The Never Ending Projects

Revised notes December 17, 2015

There is a dilemma facing boards in HOAs. That is "What is the appropriate reserve level?" Determining how and when reserves will be spent is necessary to come to some reasonable answers to this question.  This is a complex problem for HOAs in which the solution may span decades and many boards.

"The roof project at BLMH began as a shining example of how not to do a project." (see notes).

For example, our roofing project will require about 16 years from first roof to last. That is in fact longer duration than is prudent for this project. However, the real question is how to financially prepare for such a project. I'll use our HOA project as the basis for an example.

Let's assume the total cost of this project to be about $2,000,000, which is about $125,000 saved each year for 16 years. Why use 16 years to accumulate the necessary funds? Read on.

So how much should a board have set aside for this at the time the project begins? Of course, one should not deplete reserves for a single project. So, beginning such a project with $125,000 or less allocated to it would not be a good idea, would it? To do so would require collecting funds as the project proceeds; a sort of "pay as you go" approach. That approach would require the delay of roofs as funds are accumulated and that's what occurred at BLMH, and why a 10 year project will take about 16 years and some roofs may reach 23 years of age.  At the other end of the savings range, one could delay until the full $2,000,000 for this project has accumulated in the appropriate reserve account. But that puts a large fee burden on owners for many years prior to the actual project begins.

I think we'd agree that the reality is some where between these extremes. That is a problem for boards to determine and it must be replicated for streets, driveways, garages, walks, streams, decks and so on.

Furthermore, this problem will not be solved by one or two boards. In fact, it is not uncommon to have board members turn over every other year or three or four. Some may stay longer, and some may depart after one year. So how do boards deal with multi-decade projects? How are new board members received and how are they brought up to speed? How is continuity maintained? At BLMH in 2008 we had a near complete board turnover. In such circumstances will chaos be a result? It could be. Not only are reserves and projects impacted. So too are rules and the many tasks boards are charged with completing. Board turnover can result in what I call "working on the engines of the airplane while it is in the air." It did happen here at BLMH and it is why I say I've been cleaning up messes created by others each and every year I've been on the board. It has taken me about 3000 manhours to get to where we are today. This is something to be avoided. That's common sense.

Reserve studies are helpful, but boards have latitude about when to begin projects and how rapidly to complete them. Some boards may not use the studies for the tools they are meant to be. That is a problem.

BLMH was built in about three years. New construction can proceed at a very rapid pace as compared to repairing occupied buildings. Boards cannot simply reconstruct a large HOA while hundreds of residents are living in it. Consider the inconvenience and disruption to residents projects may cause. Some of this may not be avoided, but it does need to be considered when planning these projects. Some common sense might be necessary. For example, it might not be practical to replace 10 large roofs in a year. We had great difficulty doing eight in one year. The other extreme, replacing 2 per year is certainly easy, but that approach would require 22 years for a project, and the existing roofs had a life of 15 years.

Of course, all of this is explained to each new board member in the "Board Member Handbook" they are given upon assuming their duties. Handbook? What handbook? Some HOAs have great difficulty getting a newsletter put together. Handbooks are apparently for professional organizations.

Nevertheless, boards will have to cope with large capital projects and each year the HOA board must figure out how to do this. One of the first tasks facing a board with such a large project as roof replacement on 44 buildings is to determine the remaining life of the roofs, determine a practical annual limit to the number of roofs that can be replaced and then develop a budget. That budget might require some funds for existing roof repairs if scheduling allows some roofs to reach an age 5 or more years beyond their design life. The next task is to determine how much to save for the project, when to begin accumulating funds and for how long. After doing this, the owners should be appraised of the situation and of course, fees have to be collected.

But one can't wait until the beginning of such a project to begin collecting fees. Or I should say, one should begin collecting and accumulating fees for such a project some years before it commences. But how many years? Alternately, a special assessment could be used to "jump start" such a project if the reserves are inadequate. If such projects aren't planned then the 'worst case' scenario might require a special assessment to begin the project and a large fee increase to fund it as it proceeds. Alternately, the project can be delayed while fees ramp up and funds are accumulated.

Let's assume that a pro-active board recognizes the problem and decides to begin saving for this roofing project 6 years before it begins. In such an example, the full project duration would be 6  + 16 years = 22 years. That's six years of saving and then a actual roofing for 16 years. This is not the best solution because 22 years is beyond the lifespan of simple asphalt roofs. In other words, if a roof has a 15 year life, then it might be possible to delay replacement of some roofs to 18 years if they are in good condition. But some roofs might be delayed for 22 years. In such a situation will they make it? In such a situation we are beyond reasonable limits and so I'd guess one would have to use a crystal ball.

