Living in the Gap

This association is in transition, as are all associations. The question for owners in an association to ask is "Are we living in the gap, or are we drifting in the gap?"

The answer to that question provides insights into the tremendous differences that can be found among condominium associations. It's easy to shift from "being on course" which in my opinion is "living" to floating through life, which I call "drifting."

There is a lot of work that goes into planning a course of action, creating action plans, and implementing those plans. Building an organization is difficult. It can take years to put all of the necessary pieces into place.  It's relatively easy to disrupt those plans; it takes a few well timed events, or one election in an association to lose momentum, direction and all of those plans!


What is the Gap?
What is the "gap" that I am referring to? I'll answer that question directly, but for now, let's say it's about vision and planning. All organizations should have a detailed and specific plan. That plan identifies where we intend to be at some point in the future. Once we know where we are currently, and where we intend to be, it is then possible to determine how to get from here to there. The plan can be broken down into shorter time increments of one, five, ten, twenty and extend to a time horizon of 30 or more years.

Family units are also organizations. It's pretty obvious that I promote planning for families, too.


Core Necessities
There are certain things necessary for constructing such a plan. One thing is a "vision" which is where we intend to be. Another is a reserve study, or the equivalent. And yet another is a budget. Part of that is having certain tracking controls in place.

Even the simplest organization should have a budget. With a budget comes some cost accounting, so we know where the money is spent. A budget and cost accounting implies tracking income and expense. In an association this includes tracking fees and delinquencies, expenditures (payments) and open expenses (bills). Any organization that fails to do these simple tasks will have financial difficulties. In the simplest terms it will run out of money.


The Advantage of Having a Vision
There are many different ways to accomplish the vision of an organization. A Mission Statement is one support tool. What is our purpose? What is our ultimate goal?

Many organizations avoid preparing such a statement. Others develop really elaborate statements. I recommend a simple and straightforward statement that will direct and empower the members of the organization, and will communicate the "mission" to the shareholders. In an association, that is, to the owners. Such a statement also establishes further accountability for the "leaders" of the organization. In complex organizations such as a condominium association which has governing documents and is to operate in accordance with statute, which in Illinois is the "Illinois Condominium Act" (ICA), there are a lot a things that need to be done. There are also many paths and approaches that can be used. If that were not true, then every association would be an exemplary one, there would be adequate reserves in each, and so on.

It's also realistic to assume that there may be owners and others attempting to move the association in a direction that is at cross-purposes to the mission statement. It's certainly easier to do so if no such statement exists.

Having a vision and a public mission statement is a huge assist in determining the goals and the paths to be chosen.  It can be helpful when choosing the different methods and establishing priorities to get to the stated goals.

There are many reasons associations don't have a mission statement, which is a public vision. It can be difficult work to develop one. It can be difficult for all the leaders to agree. Some boards may consider it a constraint on their activities, or on the activities of future boards. I suggest that it's more important to develop guidance and a structure. This will permit owners can ask "Is this activity consistent with our mission statement?"

Future boards have the freedom to adapt or to change any mission statement. However, such board activity should be public and published.

Empowerment
Of course, it is also important to view the big picture when evaluating the direction of the association. Any one activity may seem inconsistent with the stated goals, but that does not necessarily indicate an overall change in direction. A good example taken from nautical terms of sailing is the maneuver called a "tack." It is not possible to sail directly into the wind, so sailboats sail at an angle acute to the wind. At any moment it is apparent that the sailboat is not sailing in the direction it must be going to be on course. However, observing such a boat over a period of time and after several different changes in direction, or tacks, it becomes obvious that the overall movement of the sailboat is in the proper direction. Observing the various board actions and activities and then evaluating the whole is usually a good method of determining the direction of the board, even if it is not clearly stated.

Here's an example for an association. Suppose there is a maintenance program, that has been previously voted "Aye" by a board, and work is being done in steps, or phases. A year or so later, on viewing current realities, a board decides that in order to keep an assessment increase from exceeding a certain percentage that some programs must be postponed. Is that a change in direction? Perhaps it is. After a year or two if the program hasn't resumed, at that point I would say it is such a change. One concern I have is if the board makes such a change or changes, but doesn't publish the change or its intention to resume at some, appropriate, future date. The lack of such published statement is an indicator of a true change in direction.

