Creating Budget Surpluses through better Processes

 

Budget status August 31, 2018, prior to annual budget meeting

This post will compare two budgets. The 2018 annual budget included a zero percent fee increase.  This was not an accident, nor was it a financial gamble.  This was the last budget I participated in at BLMH and it was one of a series that created a surplus.  In other words, the board ran the association in such a manner that all work per the Operations & Maintenance (O&M) budget was completed, the Replacement Fund (reserves) were fully funded, but not all owner fees were spent to accomplish this.

2018 was the culmination of 8 years of hard work and planning. 

Creating annual budgets was a challenge during my board tenure, from September 2010 until September 2018.  This period included the "Great Recession" and fallout from the 2008 banking crises. We experienced owner fee delinquencies that exceeded $80,000 in one year. Yet, we stabilized fees and avoided the 3 to 7% annual fee increases of earlier boards, and we simultaneously eliminated an extensive maintenance and repair backlog.

During this period Homeowners Associations (HOAs) experienced severe financial difficulties. Some owners found that they could not afford to pay the mortgages and HOA fees. Dealing with this was a challenge for boards.  To do so responsibly as a board member required that owners be held accountable for their agreements. In other words, all owners were equally and fairly required to pay their fees.  The budgets were constructed with that understanding, even though some owners did not, and some foreclosed.  As a consequence, annual "bad debt", which is uncollectable fees reached a peak in 2013 and 2014 of about $30,000.

Commencing in 2011 significant changes were made to better monitor and control the fallout of delinquencies and foreclosures, and in so doing, shield other owners from the consequences of their neighbor's misfortune or financial mistakes.  Earlier boards had never considered such problems and so there were limited financial controls in place.  I saw the handwriting on the wall in December 2006 and so I began preparing.  Few would listen at the time.  By fall of 2008 owners elected a new board with no prior HOA board experience, and very limited business experience.  Some said "We have enough money" but I attributed that to denial.  It wasn't until September 2010 that things had become so ugly that desperation set in among owners and some board members.  So, I got a seat on the board but it was solely because of an earlier treasurer who created a vacancy for me.  "You can lead them to water, but you can't make them drink" is an old expression.  

From the period 2011-2018 the board was diligent in collecting fees.  I've written about that in other posts.  Even so, there were significant delinquencies and "bad debt" which is owner fees and related legal collection expenses which were owed the association and never collected.

Delinquencies and "Bad Debt" 2009-2018

As a responsible fiduciary I worked to construct budgets which would balance, keep fees to a minimum, maintain the association and a balance. It isn't possible to create a "perfect" budget in which expenses match the forecast made in the prior year. As a consequence, budgets were designed to create a small surplus each year.  Of course, that might or might not occur.  The budget could balance, but it was paramount not to overcharge owners, or create a shortfall which would be an issue for the next year's board to deal with. So, I led boards in creating budgets which could include a small surplus.

That small, anticipated surplus was to be a cushion.  If such a surplus did occur, it was a contribution to the Replacement Fund (reserves).  This was important because there were failing roofs at end of anticipated life as well as failing streets and failing water mains that had to be dealt with.

Spreadsheets, Charts and Graphs - Operations & Maintenance (O&M) Budgets

 

Comparison, approved O&M budgets 2011-2018
and projected year end budgets.
If the "Projected Year End" is less than the "Approved budget", 
then a board has spent less than the fees collected, and a surplus was created.
Better controls = better and more stable budgets
Caveat: Kicking the can down the road, an old favorite technique
of boards prior to 2010 will fool current owners and penalize future owners
with higher fees and inadequate maintenance.

Note : click on images to enlarge.

Spreadsheets, Charts and Graphs - An Aid to the Board in Making Better Decisions

This is one in a series of posts about how spread sheets which can then produce charts and graphs are very helpful when boards need to make financial decisions.  This is particularly true with delinquencies, budgets, bid reviews and Replacement Fund studies and decisions.

Not all board members agreed about this when I was a board member for eight years. In fact, one very long serving member insisted that she "could run this place with a columnar pad" and in the past the board did.  However, those boards also raised fees relentlessly and continued to vote for fee increases even when the numbers indicated a large surplus existed for the prior year (see the 2019 budget).

This post looks at Operations and Maintenance (O&M) budgets. These are short-term budgets for a single year.  The O&M budget is separate and distinct from the Replacement Fund (reserves) budget.

The following chart compares O&M approved budgets to O&M year end projections for several years.  As you can see, the budgets generally increased each year.  However, the projected year end surpluses increased as the expenditures decreased.  That was not an accident.

Boards must be cautious, and sometimes first glances at data can result in poor decisions.  There is a lot of information and board decisions behind the graphs below.   An analysis of the categories of the budget each year in October-November provided insights into why there was a difference between Approved (designed)  and Projected Year-End budgets.  In some years, the approved budgets were too large or small.  That knowledge was used to make adjustments when determining the budget for the next year. However, a board member should be careful to do the work to determine why and how approved budgets deviate from the projected year-end budgets.  As a board member I did not allow a single problem or issue sway the design for the following year.  For example, a large snowfall season (ice and/or snow) can have a significant impact on the expenditures for that category in one year. A spike in water bills certainly warrants a careful determination of how and why. So too if the Grounds Maintenance expenditures were larger than anticipated.