I suggest it is best to plan using real world lifespan numbers. Neither the 'best case' or the 'worst case'. Here at BLMH we were once informed our old roofs should be expected to have a lifespan of 15 years. Today, we have some old roofs that are 22 or 23 years of age. Now, that is really pushing the envelope IMHO.

So how should a board proceed with such a project? If a board decides to begin replacing some roofs based on condition, and if those roofs are 15 years old, then it is implied that savings must begin 6 years earlier to accumulate and have on hand sufficient funds to replace all roofs in a reasonable time. So, if fees are collected for six years and then four roofs are replaced each year thereafter, the roofing project will be completed in the 16th year. Actual roofing will require 11 years from first roof to last.

However, if all of these roofs were originally constructed in a span of four years, we have another complexity. If a board decided to delay roofing replacement until absolutely necessary, then it is probable that some roofs might be replaced at the age of 13 years. These are the early failures. But what about the rest of the roofs? At that time the youngest will be 9 years of age. These roofs will reach 15 years of age in 6 years. If we assume some roofs might fail early, at 13 years, it is also likely some will do well for 18 years. In other words, the project will most likely begin when some roofs reach 13 years and will be completed when some reach 18 or even 19 years of age.

The above roofing project will require about 9 years from replacement of the first roof to replacement of the final roof. Is that a reasonable, practical possibility? Boards do have to figure this out. In my example, replacing 44 roofs would require replacing about 5 each year. In fact, at BLMH our "real" roofing project replaced one, two, three, four and eight roofs each year. It has taken more than 9 years to complete and some roofs are approaching 23 years of age.

Of course if the new roofs have a life span of 15 years then it is possible the first roof completed will reach 15 years four years after the completion of the final roof. In other words, saving for such roofs would be a continuous process. As soon as one roofing project was completed, the next would begin in about six years.

So what would a 16 year cycle of saving look like? After 5 years of saving the HOA in our example would have $625,000 in the "roofing reserves' fund. It would continue to put an additional $125,000 into this fund each and every year. However, in the 6th year the draw down on the fund would begin as roofs are replaced. In the 16th year the final roofs would be completed and the final $125,000 spent for a project total of $2,000,000.

However, the HOA in my example would immediately have to begin replenishing the roofing fund in year 17. So another $125,000 would be collected and saved in that year and for every year thereafter.

This is but an example, and there are some other things to consider in the real world:

1. Projected lifespan numbers are per experts. I have my own opinions but I do not encourage homeowners or HOAs to roll the dice with roofs and I am more than a little uncomfortable with the current age of some of the roofs at BLMH. Our real word experience as well as mine in a home supports the expert opinion that simple asphalt roofs over tar paper can indeed provide good service for 15-18 years. It is also possible for some roofs to survive longer and some may fail at 13 years. My home which was built nearby had a roofing experience similar to the buildings at BLMH. A second layer of asphalt shingles were applied at the end of life of the first. The combined lifespan of the two layers was 32 years, or about 16 years each. I didn't wait until the roof was failing to replace the shingles with an entirely new roof. In other words, it might have been possible to gain another year or two on my home. Of course, that is flirting with leaks and interior damage. Not a good idea for homeowners or HOA boards, IMHO. 
2. Inflation must be accounted for when doing the numbers. It is reasonable to assume that the cost of roofs 17 years hence will be greater than the cost today. So future boards would find it necessary to save more than the $125,000 in the example.
3. The new roofs at BLMH are architectural roofs and are a significant improvement over the old. The new include extensive ice and water shield, kynar edging, etc. The new roofs are projected to have a lifespan of 30 years with pro-rated "lifetime" manufacturer's warranties. I've studied the warranties and they provide benefit but are no guarantee of 30 year service. 
4. Future roofing projects may not have the same scope as current projects. For example, at BLMH the boards of 2001 and thereafter made a decision to reconfigure gutters and downspouts to move water off of driveways and adjacent to entrances. This decision required significant drainage improvements to most roofs. Boards after 2007 found that they had been committed by the earlier board to a much larger project than simply replacing roofs. Each and every owner is to be treated equally and fairly in a HOA. Future roofing projects should not require funds for these as this work is being done during the current project. However, some drainage system repairs may be necessary. 
5. The roof project at BLMH began as a shining example of how not to do a project. Create an expensive project at a time there are no funds for it. Begin the project while attempting to increase fees for it while doing one or two roofs per year. Create a project that commits future boards to a decade or more of fee increases in a "pay as you go" scheme. Create and begin the project with no viable financial plan. Don't communicate the scope and cost to the owners. Don't communicate the full range of problems to replacement boards. Suck the reserve coffers dry and curtail other projects including stream repairs,  concrete patios, common area patios, streets and so on. Gamble on 15 year roofs surviving and providing service for 20 to 25 years. Leave it all for someone else to figure out. Leave it to others do do the heavy lifting. What a mess!