It's a balancing act. I appreciate that boards must balance current benefits with current costs and future financial liabilities. I also appreciate that financial prudence dictates that not everything can be done "this year, or the next." Maintenance programs can be designed to set a pace and control spending. However, if maintenance is passed into the future, shouldn't the owners and future boards be advised of this? I like to think of it as "there is no way to escape the future."  Of course, some owners hope to sell before it's time to "pay the piper." I suppose in some associations those owners do take over a board. If that occurs in an association I think it's reasonable to ask if the board is operating as fiduciaries, or for their own financial gain?

Empowerment is accomplished through action and effective communications.  If there are issues about spending, and I think there are always such issues, then it is my preference that there are ongoing discussions about "austerity" and that conscious choices be made. There is always a choice! Spending priorities can be established by the board by listing all priorities and then striking some to get to the current financial goal. This information, including the current compromises, could be included in the Newsletter with a stated commitment to revisit this in the following year. Budgeting and setting initiatives is an ongoing, annual task.

Another method is to simply drop out certain initiatives. That's the easiest way to sometimes meet financial goals. Using that method there is no "plan," things are removed until the budget is met. There may be no published statement by the board. Some years later some owners may ask "why aren't these things getting done?" In fact, the current board, if separated several years from the group that made these decisions, may be completely unawares.

In reviewing the different methods, the question to ask is "Which is consistent with a mandate to maintain the property?" I also ask "Which method empowers not only the current board, but also future boards and of course, the owners?

To the owners I also ask "Are all the positions on your association board filled, and do all such positions have accountabilities and specific responsibilities, duties and assignements?" If the answer is "No" then I suggest the board is not fully empowered by the owners.

If a project or program is simply "dropped out" is that a "bad" thing? It depends. If the project is completely "dropped out" then perhaps the association has, indeed strayed.  If this occurs, it will remain for future boards to re-discover this and begin discussions. This points toward another aspect of running an association and that is, good documentation and good communications. Many boards "turn over" with little passing of information about current programs and initiatives to the new boards. Professional managers frequently deal with multiple associations, so the emphasis is on operations.

These factors all contribute to the "drift" when in that gap.  That is opposed to "action." I suggest these things should be conscious, planned decisions. The alternative is to avoid responsibility and to be a reaction to current events.


What is the Gap?
The gap is the place between where the association began and where it will eventually be, decades in the future. Where the association currently is, in this gap is the "here and now." The place it will be at some point in the future is the established goals, if the association adheres to the plans. In a long term endeavor such as BLMH, the ultimate destination is so many years away that it is possible not a single original owner will be living here when the association reaches that place.

This highlights why it is so very, very important for all boards to operate at all times with a view toward guiding an "association" toward that distant "destination." It really isn't about the individuals; its about an entity which is a community. "The whole is greater than the sum of its parts." This, of course runs counter to individual egos, wants, needs and desires.

Establishing goals for this year, and the next, and so on and then comparing those goals to where we are currently, is one way to determine where we really are in the gap, and how well we are doing. This objective evaluation must occur each year.

Having goals is one necessity. Another is a means of measurements that determine where we are in the plan to accomplish these goals. Regularly, the board must compare the measurements to the goals. It must also balance external forces, such as the ICA and even certain Federal guidelines when decisions are made. Of course, there are also certain financial realities to be dealt with. However, good internal measurements will point these out.


Forward Planning Indicators
But what about forward planning and economic indicators? We don't need to read the Wall Street Journal, MSNBC, C-Span or Fox TV every day to know that we have experienced a terrible recession. However, much information available from the Bureau of Economic analysis and other reliable data sources are extremely helpful when making forward looking plans and decisions.

In 2006 there were serious indicators that this economy was headed against the shoals. That was two years before the "panic of 2008" and a year prior to the official recession (December 2007 - June 2009). The "panic" occurred when a lot of people suddenly realized that the music had stopped and a bank had indeed, failed.  However, using the forward indicators, there were some who, in 2006, began adjusting plans to accommodate serious economic hardships, and I do admit that I was one of them.