Not all board members do the analysis required and some merely argue for higher annual fees; i.e., increase the budgets by 3% or so each year.  It may be tempting to use inflation as a guide or justification. But the CPI-U is not useful for determining a HOA O&M budget increase or decrease.   

Changes in contracts, utility price hikes, anticipated weather patterns, and so on are useful for determining future budgets.

At BLMH we did repairs 2011-2018 which were intended to not only maintain the association, but to also decrease the annual O&M expenditures.  Improving efficiencies is one way, stopping waste is another.  Doing meaningful and long term repairs is another. Such repairs can reduce the maintenance hours spent each year. Maintenance  hours come out of the O&M budget. Similarly, landscaping improvements such as transitioning from decorative wood chips to stone can reduce annual O&M expenditures by $20,000 or more, if it reduces the annual cost of chips, reduces flooding and maintenance around buildings.  I've published lists of maintenance and projects which were intended to have long term benefits while reducing annual costs, with no reduction in services, etc.  

O&M Budgets - Approved budget compared to actual (projected year end)

Next is the same chart shown above, but with trend lines added.  The trend lines indicate something interesting.  The black line is the approved budget designed each fall. The red line is the expenditures projected for the year, as determined about a year later, after much of the year had passed.  Comparing the two is something that the board should do when determining the budget for the next year.  The board should also question any anomalies.  I did, but not all board members do. 

In the chart, the black trend line is the approved budgets ········ . That trend line indicates that annual O&M Approved Budgets increased by about 13.64% over a 7 year period. That's an increase of about 1.95% each year.

The red trend line for the projected year-end budgets ········  indicates actual annual expenditures increased 2.29% over a 7 year period. That's an increase of 0.33% each year. 

If we compare the approved to the projected year end O&M budgets it seems a surplus occurred.

During the period 2011-2018 the board Approved O&M budgets collected $7,214,060 via owner fees. (Note 3).  That was about $256,186 more than was spent.  (Note 2).  Such a difference between budget and actual is a surplus, which normally flows into the Replacement Fund as reserves.  I've included a summary for boards of the seven year period 2004-2010 (Note 4).

Interestingly, some board members will conveniently ignore surpluses when arguing for a fee increase during the budget process.  In the fall of 2018 with my departure from the board, the president promoted and the board unanimously voted for a 1.88% annual fee increase. The budget and projected year-end numbers indicated a large surplus. (Note 1). but some board members are never deterred by the facts.

O&M Budgets - with Trend Lines added  
trend lines are dots  ········

Scale is important.  Altering the x-axis, which in the chart above is dollars, amplifies, or exaggerates differences, making these more apparent.  It can also distort perception.  Below is the same chart, but with a different x-axis scale.

Operations & Maintenance Budgets - 2011-2020

I created a series of spreadsheets as an owner and later as a member of the board to monitor and compare changes in the O&M budgets. It included approved budgets and projected year end numbers. These were gleaned from the financial information the board released to owners during the budget approval process.  

The next chart is one. It provides and indicator of how designed budgets actually performed, and of the trends in rising or falling O&M costs.  You will note that budgets stabilized as better financial controls were implemented by the boards. 

Projected O&M budgets 2011-2004
My spreadsheet as an owner and not a board member

Next are a several charts I created as an owner, before I was elected to the board in the fall of 2010. I would update these each year after the board released the "official" annual budget to owners. 

I didn't achieve a board position until September 2010 (Note 1):

Percent Change in O&M Budgets, year by year 2004-2011

O&M Budget Graph
Change year by year, in percent 2004-2011

Here's a comparative graph I created in November 2011 and a table. This provided two things for the board. 

1. An indicator of the magnitude of various O&M bills.
2. A comparison of two years.

I produced the following pie chart presented to the board during an association meeting. They liked it, and it was put in the association Newsletter. This led to other spreadsheets, charts and graphs:

Budget pie-chart produced 2011 and put in the Association Newsletter

 

Here's a comparative graph I created in November 2011 and a table. This provided two things for the board. 

