially proposed it would decide what new  amenities  would  be  built.  The Districts now have the power to determine the details of the new amenities.

Avatar proposed a 5% construction management fee which  was  estimated  at  $550,000. The Districts have negotiated this structure to an employee  leasing  arrangement,  with  a cost not to exceed $50,000. As a result, an additional $500,000  will  be available  to  be spent from the bond proceeds on the construction of the new amenit ies.

Avatar proposed that the Districts agree to assume all existing contracts related to the amenities and that the Districts pay all costs associated with terminating contracts the Districts did not  want.  The Districts refused.  The Districts  now  have  the right  to reject  an assignment of a contract and Avatar is required to pay any associated termination fees.

Avatar requested veto power over the management company the Districts hire to run the amenities. Negotiations resulted in the establishment of minimum qualifications for the manager, with no veto power for Avatar.

Avatar proposed a requirement that the Districts hire Avatar to manage all the amenitie s, including the restaurants. The Districts rejected this proposal  and  will  have control  over the manager of the amenities being acquired.

Avatar proposed that it would have control over the rules and regulations adopted by the Districts for the operation of the amenities. The Districts refused, and the  Districts  will retain control of the operation of the amenities, including the rules and regulations.

Under the Club Plan, Avatar can issue as many non-resident memberships as it wants, unlimited in duration and not limited to age.  The  Districts  negotiated  the  number  of passes not to exceed 1,000 passes in  the  aggregate.  The  Districts  also  negotiated additional limitations including: 1) the passes can only be  used  by  Avatar's  residential home buyers in Avatar's neighboring community for up to one (1) year after the pass is  issued to the home buyer, 2) at least 90% of the  passes  will  be transferred  to  Avatar's home buyers who are age fifty-five (55) years and older, and 3) all passes, regardless of whether they have been assigned to home buyers by Avatar, expire five (5) years after the sale of the first home in the neighboring community.

The Districts insisted that  Avatar  bring all facilities  being acquired  up to ADA standards  at Avatar's cost prior to closing to prevent the Districts from paying this cost  through resident Amenity O&M Assessments.

The Districts negotiated with Avatar to include protections  in  the  PSA  designed  to  prevent the Districts from being charged an unreasonable amount for reclaimed water  service relative to the amenities.

Miscellaneous Negotiations

Avatar initially proposed a structure that allowed Avatar to lease the Sales Center and Administration Building ("Sales Center") to itself or others it selected in perpetuity for little or no compensation being paid to the Districts and under lease terms controlled by Avatar. Avatar also initially proposed that the Sales Center would not be conveyed until ten (10) years after closing. The Boards believed this proposed structure would give the Districts all the burdens of ownership, with none of the benefits. The Districts rejected this approach. As a result of negotiations, at the election of the Districts, the Sales Center can be conveyed to the Districts for a purchase price of one dollar ($1.00) upon the earlier of February 1, 2025 or when Avatar owns less than 200 lots in Solivita. In addition, Avatar shall only have the ability to lease the Sales Center for 18 or 36 months following conveyance, depending on the number of lots owned by Avatar at the time. Further, Avatar must pay off the existing 2017 PWCDD debt assessments and 2012 PCDD debt assessments on the Sales Center, which are currently a lien against that property, prior to or at closing. This ensures the Districts are not required to repay bondholders these amounts from resident assessments.

Avatar proposed to only carve out the amemt1es from the  Club  Plan  through  an amendment to the Club Plan. The Districts insisted Club Plan  be officially  terminated, which is now a requirement of the PSA.

The Districts have negotiated thirteen (13) extensions of  the inspection  period  to  make  sure that the inspection period lasts until a date near the closing  on  the amenities.  During the inspection period, the Districts can choose not to proceed with the transaction if the condition of the assets being acquired is unacceptable. The extension of  the  inspection period is a benefit to the Districts.

Other Protections for the Districts

Although the obligation of Avatar to pay Amenity Debt Assessments was not subject to contentious negotiation, the Districts made sure this  requirement  was  affirmatively  stated in the PSA. This amount was estimated in 2017 to be a total of $6,730,000 to be paid by Avatar.

Additionally, the Districts ensured that they had protections in the PSA that they are not required to close on the amenity transaction if the Districts do not sell the amenity bonds.