3.77% under budget is how we got a 0% fee increase in 2018

We do our annual budgeting in October, which can be difficult because we don't have year end figures.

In October 2017 we projected a significant budget surplus. In other words, our total expenditures for 2017 would be substantially under the projected expenses. We didn't "skimp" on anything or hold back expenditures for the next year. The numbers reflected the actual, real and true expenditures, to the best of the knowledge of the board.

Of course, there are always year end surprises. For example, a nasty December can push up snow removal costs for the year. Significant icing can push up maintenance costs as we clear ice from roofs. Last minute bills can also have an impact. So I am inclined to think of 1% as within the "noise band" which is about  $13,500. We have to do substantially better to consider holding fee increases at 0%.

BTW, the change in our painting schedule and approach in 2011 has saved this association nearly $9,000 each year. That's an example of how we've achieved these results.   These things add up. I'm always preaching incremental, continuous improvement, but not everyone on the board believes this. The long term results speak for themselves. There are lots of gimmicks that our boards have used to achieve short term results. Shame on them!

When our association is under budget, any surplus is put into reserves. However, this can also be used to the benefit of the owners.

In January 2018 we got the final numbers. We were 3.77% under budget for the year. In other words, our 1.50% fee increase in 2017 was unnecessary.  We can't turn back the clock and I certainly don't want to undershoot in any year. In fact, some seasoned board members continue to adhere to the unsubstantiated belief that we need fee increases of at least 3% each and every year.

However, during the budget discussions in October 2017 which I prefer to call "negotiations" it was apparent that an increase was unwarranted. Those present voted for a 0% fee increase based upon 2017 data and 2018 projections.

I want to point this out: what we saved by a lot of hard work over a period of years reduced expenditures in 2017 by an amount equal to a 3.77% fee increase.  I'll let that sink in.

There is micro-management and then there is effective management. I prefer to be effective, which is reflected in this chart. Blue are actual fees per month per owner and red is projected. I joined the board in 2010.

A zero percent fee increase

Our board decided upon a 0% fee increase for 2018.

While preparing my article for the newsletter, I advised owners that "this is a rarity" and it is.  It is impossible to say what will occur in October 2018 when the next board meets to decide the budget for 2019.

Here are a few of my observations:

1. It takes years to build large deficits or large surpluses.
2. Recent boards have taken a pragmatic approach.
3. Recent boards have take an approach supported by good data.
4. Not all owners cooperate which is why legal costs for our fireplace fiasco hit more than $40,000 this year. That fiasco was entirely a consequence of builder error and City of Wheaton Building Inspector incompetence. Yet we were sued by the City of Wheaton.

The association board will be evaluating actual 2017 costs after the end of the calendar year. At that time we'll know how we actually did. We can't predict snowfall in November-December when we prepare the budget in September. Nor can be predict the total manhours required to maintain our nearly 40 acres. Yet, it seems we'll be within +/-100 hours for the year. 

I have completed my maintenance/project list for 2018. Staying ahead and performing proactive/preventative maintenance is one of the ways to keep costs to a real minimum. For example, we've proactively replaced about 300 feet of water main. Is it an accident that our water main failures are reducing? I think our maintenance efforts are paying off. 

We are now addressing maintenance issues ignored and "put under the bus" more than 10 years ago.

Fees - Remember the good old days? I prefer the good "new" days

I'll take the current reality over the smoke and mirrors that were promoted in the "good old days" in this homeowner's association.

An owner who has a complaint brought to my attention the fees back in the "good old days" when he purchased a unit here. I thought the reader would find it interesting. .

When this association was built as a Private Urban Development it required that the owners via their fees would be responsible for all of the following maintenance and operating costs, and more:

• Snow removal on streets.
• Street lighting including electricity (up to 400 watts per fixture).
• Exterior building lighting including electricity (336 fixtures).
• Interior hallway lighting including electricity (756 bulbs).
• Interior hallway electrical heating systems (84 large heaters).
• Water closet utility room electric heaters (84 heaters).
• Electricity for stream pumping systems.
• Pumps and concrete and piping for the stream systems and waterfalls. 
• Cost of water for grounds maintenance and three streams.
• Maintenance of the exterior of 44 buildings, halls and garages, including masonry, panels, trim, roofs and entries.
• Maintenance and replacement of all streets, parking areas and curbs.
• Maintenance and replacement of all water mains. 
• Maintenance and replacement of all walks (about 1/3 miles).
• Maintenance and replacement of 84 driveways.
• Maintenance and replacement of all common area patios and decks.
• Maintenance of 336 limited common element patios and decks.
• Maintenance of the common area electrical systems. 
• Landscaping including maintaining 15+ acres of turf and about 800 trees and 3000 shrubs.
• Shoreline maintenance for two lakes
• Professional management fees.
• Professional accounting fees.
• Professional legal fees. 
• Professional reserve study fees. 
• Saving and growing reserves as required by State statute. 

Here is the trick question: What were the fees in the good old days for each of the 336 owners per month to do all of the above? Pick one:

• $75 per owner per month
• $55 per owner per month
• $45 per owner per month
• $35 per owner per month

To help you in guessing which of the above is the amount of the fees "back in the good old days" here is the total annual Operating, Maintenance and Reserve Budgets that the above fees would support:

$75 per owner = $302,400 per year for the association, including reserves.
$55 per owner = $221,760 per year for the association, including reserves.
$45 per owner = $181,440 per year for the association, including reserves.
$35 per owner = $141,120 per year for the association, including reserves.

Answer: Apparently the association was collecting $35 per month in fees per month per owner back in the "good old days." Of course there were no reserves. I'd love to see that original budget. 25 years later the fees were less than a "staggering" $195 per month for the average owner. In fact, over those 25 years fees increased about 7.25% each year, on the average.  If fees had been a more realistic $75 per month "back in the good old days" then the required annual increase would have been 4%. And, this association would have been saving substantial reserves commencing with day one.

 Who is to blame for this? I'd prefer to look at root causes.

Our legislature requires the association save for reserves. However, how one arrives at the numbers is not defined. Builders are not required to put up substantial reserves. So this passes to new boards. The boards can cobble together any reserve program they choose. Here at BLMH they called it a "replacement fund." Here at BLMH the first comprehensive reserve study prepared by outside professionals for this purpose occurred when the association was 32 years old. That is a long time to avoid opening Pandora's Box, as one manager described the possible consequence in 2007.

It would be better if our legislature had a statute which forced boards to use competent, professional companies to arrive at a 30 year reserve study in year one. Better still, have the builder or developer do this so owners pay appropriate fees from day one. But the legislature didn't do that, and it never will. Now the legislature has qualified all realty professionals as being qualified to manage a homeowners association. I ask, what does selling have to do with maintaining a HOA, in particular one of 40 acres, etc.? But the legislature passed this decision to a board comprised of amateurs. Which is why our board in 2011 attempted to hire an army of handymen equipped with lawnmowers and attempted to replace management with a realty professional.

If you think this is an isolated problem, think again. A friend purchased a lovely and expensive town home in 2014. That small association has limited reserves and has yet to conduct a proper reserve study. That's another problem in the making.

Ultimately the problem passes to future owners. Of course, after buying a unit with a $35 monthly fee, who is going to push for higher fees? No one. There is that expression "if it is too good to be true, it probably is" but a sucker is born every minute is the other expression.

Of course, owners did realize that this was unrealistic. I'm sure those who sold homes and moved into a condo at BLMH realized what a "bargain" $35 a month was as compared to what they were paying to maintain their houses including the lawns and exteriors as well as the water for lawns. Which is why fees gyrated to meet bills. Nevertheless the owners simply chose to ignore the elephant in the room and fought to keep fees low for as long as possible. Some owners attacked boards in 2006 and thereafter as fees escalated due to aging infrastructure, but many of the real culprits had already sold their units and moved on. The board members and owners who remained were left to hold the bag in 2008.

This is one of the problems with HOAs. It has given far too many a bad name. There has been a lot of anger in the HOA community since 2002 and I do mean well beyond the confines of BLMH. People bought at very high prices and were squeezed by increasing fees as older HOAs dealt with the realities of aging infrastructure. In 2008 the foreclosures began and HOAs saw declining revenue. It resulted in a death spiral for some associations. Not all were as fortunate as BLMH with 336 units and a small group of owners who were willing to notify owners in writing and at personal expense of the magnitude of the problem in 2010. I was one of that very small group.

I'd suggest that we remember the "good, new days." These are the recent years when the association is being properly maintained, it has the fees necessary to support the maintenance efforts, it doesn't kick the can down the road, current owners are paying their fair share and are seeing results. The association has a 30 year plan and works diligently on a 10-year plan each and every year.

I'll take the current reality over the smoke and mirrors that were promoted in the "good old days."

Reserves of $86,321- Assessments and Budgeting

This is another post in a continuing series on HOA budgeting.

"In 2014 the reserve contributions were 312.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001."

In other words, in 2014 the average monthly owner fee for the O&M budget at BLMH was $28.56 greater than it was in the 2001 budget. In 2014 the average monthly owner fee for the reserve budget at BLMH was $83.68 greater than it was in the 2001 budget.

The above is why I pay so much attention to reserves at our HOA and why you should at your HOA. Our reserve contributions climbed nearly four times that of the O&M budgets.

".....we need to live in the present."

"I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual budget each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves. In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH.  This change has had a profound impact upon our HOA finances."

In February 2010 I sent an email with five links to the Architectural Director of the Board of BLMH. These had to do with fees and budgeting at our HOA. Four of these links are contained in this post.

As I have stated elsewhere in this blog, I had been doing my own research about the finances of the HOA since considering a purchase in 2001. All I had at that time was the information provided by the various boards to each of the owners and the most recent newsletter; that information (excepting the 2001 newsletters) is adequate and included published budgets and balance sheets.  Some of my research had been completed prior to purchase, but there really isn't a lot of time to delve deeply into this prior to making a purchase commitment. Of course, back then it was a seller's market. Today it might be easier to take one's time to do sufficient research. I had legitimate concerns about reserves and fees.

The first budget I was given was the 2002. It showed a reserve contribution of $108,000 for the year 2001 and a 2002 budget with a $148,108 contribution for reserves.  However, I later discovered that the total reserves at BLMH in 1998 were $86,321. The average annual fee increase had been 2.59% over a period of 10 years. This changed when a new management firm came on board in December 1998. Commencing in 1999 there were large annual fee increases of 11%, 11%, 9% and so on. Owners had become accustomed to very low annual fee increases in prior years. But those budgets were inadequate.

At BLMH the Operating & Maintenance budgets (O&M) were not separated from Reserve requirements in the percent changes to fees provided in the "Welcome Packet." Nor were reserve fund balances provided year by year. I suspect that a few owners might have become alarmed had that information been provided in that form. But it was in the "Balance Sheets" for the HOA and not flagged. But then, as is the case today, owners are largely uninvolved in the affairs of managing this HOA. Today, most owners prefer to let another owner in a board position do the work. When things are not to their liking a few of the "owners' will show up to express their displeasure and make demands upon the board of volunteers. Boards will frequently be inclined to acquiesce. That's the way it was, and that is the way it is today in our "entitlement" society.