 

 Notes:

1. A cabal of owners did their best to keep me off the board, even chanting "Norm will raise your fees".  That worked for a year or so.  Fear is a powerful motivator, particularly in the midst of a banking crises and deep recession.  The cabal succeeded until September 2010.  Even after I achieved a board position, one individual persisted and issued an email telling select owners that "Norm is dangerous".  It took a letter from my attorney to put an end to that nonsense.  The lawyer and letter was paid for at my expense, of course. Those owners were wrong, which makes one wonder why they were so dead-set on keeping me off the board.  One possibility is that some owners wanted to keep their friends on the board.  Did I raise fees? Here's a table with the fee reality.  Pay particular attention to the fees from 2011 until 2018, when I was a board member, and compare them to the years prior and to 2019: 

2. Actual annual budget surpluses or deficits are determined via audit. However, audits are completed months after a new budget is created and approved. For example, the budget for 2018 was created in October-December 2017.  The projected O&M expenditures were determined about a year later, in September-October 2018.  The audit was completed and reviewed by Management and the Board in 2019.  That audit for the calendar year ending December 31, 2018 was dated September 19, 2019 by the accounting firm that prepared it.   I know this because I requested a copy and after months of delays my threat to get an attorney involved, the board finally relinquished and gave me a copy. 

 3. Owner fees contributed these amounts in the seven year period 2011 through 2018:

• Replacement Fund (Reserves):  $3,270,920
• Operations and Maintenance (O&M):   $7,214,060
• A portion of O&M was identified as a surplus: $256,186 (Note 2).
• Fines and late fees contributed additional amounts. 
• The O&M budget was about 69% of the total over the period 2011-2018.  

           4. Budgets for the seven year period 2004 through 2010. I provide this for comparison purposes to the budgets in Note 3.:

• Total to Replacement Fund (Reserves):  $1,816,915
• Total to Operations and Maintenance (O&M):   $6,435,701.
• Total Estimated portion of the O&M identified as a surplus: $66,238 (Note 2).
• The O&M budget was about 87% of the total combined budgets over the period 2004-2010 (Replacement fund + O&M budgets). 

(c) N. Retzke 2021

Maintenance Reports

 

One of my spreadsheets, January 2017

During my 8-year tenure on the board, management provided as part of monthly packet to the board a summary of maintenance hours worked in the association.  There is a contract for this maintenance, which stipulated that a specific number of hours will be available each year.  

If the hours are exceeded, there are additional bills to pay.  I discovered that in some years the contract hours were exceeded. Normally, this would result in an additional bill for maintenance during the calendar year.  That bill would be for the hours spent and materials in excess of the contract amount.

I discovered that some boards prior to 2010 didn't handle it that way.  Contract overages were rolled into the next year.  That "balanced" the budget, but also reduced the number of maintenance hours available in the following year.  

Under my tenure on the board, I advocated that the board cease that practice. I also implemented improved cost controls.

My table above indicates that there were surplus hours available in 2015 and 2016.

(c) N. Retzke

Budget Contra Amounts and "Bad Debt"

 

Significant "Past Due" Amounts, per year, showing
"Bad Debt"
Presented monthly to boards by me. (Note 1)

Some fees in arrears to the Association may become "Bad Debt"
In 2013, according to audit, the amount of Bad Debt was $24,563.
"Bad Debt" in the audits is money owed the association that is never collected.

A "contra" account was added to the 2013 annual budget and budgets thereafter.  In the 2019 budget the Board, under old leadership and board president, the board decided to use a "$0" contra amount. In other words, that board decided that all fees due the association would be collected in the calendar year and there would be no "Bad Debt".  

That is not always the case and this post indicates why. I challenged that board but under that president, they not only raised fees with a large apparent budget surplus, they also decided that there would be no "Bad Debt" in 2019.

Keep in mind that in any calendar year there are owners who are in arrears a portion of their fees.  The board knows the precise amount because they are provided with a detailed delinquency report by management each month.  The budget provided to owners usually doesn't indicate delinquencies. The budget YTD (year to date) and Projected Year-End numbers are a fiction because they indicate that all owner fees have been paid year to date, and that all fees will be paid within the calendar year. 

It may be reasonable to assume that most delinquent amounts will be collected by the association.  However, once the board initiates legal action on the part of the association to collect those delinquent fees, it is probable that not all will be collected.

The "contra" amount is a negative number which reduces the amount of budgeted income to the Association. A contra budget category was considered necessary because in bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  Such debt is classified by the accountants when doing the audit as "Bad Debt".

The "contra" amount used by the Board in the budgets to owners was -$4,000, although significantly higher amounts were not recovered during a number of years. The annual audits reveal the actual amount of the contra amount and define them as "Bad Debt".   Of course, while doing the annual budget the board can only rely upon prior years audits.  These are helpful indicators.

Here are a few amounts per the audits of a few recent years.  I haven't bothered to publish all of the years 2012 to 2018.  I have not had access to the audits of 2019 and 2020.  Audits cannot be completed until the following year, so the audit for 2021 won't be completed until 2022. That doesn't mean that the audits will be readily available to owners. For example, my access to the 2018 audit was delayed by the board for more than a year after that audit was completed. The following are from audits:

• For the year 2010 the "bad debt" was $6,575.
• For the year 2012 it was $7,000.
• For the year 2013 it was $24,563.
• For the year 2014 it was $7,631
• For the year 2017 it was $900. (Note 1).
• For the year 2018 the bad debt was $3,943. (Note 2).
• For the 2019 budget, the board decided to use $0 (Note 3). 

