RSF Association members upset over PPP loan ‘fiasco’

The RSF Association board meets on Dec. 7.

Board delays decision on how to account for $2 million loan repayment


DEC. 8, 2023

When the community learned last month that Rancho Santa Fe Association illegally obtained $1.5 million in federal Paycheck Protection Program (PPP) loans during the pandemic, many members, including current board members, were left shocked, disappointed and embarrassed.

After negotiations with the U.S. Department of Justice, in November the Association agreed to a $2,037,451 settlement which includes the repaying of the loan plus about $500,000 in fees and penalties. The Association had faced a penalty nearly three times as much but they were able to settle on a reduced multiplier, which the organization believes reflects their “documented, good-faith efforts to verify eligibility for the loan.”

At the Association board’s Dec. 7 meeting, Covenant members voiced their opinions on what they called a “fiasco” and an “irresponsible act of deceit.”

“We are the oldest HOA community in the country and now we have a stain,” said resident Saiid Zarrabian. “We have a stain that impacts our property values…We’re a laughing stock. We got written up in the paper for having illegally taken money from poor people who may have needed it. I swear to you, three minutes worth of a search said a 501(c)(4)s not eligible.”

“It’s simple fraud… We cannot allow this to happen.”

“As an Association of one of the richest communities in the country, we have to hold ourselves to a much higher standard than what we stooped so low to,” echoed resident Linda Leong.

As the board was set to make a decision on how to allocate the loan repayment within the community, many residents requested that the board defer its decision until a special meeting can be held for more public input. Given the response from the public, Director Scott Thurman made the motion to hold the open forum, which was approved by the board unanimously.

In a written statement to begin the discussion of the PPP loan, Association Director Dan Comstock said he understood that community members are upset and want to point fingers or blame staff or board members.

“We share these same emotions as we are members of the community as well. All of the senior staff involved with the PPP loan no longer work for the Association and all of the board members who were involved in getting the PPP loan are no longer on this board,” said Comstock. Former Association manger Christy Whalen resigned in May and CFO Seth Goldman retired last month. “The seven of us (on the board), the new staff and the community as a whole have to deal with this issue so we really want to try to not look backward but move forward.”

Association board Treasurer Phil Trubey did look back, to give a detailed overview of how they arrived in this position. He said normally a staff member would’ve given the presentation but it was only the new CFO’s third day on the job.

Through the CARES Act announced in late March 2020, $340 billion of funding for PPP loans was made available on first come, first serve basis and there was only a two-week period when everyone could determine if they were eligible for a loan.

“The information at the time was spotty and incomplete,” Trubey said, citing a PPP fact sheet from the Small Business Administration at the time that stated that nonprofits were eligible. Reading the CARES Act online today, Trubey said it doesn’t take very long to realize that 501(c)(4) organizations like the Association were not, in fact, eligible.

Most nonprofits are organized under the 501(c)(3) section of the federal tax code, meaning donations to the charities are tax-deductible. They were all deemed eligible for PPP loans. C-corporations, which allow shareholders to file taxes separately from the business, were also eligible.

“We talked to lawyers and bankers and applied, which was a mistake because we weren’t actually eligible,” Trubey said.

Per an email at the time, the thought in applying was that if the Association was not eligible, they would simply get rejected or at worst would be forced to pay it back.

Trubey said that the Association’s first mistake was applying for the loan and its second was checking the wrong box on the loan application form: 501(c)(4) was not even an option to be checked on the loan application, which might have been a good first clue.

“On the verbal advice of a banker, who no longer works at the bank, we checked C-corp. Mistake,” Trubey said.

The Association received the $1.5 million loan and during the 24-week measurement period, funds were spent on payroll and benefits, utilities and rent. Furloughed employees were able to return to work and only one position was eliminated.

The loan was disclosed in detail in the fiscal year 2020 audited financial statements and the CFO made mention of the PPP loan during quarterly financial reports. The loan was forgiven in December 2020.

The Association was notified by the government of its investigation in late February. The DOJ investigation was the result of a whistleblower suit filed by Wade Riner, a man in Texas who independently uncovered $51 million in improper PPP loans at 60 different HOA and country clubs across the country, ineligible nonprofits due to their tax status: “We weren’t the only idiots,” Trubey said. As the relator, or the person who brings the claim, Riner got paid 15-30% out of the Association’s settlement.

As the Association is run conservatively and stays 95% reserved, they had the cash on hand to make the repayment to the government, which was done on Nov. 30.

With the DOJ matter settled, the Association’s next step is to account for the repayment of the loan. Trubey said the Association is exploring their options to re-coup money from other parties, those who wrongly advised them.

To repay the loan, the Association’s finance committee has recommended that funds be taken from general services to pay the penalties and interest, and that the golf and tennis club pay back the funds they used, which would be $525,474 for the golf club, and $100,971 for the tennis club. This would lower the Association’s reserve level to 71%.

At this time there has not been a recommendation for a special assessment to cover the Association’s budget shortfall moving forward. Trubey estimated a special assessment could be about $250 a household.

“As a homeowner, I will not accept a special assessment nor do I wish to see this money taken from our reserves,” said resident Carol Warren during public comment. “The board who lied in its application to the government and the attorneys and bankers who misled the board in thinking that their application was legitimate must be held accountable.”

At the meeting, both the golf and tennis club spoke up against the finance committee’s recommended plan for repayment.

Todd Neal, the president of the RSF Golf Club board, said even though they experienced a dip in revenue due to the course and clubhouse operations being limited or completely closed, the club did not request a PPP loan. He said the golf club was also unaware that the Association had misrepresented itself.

“We pay the Association $350,000 a year for accounting and HR support….In exchange for paying that amount of money, we reasonably expect to receive competence.” Neal said. “The golf club has clean hands in this situation but now we’re facing the process of depleting or at least reducing our reserves to fix the situation.”

Neal said while he agrees that the golf club should pay back the principal, he does not believe the golf club should be on the hook for the interest and penalties.

Deb Gustafson, the president of the RSF Tennis Club, said while they also did not request the PPP funding, what they received was used to pay employees instead of laying them off. She said it was unfair to now ask the club to repay the funds, especially at a time when they are attempting to make improvements for members—$70,000 was recently committed for the planning for additional tennis courts.

“It is disheartening that we relied on paid professionals to make this determination but the members are the ones who are made to suffer the consequences,” Gustafson said.

Many members also questioned why the community was left in the dark, only learning about the situation and the loan settlement in late November via a message sent out to the community by President Courtney LeBeau. Board members said their legal counsel strongly advised “radio silence” as they were negotiating with the DOJ and that the matter remain confidential. Two of the current board members, Jeff Simmons and David Gamboa, only found out about the issue when they were elected in June.

The finance committee’s recommendation for the PPP loan repayment was on the agenda for Dec. 7 before the public asked for more time for input and a special meeting. Some members of the board were hesitant to call for an additional forum. LeBeau said that all 1,800 Covenant members were invited to the board meeting to hear more about the issue. The board meeting room was filled with about 35 people (the meeting is also broadcast online) and Manager Domanique Albrecht said they had received public input from about 15 members.

In his support, Director Simmons said making the community more comfortable with the process was worth a meeting.

“Transparency is warranted here and I hear that loud and clear,” Director Lorraine Kent said. “We should be doing what’s in the best interest of the community members, I think it’s warranted because a lot of people are upset.”

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