Board Vacancies - The Problem

As I stated in the previous post, our HOA has had great difficulty filling board positions in recent years.

This may simply be the way it is in HOA volunteer organizations in which some owners pretend they live in an apartment complex while others pretend it is a retirement village.

Here are some observations about boards since I've been living in this HOA. There has been great difficulty getting anyone on the board for more than a term or two. There has been an unequal distribution of tasks. These have been determined by director's title and the historical precedent of picking and choosing jobs. When the list didn't fit a board member's desire, boards sometimes created a position that was palatable to the board member (communications director, webmaster, etc.). Other factors have included skills, tools unavailable (computer, printer, email, etc.), health and willingness to put in the necessary time. Age is certainly a factor, because as weage, we become physically less able. We may also face cognitive decline. These conditions are normal and natural. It would probably be best for the HOA if our board was comprised of individuals younger than 60. That's a generality.

Time requirements is another problem. It has been noted by our most recent president that I've put in between 700 and 500 hours per year "serving" this community. I sometimes cringe when that number is mentioned. The larger problem is the owners who might consider a position on the board. Who in their right mind wants to volunteer 500 hours annually for a HOA? Some owners might think that this is the required amount. It isn't. I've had to do this because 1) This HOA was in serious trouble a few years ago, 2) The unequal distribution of tasks made it necessary and 3) Skill required to get the job done and I do have the requisite skills.

Board turnover after a term or two is also a problem. It takes a while to come up to speed and because most owners don't regularly attend HOA meetings there is little preparation or foreknowledge prior to being elected. So it becomes "on the job" training. With all of the cycles that a larger HOA must go through, some tasks are only done once per year. It may take two or three years to get into the groove, as it were. But board members frequently leave at the end of one or two terms. Some run.

At the opposite side of the spectrum, some board members may seem to set longevity records. But that is the exception.

In fact, for the past 5 years, more and more tasks have been pushed to one or two board members Everything from supporting the enforcement of Rules and Regulations to decisions about fees (delinquencies), cash flow, attending City, COD and Neighborhood meetings, preparing the newsletter, doing reserve study tasks, performing all manner of surveys and so on.

I suspect some boards have enjoyed this as it allowed some members to avoid the enmity of unhappy or delinquent owners. That's what happens when a board is fractured and unpopular duties are performed by one or two. The others will have the opportunity to duck, cover, and blame it all on "Nasty Norm" or whomever. The one or two who are most visible become the target of the dissatisfied owners. Other owners aren't stupid. They hear or observe some of this and it makes it more difficult to enroll board members. We might as well hand out targets for them to paint on their backs and signs to carry which declare "I'm a board member and that makes me a leper and unpopular." There is the example of the individual who attended a club event and was asked who she/he was. When it was discovered she/he was the spouse of a board member, people immediately lost interest and some walked away.

BLMH, being the behemoth it is, has a full time management firm, but not full time on-site managers. Boards over many years have willingly or unwillingly made a variety of decisions to "save money." For example, this has occurred as in-house street design and project management, and numerous project delays, sometimes for no reason other than a lack of funds or board "man or woman power." I know of a former board member who stated that he/she frequently picked up trash on the property. And so on. This approach over decades created not only the streets we have but also the image of the board and the expectations of owners. Some owners think we are incompetents and janitors. Which is so? I leave it to the reader to decide.

Because boards are comprised of volunteers and there is sometimes desperation to fill a position, skill may be an afterthought. A criteria might be "How much or how little damage will she/he do on the board?" After all, all board members vote, and some my be inclined to discuss sensitive issues outside the HOA meetings with owners. But boards need to fill positions, and what was needed first and foremost was bodies. For the politicos, getting a compliant body on the board is a win, as this is someone who can be manipulated to vote in a specific direction.