Why do some debts become "Bad Debts"?

Under the Illinois Condominium Property Act, if a unit is foreclosed and sold to a third part, the Association may be able to collect six (6) months of common expenses and court costs, provided certain steps are taken by the Association. Those steps include initiating its own collection action. If no action is taken and an account is or becomes delinquent, the association attorney has recommended that the Board proceed with a forcible entry and detainer action, so that it may collect some funds, even if the foreclosure is completed. 

In bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  

Notes:

1. Each month I prepared an updated spreadsheet using the information provided by management to each of the board members.  My spreadsheet was a "delinquency" spreadsheet and it included tables, charts and graphs from 2008-September 2018.  To be accurate, the financial audits should be used to determine the actual amount of bad debt. The audits include the amount of bad debt, year by year. Because the board creates budgets in November for the following year, the actual amount of bad debt is unknown.  Which is why my spreadsheets were updated monthly to indicate to the board the current amount that owners are in arrears to the association.  The spreadsheet showed this as a table for recent months and also year by year from January 2009 to my final in September 2018. Several charts were included. 

   

   Typical Delinquent and Bad Debt Spreadsheet (click to enlarge)
   Prepared monthly by me and provided to the board
   Uses the Management data provided to all board members each month.

   
   
2. The "Proposed" budget for 2018 indicated a projected December 31, 2017 contra amount of $7,640.  The Board decided to use $4,000 as the contra amount for the 2018 budget, primarily because of the uncertainty.  Boards really don't know the actual "Bad Debt" for any year until the financial audit is completed.
3. The board elected in September 2018 decided to use a $0 contra amount for the budget of 2019. I sternly admonished them for that and the fee increase.  That board had three experienced board members, two have been on the board for a combined 30+ years.
4. Not all board presidents have been equally skillful, and one has been opposed to the use of the "contra" account in the budgets.  The association has been fortunate to have had several presidents who were better leaders as presidents, with varying skill sets and capabilities.  In the period 2011-2015 our board president's work experience was that as a Certified Public Accountant.  My work experience included president of a small "C" corporation, other management positions, and engineer in various capacities.   I'd worked in a leadership role with American multinational corporations and with their management as well as with companies and Nationals of Brazil, UK, Canada, France, Germany, Saudi Arabia, etc.

(c) 2021 N. Retzke

Financial Impact of Fees for Reserves

 

Unit Prices at BLMH  2009-2018
A total of 165 units sold, 2009 through July 2018
Boards 2019-2021 aren't as transparent.

Boards determine the annual budgets, including the Operations and Maintenance (O&M) budget as well as the allocation to the Replacement Fund (Reserves).  While I was a member of the board I created a series of spreadsheets. These were produced with the information management provided to the board each month.   

Looking at the charts I publish here may be considered a waste of time.  I know, this is "old stuff" and some on the board have argued that owners are already aware of it. One board member used that argument as the basis not to publish information in the Newsletter.  

In fact, 165 units were sold in the period 2009 to July, 2018.  I don't have the unit sales from August 2018 until October 2021 at my fingertips.   More than half of the units at BLMH have been sold since 2009.  Since 2015 about one-fourth of the units at BLMH have been sold.   

So, this is "new" to many on the board as well as to recent owners.  I doubt if the "old timers" on the board, those who lived here 20, 30 or more years, have spilled the beans to the others on the board. After all, for some information is power.

My point in saying the above, is that a substantial number of owners are unawares of the issues that transpired at BLMH prior to 2015.  They may think that the situation of the last six years is typical. It isn't. (Note 1). 

While I was a board member I created hundreds of spreadsheets and charts so the boards could make the best possible decisions. Some were also part of the annual meetings in special presentations to owners. 

I also concluded that for some board members it was an "out of sight, out of mind" situation.  Graphs can  consolidate and present reams of data with a chronological context. My experience has indicated that we have difficulty comprehending columns and rows of numbers. To really understand tabular data may requires better conceptual and critical thinking skills. Boards are no different than anyone else. Nor are boards good at retaining information.  I realize my limitations which is why I keep notes and build spreadsheets and charts and do additional data analysis. 

Nor do board member pass what they know on to the boards that follow them. Information in monthly packets seems to be quickly forgotten. I think sometimes that is deliberate.

I provided insights on this blog and when I was president of the association I presented to owners who attended the annual meeting. The chart above was part of a presentation to owners and was published here in September 2018.

The board is provided sales information, month by month, which is how I created the "Average Unit Prices" for 2009-2018, above.

A few additional annual budget inputs.
There weren't significant surpluses from 2000-2013.
Some data for 2019 is unknown, because the board didn't publish it
and provide it to all owners.

The chart above was useful for determining the financial health of owners, because it included the number of owners significantly delinquent and the amount owed.  The number of owners owing small amounts (less than $100) and those small amounts were ignored because that eliminated minor fines, etc. What remained was the number of owners significantly in arrears. 