The question I pose for you is this. Is it prudent for an association to consider these things when looking into financial projections? As individuals, is it also prudent to consider these types of "headwinds" when we make our personal financial plans?

In other words, we are all living in the "gap." We may not be aware of it or we may be unwilling to acknowledge it. That's immaterial; reality has a way of intervening into our dreams and fiction.


What is the Real Purpose of the Board?
The purpose of the board is to operate as fiduciaries and keep the association always in view as the thing that is being guided. It might be helpful to view this association as the 'HMS BLMH' with the owners as "passengers," the board as the ship's "officers," and the various contractors, vendors and suppliers as the "crew."

At various times, some passengers depart, and others get on board. Some passengers are unruly or complain, or argue with the crew or the officers. Some want better amenities and are unhappy with their quarters. That may be a diversion for the board.

The real purpose of the ship's officers, the "board" is to get the ship to its next port, which is to say, it's next destination, and then to the next thereafter, and so on. This will continue for as long as the association exists, on a long, long "voyage" spanning many decades.  In that span of time there will be many boards. So how does a new board determine where the association is going? How to assure that the "course" of the 'HMS BLMH' is maintained?

Having goals is similar to having a chart on a ship with a course plotted. The board, at any time, will use various measurements similar to the compass and GPS on a modern ship. Those measurements determine where along the course, the association really is. In our association, there are financial and other measurements each month.


What are the Tools Available to the Board?
The association has many. They include a professional, experienced "crew." That crew includes professional financial, professional legal, professional management, professional maintenance and professional landscaping support. Notice the emphasis on the word "professional." That's not an accident. If the association is to make continuous headway, then it needs a "crew" capable of making decisions consistent with the long term goals of the association. One of the purposes of the crew is to advise the board. The board must be aware of the condition of the association. Who is to do that impartially and with professionalism? Who has something at stake in the outcome for the entire association?

Another tool is the reserve study. This association has had two in recent years. They each provide 30 year goals for this association. One of the interesting thing about having two reserve studies prepared by two different firms is the entirely different conclusions reached. Was that a consequence of different goals established by different boards, or different perspectives by two firms? Or both?

If an association does not use the tools, or doesn't develop specific plans (steps, dates, costs, fees) to accomplish the stated vision or goals, then that association is kidding itself, and the owners.

Operations and Maintenance
Operations and Maintenance, or "O&M" is directly in the sights of any planning by the board. It's the single largest area in which funds are expended in most associations. Take away O&M and what is left is landscaping and certain contracts.

The ICA dictates that boards "maintain the association." What precisely does that mean? Some of the owners, which is to say, the "passengers" of HMS BLMH have expressed that their definition of a properly maintained association is contrary to that of the boards. For some owners, it means that "their" building should be impeccably maintained. For a few, it may mean an impeccable association. This includes the grounds, structures, walks, streets, driveways, trees, lanscaping and so on. That's quite a tall order, and it is somewhat confusing when some of the the same owners argue that the fees are "too high." This type of behavior trips my "personal agenda in play" alarm!

What's a board to do? I advocate listening to owners. However, I don't listen as in "tell me what to do." I listen as if I were listening to passengers on a ship. Yes, they've paid for the voyage. However, it's not the purpose of the board to cater to individuals. The ICA is a guide in this. All owners are to be treated equally. In other words, the board can only do for one owner what it will do for all owners.

Some boards may attempt to skirt this fiduciary requirement by avoiding their duty. One way to do this is to listen and respond to a certain group of owners, and to only respond to complaints. In other words, in that type of association, the "squeaky wheel gets the grease." How to determine if your association is operating that way? Check the roster of special owner's groups. Also monitor "official" publications. If the board makes up a significant percentage of any owner's group and if the official publications fail to advise the owners of different initiatives available to owners, then it is possible that your association may be operating on the fringe of fiduciary compliance, and catering to special interests. Boards may attempt to operate this way for simple financial reasons. The budget may not allow "everyone" to have the special amenities. So if they aren't advertised, that will keep the costs down, won't it?