As for bodies on the dias, in some years, that's about all the owners got on the dias. Boards are so overloaded that it is common that anyone who shows up will have a position.

Being comprised of volunteers, the boards may face an impossible task. Some volunteers have a personal agenda and the easiest way to get that personal want realized may be to get on the board. Some want power and access to money decisions. A few might have an overwhelming interest in damage control and protecting their unit values. A few may also be on the board to keep others off; there are a limited number of positions available and each board member does vote. Others simply want to be popular. After all, these are my "friends" has been the occasional refrain when discussing the situation of owners who are not board members. For that reason, upholding rules can be very difficult. Most owners expect the board to do the dirty work, and some board members have found this to be impossible for them. When this occurs, boards fail to fulfill their duties and more and more increasingly difficult or unpleasant tasks will fall to the one or two who might be willing to do them. I've had a lot of unpopular tasks pushed my way. It reminds me of that old Wheat Chex commercial "Give it to Mikey" said the kids. Some boards are very undermining and some board members relish throwing others "under the bus" as long as it isn't the favorite contractors, etc. The rest of us are road kill! No kidding, it is immaterial if it is to be another board member, an owner, a manager or a less than favorite contractor. At some point we may each become road kill for such a director.

In recent years, the number of personal attacks by owners have increased and I am not the only board member who has been threatened. That is probably the "dirty secret" about BLMH. However, this HOA is not alone in this. Professional managers have informed me of brawls at other HOAs.

Some of this may be inevitable. Real estate professionals may not vet or inform potential owners of their duties and responsibilities as HOA owners. It's all about the sale and the commission. Condos are just like homes, aren't they? Or perhaps they are believed to be apartments which will appreciate over time and provide a nice windfall to the owner. Some owners discover after purchase the reality of fees, what living in such a community involves, the fact that the reserves are not a slush fund for owner exploitation, the HOA isn't a social club or a piggy bank or get rich scheme. The last two hit home in 2008. After the cold shower, some owners are bitter and feel that others betrayed them. The alleged culprits include the government, banks, real estate professionals, boards, etc.

For the most part, bitter owners have no one to lash out at but the management and the board, and some do.

There are consequences. Owner nastiness, board member nastiness, lack of support by other owners (beyond an "attaboy") have all contributed to produce our boards. These are sometimes not fully staffed, or we have the same people coming back year after year after year. The board is getting older, and older and older. Why? It's simple, No one wants to do this job. Everyone demands results. But some one else should uphold the rules, because "these are my friends" or I won't or can't. Some owners don't have the stomach to deal with nasty owners and some owners are unfit to be fiduciaries.

As I have repeatedly stated, owners get the boards they elect and deserve. From time to time a board will appoint someone to a vacancy but that appointment only occurs because owners couldn't bother to elect someone.  Once in a while a champion may appear, but that is rare. Most people prefer to put their skills to work making money, in a hobby, or making a difference in a larger way. HOAs are supposed to be a place of "community" living in which the "community" participates.  But many HOAs are not.

The miscreants are waiting in the wings. That's the way it is in many HOAs today.

HOA Board Setback

Our HOA has had great difficulty filling board positions in recent years. We've had boards with unfilled positions. Other examples include boards with members who had difficulty performing their board duties and tasks, boards with members who had no assigned duties and board positions which were vacated after a year or two. Some boards had members which wouldn't or couldn't use email, spreadsheets and so on. We've also had boards with members who avoided creating newsletter articles or reports to owners. HOAs simply do their best with the boards which have been elected or appointed.

When owners wonder why some things don't get done, or the newsletter is the way it is, or whatever, it is because of who is on the board, the unfilled positions and the manner in which duties are distributed and performed.

This may simply be the way it is in HOA volunteer organizations.

The most recent setback? At our annual meeting, we fell back to a board with an unfilled position. Our youngest member has moved on to other duties. There will be fewer people to get the job done.

There will be consequences. This may not be of concern to some owners, who expect whoever is on the board to simply get the job done. Not my problem says the owner. Oh, yes it is.  A few years ago we had a group that was convinced this was an effortless, easy job. Just issues orders to Management and voila' the work is done. They learned the hard way that was not the way it is. Soon they were gone, using any excuse possible.

Why such difficulty in a HOA with 336 owners? I'll save that for another post.