A part of a monthly spreadsheet I prepared showing owner 
delinquencies, 2008-2018. I also presented to owners,
last time was during the September 2018 annual meeting.

The banking crisis occurred in 2008, and the "great recession" occurred between 2007 and 2009.  There were a significant number of foreclosures at the association and that continued for several years after the recession ended. I don't show the amount of "bad debt" which is the amounts never collected from owners. (Note 2, 3).

The boards were given all of the details by management via monthly packets of information. The packets were to be studied by board members and then discussed during open sessions, unless there was a specific prohibition as per the Illinois Condominium Act. I noted board members were inclined to only talk about some of the new that they felt was "good news".  

I used data provided by management to the board each month. I tracked the amount owed by owners and the number owning, month by month.  I provided a printout of a customized, updated spreadsheet to the board each month, in the period March, 2011 until September 12, 2018.  The sheet was useful when doing the budgets.  The unit prices, delinquencies and fee increases indicated the plight of owners.  

When serious delinquencies peaked at nearly 16%, it meant that one over in each building was seriously delinquent (40 8-unit and 4 4-unit).

The charts clearly illustrate the financial problems faced by owners in the period 2010-2014. Not all board members were empathetic to the plight of owners.

Using the information, on unit price declines, delinquencies and foreclosures I petitioned the board to tread carefully when raising fees to accommodate increases to the Replacement Fund (Reserves). Unit prices bottomed in 2012, but didn't recover until 2015. I don't think prices have returned to the peaks of 2006-2007.

So how did boards respond?  That was determined by leadership and board makeup.  In any board, some members coast and follow a leader. That may be the president, or not. As a board member I was obviously concerned about the financial impact of fee increases, etc. on owners.  Which is why I took the time to build spreadsheets, and issue specific charts to the board.  It didn't sway all board members.

The financial situation of owners is one of the reasons I worked double time to manage fee increases. I recall an association meeting when an owner came to the meeting and petitioned the board for some relief from the fee increases each year.  The owner said "I'm retired and living on fixed income." The president responded "We all are. We all have a similar problem. Simply because some of us aren't retired and work doesn't mean we can ask the boss for a raise every time we face a financial issue."  However, the board did work to reduce the fee increases because we saw the financial carnage inflicted upon owners in the management packet each month.  This was a motive force for the improved controls to better manage fee increase 2012-2018.  However, not all board members were empathetic and at least one was of the opinion their first responsibility was to the association. I argued that isn't what the Illinois Condominium Act states. That too didn't influence all board members. (Note 4).

In a seven member board, four must be aligned and vote together to pass a directive, etc. We have had boards with only six members and that can result in tie votes.  Such ties can only be broken when one board member switches sides in the vote, breaking the tie.  We have had board members who are committed first and foremost to their personal agenda. These board members attempt to build a coalition aligned with their agenda and beliefs. In the ugliest situations they will drive off other board members who aren't aligned with their position, so as to build a coalition. The association has lost some good board members that way. Owners are oblivious. 

If a tie vote occurs and a board member switches their vote and goes "to the other side", thereby breaking the tie, it may be treated as tantamount to treason.  On one occasion a board member decided to vote for a lower fee increase. The coalition leader who was pressing for a larger fee increase attempted to have the vote nullified.  Then attempted to get the rebel to declare it to be a "mistake" and change his/her vote.  The goal was to require a re-vote in which the larger fee increase would be passed. 

The Illinois Condominium Act states that Boards must consider the value of the units as well as the financial impact on owners when determining reserves via the annual budgets:

(765 ILCS 605/9) (from Ch. 30, par. 309)
    Sec. 9. Sharing of expenses - Lien for nonpayment.

2) All budgets adopted by a board of managers on or

after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

Notes:

1. Owners think that future fee increases will be less than 1.5% per year.  They are unaware of the consequences of some of the horrific water main breaks that occurred prior to 2015.  The recent newsletter mentioned a cost of $50,000 for one break, but in fact, a few years ago the association spent about $65,000 for the plumber plus asphalt replacement and lawn repairs as well as maintenance workers to clean up the mess.  Recent buyers aren't aware that owners described Lakecliffe Blvd as a "minefield" in 2013 or so.  They are unawares that as early as 2011 real estate prices were much lower, and one unit sold for about $60,000.  They are unawares that today, units are selling for 80% more in price than they were 9 years ago.    They are unawares that the City of Wheaton condemned all of the fireplaces on the property, and the struggle it was to get that addressed. It took more than four years, coordination of unit owners on the first and second floors, letters by me to the City to get better guidance, etc.  I suggest owners, and the board, are unprepared for the future at BLMH. There's an old expression "Those who are unaware of history are inclined to repeat it".  Even the old timers seem to have forgotten, or would prefer to forget, rather than be implicated by the earlier issues.  
2. A "contra" account was added to the 2013 annual budget and budgets thereafter until the budget of 2019 by a new board. The "contra" amount is a negative number which reduced the amount of budgeted income to the Association. This was considered necessary because in bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  The amount used by the Board in the budgets to owners was -$4,000, although significantly higher amounts were not recovered in a number of years. The annual audits reveal the actual amount of the contra amount as "Bad Debt".   For the year 2010 the "bad debt" per the audit was $6,575.  For the year 2012 it was $7,000. For the year 2013 it was $24,563. The most recent audit I have been able to get was for the year 2018. The bad debt that year was $3,943. 
3. Under the Illinois Condominium Property Act, if a unit is foreclosed and sold to a third part, the Association may be able to collect six (6) months of common expenses and court costs, provided certain steps are taken by the Association. Those steps include initiating its own collection action. If no action is taken and an account is or becomes delinquent, the association attorney recommended that the Board proceed with a forcible entry and detainer action, so that it may collect some funds, even if the foreclosure is completed. 
4. I left the board for a variety of reasons. One was because during my final year I decided the board makeup for the next year would comprised of passive-aggressives with increased covert, undermining  activity. I'd experienced that for a few years and as I am fond of saying "Owners get the boards they elect". So, I let the owners choose the new board.

