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Myths & Facts about the Cost of Rebuilding
Jan. 2004

There are lots of opinions floating around about the financial impact of Arrakis, but how many of us have actually seen the numbers? Frankly, a lot of people are making assumptions without looking at the facts. So let's look at some numbers to try to put things into perspective.

One thing that's important to do is to separate the cost of Arrakis burning down with the cost of rebuilding Arrakis. They're completely separate. We incurred big, big costs whether we rebuilt Arrakis or not.

Next, for some bizarre reason people seem to be focusing on the cost of building Arrakis while ignoring the money that Arrakis brings in. Considering the revenue we get, Arrakis pretty much pays for itself. Even with the cost overruns.

Finally, when we speculate about how much we might have saved by not rebuilding Arrakis, we also have to look at what we would have given up by not rebuilding it. The main thing we would have given up is the ability to dramatically lower room rates in the future, though there are other things we would have given up as well.

One note before we get started: I don't use the term "rent" because since you own the organization you're your own landlord so you're not really paying "rent". The money you pay is an investment in the organization you own. Another way to think of it is "membership dues". I'll refer to it as "room rates" instead of "rent rates". And now on with the show....


  • Room rates went up because of Arrakis burning whether we rebuild Arrakis or not. That's because Arrakis didn't generate any revenue for the three years that it sat empty, and because the fire made our property insurance go up for all the houses. This accounts for $26 of monthly rates, whether we rebuilt or not. Fires are expensive.

  • Had we sold Arrakis and applied the money directly to room rates, they could have gone down by $10/mo. But applying the money directly to room rates is fairly irresponsible because you throw away your asset and then it's all gone. This is like Bush's tax cuts which give you a small break right this very minute vs. investing in the future, which gives an impact that is larger and serves more people. There are a number of ways to invest that money so you retain your asset, but most of them benefit future generations, not the current one. Finally, remember that since the cost of burning was $26/mo., that means that the cost is still an increased $16/mo., even if we blew all the money from selling Arrakis on room rates.

  • But wait, you say, rates didn't go up by $16/mo.! That's right. That's because we put off most of the pain until the future, in two ways: (1) We slashed the maintenance budget, and (2) we refinanced our loan, which lowers our monthly payments but means we have to make those monthly payments for more years. In both cases, we're borrowing from the future. The costs that you're not paying now will be borne by the next generation of co-opers.

  • Arrakis almost entirely pays for itself, even with the cost overruns. When people look at how much money we could have made from selling the charred remains of Arrakis they usually fail to consider how much money the rebuilt house brings in. The revenue from Arrakis almost entirely covers the cost of rebuilding it. Had the project not gone over budget it actually would have paid for itself and then some, offering the ability to drive room rates down a bit. (That was part of the plan.) The fact that it went over budget was upsetting, but it wasn't so bad that rebuilding Arrakis suddenly became a mistake. The house will pretty much pay for itself. And once it's paid off, it'll wind up saving us around $31/mo. per member.

    (By the way our accountant's budget shows that Arrakis completely pays for itself, even in the short term, while I say that it mostly pays for itself. Here's more on why our numbers are slightly different.)

Now let's look at these issues in more detail.


You can easily figure out how much an item impacts room rates by using member-months. Here's how it works: Let's say a charitable foundation is going to give us $45,000 a year forever, and you want to put it towards lowering room rates. The first thing you do is to divide it by the number of members. How many is that? Well, we have 167 beds in ICC without Arrakis, but we have only about 90% occupancy over the whole year, so let's call it 150 members. So dividing our $45,000 by 150 members we get $300 per member.

But that's per year. To figure the cost per month we divide our $300 by 12 months and we get $25/mo. Now, since we're always going to be dividing by members and then dividing by months, we can use a shortcut and divide by member-months. 150 members x 12 months = 1800. So in the future we'll divide by 1800 member-months.

On calculations that include Arrakis, we'll use 2000 member-months instead of 1800, because when we have Arrakis we have more members. (It's actually 2030 member-months, but let's not split hairs.)