Returning to my financial concerns in 2001. This information was available in the prior balance sheets. This HOA had less than $100,000 in reserves in 1998 and yet would begin a multi million dollar roofing project in about four years, and a complete street replacement in four years. Simple arithmetic would indicate that there would be insufficient reserve funds to do these projects unless drastic action was taken.  Boards had no choice and so fees increased at an average annual rate of 7.41% during the period 1999 to 2008. Projects were delayed to allow the accumulation of funds to do the work. A significant amount of the money collected for these capital projects was spent as soon as it was collected.

But no one at this HOA read about this in any letter and any newsletter. So most of the owners were blindsided. They didn't know that the boards prior to 2008 had thrown us under the bus, spent money on a defective street project and, with about $250,000 had embarked upon a $2 million dollar roofing project commending with the building which housed the president of the association.

This history is why so many boards have struggled for nearly 20 years with annual budgets at BLMH. This history may also be why some board members have been so averse to 0% fee increases in recent years. They may remember the pain and the owner angst and they want to avoid it.

But as 2016 approaches it is important to realize that this HOA is not operating or being managed the way it was in the 1980s and 1990s. I am of the opinion each and every owner is better for it. Anyone who disagrees needs to state their case rather than simply gripe, or make derisive remarks under their breath during HOA meetings. A few probably prefer the "good old days" when we either didn't know what was going on, or we were fed "pap" with articles about architecture in England. Either way, ignorance may be bliss until reality sets in.  In HOAs the blissful hope they sell their unit before the reality sets in.

I do recall the newsletters of 2002. Back then the "big deal" was the winter tips. Reading those newsletters, one would assume the board had everything under control and we were in great shape. It was a sham and nothing could have been further from the truth. But one of the favorite expressions of the leader of the board back then was about "throwing people under the bus." And so they did. But for as long as possible boards and the board presidents of this HOA did what they could to keep up the facade. Reality intervened then as it does now. But today it is a different reality. The newsletter is no longer a facade or a "feel good" piece of paper. We do have reserves and we do know what they really intended to accomplish. The HOA is aging, but it is no longer falling off of a cliff.

I cannot go back in time and fix the past. We can and do address identified issues in the present, while planning a 30 year future. That is not the way it was, and those who participated in those years should take responsibility for their actions. That includes owners and former board members.

We today have owners who have lived here for 30 years and remember "the good old days" when annual fee increases averaged 2.59% and for many years the fee increases were 0%.  We also have one current board member who was on the board back in "the good old days" and experienced it all.

However, we need to live in the present.

I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual increases each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves and several projects began in 2002, including an incredibly costly roofing project.

In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH. This change has had a profound impact on our HOA finances. These changes began slowly in 1999 but became more sophisticated by 2011. But until the roofing project is completed and the redo of the streets a lot of money will continue to be spent. Unfortunately our streets began less than 10 years after they were replaced in 2002 or 2003.

In 2014 the reserve contributions were 412.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001.

The percentage of fees for reserve items has increased from about 0% in the 1980s and 1990s to about 31% or more in recent years. Reserve contributions via fees peaked at 33.9% with the 2012 budget. In 2011 there was a 7% increase in assessments to owners. All of it went to contributions for reserves. In fact, the budget for O&M items actually decreased that year by 1.1%. In 2012 the budget called for an approximate 3% fee increase. Of that increase nearly half went to reserves.

In recent years the boards temporarily shifted to a multi-tiered approach for reserves and very closely monitored requirements for the 10 year future period while also considering 20 and 30 year requirements. Had this been done from 1985 to 1998 there would have been no need for me to do the work to create the information contained in the links later in this post. I also probably wouldn't be providing about 450 to 700 hours of free services to the HOA each and every year.

The earlier approaches of low fees with minimal reserve contributions created the financial problems of the 2000s. The grandiose or poorly executed projects which began in 2002 sealed the fate of this HOA for the next two decades. It was the available funds that probably dictated the approach used for the street replacement project in 2002. That is understandable if a HOA lacks the funds to do it right. Understandable, but not excusable. However, for a time the HOA owners did get the low fees they wanted. This could not continue and owners from 1999 to 2008 paid for this and got average annual fee increases of 7.41%. That's 3 times the fee increases each and every year as compared to the earlier period 1982 to 1998. Most of the money for the annual increases after 1998 went into reserves and to pay for immediate capital projects including the 2003 street replacement and that $2 million roofing project.

It is only since 2010 that this HOA made the huge leap to more sophisticated and realistic reserve requirements. This has not been smooth, either. But boards are getting better at this. A lot of time has been spent by a minority of boards members since 2011 looking into reserve requirements and implications for finances. This was necessary because of the condition of Lakecliffe and other streets, which were not predicted for retopping until the 2020s. Instead we found we had to completely replace Lakecliffe Blvd. Other projects and surveys which had been delayed are finally being addressed. 2014 and 2015 have been very different years as compared to the preceding ones. This needs to be considered when preparing HOA budgets at BLMH.

Here are the links I mentioned at the beginning of this post. Yes, we can plan and prepare. Yet, it is true that some can't, some won't learn from the past, and a few expect a totally different outcome no matter what they do. Yet, boards are supposed to muddle through. History can be a great teacher if we are willing to learn the lessons it provides. The reader may not agree with all of the following, but it does include some eye opening information:

September 2008 - Assessment History


November 2008 - Where Our Fees Will Go in 2009


March 2009 - A Method for Arriving at Assessments


June 2009 - Unit Owner Budget

Budget Meeting 2015 - Part II

"The fees collected for reserves at BLMH have increased by nearly 8.75% each and every year for the period 2001-2015.   The O&M expenses actually increased by less than 1.5% each year." 

The above statement is the result of my ongoing cost/fee analysis at my HOA. This is precisely why I have put so much effort into scrutinizing the reserves here at BLMH. Because reserves are nearly one-third of our owners fees, any moderation in reserve requirements will have a very large, and disproportionate effect on annual budget requirements and on our owners fees. Conversely, if reserve requirements go upwards, that too will have a very large effect on fees, and it has, for 15 years.

Not everyone understands this. Boards at BLMH have historically focused on the O&M expenses. In doing so they miss the elephant in the room. This is not news. It began decades ago when boards focused on meeting annual expenses and darn near ignored capital expenses and replacement costs. Some boards operated on automatic which is why there is resistance to fees determined by actual budgetary requirements. It is easier to do an O&M budget and then increase fees by 2 or 3 percent. Any income excess can be allocated to reserves, ignoring actual requirements.

It could be worse. In some HOAs the boards simply go with low annual fee increases, or none, and then pass special assessments to deal with budget issues. But in recent years our HOA has declared that we want a steady approach. I agree because I think that is best for our owner/shareholders. That sounds simple. Getting there is not and doing the work falls on a few of the board.  In other words, making these grand statements is easy. Doing the work to make it happen is not. Which is why I put in 450 to 700 hours each year as a "volunteer" on a HOA board. What a bad deal!

Last year this HOA had a 0% fee increase. For some board members, you would have thought that was sacrilege. However, if one realizes that reserve contributions have increased nearly six times faster for 15 years than have O&M costs, then this is not really so difficult to comprehend.

I'll say it again. Reserve contributions have increased six times faster than O&M contributions for 15 years. So where would you put your talent if you want to deal with HOA budgets? I decided some years ago that the reserves were the Achilles heel of BLMH. Therefore they must be monitored more closely and scrutinized.

How do you think we did water main replacements and street replacements decades ahead of what was planned? It wasn't fun, and there have been consequences. For example, all of the drainage improvements would be done today if our streets hadn't failed. That is a fact. But that is another issue. For budgets, long term situations can have serious consequences.

Budgeting Overview
A short time ago I posted about the annual budget meeting, which is the first task a new board is faced with. At BLMH this occurs immediately after the election and assignment of officers.

As I am fond of saying "We need to hit the ground running." Not that I think that's the way it should be, but that is the way it is, each and every year. Is it any wonder a new board might struggle?

Budgeting should be straightforward. In a HOA it might not be. This and subsequent posts will provide some insights into the budgeting process and why it may be difficult. It also provides some history and emphasizes why it really is so important to get the budgets right. However, this is 2015, not 2000. A lot has changed since then. Some of our owners can't comprehend this.

In my blogs, it is important to understand that board members are also owners. So I may use the terms interchangeable. A "board member" is also an owner. When I describe owners, it is to be realized that what I am saying also applies to board members because they too are owners.

We are each either a part of the solution, or part of the problem
Budgets are a necessary part of any business. But many HOA owners don't run their personal lives like a business, and so a few don't expect their HOA to be run as a business, either. Some of these owners become board members. Owners bring their practical experience with them. Also their personal judgements, opinions and beliefs.

Nevertheless, the annual budgets are serious business, with long term consequences. Nothing more and nothing less.

The October 9 post delved into the some of the discussion items for the budgeting process. I have a link at the end of this post. That meeting was long because the budgeting is not a simple task and boards sometimes make it more difficult than necessary. We also have other things to do during the meeting. This is a full meeting and there are the usual agenda items, including the Homeowner's forum.

We're taking a closer look at some of the underlying assumptions and so the budget remains unresolved.  One of the problems to be solved is determining the projections for the Operations & Maintenance portion of the budget. We have information about how the money was spent for the first 9 months of the year, but our budget ends on December 31. Management prepares a "projection" for the remaining three months and that provides the board with the anticipated expenditures as of December 31.  There is obviously some guesswork involved.

It is done this way because "This is the way it has always been done." I suggested an alternative approach a couple of years ago with a long time board member and they were inflexible. As I pointed out at the time, this puts any new board member at a serious disadvantage and can create pitfalls for boards, both old and new.

So we continue to do our budgets with a certain amount of guesswork. The sole reason is so owner fees can be adjusted on January 1 of the year. I am of the opinion that is an artificial date imposed by boards and have stated so.

Budget Issues
I have not been completely satisfied with the budgets amd the methods used to arrive at budget projections. For example, are they straight line approximations? Should they be otherwise? I am of the opinion that the budgeting could be improved, and should be. In recent years it has been, but this is a slow process and it occurs incrementally. Change can be difficult. In my experience there may be resistance. Remember the expression "The best defense is a good offense?" Call into question how people do things and that's what one may get. It's called "push back."

I am of the opinion that with an entirely new board it could be easier; no methods or turfs to defend. On the other hand an entirely new board would have to get up to speed in less than 30 days. Won't happen and entrenched boards may have a lot of automaticity. As in, for example "We always did it that way."

Additional Scrutiny
This year, I've provided additional scrutiny to some aspects of the budget and I asked a few more questions. The purpose is to arrive at a better budget.