(c) N. Retzke 2021

Replacement Fund Scenarios - Reserves

 

My crystal ball, which I put on the dais at Annual Meetings.
I told the owners that my crystal ball was imprecise,
but my spread sheets were better and more useful. 
The spread sheets were much better for owners than flying by the seat of the pants,
 and kicking the can down the road.

My Basic scenario for Roof and Driveway Replacement 2008
The chart indicates funding accumulation versus savings for expenditures
This is explained in the post.

Note: click on images to enlarge.  This post looks at what is required to create a reserve study. It looks at some of the scenarios I created to determine how to responsibly complete a large maintenance backlog at the association.  It also includes a snapshot of the financial situation facing the association in 2010.  I post this so current boards can avoid some of the problems and mistakes that occurred in the past. I also post it to provide current owners with some insights.  One of the most tired questions I was asked during my 8-year tenure on the board was: "How could this happen?" Well, one reason is because "Ignorance is bliss." There are methods to unconceal reality, but boards and owners must choose to use them.

In this post, because it includes a variety of scenarios, you will see a variety of numbers. In fact, as condition reports, surveys and actual repairs are made, we get better projections because we have real costs and real condition reports, rather than estimates to use. Board can choose to avoid Reserve Studies, or to use Reserve Studies as "worst case" scenarios or as "best case" scenarios.  They can choose to avoid getting periodic, formal updates, too. However, without accurate condition surveys and reports, any reserve study is at best a "guesstimate" and must be considered with a dose of skepticism. Personal agendas may interfere and I have known board members who always argued for the worst case scenario and the higher commensurate fees.

In fact, when good studies are made, with extensive and accurate condition surveys and reports, and maintenance backlogs are eliminated, the specter of huge unknowns diminishes. Certainty improves, but should be approached with humility.

Thanks to the boards prior to 2009, the association did, indeed face a "worst case" situation in 2009.  I never considered my time on the board as creating anything. My time was absorbed in remediation work, cleaning up the problems and messes created by others, particularly those earlier boards.

Reserve studies and Replacement Fund numbers are useful, up to a point. Boards must balance annual and reoccurring condition surveys, possible expenditures, funding plans and the finances of the owners.  That's what fiduciaries are supposed to do. (Note 3).

It seems do boards have difficulty making good decisions. For example, in the fall of 2009 the board discussed the situation about the driveways in the association. I'm going to quote my blog post of October 7, 2009:

".....there have been discussions during quite a few meetings regarding the state of driveways. Here is a summary, but not necessarily in the order of the actual events. The discussions included aspects of the how and why of performing these repairs. Unit owners attending the meetings brought some of the problems they were having to the attention of the board. They stated issues they faced last winter. There were a number of discussions over several meetings about ice, heaving driveways, heaving garage floors, standing water, water entering garages, methods and options for controlling run off and the flow of water from roofs, etc. The state of driveways and water was described as a "serious" problem by several members of the board. The board authorized the management company to complete a thorough survey of all driveways and rate them. At a subsequent meeting the manager reported on the driveways most in need and those had been ranked. Discussion at various meetings was interrupted by events I have reported in earlier posts. Eventually discussion at meetings resumed. Details of asphalt installation and concerns were stated regarding the unique nature of many of the driveways and even the uneven traffic patterns. Concern over weather interference, specifically the closing of asphalts plants in the fall and the need for urgency was pointed out. Finally, at a meeting the board discussed the results of inspections by our Architectural Director and our Landscaping Director.

The Architectural Director made a presentation and stated there were sufficient funds to do some, but not all of the driveways. He requested that seven (7) driveways be approved for repair and replacement in 2009. He made further statements regarding the criteria for selection.

The board voted and the motion was passed. There was a single NO vote cast. That vote was cast by our Communications Director."

The board that voted replaced most of an earlier, long running board in September 2008.