Finally, note that this trick only works when you're talking about annual savings or expenses. In our example above we assumed we got the $45,000 every year. But if you get the $45,000 only once then it's different. If you want to have that windfall lower room rates over many years rather than just once, then you have to turn that money into annual income or annual savings. You could do that in the following ways:

  • Divvy up your one-time savings over X number of years.
  • Pay down your debt, saving on your annual interest expense.
  • Loan out the money to another co-op organization, collecting interest as annual income.
  • Invest in more properties, and get revenue from room rates.

We discuss those methods in more detail in our article How much can you lower room rates with $X?

Now that we know about member-months, let's look at the costs surrounding Arrakis.

Cost of the fire

We incurred costs from Arrakis burning whether we rebuilt or not. Those costs are:
Property insurance. For some reason our insurance company doubled our rates, just because we had a second major fire in three years. This would have cost us another $25k/year if we didn't rebuild, or $29k/year since we did and now we have another house to pay insurance on. Either way the cost is about $14 per member per month. The cost per member doesn't increase by having Arrakis because Arrakis gives us more members to divide the cost by. (By the way, Seneca was the other major fire, in 1997.)

Lost revenue. Arrakis has been producing no income for the three years it's been sitting empty, which is about $108,000. The insurance company paid us $48,000 for lost revenue so our net loss was $60,000. Over the last three years, that amounts to around $12/mo. ($60k / 3 years / 1650 member-months. I'm using fewer member-months because we didn't have the 14 members from 1910 for almost all of those three years).

[I figure this by adding up the revenue that would have been collected (12 members x 90% occupancy x $544 avg. rent x 12 months x 3 years = $212k), and minus the things we would have spent money on had the house been open: food ($105/mo. x 10.8 x 12 x 3 = $41k), utilities ($9k/yr. x 3 years = $27k), maintenance ($36k, derived by dividing the total maintenance budget by 8 houses and multiplying by three years). The utilities figures are estimated by considering that in the 2002 budget 20% went to food and 12% went to utilities. So anyway, $212k income - $41k food - $27k utilities - $36k maintenance = $108k.]

So that's costing us $26/mo. per member. And that cost is the same whether we rebuilt Arrakis or not.

Now, those who have been around for a while know that the board didn't immediately raise rates by $26/mo. It put off the increase by slashing the maintenance budget, and by refinancing our loans (which lowers our monthly payment, at the expense of having to make that monthly payment for many more years). The current generation hasn't borne all these costs, but future generations will. That $26/mo. cost is very real whether all of it is immediately reflected in room rates or not.

Again, Arrakis burning cost each member $26/mo., whether we rebuilt Arrakis or not. Think about that the next time your maintenance officer is concerned because you removed your smoke detector battery, or you put a whole bunch of cardboard boxes right next to the heater in the basement, right where it's marked "FIRE CODE: DO NOT PLACE ITEMS WITHIN 10 FEET OF THIS EQUIPMENT".

How much is the rebuild costing?

Before we look at the numbers, let's get some perspective. According to Howard, construction costs in West Campus are about $140 a square foot.  ICC's costs have run closer to $100-$110 a square foot. And here are those numbers:

Source of funds

Total Cost
Annual Cost**
Monthly cost per member

Original reconstruction loan


Expansion Fund tapped


Insurance proceeds


Total before cost overruns


Overruns paid for by increasing our construction loan


Overruns paid for with Emergency Fund


Overruns paid for with prior year's surplus


Overruns paid for with Expansion Fund


Total after cost overruns

*Cost of Expansion Fund contribution not considered to impact monthly rates because our budget builds the Expansion Fund at a set rate whether we use those funds or not.

**Amortized over 20 years. Loans considered at 8% interest. Loan actually starts out at 7% interest but it's adjustable rate, so I figured 8% over the life of the loan was a more realistic figure. Amount from Insurance & Savings figured with no interest. 