Each year boards literally agonize over some of the budget decisions. Boards need to meet O&M budget requirements plus reserves and then set fees. Sounds straightforward. However, if a board overspends the total O&M budget, then the HOA must make up those funds. If we use more maintenance hours than were allocated, then we may have to "borrow" hours from the next year. This of course, reduces the hours available in that following year. "Robbing Peter to pay Paul" is not a good method. It also places additional pressure on the new board. There is nothing worse than starting the year with a deficit. 

If the opposite occurs and if we are under budget, then we collected more via fees from our owners than was absolutely necessary to run the HOA for the year. If this is a moderate amount, it is acceptable. To be 1% under the O&M budget could spare owners from larger, future fee increases. If we are within 1% for O&M then we are actually within about 0.7% for the entire budget because O&M is about 70% of the annual budget.

Trying to hit that bulls eye is difficult. In a household budget of $50,000 that would mean we are within $350 of such a budget, or within $175 of a $25,000 budget. I would guess that most of us aren't able to manage our household annual budgets this well. Yet, owners demand and expect that boards get it right.

Boards simply do the best they can. I suppose if we worked on the budget for the entire year, we might do better. But the reality in any HOA is some board members come to the meeting and may not be fully prepared. We have been discussing reserves for several months. But not everyone participates in the details of the planning.

How Much is 1%?
When budgeting it is really important to separate O&M requirements from reserve requirements. Why?  For example, let's assume that our HOA is attempting to get our O&M budget to within 1% of the actual. That's an attempt  to get the O&M budget to within $2.32 per owner per month. I'm using the average owner. What the board is attempting to do is project the costs of the future utilities, snow removal, printing, postage, legal, tree repairs, grounds maintenance, miscellaneous repairs and all other unknowns of 2016. It cannot be done with absolute precision, or if it is, it is part luck and part planning. 

Owners expect and a few demand that boards walk these tight ropes and get it right. I understand the expectation and I think that's acceptable. However, for those who make demands of the board, I guess that's all a part of their desire for apartment living, where some one else is supposed to make things work.

A few years ago I brought a crystal ball to the annual meeting as a tongue in cheek symbol of the problems all boards face. If we get it right, our budgets balance. If we don't, then we either under collect the fees (overspend) or over collect fees (underspend). The only way I know to do this is to identify all known costs, and also identify the unknowns. Add them up and that's the budget.

I think everyone would agree that HOA boards should not collect money simply because they are concerned about the future possible shortfalls. Fear is not a good business plan. We need to do the numbers and then base our decisions upon them. Nor should HOA boards spend money simply because it is in the budget.

Avoiding Debt
HOAs have financial limitations and most don't want to go into debt. In a household, when people overspend and run out of cash, it may be handled by making purchases with a credit card, which can be paid off in a few months or years. HOAs don't have access to this type of quick credit, which is probably a good thing. It is my understanding that the average household owes $7,529 on their credit cards. If our HOA did this, we would have $2,529,744 in credit card debt.

With no credit card available, boards work hard to get this right, and they have been doing so for about 40 years at BLMH. If boards get it wrong, they either collect too much from owners or collect too little. It is a fact that it is impossible to get this absolutely right and have the budgets balance to within the penny.

It is obvious that a few of our owners have experienced this in their personal lives. That's why in HOAs there are delinquencies and foreclosures. 

Avoiding the Short-Cut

Because we know we won't get it absolutely right some boards may take a simplistic approach. Add up what we think we know about the future budget, increase by 2 or 3 percent and then collect the necessary fees to match. It is my understanding that this is to avoid larger fee increases in the future and avoid a budget shortfall while dealing with inflation. This may not work as planned because:

1. Budget surpluses don't remain in O&M accounts and so each year stands alone.
2. Historically, the largest budget shortfalls at BLMH came from capital projects and reserves.
3. Reserves can and do accumulate and that's essential to have the funds available for projects such as roofs and streets. But these funds can't be used for O&M.
4. Reserves can and should be determined by long term planning, but some boards have problems doing this. 

If boards do want to take the easy route, then I am of the opinion that two budgets must be closely scrutinized each year. These are the previous year and the coming year. For the previous year's budget, what we are interested is identifying:

1. How well the crystal ball worked. Did we make good decisions? If not, why not? 
2. To identify those areas that may have experienced significant budget changes.
3. To avoid runaway escalation of fees. 
4. To avoid nasty budget surprises. 
5. To learn from our mistakes.

As with all things budgeting, a board must be willing and able to do the necessary research and ask responsible questions. 

Annual 3% budget increases might not sound like a lot, but over time these small amounts add up. Fees will double every 25 years.  

Long Term Versus Short Term Trends

Now, over long term periods it is true that the cost of maintaining a HOA does increase. These costs may vary each year as water rates change, or we receive more or less snowfall, or roofs need repairs, or ice dams form, etc. 

That's one of the pitfalls of taking, for example, the budget for expenses in 2001 and comparing it to the budget for expenses in 2015. Of course, total expenses have increased since 2001. But those increases don't occur in smooth and steady increments each year. For example, in 2001 this HOA spent $19,000 in roof repairs. In 2015 it spent $0. If we simply added 2.5% to this number each year, it would be expected that this HOA would have budgeted and spent about $27,000 in 2015 on roof repairs, but we didn't.  Costs for utilities (electric and water) have increased since 2001 and by about 3% per year. However, overall the costs of O&M at BLMH have increased by less than 1.5% per year. But you wouldn't know that unless you 1) did the research and 2) separated reserves from the total amounts of fees.

But some boards do like to use generalities. It is my opinion that isn't good budgeting. Trends may be useful for identifying anomalies. This is useful for detecting changes or errors. 

The Elephant in the Room

Now, there are those at BLMH who might look at historical changes to fees for guidance. But to do this properly, one must separate reserve contributions from O&M contributions. The information on fee increases is contained in the HOA welcome packet, but the percentage of fees allocated each year to reserves was not tracked in that manner. For decades, boards were concerned about total budget and the O&M accounts, but overlooked the elephant in the room.  

In fact, the fees collected for reserves at BLMH have increased by nearly 8.75% each and every year for the period 2001-2015.  The O&M expenses actually increased by less than 1.5% each year. 

Here is the change in fees collected for reserves over the past 15 years:

2001 percent fees for reserves = 12.27%

2015 percent fees for reserves = 28.6%

2001 amount of monthly fees to reserves, average owner = $26.79

2015 amount of monthly fees to reserves, average owner = $93.27

Change in monthly amount of fees, average owner, since 2001 = $107.40

Boards are Comprised of Owners

Let's look at it this way. Boards are comprised of normal human beings. How many households in the US have viable 30 year financial plans? How many have a retirement financial plan? How many households live debt free? That's what a HOA board is expected to construct for the association. If this were so easy, most of our households would be debt free. But they aren't.

Yet, these owners as board members are the very people who create our long term budgets. I think it is fair to say that owners bring the burden of their personal finances with them when they become board members. They also bring their skills and knowledge. 

Why Are My Fees What They Are?

That's one of the labels for this post. I wish that owners became more engaged in the budgeting process. By that, I wish they would observe and listen. A few will do this. Others will come to a meeting and then will complain. Some show up thinking they will figure it all out in 20 minutes. Most really don't know why their fees are what they are, and a few prefer to throw blame at someone else. Ah, the joys of apartment living where some one else is supposed to take responsibility for my well-being! But HOAs aren't apartments!

Earlier Post on Budgeting 2015:

http://briarcliffelakes.blogspot.com/2015/10/budget-meeting-2015.html

Budget Meeting 2015

Last night was the annual budget meeting. This was an open meeting for all owners to attend. It is, in fact, one of two most important meetings for this HOA. The annual meeting is the other. The annual meeting can and did include various "State of the HOA" reports by board members. The budgeting meeting lays out the entire budgeting process with board discussion and owner observation. There is an opportunity for "Homeowner Comments." The board expects the shareholders of the HOA to provide constructive comments.

Why is this annual budgeting process so important? It will determine not only the fees this year, but also will impact future years. The board knows this and it and management has spent some weeks doing the preparatory work.

Last night, any owner who was present was made fully aware of the following budgeting plans, the projects and methods the board is considering in order to accomplish the next ten years here at BLMH. Details of the following were openly discussed. It was part of a 3-1/2 hour meeting. Now, how much of this do you think a board can compress into 3 pages of a newsletter, along with all of the other business? Answer: Not much. A letter will provide some additional explanation, but it is impossible to compress a 3-1/2 hour meeting into two pages. Here are the core budget discussion items:

1. Review of 2015 budgeting and costs; How well did the board do last year and what did they miss? What changed? 
2. Operations and Maintenance projections, by category for 2016.
3. Projected Total Reserve Expenses 2016-2025.
4. Projected expenditures for Streets, curbs, catch basins, 2016-2025. 
5. Projected expenditures for Unit Patios and Decks, 2016-2025.
6. Projected expenditures for Common Area Decks, Gazebo, Pedestrian Bridges , 2016-2025.
7. Projected expenditures for Concrete Ponds, Creeks, Walks, 2016-2025. 
8. Projected expenditures for Drainage, Landscaping and Trees, 2016-2025.
9. Projected expenditures for completing the Roofs, 2016-2025.
10. Projected expenditures for Exterior Lighting, 2016-2025. 
11. Projected expenditures for Water Mains and Related Replacements, 2016-2025.
12. Projected expenditures for Interior Carpeting, Intercoms, Lighting, Mailboxes, Entry Doors, 2016-2025.
13. Projected expenditures for Garage Floors, 2016-2025.

It is only after a thorough review of the actual and projected 2015 expenditures for the property that it is possible to discuss the budget for 2016. This is far more complex than anyone's home budget. Fees are determined by looking at real costs, determining the cause of any 2015 "misses", making adjustments for next year knowing what we know about water rate, electricity, contract and other costs. To this is added projections for capital expenditures. Sounds simple, doesn't it? Well, when one compresses weeks of work and a three hour meeting into three sentences, of course it will sound simple. However, this need not be more difficult than it actually is.

It has been a priority to see that the board is aware and informed. We have been thoroughly discussing the issues. We did consider the opinions and concerns of each board member last night. Owners will get a newsletter, but the articles are merely the tip of the iceberg. Many owners forget that board members are owners, too. Many owners also decide to ignore the knowledge and insights of the board. Here is a wake up call: Who is most aware of the situation in a HOA? An owner who lived here for decades and never attends a single meeting, or a board member? One would think the answer is obvious, but some of the oblivious think they are more informed than board members. I do wonder where they get their information so they can come to this conclusion. It certainly wasn't by poring over and reviewing about a thousand pages of reports ad studies in the past year, or building or reviewing tens of thousands of cells in multiple spreadsheets.

So how many owners actually attended the meeting? What would you think would be the answer to that question? Here is an HOA in which only a few years ago some (a very few) owners made complaints about transparency and so on. So the meetings which were announced, were moved to larger facilities to accommodate the alleged interested owners.

So, how many did, in fact, show up last night? Answer: Four. One owner, who came on a personal matter left a few minutes into the meeting. So Three owners remained to observe the budgeting discussions. That's fewer than 1% of the HOA shareholders. I guess the 99.1% had other things to deal with.