Striking a Balance and Accomplishing the Same
So, there is a need to strike a balance between short term maintenance needs and the annual budget. There is also a need to strike a balance between the complaints of individual owners and the need to provide broad maintenance in the association.

How best to accomplish this?

I prefer several methods and approaches.

1. Annually - Review the incompletions of previous years and adjust current plans.
2. Annually - Review the reserve study and look at 5-year requirements.
3. Annually - Establish maintenance goals and specific projects.
4. Annually - Publish various initiatives so all owners are aware. Provide updates in newsletters.  
5. Monthly - Discuss and report to the board.
6. Bi-Monthly - Publish summaries in each Newsletter. 

My Answer to the Question
At the beginning of this post, I asked the question "Are we living in the gap, or drifting in the gap?

That's a question each owner should consider not only about their association, but about their individual lives.

The question implies that in "living" there is some planning and management necessary. The alternative is to drift which implies doing as little as possible, going with the status quo, and hoping for the best.

What's my opinion about where this association is in this process? To answer that, I'd suggest we remember that at the time this association was founded, the board was handed a new development and a clear slate. There was a waiting list of buyers; there were no foreclosures and few or no delinquencies. There was no reserve study, there were no planning guidelines. One manager did it all, from internal accounting to planning to managing of the various contracts and contractors. The board had no history to go on and dealt with problems as they occurred. As a consequence our fees zig-zagged all over the map as the board struggled with meeting cash flow requirements, establish a base fee, and then maintain fees "as low as possible."

I'd say that over the years "We have made great progress." I am also of the opinion that if the association were run today as it was in the early years, that we would today have some really serious problems. But the association is an established one, some of the stalwarts are not only older, but wiser, and we have some really good tools and good contractors including extensive management support.

My answer to the question is: "I think we are doing extraordinarily well by some measures." By "we" I mean the entire board of BLMH, I say that with a view that "the whole is the sum of the parts."  The association does have "gap management" techniques in place and does use them; so we do have a "course."

I would suggest that any organization which does not have and use such techniques is "adrift." It either has no viable purpose, or it is operating at cross purposes to the stated goals.

What are some of the measurements to determine if we are "living in the gap" rather than "drifting in the gap?" I'd include:

1. Do we have a mission statement?
2. Do we have long term plans?
3. Do we have long term programs in key areas?
4. Do we have, and use, a viable reserve study?
5. Do we closely monitor our finances, and do so monthly?
6. Do we closely monitor other aspects of the plans?
7. Do we manage our managers, our contractors and vendors?
8. Do we manage delinquencies and foreclosures?
9. Are our decisions based upon current finances, projected income and projected expenditures, or is it based upon "How much do we currently have in the check book?"
10. Do we monitor and maintain statistics about rules violations?
11. Do we provide the same information to all owners?
12. Do we have people on the board with applicable professional experience?
13. Do we have board members with long term association guidance experience?
14. Do we have board members who avail themselves to fiduciary and other association training?
15. Does the board understand the ICA?

 Notes:

1. I began this post with the statement "This association is in transition." I would suggest that owners consider what that means. 
2. The principles of gap management are applicable to all organizations, be they families or HOAs or even social clubs. I would suggest they are mandatory in any organization or endeavor in which funds are collected from some of the members and where there is supposed to be a "purpose." 
3. The 'HMS BLMH' is not a pleasure cruise, and the owners are not passengers in the usual sense. In other words, this isn't "The Sapphire Princess." All owners have duties and responsibilities and that includes maintaining their units. There are no stewards or concierge on board. When different owners begin making demands of the association, it is somewhat like having the "passengers" attempt to "take the wheel" and steer the ship. It does happen, and some boards forget the charts and the itinerary and give in to those owners. The question I ask is this: "Do those owners have a fiduciary duty?" Of course, the answer is "No." The next question I ask is "Is such behavior by a board consistent with their fiduciary duties?" The answer to that question is: The board should never forget its fiduciary duty and should adhere to plans. If the board decides otherwise, then it should review any and all plans that could be affected by the change. Then all owners should be advised of any consequences, and any changes should be applied equally to all owners. 
4. Coming soon "Communal Living."