A mistake is to look only at how much Arrakis costs us without also looking at how much it makes us. Let's look at how much Arrakis will generate:

  • Annual Revenue: $114k (20 members x 90% average yearly occupancy x average room rate of $530 x 12 months)
  • Less expenses: Food $23k ($105/mo. x 20 members x 90% x 12 mos.), Utilities $14k (accountant's estimate), Maintenance $5k (facilities manager's estimate)
  • Annual Income: $114k - 23k - 14k - $5k = $72k

By now you know how to take any amount of yearly income and figure out how much it impacts room rates: we just divide by the number of member-months:

  • Income can lower room rates by: $36/mo. ($72k divided by 2000 member-months)

The bottom line: Before the cost overruns we expected Arrakis to cost us $33.50/mo. per member. After the cost overruns it's going to wind up costing us $39.00/mo. But that's offset by the $36/mo. in revenue. So Arrakis costs us only $3/mo. more than what it generates in revenue.

This doesn't mean that rates go up $3/mo.! The $3/mo. figure is the average that members pay over 20 years. The way it actually works out, rates go up by only $1/mo. now. So you're thinking that means rates have to go up by more than $3/mo. at some point in the future, but that's not actually how it works either. Without the overruns we would have reached the maximum amount we needed to sock away for savings in four years, and without a need to save any more rates could go down by $8/mo. at that point. With the overruns it's actually going to take nine years for us to max out our savings, not four. So it's not that rates go up, it's that they just can't go down as soon as we'd like. Details about this are in the Appendix, Financing the Overruns from Savings.
In any event, what we see is that the building almost entirely pays for itself. Plus, when Arrakis is paid off we'll no longer have the $31/mo. expense of the construction loans, and at that point room rates can go down by $31. It's a clear long-term benefit.

But while I say that the project mostly pays for itself in the short term, your accountant says it completely pays for itself in the short term. Who's right? We both are, we're just using different perspectives. Here's more on the difference between my figures and your accountant's.

Anyway, even though Arrakis is an excellent long-term benefit, it's still true that $3/mo. extra on average is more than zero. In light of this, did ICC leaders make the right decision in deciding to rebuild? You'll have to draw your own conclusions about that. Here are my own feelings:
  • Your leaders and staff fully expected the house to pay for itself even in the short term. The cost overruns were definitely an unplanned surprise. Your leaders went with the best information they had at the time, which was all they could go on. That information squarely pointed towards rebuilding. I doubt you or I could have done better in that situation.

  • The overruns weren't so large that the decision to rebuild suddenly became a mistake. Even with the cost overruns, the rebuild project is still one of the best long-term uses of our money. As it turns out, even the $3/mo. extra isn't devastating, and it's balanced by the fact that paying this now buys us the ability to lower rates by ten times that much in the long term once the house is paid off.

  • The way it works out, rates actually go up only $1/mo. for the next several years, not $3/mo. The missing $2/mo. is the fact that we have to wait until 2013 for rates to be able to go down, instead of 2008. How much extra are you paying for Arrakis right now and for the next several years? $1/mo.

  • This $3/mo. is a drop in the bucket compared to the $26/mo. hit we took from Arrakis burning, whether we rebuilt or not. It pays to put things into perspective. If you want to be upset about what could have been, it makes more sense to be upset about Arrakis burning in the first place.

What would have happened had we not rebuilt?

Let's say that instead of rebuilding we wanted to sell the lot and put all the money into lowering room rates. The first thing to consider is that we were already hit with a cost of $25/mo. per member just from Arrakis burning in the first place. Any amount that we were able to reduce room rates would have only gone towards mitigating that $25/mo. cost. It wouldn't lower rates from what they were before Arrakis burned.

With that in mind, let's look at how much we can mitigate that $25/mo. cost by not rebuilding. To do this we first add up the sources of revenue we'd have available by not rebuilding:

And then there's what we'd have to take out:

  • Cost of selling. The standard cost for a realtor for selling a property is 6%, or $11k.
  • Lost Revenue. Every year that Arrakis sits empty costs us $34,000. Let's assume it took us a year to convince someone to buy our charred lot for $190k. It could easily have taken longer.
  • TOTAL: $45,000

So we'd expect to clear this much from the sale:

  • Net Windfall: $367,000

Now that we know we're sitting on $367k, how could we lower room rates with that money? We can't just divide that $367k by member-months because we're not getting the $367k every year, we're only getting it once. There are many ways to use that money to lower room rates, but each of them has a downside:


Annual Amount
Room rates can be lowered by this much (use 1800 member-months)
When rate goes down
You lose your asset in the process

Divvy it up over 20 years, at which point our loans are paid off and room rates can go down $59/mo.