Will Owner Fees Increase? 
That's apparently all that owners in our HOA are interested in knowing. "Please, spare me the details or the issues, or the concerns."

When I am asked the critical question, I have a stock answer. Fees need to be adjusted for inflation. Inflation, as we all know is the cost of all goods and services. This HOA purchases electricity, water, and everything from snow removal to landscaping services. Reserves are also annually adjusted for projected inflation.

So, the simple answer is that from year to year, we can and should expect fee increases.

In the budgeting area, HOA boards attempt to predict, with expert opinion, the costs next year as well as for the next ten years, and beyond. Future costs require inflation adjustments when we are planning.

So, what do you think? Will costs increase? Should HOA budgets increase to cover costs which increase over time, just as occurs with our personal water bills, insurance and so on?

Budgeting 2016 - Oh, Oh!

It's that time of year again for the annual budget meeting. This is one of the more difficult tasks faced by boards. But this task should not be more difficult than necessary. In fact, it is my opinion that boards frequently get caught up in emotional issues and beliefs. These then become translated into positions. Rational discourse can be difficult. It happened last year and it will happen again on Thursday.

Why is this? IMHO, some boards fail to understand the budgeting process. Large numbers can be scary. We may fall back on simplistic arguments "Fees must always increase."

It is essential to establish budgeting priorities, work with management and do our fiduciary duty while operating in accordance with the Illinois Condominium Act. Even doing this, boards can stumble. Some boards were "burned" by oversights. Some members of some boards became a reaction. Others remained oblivious. Some walked when it got difficult.

This HOA apparently ignored the "elephant in the room" for decades. What is that? It's the reserves. Once called a "replacement fund" it was not the main event in the budgeting process for decades. Then in 2002 the board made a momentous decision. It decided to embark on a series of projects which would ultimately costs more than $3,000,0000. Now, that's not necessarily a problem. But it is if a HOA has falling reserve balances and less than $400,000 accumulated reserves, and collects far less than the required amount each year.

How much is $3,000,000? It's $300,000 each year for 10 years. Moving from $180,000 annual reserve collection to more than $300,000 each year is a huge change. How much? More than $30 each month for the average owner. Then add the other requirements for reserves, and requirements for increases to Operations & Maintenance and fees could increase by more than $50 a month. And they did.

A board member with decades of experience and fond of quips would use the expression "follow the money" from time to time. That's what I've been doing since about 2002.

Boards didn't do a good job of communicating the problem to owners. In fact, it remains unclear to me if the boards and presidents fully understood the nature of the problem. Where was that money to go? To new roofs, new driveways and drainage improvements necessary because of the new downspout configurations. This is simple arithmetic. Multiply the cost of one by 44 and add inflation. Voila'.

It was a very, very difficult ten years and today we are not yet complete. Why? Because we've been saving money for ten years while pushing back the replacement of some roofs, etc. So the roof in the building in which I reside is approaching 23 years of age. Not a good thing for a roof designed with a life of 18-20 years.

So What is the Problem?
The chart above shows the possible condition of reserves, looking ahead for a decade. Three board members (Treasurer, Maintenance and Projects/VP) have been working on this for over a month. In fact it was discussed by the entire board during the August meeting.

The chart which is an example and not "cast in stone" would indicate this HOA is doing a good job dealing with the "elephant in the room." It is amazing the transformation that has occurred since 2008. Remember, we have also replaced four sections of water mains and the chart also reflects the early replacement of Lakecliffe and other cul-de-sac street projects.

However, old beliefs are difficult to manage.

Budgeting can be complicated by the fact that boards should attempt to project all of the O&M costs for an entire year and not collect more than necessary. Here at BLMH we are hamstrung by the fact that our budgeting process occurs in October, long before all of the bill have come in and have been paid. In fact, to keep within annual O&M budgets boards may from time to time push current bills into the next year. Not a problem, unless someone doesn't adjust next year's budget to deal with this. From time to time such land mines have been left for new boards. I call that " throwing the new board under the bus." Can't happen? Sorry here at BLMH "been there done that."

Owners don't get very involved here. But from time to time they'll fire a board. Happened once in 2008. Owners were fed up with fee increases which were not well understood by the owner body and not explained by the boards. Some long time board members didn't appreciate being executed or the lack of confidence.

Knowing all of the above, it is easy to understand why some boards or board members might be a bit edgy about the budgeting process.

Do Fees Have to Increase Each Year?
That's one of the long held beliefs. In fact, what needs to occur each year is budgets need to be adjusted for current reality using what is known. This includes Operations, Maintenance and Reserves. Then fees are calculated. Boards are also responsible to the shareholders and are required to uphold the Illinois Condominium Act.

However, using "beliefs" some boards may count the pennies and then arbitrarily increase fees. The amount may be between 3 and 5 percent annually. In their defense, this is also an attempt to smooth budgets from year to year. But is it a backwards approach and in my opinion not proper.

In fact, boards really must focus on 10 year projections as well as annual O&M expenses. Budgeting can be complicated by the fact that boards should attempt to project all of the O&M costs for an entire year and not collect more than necessary. Here at BLMH we are hamstrung by the fact that our budgeting process occurs in October, long before all of the bill have come in and have been paid.

In any one year it is possible that reserves may fall behind, or actual O&M expenditures may increase beyond expectations. Is this a serious problem? No, it is not. Boards can compensate in the next year, can do short term (less than 12 month) borrowings against reserves to handle bills that come in above budgets. Boards can then adjust in the next year.  Simple, really.

So why the difficulty? It is a historical perspective. A few years ago this HOA had about $180,000 in reserves, had maintenance requirements piling up, didn't have an independent reserve study and frankly didn't have a plan.

Today we live in a very different reality. Good Job! Now let's act in accordance with that reality. But old habits are difficult to break.

I find this somewhat amusing. When I was attempting to join the board, there was a populist refrain "Don't elect Norm, your fees will go up!" Fear is a powerful motivator. Of course, no one runs for a board position for the purpose of raising fees? Or do we? Of course, no one would get elected if they published in the bio "I want to raise your fees by 10% a year." But at times I do wonder. Actions speak louder than words. I hope owners are watching. Very few attended last year's budget meeting. They missed some interesting and contentious discussions.


Notes:
1. Updated to correct description of one chart item.
2. We have 4 small residential buildings. The remainder are double the size of the small.  I use 42 as an average.

A walk down memory lane - Reserves

This is from my November 13, 2008 post:

"I'm putting these numbers out here so you are informed, and to provide a service to all of the unit owners. This is from my independent analysis of the information that is provided to us all. What I am doing does not relieve you of doing your own research. If you are angry, I can't do anything about that. However, you need to know that this problem began at least 15 years ago. It is my experience that the recent boards and professional management team have done everything possible to correct this problem, and to keep us informed.

Keep in mind that in 1999 we were paying about $1.15 a gallon for gasoline. I doubt if any of us were saving a $1 for each gallon of gas we put in the tank, so as to help pay for the fuel increases that have occurred since then. So too with our board. They cannot predict what inflation and the price of gas will be in 2015. If in 1999 they had raised our assessments $25 a month to help cover the effects on reserves as a consequence of someone's "predicted" $4.00 a gallon gasoline in 2007, I suspect unit owners would have been irate. And with good reason.

The board could not with certainty have predicted what has happened. What we do know is inflation does occur and it is historically between 3.5 and 4.1% per year over long periods of time. Or I should say it WAS. Because that is what economists do; they give us historical data and we apply that to the future. But who knows what the future will bring? We do know that the price of oil affects the cost of most materials, and even labor, as wages increase to keep pace as costs rise. That's why social security benefits are rising by 5.8% in 2009. We are all struggling with rapidly rising costs and the assessments required to raise reserves. Some of this is way beyond our control or that of the current and recent boards. If you are angry about volatile and rising gasoline and energy prices and the consequences on the economy and our association, that is something all of us are at the effect of. I suggest you direct your anger at the politicians who collectively have avoided a cohesive energy policy for the past 30 years!

Returning to the present situation, during the board meeting and during past budgetary meetings open to unit owners that I have been able to attend, I have been present to complaints about the increases in assessments. The board and our professional managers have done a very good job explaining how we found ourselves in the current predicament. For the nearly 8 years I have been here, the board has been accumulating reserves to make up for the fact that for many years there were either inadequate or NO contributions to reserves. Unit owners have overwhelmingly stated at the meetings I attend that they are opposed to "special assessments". That gives the managers, and our board, little choice.

To demonstrate the consequences of these choices, as of January 1, 2009 I will be paying a monthly assessment of approximately $47.28 to the roofing reserves. And so it is with paving, concrete and masonry reserves, to which in January 2009 I will be contributing $34.15 each month. These items combined are consuming $81.43 of my assessments each month!

If each unit owner contributes at this level of funding, the roofing reserve would accumulate in excess of $2,800,000 in 15 years! That is about 70% greater, or $1,160,000 more that is actually needed for roofs! So why are we today required to make this monthly contribution? It is because we don't have 15 years. We are "catching up" to the funding needs so that imminent roofing work which has already begun can be completed no later than 2014, and before we are all dealing with the breakdowns and expense of failed roofs. That's it, plain and simple. To put it bluntly, I am today putting $47.28 monthly into a roofing fund because 10 and 15 years ago there was $0 being put into this fund each month. So if there is no funding for 7 years, then the funding must be nearly doubled in the final 8 years to accumulate the necessary reserves. As a consequence, our current monthly roofing reserves payments are larger.

How much should the funding have been 15 years ago, back in 1998? If the average monthly assessment of the unit owners had been $25 greater than it was on January 1, 1998 and if that amount were put into reserves and, if each successive year the amount collected were adjusted upwards to compensate for inflation (let's assume by 3.5% per year), as of December 31, 2008 our reserves for roofing would have about $1,144,000! If we had been funding the roofing reserves commencing in 1998, our monthly assessment in January 2009 for roofing reserves would be about $36.50. Our actual payments, because we did not fund the reserves in 1998 will be about $47.29 each month into the roofing reserve fund. So our assessments are $47.25-$36.50 = $10.75 higher each month. [Note: Professionals are currently using 2.5% as the annual, long term cost of inflation applied to capital projects.]

If we use that yard stick for concrete, paving and masonry reserves, which I am funding at the rate of $34.15 each month commencing January 1, 2009, these funds will accumulate in excess of $1,700,000 in 10 years.

If you are a long term owner at BLMH, you can take some consolation from the fact that the board, instead of funding the reserves for the roofing project, allowed you to keep that money all of these years. How much did you keep? I estimate that if the funding had begun 30 years ago, our assessments would have been $14 greater each month than they actually were in 1980 and would have increased at the rate of at least 3.5% each year to keep up with inflation. At that rate, in 1990 we would have been paying $19.75 each month for the roofing replacement fund and in 2000 we would have been paying $27.86 each month for that fund. In 2009 our assessments for this fund would be $37.97 and we would have accumulated $1,692,000 in the roofing fund as of December 31, 2008.