After being elected to the board

Upon being elected to the board September 2010, I was provided information that indicated that the driveways had no remaining useful life, and the roofs were nearing end of useful life and all roofs needed to be replaced within five years (by 2015).

The Reserve Study indicated that the costs to accomplish the above would require $3,046,000. All work was to be completed by 2016.  

Furthermore, there were serious problems with the condition of deteriorating streets. In 2011 the board was advised by an engineering firm hired to provide replacement fund guidance.  "We recommend that the Association plan for a phased total replacement of the asphalt streets and parking areas....concluding by 2022."  

As recommended, and based upon condition surveys and inspections the Boards 2014-2018 made major repairs and replacements to streets n a systematic, logical manner. The boards 2019-2021 decided not to continue this program.

In fact, there were flaws in the 2010 study.  For example, I determined that the square footage of driveways and adjacent asphalt excluding streets was understated.  I've included a small portion of my spreadsheet in this post and the post in the next link explains how I determined this and provides some budget numbers.

Click on:   Budgeting - Driveways and other Projects October 2010

Furthermore, the cost per square foot to replace was also understated. Bids obtained by the board in 2010 were 91.7% higher or nearly double that anticipated. 

Using the estimated replacement cost for roofs and adding the 2010 price to replace driveways resulted in a much higher estimated cost and Replacement Fund expenditures anticipated for 2010-2015.

• Revised total cost to replace roofs and driveways:  $3,651,000 to $3,752,000
• Cost to replace the remaining driveways not replaced in 2010:  $783,873.

The state of the Replacement Fund (reserves):

• Total amount in reserves as of December 31, 2010: about $1,400,000.
• Budgeted contribution to reserves for 2010: $330,000.
• Replacement Fund balance would be a large shortfall as of December 31, 2015 with many streets remaining to do: -$687,000. To raise this amount of money, an additional $137,400 each year for five years would have to be levied on owners.
• At the end of 2015, the amount in the replacement fund (reserves) would be zero, even if the annual budget allocation was increased via fee increases.

As a new board member, what would you have done in this situation? It was obvious there were serious budget issues. 

The numbers were so large that the boards of 2009-2011 decided to commission two independent reserve studies, by two firms.  The second study in 2011 concluded:

• Expenditure to replace identified items by 2018, excluding additional for streets: $4,337,000
• Expenditures including all streets, the period 2012-2022:  $5,737,000
• Much higher annual allocations to reserves was  necessary.

What would you do? Here were a few possibilities:

1. One possibility is to do what was necessary to come up with a viable plan, but also do everything possible to minimize further fee increases.  Now that's what we call an oxymoron.
2. Another possibility is to resign from the board and leave this for others to deal with.
3. I chose to do the work and come up with a viable plan. That plan would require a lot of work on the O&M budget to identify areas where expenditures could be reduced while maintaining or expanding services.  It would also require some serious planning about how to catch up with the maintenance backlog in a responsible manner. 

Communication was vital.  I expanded the content of the newsletters and made a special presentation to owners during an association meeting. The presentations became a regular event during the annual meetings. This was done because owners needed to know:

1. What the current situation was,
2. Board decisions to be made,
3. What the board was doing, 
4. What the future looked like,
5. This was a solvable problem, 
6. It would be difficult, 
7. There was a light at the end of this tunnel, and,
8. There was at least one on the board who would lead the way and get the job done. 
9. Video example of one of my annual meeting presentations: Click for President's 2016 Address

Several on the board of 2011 decided a solution was to replace management. In fact, FUPM, the management company had been replaced by a transfer of ownership, new company management, and we had a new manager. However, the real culprit was the earlier boards and the owners that elected them, year after year. Some board members deflected criticism to management, preferring to "throw management under the bus".

Of course, replacing the management company in 2011 was far too late, as was getting a reserve study done in 2010.  The numbers should have been done years earlier and used to make realistic annual allocations to the Replacement Fund (reserves). 

Boards made these past decisions, and boards today continue to make all of the financial and reserve based maintenance decisions at the Association.

Boards today do have several reserve studies to use as well as my data.  Three of the current board members were on the boards that commissioned those Reserve Studies. They had ample time on the board to study the findings. In 2011-2017 several additional studies and many, many board discussions and presentations were made to the boards, including two of the current board members. Considering board decisions 2019-2021 it would seem they are disinterested in using the studies or the notes they took (or should have taken). 

What no one has ever been able to explain to me, including some members of the boards prior to 2008, is why they never commissioned an outside Reserve Study.  I suspect there were those on the board who really didn't want to know how bad the situation really was, and that included some of their supporting owners.  I also suspect some board members wanted to keep fees low, so as to facilitate sales. Sales prices are determined by market conditions, but also by the total monthly cost of the mortgage, real estate taxes and fees.  The higher the fees, the greater the negative impact on sales as the total cost of ownership squeezes potential buyers out of the market for our units.  I made it a point to repeatedly inform boards after 2010 so individuals couldn't hide or feign unawareness. (See "What about the value of the units, and annual sales?" later in this post). 