$10/mo. for 20 years

The money is all gone and you have nothing to show for it afterwards. Most experts would consider squandering a community asset like this to be irresponsible.

Loan out the money to a group starting a co-op and charge interest (8% over 20 years)

$11/mo. forever

Have to find a group to loan the money to. Risk of their not paying us back.

Pay down our debt

(see note)
In 11.5 years

Rate will go down $59/mo. anyway when we pay off our debt in 20 years. Paying it off early simply makes that day happen sooner. No rate reduction happens until debt is actually paid off.

Rebuild Arrakis, estimated

Down $28/mo. forever after 20 years
In 20 years

Rate goes down only when building is paid off, in 20 years.

Rebuild Arrakis, actual

Up $1/mo. now,
Rates fail to drop by $8/mo. between 2009-2014 (info)
Down $31/mo. forever after 20 years
In 20 years

Rate goes down only when building is paid off, in 20 years.

Buy another property

In 20 years

Numbers would probably be similar to the Arrakis rebuild. ICC-style houses are hard to come by, and there weren't any on the market when we chose to rebuild.

As you can see from the table, everything's a tradeoff, there is no golden correct answer. The two methods that let us lower rates immediately either require us to blow our windfall completely or look for a favorable situation that might not exist, and either way don't lower rates by very much. And the methods that let us lower rates by a lot require that we wait several years before we can actually lower rates. These methods are explored in more detail in the related article How much can you lower room rates with $X?

Note that the advantage of rebuilding Arrakis is that it pretty much pays for itself over the term of the loan, and then when the loan is paid off and we no longer have to make mortgage payments, room rates can go down by the amount of those payments. ($40 per member per month)

I'd like to specifically point out that the estimated cost for the rebuild of Arrakis called for no short-term impact on rates, as listed in the table. That's the best information available at the time the decision was made. You could blame your leadership in hindsight for the fact that the cost went a bit over the original estimate, but that seems kind of petty, like a Monday-morning quarterback. Besides, I'd like to hammer home the point that the amount of the cost overrun isn't devastating and that this project still gives us the best opportunity to lower room rates by the maximum amount in the long term.

That's the choice: Would you prefer to lower room rates now by only $10/mo. for only 20 years, or would you lower rates by $31/mo. forever starting 20 years from now? This forces us to consider why ICC is here in the first place and what its goals and values are. Is it more important to have the cheapest rates possible for whoever happens to live in ICC at the moment, or is it more important to have a financially strong organization which can serve more members and have much lower rates in the future? We chose the latter path.

Your leaders didn't just look at that comparison between immediate and future room rates. They considered what we'd lose by not rebuilding:

  • More risk. We had only seven houses when Arrakis burned, and we've expected to lose Avalon within the next few years because we don't own it and the owner will probably want to do something else with the property. Going from eight houses to seven was bad enough, but going from seven to six could have been devastating. Having another house in our portfolio on the day we lose Avalon will help us weather the storm. Especially since one of our houses (Arrakis) will be a stellar asset, rather than all of our houses being mediocre had we not rebuilt.
  • Serving fewer members. The whole reason ICC exists is to serve a membership base. With more houses, we serve more members and spread the cooperative concept even farther.
  • Missed opportunity for ADA rooms. The organization had set a goal to make our houses more accessible to persons with disabilities, and compliant with the Americans for Disabilities Act. Rebuilding Arrakis gave us the perfect opportunity to do so.
  • Lost opportunity for future rewards. Once we pay off Arrakis it will generate way more monthly savings than it cost to rebuild. The only way to get that long-term advantage was by rebuilding. This has far, far greater opportunity to lower rates in the long-term than simply selling off the property. More on this below.
  • Inability to stay competitive to survive. Our neighborhood is slated for denser development which will push market rates down in the future. If ICC can't remain competitive with those rates then we'll die. A piddling $5/mo. is not going to make us competitive with the market. Our only hope will be to lower our rates by more than that further down the road, and rebuilding Arrakis gives us the ability to do that very thing. If we hadn't rebuilt Arrakis (or bought some similar property), then the competition would eat us alive in 20 years when our rates would be too high and then bye-bye ICC.
  • Missed chance for expansion. ICC-style properties become available only once in a blue moon, and when they do they're either more than we can afford or we're not ready to buy. Had we not rebuilt Arrakis it could have been a long time before we could have gotten any other building.
  • Missed a good deal. Even with the cost overruns, rebuilding Arrakis was a good deal for the price we paid. Had we wanted to buy a house like that from someone else it would have cost a lot more.
  • Preserve our history. When Arrakis burned it had been part of our family for 25 years and there was a lot of emotional attachment to it, especially by some of the people who had been displaced by the fire. Many of you today don't care about Arrakis because you never lived there and never saw it functioning, but you might feel different if it were your own house that burned down. After the fire, people who had lived at Arrakis over the last 25 years came out of the woodwork to go to the site to see what had become of their old home. Many alumni gave generously to the fund to help the displaced Arrakans, because Arrakis meant something to them. I gave $1000 myself. But again, emotion aside, the decision to rebuild was also squarely based on improving the long-term financial health of the organization, especially the opportunity to lower room rates in the future by a lot more than we ever could if we didn't rebuild.

You can still feel that it was more important to save $10/mo. now than save $31/mo. in the long term. There are no right or wrong answers here. The goal of this page is simply to show what the numbers actually are, so you can know the opportunity costs of the various choices.

The Long-Term

One of the biggest advantages of rebuilding Arrakis is the long-term impact. When the building is paid off in 20 years, the $31/mo. expense goes away. Room rates could go down $31/mo. at that time.

Twenty years is a long way off, but consider that ICC has been around for nearly 34. If the board had done some responsible co-op building such as this 20 years ago (instead of some irresponsible purchases of overpriced apartments), you could be seeing the benefit today, every month when you wrote out a smaller check to ICC.

Miscellaneous Notes

Why we didn't have more insurance. Many have wondered why we didn't have more than $200k of insurance on a million-dollar property. First off, our insurance was closer to $350k, not $200k. Second, the property was worth around $500k, not $1M. (The rebuilt house is worth around $1M, not the old house.)

Okay, so why did we have only $350k on a $500k house? Simple: Nobody would give us full coverage. We're a high-risk client (as demonstrated by our fire). Even if we had been able to get full coverage, we would have paid out the nose for it.

BTW, here's some info from Howard on ICC insurance in general in Feb. 2004: "In the past in order to make our insurance affordable we have insured for approximately $71 a foot of replacement cost. there is no doubt that we are under insured compared to where we would like to be.  When I first came to ICC we insured at $50-60 a foot and I raised it once we could afford to do so. As you can tell we have around 52,000 gross sq ft in ICC including Arrakis. We do not insure the Avalon building, only its contents.  [ICC property, not member property.] We could increase this or decrease our rate of coverage as leadership sees fit.  If we increase it we pay (substantially) more.  If we decrease it we are "self-insuring" more of our risk.  This is a fairly complicated concept.  Given our financial circumstance I reccomend leaving the valuations where they stand and keep working on loss prevention instead of spending more for insurance.  But I am open to your comments and suggestions. Contents insurance is just that.  If you look at the cost of a commercial kitchens and vent hoods alone and remember have fairly cheap furnishings etc. you can see that those are not huge values in our policy. The reason the New Guild contents are so high is because of the offices and all of its contents in addition to NG being so large."

Arrakis land value. The value for the Arrakis lot used above came from an official appraisal in May 2001.

Related information. Anyone who had the patience to read this far is an ICC junkie and will probably like the related article, How much can you lower room rates with $X?