Funding reserves is not an easy task and requires predictive skills and the ability to make adjustments each year. It is necessary to determine the point of replacement, and project the costs at that time. For example, let's assume that roofing must be done every 15 years to avoid leaks and damage to the units. So a second set of shingles can be put on each roof in 15 years. In another 15 years, the two sets of shingles are then stripped and repairs to the wood structure beneath the shingles, new membrane and totally new shingles are installed. If that approach is used, then we could say that we need to save enough to 1) Add new shingles in 15 years and 2) To completely re-roof in 30 years. If that is so, then the annual amounts we would be adding to the roofing reserves should be the amount necessary to shingle in 15 years PLUS the amount necessary to completely re-roof in 30 years. We also need to increase the amounts collected each year to compensate for inflation, as the cost of materials and labor do increase each year.

As for projecting the costs, let's assume that the new roofs will cost $1,650,000 in 2011. How much would such a project cost in 30 years? If inflation is 3.50% per year, and costs rose at the rate of inflation, then the cost of such a project would be $4,474,599 in the year 2040! If inflation were 4.0% per year, then the cost would be $5,145,775! The actual calculations need to include various factors. These may include, but not be limited to the differences, if any, between the interest accrued on the money saved in reserves and the rate of inflation, actual costs which may rise over time at rates greater or less than the basic rate of inflation and, adjustments for current inflation. So having a management company which is good at these types of calculations and keeps a "pulse" on true costs, is essential for projecting reserve requirements. These numbers may seem large, but keep in mind the cost of a unit in 1978 and what they are selling for today. Even automobiles prices have increased. As I recall, I purchased a new compact car in 1969 for the price of $1,800 [ including tax, title and shipping]!

My final comment on reserves and the assessments for them is this. When we as unit owners are inclined to compare our funding requirements and assessments with those of neighboring associations, it is essential that we also determine what the nature of their reserves are and how they got that way. I can imagine a situation 20 years ago, at a time that we were not funding roofs, in which a unit owner in a neighboring association attended a board meeting and said “I don’t know why our monthly assessments are so high! The people over at BLMH, their assessments are nearly $50 a month less than ours!” Of course what that neighboring unit owner did not take into consideration, was that we were not funding some of our future maintenance needs, while their association was doing so!"

Comment: In the above I give boards the benefit of the doubt. In fact, our newsletters tended to gloss over the problems and amplified the mundane. The budgets did give an indication of the magnitude of the financial issues. But no one, and I do mean no one, stated the stark reality. 

Why Are The HOA Fees "As low as they are?"

In a recent post I responded to a reader's question about why HOA fees are what they are. I've based my opinion on what I have learned here at BLMH,  the experiences of my friends and relatives at their HOA's and reports in the popular press.  I don't consider BLMH to be a typical HOA. It has 336 owners, 44 buildings on about 40 acres and is a PUD. Of course, I don't know if there is a "typical" HOA.

When owners or potential owners look at the fees of a HOA I have found that most ask "Why are the fees as high as they are?" That was the perspective of some owners in 2001 and it remains so today. I have suggested that it is also useful to ask "Why are the fees as low as they are?" The unasked question is why do we automatically think of fees as being "high?"

An Internal Bias
When we look at the fees of an HOA, many of us are predisposed to think "Wow, those fees are high." After living in an HOA for over 10 years, I have decided that it is of no matter what the number is. It seems that some view HOA fees as a "tax" and as we all know, taxes are collected and poorly spent, aren't they?  So the very thought that it's a tax creates an internal bias. But why would we compare the HOA in which we live to the government in Washington, or in Springfield, IL?

I've concluded that it's about the use of money. In a HOA we are required to turn over a fee each month to an "association." That fee includes the costs of operations & maintenance. It also includes an amount for savings for reserves. But we don't think of it as a just fee. Now I ask, why would we think this way?

It might be societal.

An Example - And Yet a 1% Annual Fee Increase!
So how are associations managed and does this justify the poor opinion of some owners? In 2013 the BLMH association experienced a severe problem with a water main. This was anticipated by the board but it was not predicted to occur. So how to collect fees for such an event?

In 2013 not one but several breaks occurred in a small area in which several previous breaks had occurred. I was appalled by the costs of the repairs and pressured management and the repair company to come up with a better solution and one which would be pre-emptive. Emergencies cost far more than "planned" maintenance during normal 8-5 business hours on Monday through Friday.

As breaks occur on weekends or nights and sometimes over holidays the costs can be formidable. In 2013 a water main break was very destructive. A recently replaced driveway was destroyed, an entranceway was torn up, a foundation was damaged, and not one but several repairs were made, each at a cost of thousands of dollars. The City of Wheaton threatened to bill the association for the water lost. Cleanup, landscaping and driveway and entrance repairs costs additional thousands of dollars over the cost of repair of the main.

After consultation with experts and discussion with management the board agreed to replace a large section of the main. From my perspective, waiting for the next "unforeseen event" and only then doing ongoing repairs in that area was the equivalent of the "death of a thousand knives." We have the numbers to prove it. Some were published in the association newsletters. All were discussed during normal association meetings and any owner with the interest to come, listen and take notes knows as much about the costs as anyone on the board does.

We did not have money earmarked specifically for this in our budget. We had amassed and continue to collect a small portion of the monthly fees for a "contingency" fund, which is something I began arguing for in 2009. Even our manager and the board was skeptical at the time. That fund was created and has been used to date exclusively for water main repairs.

Was There a Special Assessment for "Water Main" Repair?
No, there wasn't. Nor was there a large fee increase this year, unless we take the perspective that a 1% fee increase is a "large" increase. Nor was a loan taken to deal with this. How was that possible?

The contingency fund helped. Having sufficient reserves helped.  But that money was spent and it will be replenished. The board will continue to walk the tight rope.

The board has discussed fees during association meetings. A 1% fee increase was agreed for 2014. This was considered by one board member to be "too high" an increase and "too low" by another. I agreed with the 1%, but with reservations. One concern I have is the reserves. Are they sufficient? I'm of the opinion that we will know only after after the full costs of the replacement of half of Lakecliffe Blvd. a professional assessment of the remainder of the streets and then an update to the reserve study.

Yet, I understand some owners think "Our fees are high." To date we've had twice the normal snowfall and we've had four times the snowfall of last winter. In this HOA our fees pay for snow removal and the application of "salt" on the streets and driveways. Obviously, our snow removal costs will exceed the budget for the winter of 2013/2014.

Do We Have Enough Money?
That's a difficult question for any association to answer. The BLMH HOA is 39 years old. The buildings, streets and so on are "middle age." Some types of failures are impossible to predict. Yet we do know that the streets, roofs, driveways, garages, building, street lighting and water mains and sewers have a finite life. An HOA should be saving for this, shouldn't it?

Yet, some of our owners have argued "We have enough money." Even former boards took that position and glibly passed 0% fee increases.

I think the real question for any association should be "Do we have sufficient reserves and are our fees levels sufficient to support our Operations & Maintenance budgets?"

If the owners of a HOA can't answer that question with substantiation, then I suspect they are gambling. If a board can't answer that question with a few caveats, then I think the board is also gambling.

What Do I Mean By "Caveats?"
Any budget is based upon assumptions. For example, our 1% fee increase assumed a "normal" winter which includes about 26 inches of snow and that means a certain number of "pushes" by our snow removal contractor and the application of a specific amount of "salt" to the streets.

So if I were asked "Is our budget adequate" I would say "Yes, with provisions." My provisions include the weather, the conditions of our streets, the assumption that no more than six roofs will be replaced each year as part of the "roofing project," there will be no disasters such as fire, and so on. I would also say that any assumption about fees is that owners will pay them. However, since 2008 most HOAs have experienced delinquencies, foreclosures and higher legal fees. In other words, collections aren't what was expected and legal fees are required to collect from some owners. Our association uses a specially prepared delinquency spreadsheet with charts to track delinquencies. I created it with the assistance of our current Treasurer. It historically tracks delinquencies, number of owners delinquent, amounts and so on. It spans the period from 2008 to the present.

Sadly, a lot of people seem to prefer the quick answer about budgets. They want the simple "Yes" or "No" about budgets and assurances. I've concluded that they want someone else to carry the burden. This too may be societal.

The Real Question
I suggest that if we really don't know why the fees are what they are, then perhaps our opinions are not grounded in reality. Remember, your board pays the same fees you do. I suppose there are some associations where the board gets "special" favors. In a professionally managed, transparently run association that should  be impossible.

I do have a lot of uses for those fees I pay each month to my HOA and it would be wonderful if someone else paid for the lawn care, the driveways, roofs and street repairs. It would also be wonderful if the exterior maintenance and painting, snow plowing and so on was free. Ditto for the arborist and picking up the trash and doggie bags in the community trash receptacles.

But I as a unit owner don't want to do these things and so I have to pay someone else to do them. That's the way it works. As they say, "there is no free ride." Nor do I have the benefit of building a fence and having a private yard. BLMH isn't designed that way nor is it a townhome complex.

The real question to ask is this: Is my HOA board acting as fiduciaries and in the best interests of the association?

When asking that question, it is useful to remember that we each have our personal biases and opinions that color everything we do. It's also useful to remember that Home or Condo ownership is not for everyone. That was and continues to be a fiction promoted by certain politicians and those who financially benefit from the real estate and home building industries.

So why do we think the way we do? It could be part of the psyche of living in a society in which many of us take these positions:

1. We don't like to be told what to do.
2. We think we each know what's best for ourselves.
3. We don't trust those in authority.
4. We think we can do just about anything better than the next person, and that includes the board of the HOA.
5. We think we're smarter than everyone else.
6. It's my opinion that matters most; after all, I'm the center of the universe. 
7. We each have a better, personal use for those fees.
8. What works for me is what matters.
9. We may feel we are entitled. 
10. We may not want to be accountable for our personal situation. 
11. Most of us are such poor savers that we won't have enough savings for our retirement. So why should I be willing or coerced to contribute to a HOA when I could use this money for my own retirement? See the Notes at the end of this post.

If the things on the list are part of our personal perspective, and I assert that they may be, then of course, fees collected or should I say "imposed" by a board of managers are not going to be spent the way you would want them to be. Someone with these perspectives will be unable to see that association fees will be spent for any good purpose, unless it is directly spent for their personal benefit.

Notes:
Here are some recent statistics (2014) about how well Americans save for the future. I provide this to substantiate my opinion. The figures are based upon statistics for those who begin working at 25 and reach the age of 65. These are according to U.S. Census Bureau figures, Bankrate.com and Saperston Companies:

1. How many will have sufficient retirement savings at 65? Answer: 4%. 96 out of 100 won't have enough savings. 
2. How many will be working at 65? Answer: 1%.
3. How many at 65 will be dependent upon Social Security, charity, relatives or friends for their financial well-being? Answer: 63%
4. How many 25 year olds won't live to reach the age of 65? Answer: 29% will die before reaching 65. 

How many retirees over 65 rely entirely upon Social Security for their retirement income? Answer: 35%.  In other words, only about two out of three retirees has sufficient savings to augment their Social Security income. The rest live from SS check to check. 