Indicators of a Well Run Association

Running a community association such as ours is not fun, and it isn't easy. It is certainly challenging. The board finds that it must make difficult and unpopular decisions from time to time. It remains to be seen if future boards can do better. Of course, there will always be those in the audience who clamor for "change." As we have learned, "change" is not always better.

As for the involvement of owners, I look at some simple measurements. Is the board fully staffed? Do we have full committees? Are our association fees paid on time? If the answers to these questions is "no" then I am of the opinion that there is room for improvement among the bystanders.

I also am of the opinion that the indicators of a well run association include:

1. Does it have long term financial and monetary programs in place?
2. Does it have adequate reserves?
3. Does it have a reserve study, and has it been dusted off recently?
4. What is the most recent (10 year) financial history?
5. Is the property maintained? For example, does it have programs in place for landscaping, capital improvements and so on?
6. Is the association professionally managed? 
7. Is the property professionally maintained?
8. Does the board understand it's duties and responsibilities? 
9. Does the board have a long term financial plan, updated annually and a commitment to avoid special assessments? Can it articulate that commitment?
10. Does the board engage in discussions about the role of the fiduciary?
11. Does the board get training?
12. Does the board treat the professionals as partners, or adversaries?
13. Does the association have procedures in place for managing delinquencies?
14. Does it adhere to the ICA?
15. Does the association avoid catering to special groups?
16. Does it uniformly enforce the Rules and Regulations?
17. Does it enforce the Rules and Regulations? 
18. Does the board adhere to the governing documents?
19. Is the board fully staffed, and what is the duration of tenure of the current board?
20. Are there specific duties and responsibilities for each board member?

Robert Shiller and Home Prices

By this time, about 6 years after the peak in home prices, most of us are somewhat familiar with the "Case-Shiller Home Price Indices."  Even the "talking heads" on the evening news can now say this rapidly 5 times in succession without fumbling. We've been listening to these indexes (indices) being quoted or reading about them since the housing peak. However, where did these indices come from?

The "Shiller" in "Case-Shiller" refers to Robert Shiller, a professor at Yale University. Professor Shiller is the co-creator of the "Case-Shiller" indices. The professor has a web site, and it has some interesting tid-bits. Here's a graph constructed from his spread sheet data for "Home Prices since 1890." You can get this and more by going to Prof. Shiller's website, which is contained in the notes for this post.

The historical data for the chart is updated at Professor Shiller's website four times a year. This data is in Prof. Shiller's excellent book "Irrational Exuberance" [Princeton University Press 2000, Broadway Books 2001, 2nd edition, 2005].

The above chart indicates long term changes in home prices, the overall trend in home prices, building costs, population and interest rates. As you can see, prices currently are below the trend line. What does that mean? It implies that for prices to return to their trend, that they will increase. However, as can also be seen, home prices can be depressed below the trend for periods of time. Notable is 1918-1945, a span of 28 years with below trend prices; of course, there were four recessions in the period 1918-1927, the great depression, world war II, dust bowl and other economic hardships and restraints during that period. Prices also fluctuated during the period 1967-2000, and yet, during that time, a lot of people made money in real estate. That was before the now infamous bubble! So I would caution anyone to avoid making gross conclusions simply based on this chart, or to make predictions.  

One item of interest is the rise of population and the trend line for home prices. They track reasonably well. It may be a coincidence or not. The chart does not have information on rentals. The population has two choices of where to live; in a home which they "own" or in a rental unit. 

A second item of interest to me is the rise in building costs in the period 1970-1982. What was the primary cause? During that period, the economy experienced "oil shocks" and the Arab Oil Embargo, the Iranian revolution, Iran/Iraq war and price controls in the U.S. But why, even with high oil prices in recent years, have construction costs moderated? Here is a chart from the Council On Foreign Relations which provides some insights. It shows the spending for oil as a percent of GDP. Many aspects of home construction cost are governed by oil prices. They include materials, materials processing costs, fabrication and even the cost of transportation to and from the job site and on site construction costs. Clicking here will open the original article:

New Window> Revisiting the U.S. Economy and High Oil Prices

Returning the the Shiller chart, it becomes somewhat obvious that something was drastically wrong with "Home Prices" from 2000 to 2006. Never mind that Federal Reserve Chairman Greenspan, the National Board of Realtors (R) and just about everyone else who stood to make a profit took the position that "There is no bubble! What bubble?" 