I hope this information has been helpful.

-- MBJ

Details of the insurance proceeds

Insurance Received


Loss of property & contents


Covers only ICC property, not property owned by members.

Lost Revenue for 12 months



Total Received


How we spent it


Insurance Adjuster, 7.5%


An adjuster is our advocate when we negotiate with the insurance company.

Asbestos Abatement


The City required us to do this whether we rebuilt or not.

Miscellaneous costs related to the fire


Legal, administrative, security, staff

Applied to 2000-01 budget to cover lost revenue


This is the amount we would have made from Arrakis from Jan.-May had it not burned. We added this back to the budget so that for 2000-01, it's like the fire never happened.

Costs related to refinancing our loan


We refinanced our loan to reduce our short term costs, so we wouldn't have to raise room rates immediately after losing the revenue from Arrakis

Remainder applied towards rebuilding Arrakis


This is the amount we could have used to do something else with, such as loaning it out or paying down our debt early.

Impact on Room Rates by Financing the Cost Overrun from the Emergency Fund
ICC has an Emergency Fund (EF) for rainy days. Our policy requires that we keep building it until it reaches a ceiling of $1400 times the number of beds in ICC. We have 188 beds in ICC so we can stop saving when we've saved about $263k.

We build the IF by setting aside 1.5% of our gross room rate income each year. So these days we put about $16k a year into the EF.

The EF should be at around $205k by May 2004 and the board is expected to take $83k to pay for most of the overruns on the Arrakis rebuild project. That means that we'll have to keep saving for another 9 years to hit the ceiling, instead of another 4.

At the point we do hit the ceiling, we won't have to fund the EF any more, so we could charge members $16k less per year. That works out to an $8/mo. reduction in room rates.

So it's not actually that room rates go up because we used money from the EF to pay for the Arrakis overruns. It's just that rates don't go down as soon as we'd like them to.

Bottom line:

  • Taking money from the EF doesn't make rates go up at all.
  • In 9 years rates can go down $8/mo. Had we not had to pay for the overruns then they could have gone down after 4 years.
  • This averages out to an extra $2/mo. over the 20 years, even though rates actually don't change for nine years as a result of our taking the EF money. And after nine years they can go down.

Why was Arrakis so much more expensive than 1910?

ICC member Margaret from French House writes: "Why did Arrakis cost so much to rebuild ($1.025M), compared to the purchase of 1910 ($454k purchase + $60k rehab = $614k, and the lot worth around $145k was already included)?

That's a great question. Here's why Arrakis cost more:

  1. It's bigger. 20 beds vs. 14.
  2. All the materials are brand-new. Lots of stuff in 1910 is old. We won't spend much on maintenance for Arrakis over the next ten years, but we'll spend a bunch of 1910. Arrakis can go 50 years without a major overhaul, 1910 will need one within 10-20.
  3. The materials are better quality. Windows are double-paned and new modern water heater, for example.
  4. It has stuff that 1910 doesn't have, such as a sprinkler system, handicapped accessible features, prewired DSL, ceiling fans in all rooms.

Neither Arrakis nor 1910 were bad deals, it's just that you get what you pay for.

By the way, according to Howard, construction costs in West Campus are about $140 a square foot.  ICC's costs for Arrakis have run closer to $100-$110 a square foot.


Does Arrakis completely pay for itself in the short-term or not?
Why my numbers are slightly different than your accountant's

In the analysis above I say that Arrakis mostly pays for itself in the short term, and they makes us a profit in the long term when it's paid off. But your accountant's figures show that Arrakis completely pays for itself even in the short term, making us a small profit even before we pay it off. Where's the discrepancy, and who's right?

We both are, we're just looking at the issue in different ways. When I figure the cost per member, I'm counting the money we used from the insurance settlement as well as money we used from our Emegency Fund. Suellen didn't look at those. I think a fair evaluation must include the insurance money, because if we didn't put it into Arrakis we could have put it into something else. Whatever we used it for (e.g., maintenance), that would be that much less money that we'd have to collect from the members in the form of room rates. By the same token I think we have to count the Emergency Fund money we used to pay for Arrakis. That's because the fact that we dipped into our Emergency Fund means that we'll have to rebuild that account, and the money that we'll use to do so ultimately comes from members.