Here's something to think about. Knowing the plight of many retirees, is it financially prudent or is it harmful to allow retirees to take control of an association? Are they capable of operating as fiduciaries? Or would they be inclined to operate on their own behalf? This question is general in nature. It is very difficult for anyone to put aside their personal beliefs, wants and needs and operate altruistically for others. Investors have their perspective and it might be simply to maximize their bottom line. Others may simply want to keep fees as low as possible because of personal financial hardship. Our association doesn't require a financial statement from a board member. It's assumed we're all capable and we will operate and make decisions for the good of the association. Dream on, I say! This is America we are talking about. Look toward Washington DC and Springfield IL for your inspiration and you will know what I mean. Operate for the good of others? Oh, how quaint some may say.

Any board member who is financially disabled should recuse themselves from financial matters in an association. That's the "honor system" and I assure you it does not always work. This is not a matter of age or personal wealth; it's a matter of financial impartiality and integrity.  How many of us would vote for a necessary fee increase that we personally could not afford?

Of course, if an association achieves sufficient numbers of financially strapped owners, what do you think will happen to that association?  Here at BLMH, we have a few owners who will readily state "What's good for me is also good for the association."

One of the questions an association might want to ask is "How do we deal with a rising number of aging owners?" This is not a frivolent exercise. At BLMH we have some owners who have been here 30 years or more. Some have said "I'm going to live here until the day I die." That's well and good, but what happens when they do pass on and leave their unit behind? Who then assumes the payment of fees? My experience is the property is donated or the bank takes possession or the family takes it over and sells it as soon as possible or turns it into a rental. If there have been no plans for the unit then it goes to the bank and the remaining owners in the association have to pick up the slack for the lost fees until a sale is completed. This will be the subject of a future post.

Why Are the Fees What They Are?

A reader recently asked "Where do the fees go?" The question was also asked "Are owners happy with the fees?"

I suggest that anyone interested in fee details contact the management of the HOA of interest. This is directed to anyone contemplating HOA ownership.

The official website for the BLMH association is: Clicking will open a  New Window> BLMH Official Website

Why are the fees in an association what they are?
In my opinion the fees in any association are a combination of planning, long term trends and current financial reality. For example, the level of fees over a 10 and 20 year period. I've written about the challenges and obstacles to setting reasonable fees in a HOA.  It's been my opinion that there has been a tendency in HOAs to attempt to "kick the can" down the road.

Fees at an HOA may either be "as high as they are" or "as low as they are" because of  recent board action. By recent, i mean within the past 15 years. I realize that most of us have a tendency to ask "Why are fees so high?" However, it might also be prudent to ask "Why are fees so low?" In other words, the real question to ask is "Why are fees what they are?" I also suggest that owners or those contemplating a purchase in a HOA consider long term maintenance and where the HOA is in such planning.

Of course, for a time any HOA can depress fees. In other words, keep them artificially low. This can be accomplished several ways.

1. Defer maintenance and capital projects for another day.
2. Ignore the realities of long term maintenance and project costs.
3. Fail to collect adequate fees for long term projects. 
4. Lower fees artificially with  the assumption that a financial solution will miraculously occur some day in the future. Arguments to do this may include "The economy will be better next year" or "Owners will be better able to deal with fee increases 2, 3 or more years in the future." A board may take the position "Some owners can't handle a fee increase so we won't have one." 

The problem is simply this. There will never be a good time to raise fees. Deferring fee collection merely transfers the financial burden onto future owners. By "future owners" I mean those who haven't sold their units by the time the fee increases ramp up and roll in. Can that happen? Would owners argue for lower fees hoping to clear out and leave their neighbors "holding the bag?" I've read or heard more than a few "HOA Horror Stories."

Deferring maintenance merely allows problems to compound. Ask any competent and truthful manager how difficult it is for an association to catch up once they fall behind and the answer will be "difficult to impossible." Delaying fee increases may require unusually large annual increases for a period of years. By "large" I mean fee increases greater than 5% annually. Deferring fee increases may require special assessments. The farther behind an association falls, the more difficult it becomes. Compounding deferred maintenance and deferred fees is a formula for disaster. Yet, that is precisely what some owners demand and some HOA boards create. Why would anyone do this?

It's important to remember that HOA boards are volunteers and owners. Some run their personal agenda contrary to fiduciary duties. Some do their best and yet, we all make mistakes. When these mistakes come to light, what is a board to do? The "old timers" may prefer to avoid responsibility. The new guys or gals on the board may not want the flak. After all, who wants to be the bearer of bad tidings? New boards may realize that they did not create this situation which was a decade or more in the making. They may be unwilling to take on the establishment. They may lack certainty. So it is likely that problems even if detected may not be dealt with, or may be dealt with in a gradual manner. Of course, the longer one delays the greater the difficulty.

How is it that owners ignore these problems? HOA owners may realize that "the emperor has no clothes" but they want their property values to be "as high as possible" and so some may choose to ignore the problem. Fee increases may be detrimental to sales. Owners may choose to promote a "feel good" board or a "tell us what we want to hear" board, hoping that the music won't stop, or that the "good times" will exceed their lifespan. Some may choose to simply pass the buck. I recall in 2009 there were a few people at BLMH who said "Elect Norm and your fees will go up." This attitude was a long term pattern and one of the reasons our reserves were what they were in 2001. When I asked BLMH owners about fees in 2001 some had the opinion that that "Our fees are too high." At the time I recall the fees were about $195 per month, and reserves were less than $400,000.  According to my records fees were increased to $204.64 per month in 2002.

If an association allows itself to fall into the "kick the can down the road" trap, what can it do? It's my understanding that some HOAs have dealt with this problem by turning the maintenance of "limited common elements" over to the owners. For example, costs associated with unit patios, decks, garages and driveways. Of course, this is in reality a stealth fee increase.

Delaying maintenance or capital projects may be accompanied by an attempt to keep fees artificially low. After all, if the money isn't being spent then owners will argue "Why is it being collected?" That is a reasonable question to ask. Here at BLMH in 2008 the question was posed as "What do we get for our money?"

In older HOAs the fees are the consequence of decades of decisions. These decisions were made by owners. Owners elect the boards and owners are ultimately responsible. So if you are contemplating purchasing in a HOA it's my suggestion that you look at the long term numbers and meet with the board and ask your questions. This will provide you a much better idea of the temper of the boards and of the owners. Don't allow rules to stop you. While only owners are allowed to attend association meetings, there is no reason a prospective buyer can't request a brief meeting with the HOA board prior to the scheduled meeting.

At BLMH some of the "old timers" attempt to avoid responsibility for the consequences of their actions. The "old timers" are those who have been here for 10 or more years. Some argued against higher fees and in favor of lower fees for decades. They did so in 2001 and in 2008 and did their best to put in place boards to do just that. They include those who said "We have enough money" and some said "Elect Norm and your fees will be higher." In other words, their position is simply to elect anyone who promises lower fees. And for a time at BLMH the owners aligned and did just that. The consequences of inadequate reserves and a lack of planning in any HOA will always be something for future boards to deal with.

To answer the question "Why are my fees what they are" at an HOA requires a historical perspective and for older HOAs it requires about 20 years of data. Why 20? That's the lifespan of roofs, garage floors, patios, decks, streets and so on. Only with 20 or more years of information can one determine the financial reality. It's useful to know that reserve studies span 30 years, as does reserve planning and saving. There is a very good reason for this.

Honesty and Frankness are the Best Policy
I think the best way to answer owner questions is via factual, in-depth newsletter articles. Every owner gets the same information. All owners, be they living onsite or on the other side of the world are given the same information. That's what I've attempted to do here at BLMH. This has not always been greeted by owners. It's my understanding that some owners have said:

1. I don't have the time to read the newsletter.
2. I don't understand the information. It is too complicated. 
3. I don't like the information and I refuse to read the newsletter. 
4. I don't like the author and I only read things written by people I like. 

Running an association is not supposed to be a popularity contest. Newsletters are not supposed to be the "good news" paper. Things sometimes go wrong. HOA boards sometimes have difficult decisions to make. In today's economy HOAs do have foreclosures, delinquencies and so on. There are also expensive failures, be it fire, storm damage, trees falling, nearby flooding, water main breaks. liability suits or whatever. These things are all somewhat unexpected. When they occur any HOA in which they occur must deal with them. Nevertheless, providing insights during HOA meetings or via letters or a newsletter can disturb some owners. Some owners deal with this by attempting to elect the "good news" people. 

Some catastrophic damage may be covered by insurance, but there are deductibles to contend with. Fire, etc. may result in unusual or unexpected insurance increases. 

Unusual winter events can result in higher snow removal costs, ice damage, etc. So what type of winter should the board plan for? The same as last year, a milder one or a more severe one? I sometimes think owners argue a solution to this question based solely on their perspective about fees. An owner who is in favor of lower fees may argue "We are spending too much on snow removal." A board member tells the story of an offsite owner, an "investor" who argued that our snow removal efforts were excessive. He lived offsite and it was his perspective that plowing at 2 inch depth was unnecessary. Of course, he would not have to drive his car or walk in the consequences of what he was promoting.

Some owners simply argue for lower fees with the expectation they won't be living in the HOA in a year or so. For them, reserves are a waste of money. A board member tells the story of the owner who was selling his unit and came to an association meeting and demanded a reimbursement for his portion of the reserves. For others who contemplate moving on, the position seems to be "Why save for a future I will not benefit from?" A lot of people apparently thought this way before the housing bubble popped. At that time a lot of HOA owners expected to cash in and move on. Low fees made selling more attractive. Low, current fees would place a larger future financial burden on those who stayed or those who purchased. But who cared?

It wasn't simply mortgage bankers and real estate brokers who were greedy. A lot of HOA owners joined the frenzy. 

An Unknowable Future

All HOA maintenance and repairs must come from owner fees. During the 2013 annual meeting I placed a crystal ball on the podium. That was a tongue-in-cheek effort to say "We can't predict the future." What any board can do is plan and prepare for a possible future. Owners need to ask responsible questions about such plans.  Board members should be pressed to provide honest answers to the questions. Doing so may make them better board members.

Of course, some boards are comprised of politicians who have made promises. Some boards realize there have been mistakes but would prefer to sweep the consequences under the rug. Some boards lack the courage to be honest with owners and take the flak. Some boards are incompetent. I suppose some are completely unawares or are comprised of owner hell bent to keep fees "as low as possible" until they can sell their unit and escape.

Some board members strive to avoid confrontation. They tend to agree with owners or simply avoid answering certain questions and will work diligently to avoid provoking angry owners. In extreme cases board members simply want to "look good" and so the owners are told what they want to hear. So if an owner says to a board member "Aren't our fees too high?" that board member can respond with what is wanted to be heard. Of course, in doing so a board member is dishonest and isn't performing their fiduciary duty. That's why it's common knowledge that "There is no room for politics on a HOA board." Nevertheless, such problems do occur and some boards have politicians. HOAs get the boards they elect and deserve.