As we have learned, bubbles aren't a problem unless you are one of the unfortunates who purchased late in the game, just before the music stopped. Hmmmm, somewhat reminiscent of a "Ponzi Scheme" on a grand scale, in which the early birds get rich, and the rest of us get to "hold the bag" when the music stops! However, I would say that home owners should take heart. The U.S. population is growing, the cost of rentals is increasing, home prices are below the trend line which implies a current purchase is a bargain, and it is most likely that prices will eventually turn in a direction of the trend line. In the mean time, I suggest we enjoy our homes and condos, and be thankful for the roofs over our heads. 

Notes:

1. Shiller is Stanley B. Resor Professor of Economics at Yale University.
2. His book "Irrational Exuberance" gave Nobel Laureate Paul Krugman of New York Times fame, the insight and courage to begin talking about "the bubble."  
3. In "Irrational Exuberance" Prof. Shiller explains the psychological underpinnings which cause people to listen to others against their own best judgement.  He successfully skewers the experts and gurus who so many of us listen to and rely upon. And those are the bright ones! Prof. Shiller doesn't even bother with the "talking heads" who are mere parrots. 
4. If you are interested in Prof. Shiller's website, which contains links and information about books he has written, click here: New Window> Prof. Robert Shiller Website

The "Mustard" Test

We're looking at some extensive repairs to an area which is called "Waterfall Number 2." That will include a new deck and bridge. One of several questions to be answered is "what decking material to use?"

I made a presentation to the board during the most recent association meeting, and gave them several samples of a "man made" decking product. This is, according to the manufacturer, of 95% recycled wood and plastic, and is suitable for installation in direct contact with the ground. Depending upon the actual product used, the warranty ranges from 20 years to "lifetime." As with all such decisions, the initial cost should be compared to "lifetime" benefits.  A principle goal is to reduce maintenance. That includes repairs and painting.

The product under consideration does not require staining; however, it will fade in color over time. It can be power washed, and if necessary, could be stained in the future. Who knows, in 20 years, the association might want to "spruce up" the deck.

An owner suggested that I do the "mustard test" to determine stain resistance. The material is stain resistant, but  is not immune or impervious to staining. So I decided to take one of the samples and subject it to the test.On March 10 I took a big dollop of yellow mustard and applied it, and allowed it to completely dry. I then washed the decking with plain water (no soap or scrubbing). The results are as follows:

After an hour, and allowing the mustard to dry completely:

I rinsed with warm water and allowed the sample to dry. Here is how it looked in artificial as well as daylight:

Notes:
 1. This wasn't a scientific test with controls, but it was adequate for my purpose.

The Best Time In a Generation to Buy A House

That's what some are saying. I agree.

Meanwhile, here at BLMH the "smart money" is purchasing with the intention to rent, and then sell at a nice profit in the future. Renting is one of the advantages to owners. Our Declarations do allow rentals. Any owner who has a problem selling in this market has the opportunity to rent their unit. From what I've seen, "motivated" owners are succeeding at this. In Illinois,  and under the Illinois Condominium Act, this association has exercised it's right to "forcible entry and detainer" and has rented those units, with little difficulty. In other words, there is little excuse for an empty unit to sit there, waiting for the local Realtor to do his or her "magic."

However, I would caution purchasers who intend to purchase, rent for a few years and then dump when real estate prices recover. Our association does have rules and regulations, and owners are responsible for their renters. In other words, if you intend to purchase here and expect the association manage your tenants for you, I suggest that you need to realize that as an owner you are responsible for maintaining your unit, and for any transgressions by your tenants. You will be held accountable by the current board.

A few years ago, it seems we had a "kinder, gentler" board which was committed to parties, low fees, passing costs on to other and future owners and managing tenants for absentee landlords, That type of behavior is generally undermining the other 300 owners on the property . It was a wonderful and really sweet deal for remote owners who rent. Not everyone bought into the idea, thank God!