So why didn't Suellen use those figures? Simple: Because she's looking at what our yearly cash flow looks like from this project in isolation. That's a standard way to report on projects like this. My goal was different -- I didn't want to produce a standard accounting report, I wanted to account for how much this project is ultimately costing the members, per month.

In the end it doesn't matter a whole lot. I show that the project mostly pays for itself in the short term, and Suellen shows that it completely pays for itself in the short term. We both agree that the windfall we'll get in the future from this project will be substantial, that the short-term impact is negligible to nothing, and that it made financial sense to rebuild, even with the cost overruns.

Change in room rates for selling Arrakis vs. Rebuilding Arrakis


This chart is the grand summary of everything you've read on this page. It nicely summarizes the main points:

  • Rebuilding Arrakis means that short-term rates are slightly higher than if we had sold the lot.
  • Rebuilding Arrakis means that future rates are way lower than if we had sold the lot.

Notes on the chart:

  • Why selling the lot yields lower rates in the short term. Selling the lot (the red line) yields slightly lower rates in the short term because I assume we divvy up the money and spread it out over 20 years to lower room rates during that time. This does mean that that windfall is completely gone at the end of that time. Anyway, notice that the difference between the red line (selling thelot) and the blue line (rebuild, estimated) is not that great. The difference between the red line and the green line (rebuild, actual) is greater because of the cost overruns.

  • First Drop: Emergency Fund. We build our Emergency Fund (savings) by saving part of our income every year, until we hit a predetermined level called the "ceiling". When we hit the ceiling we no longer have to add to our savings, and so we can lower room rates by the amount we had been putting towards savings. That's the $8/mo. drop you see around 2007 had we sold the lot or had we rebuilt without cost overruns. The $8/drop doesn't kick in until around 2012 for the Rebuild Actual scenario because we paid for the overruns partially from our savings, so it will take us longer to rebuild our savings and hit the ceiling.

  • Second Drop: Mortgages Paid Off. I assume we pay off our loans around 2025, though in fact we might refinance and pay them off sooner than that or later than that. I can't predict the future so this is as good an assumption as any. Anyway, around 2025 we no longer have to make our big mortgage payments, so room rates can drop accordingly. They drop more for both of the rebuild scenarios because we get to retire two mortgages: the Arrakis mortgage and the one for all the other houses combined. Without rebuilding we'd just have the one mortgage to retire.

What you can't see on the chart:

  • Benefits of rebuilding accrue forever. The chart makes rebuilding seem worse than it actually is, because it focuses on the years that it's costing us more. The big payoff in the chart starting in 2025 is depicted for only four years, but in fact that benefit extends forever.

  • Rebuilding helps ICC survive. Rebuilding improves our financial assets as well as our physical assets, and allows us to be competitive with other housing choices in the future. Rebuilding allows us to drop our rates farther in the future than not rebuilding. Without the ability to do so ICC could fail to attract enough members and could go bankrupt. Then the chart doesn't even exist.

  • Rebuilding saves our assets. By rebuilding we have invested our equity. We still own it. We can sell it, borrow against it, reinvest it, whatever. Had we sold the lot and divvied up the money towards room rates over 20 years, that money would be completely gone forever.

  • The 2004 loan refinancing. In 2004, after I wrote everything above, ICC refinanced its loans, so now they'll be paid off four years earlier. That makes an even stronger case for rebuilding Arrakis, since the short period where rates are higher is now even shorter. Also, we got a great interest rate, so shortening the term barely raised the short-term cost at all. But I'm not gonna re-do the calculations or the chart to reflect that, I've spent enough time on this, whew.

Arrakis in the news

Here's a Daily Texan article about the Arrakis rebuilding, which is typically filled with inaccuracies, especially about the cost of rebuilding.

Thanks for reading this far! I hope this has been useful, and maybe even interesting.

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