Banking Disaster, Real Estate Implosion, Foreclosures and Delinquencies
A good example of an "unknowable future" is the banking crisis of 2008 and the subsequent failure of the residential housing market.

Some people argue this was "unknowable" but I disagree. There were more than simply a few very concerned professionals out there, but they were drowned out by the ebullience. For example, by television programs the likes of "House Flippers" and the National Association of Realtors.  One of the favorite arguments of some of the owners here at BLMH when possible negative consequences are discussed is "It can't happen" or "It won't happen here." I disagree. We don't live in a fishbowl and we are subject to the financial rules of our economy. That includes lawsuits, delinquencies, foreclosures, financial breakdowns and so on.

However, one thing I can agree on is the consequences of the "Financial Panic of 2008."  Some people saw this coming but what could not be predicted were the precise time and consequences. Some of us knew it would be ugly. But how ugly? So even if you or I saw this coming (and I did) no one can predict the future. So no one can state predict precise dates and the specific severity of the crisis when it arrived. In 2007 I found myself in a difficult predicament. I saw the problem, knew it was really close to the "pop" but didn't want to scare the hell out of people. So I continued to advocate caution, planning and preparation for a financial disaster. However, I did not counsel anyone to prepare for "the end of the world as we know it." In my opinion to do so would have been irresponsible. I did follow my own advice.

In 2008 when the bottom dropped out, HOAs found themselves in a terrible situation. But oddly, here at BLMH the owners elected a "feel good" board. I guess that was a misguided attempt to avoid the current reality. Here is the reality experienced by many HOAs for the past six years:

1. Interest rates plummeted and so the return of those reserve savings also fell. "Safe" instruments such as CDs and savings accounts rapidly fell to returns of less than 1%. Savers were punished and HOAs found they had to increase fees slightly to offset this loss, or implement "austerity programs."
2. Marginal buyers who stretched to purchase in a HOA found themselves underwater. Many had special mortgages which were pegged to the value of their home or unit and would reset to higher interest rates if the value to loan balance reached a trip point. When housing values plummeted that's exactly what happened. A job loss or job curtailment made it impossible for them to meet their financial obligations and that includes paying their HOA fees. 
3. Some older HOA unit owners had used the value of their units as a piggy bank and took second mortgages or equity loans and spent to the hilt. Never mind that in retirement their Social Security, pension and savings were inadequate to pay back. Rising values would "buoy all boats", wouldn't it? Well, it didn't and these owners found themselves overextended and financially strapped. 
4. In extreme cases, HOA owners foreclosed or signed a "deed in lieu" and turned their property over to the mortgage holder. Prior to that they stopped paying their fees. This is a "work in progress" and the foreclosures continue to this very day.
5. HOA legal fees increased. Some HOAs which seldom used an attorney to deal with delinquencies found themselves paying thousands of dollars annually in legal costs never anticipated.  
6. The courts, overwhelmed by foreclosures delayed cases. Besides, it was politically unacceptable to toss voters into the streets. So foreclosures dragged on for months and years. Other HOA owners shouldered the burden of financial responsibility to make up for those lost fees.
7. Banks didn't help. On foreclosure, some also failed to pay the fees for the units they took over.  They were reluctant and unwilling owners. Under law, they weren't required to pay all of the fees. 
8. Owners who had planned on a sale of their unit in a year or so found themselves unable to do so at the price they expected. "Flippers" who expected to roll out and into another unit also found themselves trapped. In some HOA this made for an ugly owner body who were upset and angry. Boards found themselves trapped between angry profit seeking owners and complacent owners who simply expected a place to live.  It got really ugly at some HOAs. 

Believe me,  responsible HOA boards everywhere have been working diligently for six years to deal with these universal problems. The ramifications continue to this very day.

On assuming a board position at BLMH I ran independent tracking of delinquencies. I have no interest in "who" is delinquent and I do expect each and every one of my co-owners to do what is necessary to meet their financial obligations. Living in a HOA is an opportunity with a cost. We are all equals and so as equals we are all, each and every on of us, to pay our monthly fee. Period! A former president, who had been run off in 2008 returned and I discussed my concerns. We collected archived data and I prepared a new spreadsheet for board use. In 2010 we began presenting that monthly spreadsheet to the board. This supplemented the data provided by management and included colorful charts of historical data from January 2008 to the present. This information facilitated the taking of some extreme measures by the board, but not all board members were happy. Making difficult decisions is never easy. After all, these were our neighbors. However, no one was willing to pay substantially higher fees and every owner in a HOA has a financial obligation to that HOA. When I suggested that a "hat be passed" to help distressed owners, the suggestion was dropped and there was not a single taker. I took this to mean that it was expected that someone else should pay the tab.

Under the Illinois Condominium Act, all owners are to be treated equally, and all are to pay their fees. That was not a popular position and some board members clearly had no intention of enforcing such equality. I upset a few with my written emails about "upholding our fiduciary duties."

This is a HOA which had experienced a severe board earthquake in 2008, so we could have "change." I am of the opinion we got far more change than anyone expected or wanted. Certainly the proponents of "change" expected that our fees would decrease because our "fees are too high." But reality intervened.

Not all of this was bad. The BLMH HOA was able to shift from mulch to stone over the prevailing complaints of some noisy owners. Demands for more colorful plantings were trumped by financial reality. The HOA returned to a "landscaping" path and owner complaints about a lack of flower gardens were overruled by the majority. The BLMH HOA also shifted from a social organization to a business.

Yes, change can be very difficult! But there can be opportunities and most owners do want "fees to be as low as possible" and expect their boards to take the necessary steps to do that.  

Maintenance, Reserves, Reserves Studies and a PUD
The physical make-up of an association can have significant impact on fees. For example BLMH is somewhat unusual. This association is also a PUD, or "Private Urban Development." As a consequence owner fees are required for reserves and maintenance of streets, exterior lighting and even the water mains. The fees pay for snow plowing of 84 driveways and the streets. Fees pay for street lighting, street cleaning, patching of asphalt and the curbs, too. This association is large and I have been told is about 40 acres. It includes portions of two lakes, 44 buildings, about 800 trees, 15 acres of turf in extensive grounds, three streams and waterfalls as well as concrete walking paths throughout the association. Fees include water for the grounds and the streams and the maintenance of them.

Some associations have a single large boiler for providing centralized heat and hot water or a wonderful stone facade. Some associations maintain the windows. Replacement of these can be very expensive. I have acquaintances who owned units in these types of HOAs. They each had special assessments to deal with boiler replacement, exterior masonry repairs or window replacement. The cost of these special assessments? $10,000 to $20,000.

Fees include both normal maintenance and reserves for capital projects. At BLMH normal maintenance includes landscaping, carpeting, electrical costs, water, hallway and exterior painting, exterior building repairs, snow removal, streams, management, accounting, insurance, postage, mailings and so on. The BLMH association had a reserve study in 2011 to aid the board and management in acquiring the necessary reserves. The most recent study included a 30 year projection. When is the last time your HOA did a reserve study? Who did it?

At BLMH reserve expenditures include replacement of walks, streets, curbs, roofs, driveways, patios, common area waterfalls, streams, decks, gazebos and water  mains. The association is in the midst of a multi-year re-roofing of the 44 buildings in this association. That project includes improved ventilation, insulation, relocated gutters and downspouts. The improvements require drainage modifications to move water away from the buildings which is deposited by relocated or new downspouts. These improvements are intended to extend the life of the new roofs and driveways and to reduce annual maintenance costs.

Certain expenses can be managed in various ways. A significant change at BLMH was a shift away from mulch to stone around buildings. This stone is part of the drainage improvements.  It's my understanding this association once spent about $18,000 per year on mulch. Stone is a much better use of association funds, in my opinion. It does not degrade, does not require annual replacement and doesn't float on water and fill sewers or settle alongside buildings. Mulch carried by rainwater to driveways, walks and streets is simply another maintenance expense to deal with.

Annual Fee Increases and Special Assessments
For 2014 the BLMH fees increased approximately 1%. That means I'll be paying $3.46 more each month in 2014. Why? The City of Wheaton has ramped up water rates and a portion of that fee increase will go for that purpose. A ComEd electricity utility increase was approved for 2014. Approval occurred in December, 2013 after the annual association budget planning workshop.  Inflation is predicted to be about 1.8% in 2014 and that may influence other costs.

The BLMH association is replacing all roofs, driveways upgrades are about 80% complete, garage floors are being replaced where necessary. All patios and decks were recently improved and the concrete patio replacement project was completed in 2012. The association has a major street replacement scheduled for 2014, etc. Reserves will pay for these things. Every owner in any HOA needs to ask the question "Are reserves adequate and are planned reserve collections sufficient?" They should ask the board and management to prove these numbers. Simply being told "Oh, yes, we have enough money" is not a responsible answer. I can say that from practical experience. If you do not know the detailed answers then you might have a rude financial surprise in the future. However, it is also the responsibility of owners in a HOA to read all of the documents. A failure to read with an expectation that the board will read them to you is not a good use of board time.

It's my understanding the BLMH association has never had a special assessment. For anyone considering HOA living there is a personal question to be answered. Do you prefer the lowest possible monthly fees or special assessments? It's a choice of financial stability or special assessments. Owners must ask themselves "Do I have the financial discipline to save for special assessments?" Most owners apparently hate special assessments. Avoiding special assessments requires long term planning and savings by the HOA. Savings can only be accomplished via fees. So fees may seem higher than expected if they include realistic reserves.

Alternatively, owners can argue for a bare minimum of reserves. To do so can be a decision and a vote for special assessments if capital projects are to be accomplished. Driveways, streets, sidewalks, streams, large decks, landscaping (replacement of trees, etc.), patios, roofs and garage floors are expensive. How much does it cost to maintain or replace these things? The BLMH association collects about $1190 per owner per year for all reserve items. That amount was determined in part by the immediate needs of roofs and driveways.  In reality, $1190 does not go that far. But some have argued we don't need to collect this amount, we can get away with less, or by looking at the balance sheets and the bank statements have argued "We have enough money." Really?

If a board collects sufficient fees over very long periods of time, it may achieve the lowest possible fees and avoid special assessments. For example, if roofs can be expected to last for 20 years, then it is necessary to collect the value of 1/20th of the replacement cost of all roofs each year and place that into reserves. Add to this the equivalent value of asphalt, garages, etc. and you then have the best method to avoid higher fees and future financial "surprises."  In reality, our association doesn't replace all roofs in the same year. We are currently replacing 6 roofs per year and a complete project will require about 7-1/2 years. In an ideal world the reserve contributions are staggered to match the 20 year anticipated lifespan.

On the other hand, associations can hold fees low and simply deal with financial "surprises" by charging special assessments. Let's assume that a HOA decided to collect half their reserves via fees and rolled the dice and collected half via special assessments. What would that look like? Here at BLMH it could require regular "special assessments" of about $3,000 every 5 years. Of course, if anything went wrong with this planning then the special assessment would be higher.

Our association has taken the position that special assessments are to be avoided. They are the means of last resort. It is impossible to predict the future and so I don't think any HOA can make the statement that "special assessments will never occur in our HOA." However, I do think they can be avoided and BLMH has done so for the last 30 years.

So what would a $3,000 special assessment cost an owner? It would be about $57 a month for a 5 year loan. $6 per month of this is interest at 5.0%.

Some HOAs apparently deal with their finances by doing just that. Of course, the owner must save for that special assessment or can take out a loan. This is why I have heard this approach called "smoke and mirrors." HOA fees are lower but owners get a "back door" demand which increases the actual fees paid by the amount of that special assessment. In my example, that's an additional $57 per month. So which is better, "lower" fees with special assessments or fees with the true costs of reserves and projects built in? Of course, if the HOA budgets and manages their finances then there is no interest to pay the bank for loans. In other words, the monthly cost to owners is less if special assessments and borrowing can be avoided.

Special Assessments - Add to Your Monthly Fees
If owners argue for even lower fees for reserves and the board complies, then it is possible that special assessments would be much larger. I have read about and am aware of  HOAs that have in recent years has special assessments of $10,000. The approximate monthly payment for 60 months would be $188.71 at 5% per year interest. Of course, owners could pay any such assessments via their credit card. Today with a 14% annual rate, that would require a $233 monthly payment. At 18% it would require a $254 monthly payment for 5 years. .

A $20,000 special assessment if paid off over 10 years at 5% will cost the owner $212.13 per month.

Of course, at the time of a unit sale the seller would be completely responsible for any outstanding balance.

A HOA  Mortgage - Add the Repayment to Your Monthly Fees
Several years ago, some owners were pressing for the BLMH HOA to take on a mortgage to cover anticipated roof work, driveways and so on. Some board members weren't convinced and I was one of them. I prepared a financial plan and presented it to the board president. i also published a similar document on this blog.

The bottom line was straightforward. A mortgage would have to be repaid by the owners. A mortgage would require the monthly payment of principal and interest. That interest would be added to the monthly fees. In other words, a mortgage might be a reasonable solution but it will require higher fees than timely collections and accumulation of reserves.

Other board members also pointed out to owners that a mortgage could take a decade or more to repay. In other words, the owners who were promoting a HOA mortgage were in fact "mortgaging their future." To this day, I think some of the owners don't understand this.

Planning and preparation is the better approach. A mortgage, as is the case with special assessments is best held as a path of last resort. That is my opinion.

The Lowest Possible HOA Fees
Is it possible for fees to be even lower than the recommended minimum? The lowest monthly fees would include no reserves and no savings. Of course, that is not in accordance with Illinois statute. However, there are a lot of poorly run HOAs out there, if I am to believe what I read in the press. BLMH is operating in accordance with a 30 year financial and maintenance plan. Our fees include reserves for capital projects and a 2011 reserve study is providing guidance to the board, as is professional management. I'd personally like to see an update to that study in 2014, and a closer look at the condition of some portions of the HOA.

Are owners happy with our fees? To be realistic, and I state this as an owner, we would all like to see "fees as low as possible." For a very few owners I suspect that their expectation is zero fees. Of course that's impossible.

Timely Project Completion and Accumulation of Fees
One concern any owner in any association should have is the timely completion of projects. Once a board undertakes a specific path, then that path must be carried to completion. In other words, the board is obligated to obtain sufficient funds and plan for such work on every building. All owners are to be treated equally. There are no exceptions.

This implies that a board should have a financial plan in place prior to beginning a multi-year complex project. Now that would seem to be common sense, but boards can underestimate the complexity or costs of projects and find themselves in a difficult position.

Roof replacements are an example. Once a HOA begins such a project it has made the commitment to finish that project and to have the funds sufficient to do so.

For example, at BLMH our roofing project  began with a single roof. The pace ramped up slowly as the board accumulated the fees for necessary reserves to replace 40 large roofs and 4 smaller roofs.  Of course, other work and maintenance had to continue. In 2009 3 roofs were completed, then 4 and for several years 6 roofs have been completed annually. The plan is to replace the roofs before major repairs are required and to do so at a pace which will not excessively deplete reserves. The board has set a minimum level for reserves.

At present about 56% of the roofs have been completed and the balance will be completed within three years if the board and the association maintains the current pace. In the process problem roofs have been completed. These are roofs tagged by roofers as being in need for "sooner" replacement and also those identified with leaks or other expensive problems. The board does have the option to repair versus replace, but at a current age approaching 20 years, doing so to a roof is probably a waste of money. It's useful to keep in mind the fact that a large project with 44 roofs can require 8 years to do. In other words, by the time the current project is completed at least one roof will already be 8 years old. Some of our roofs are over 20 years of age. The roofs are due for completion!

When the project began, some owners complained about whose roof was being done. It is no coincidence that some owners also stormed the board and one of the battle cries was "What do we get for our money?"

At the time, the BLMH HOA had experienced nearly 10 years of gradual fee increases. Some owners were unhappy and said so. The board found itself under attack and it was in a difficult position. This is a large HOA and a PUD. Streets, driveways, roofs, water mains, street lighting, decks, patios and streams, etc. all require savings. It seemed the board was playing financial "catch up" and in my opinion it was. Four boards have been taking this on for 6 years.

An improved newsletter and consistency have quieted some of the grumblers. I'm of the opinion that one mis-step by the board and I'm confident the complainers will be back.

The stress of dealing with the necessity to build up reserves has placed the board on the opposite side of the table from some owners. As one board member said "These are my  neighbors." True, but that didn't prevent the neighbors from running off some of the board with some very vicious attacks in 2008. When it comes to money, "being neighborly" is an option. I'm of the opinion that the events of 2008 were pivotal in creating significant tension in the BLMH HOA and are one of the reasons the board is consistently understaffed.

Are Some Owners Gamblers?
That's a good question. I have read in HOA and financial publications of owners who obtained second mortgages as they approach retirement age. This implies they expect to have sufficient income in retirement to pay for that mortgage. I have also observed and read of owners who vehemently oppose fee increases. Unfortunately these same owners don't simultaneously argue for severe austerity programs. Everyone expects their street and driveway to be snow plowed, they expect the roofing project will include their building, they expect their building will be painted in accordance with the 6-year cycle, and so on.

Money collected should be spent to maintain the entire complex. That means that each owner is paying a portion of their fees each month for exterior and hall painting. Yet, it might be several years before the building in which they reside gets a new hall carpet, or paint or a roof.  Here at BLMH I'm aware of one owner who objected to fees for repairs elsewhere on the property. In other words, some owners apparently have the opinion that any money collected via fees should directly benefit themselves and no on else.

That's not possible or permitted under the Illinois Condominium Act. If this were the case then if there were a fire in a building, then the deductible would be charged only to the owners in that building. Any tree maintenance on a cul-de-sac would be paid by owners on that street. Driveway replacement or roof replacement would be charged directly to the owners who reside in that building. Any work on the lakes or or shores would be charged directly to the owners with a lake view. And so on.

That isn't going to happen here at BLMH or at your HOA if your board and management follow the rules.

I suspect owners who argue to lower fees today because of their short term financial plans or problems are arguing to raise fees in the future, or are attempting to "pass the bills" to others. Of course, who would admit that they have financial problems? Who will be honest and say "I just want my needs taken care of, and I don't give a darn about the rest of the owners?"

HOA Boards are comprised of owners who donate their time and talents "for the betterment of the association." Boards take on the duties to see that the HOA is maintained and financially capable. HOAs can have boards that are gamblers, too. If your HOA does not have a reserve study, if it does not have competent professional management and if it doesn't have a plan, then I would offer the opinion that the board is gambling, and the owners too are "rolling the dice."

The Rise of the Investor
I have read about banks and investment firms which have moved into residential real estate. So too have individuals. This is apparently the consequence of very low interest rates, low or negative returns in bonds, concerns about the stock market, falling commodities prices and so on. Real estate has been a good deal and as I have written here, some significant returns on investment are possible.

Condominiums aren't apparently as attractive to the investor because real estate taxes and HOA fees must be contended with. For the HOA investor these are the possible costs in an association such as ours:

1. Real Estate Taxes.
2. HOA Monthly Fees.
3. Possible HOA Special Assessments.
4. Unit Maintenance, including furnace, A/C, plumbing and electrical. 
5. .Opportunity Costs.

Condominiums also have rules and regulations. Owners of units in condominiums understand that they have no direct control over their monthly fees. An owner can join the board and attempt to influence decisions. However, there is also state statute to deal with. Here it is the Illinois Condominium Act. Larger HOAs also have professional management and professional maintenance. These things all increase the costs for an investor via fees, and take the day to day control of operations out of the hands of the owner. 

Individual real estate via homes or apartment buildings is probably the best way to realize maximum returns. After all, the owner decides on all maintenance and does not have to contend with other owners, state statutes or rules and regulations. In fact, the investor makes the rules because he or she has total control. No board, no licensed management firm, no reserve studies, etc. 

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In a HOA, the tenant is entirely the responsibility of the owner. For an investor that means possible costs for rules violations. Tenants who are "good tenants" will operate as if they are surrogate owners. However, not all investors understand this and I state this from practical experience. I am aware of some individual investors who give their tenants a small financial incentive each month to deal with such things as applying snow melt, minor interior repairs and so on. However, that appears to be the exception and again, such financial incentives deduct from the bottom line. 

I'm personally interested in observing how HOAs deal with the rise of investors as opposed to onsite or nearby owners. 

Notes:

1. According to the definition I am using I too am an "old timer" as I have been a BLMH owner for about 12 years. 
2. I purchased several years after a change in management. The BLMH HOA has been under a professional management. With a change in professional management in 1998 and closer financial controls, there was a change in the methods to determine budgets. Not all owners were pleased by this. 
3. Fees for the initial 5 years of this association fees increased at an average of 19.2% per year. In my opinion this is not unusual. The transition from developer to HOA owners is frequently accompanied by some difficulties in determining actual annual budgets. 
4. For the period 1983 through 1992 the average increase was 3.2% per year.
5. For the period 1993 through 1998 the average increase was 3.5% per year.
6. With new, professional management for the period 1999 to 2007 the average fee increase was 8.575% per year. I purchased in 2001 and closed in 2002. For the previous four years the average fee increase per year had been 9.25%. That's why about 33% of the owners I interviewed prior to purchase complained about the "high fees."  
7. In 2008 with a partial board change the fee increase was 5.5%
8. In 2009 the fee increase was 5.1%
9. In 2010 with the transition to the new board accomplished, the fee increase was 0%.
10. In 2011 to correct for budget shortfall the fee increase was 7%.
11. In 2012 and beyond fees have stabilized as the board realized that this see-sawing of fee increases was far too difficult for owners to plan for. Fee increases have averaged about 2.6% per year
12. For the 2014 budget the fee increase was 1%. 
13. All fee increases are approximate. Actual owner fees are rounded per their percentage ownership. Several years ago (2010) and owner complained that the board had lied because his fee was not a precise 7% increase. The previous year the increase had been 0% and with a new board, a few owners apparently expected that fees increases would go to 0% and stay there.