In 2009-2010 the focus of a new board was driveways and the roofing project. For some idea of the magnitude of the backlog faced in the association in 2009, go to this link.  I took on the challenge in 2011:

Click on:   Projects - a snapshot of those completed 2011-2018

Reserve studies are a method and other methods must also be used

Reserve studies are a method and a tool available to boards. From 2002-2010, as an owner I did not have the information that is available to a board member.  However, I made my own studies with readily available information and my personal surveys of the condition of the property. 

I was prepared when elected to the board in September 2010, I had anticipated the "bad news" and I knew what was necessary. Bear in mind that I had absolutely nothing to do with the reserve study of 2010 and was unaware of the contents. 

During the period 2005-2008 boards weren't forthright about the issues and their plan to deal with the issues. Go read the newsletters for insights during that period.  (Note 4).

In fact, in 2007-2008 management of FUPM addressed owners who attended an association meeting.  Owners had been asking why there was no formal reserve study and were pushing for one.  The owner of the management company addressed the association owners and stated among other things that "A reserve study could be opening Pandora's Box".

In an earlier post "The Replacement Fund and Owner Fees" I delve into the fees, the condition of the Replacement Fund and some aspects of the maintenance backlog. (Note 1).  In this post I provide a snapshot of what was determined in a reserve study.

The Replacement fund has this definition:

• Replacement Fund [Reserves].  "This fund is used to accumulate financial resources designated for future major repairs and replacements of the elements the Association has a duty to maintain."

Owner fees are the source of the money for the Replacement Fund and the Operating & Maintenance budgets.  Boards are tasked with determining and levying the fees on owners for both the Replacement Fund and the Operations and Maintenance (O&M) budget. The Illinois Condominium Act (ILCA) empowers a board of fiduciaries to to so. (Note 2, 3).

A Reserve Study is useful, but it is only a suggested plan, and these plans can frequently change. A reserve study may be incomplete and boards need to do a lot of additional research in order to be fully and properly informed.  Property conditions change annually and frequent surveys, inspections and reports must be made. Deteriorating infrastructure such as Dover and Plymouth must be closely monitored. 

Boards should use the Reserve Study as one of multiple tools and sources at their disposal when making decisions.  Rigidly following a Reserve Study schedule does a disservice to owners because:

1. The plan is an estimate of useful life of the elements on the property,
2. The Reserve study is only as good as the information used to create the plan.
3. All plans are fallible and contain inconsistencies and errors,
4. There are other things to be considered, including the owners. 
5. Ultimately, no matter the circumstances the property must be maintained.  Painting the buildings is not sufficient.

Prior to making an offer to purchase a unit in 2001 I reviewed certain Association financial documents.  I gave these to my accountant and asked his opinion.  We independently concluded that the Replacement Fund was insufficient.  G and I also interviewed owners we met while walking the property.  They had issues with recent fee increases. I decided to create a series of spreadsheets to monitor the finances of the association. Using those spreadsheets I created charts as visual aids.  I continued to do so while on the board and thereafter.

During my board tenure, I ran a variety of scenarios and discussed with the board. That's one of the methods used to control fee increases. Operations and Maintenance (O&M) Budgets and reserve expenditures were controlled using actual condition surveys, etc. 

One method was implementing cost controls on the  O&M budget.  Cost centers where improvements could be made were identified and plans implemented to maintain or improve services while controlling costs.  Doing so will manage fees extracted from owners, and may create budget surpluses.

As an example, the painting cycle was increased from five years to six years, reducing the annual painting budget.  Furthermore, instead of painting from 8 to 12 or more buildings each year, the number painted was the same each year.  The association has 40 large and four small buildings, the small are the equivalent of two large. If we treat the two of the small buildings as a single large building, then seven such building would be painted each year in 6-year cycle. The painter wasn't pleased with this and neither was a long serving board member: "We never did it that way".  The board voted for this change, but by 2018 the proposals were reverting to the old method.  Another reason I left the board. "You can't teach an old dog new tricks" is an expression and it applies to some people, too.

Creating my own reserve studies 2003-2008

In the most basic form, a Reserve Study can be created by anyone.  The difficulty lies in creating accurate studies that do reflect reality. The purpose of the study is to determine the expenditures required each year and the fees required to fund those expenditures so as to maintain the various elements on the property. I had the necessary skills and background. Here is an outline of what is needed to create a study:

1. A determination of the useful life of each of the elements on the property.  Engineers, architects and specialized contractors have this knowledge.  Elements include roofs, driveways, garage floors, streams, streets, lamp posts, water mains, etc. However, the materials, and methods of construction as well as the use of the elements are to be considered. These factors when combined determine the useful life.  Useful life is sometimes estimated as a range of years. For example, a roof made of basic 3-tab asphalt shingles may have a useful life of 15-20 years, depending upon the environment, underlayment, etc.  Higher end and more costly architectural shingles and roofing systems may have a useful life of 24-30 years.  
2. The age of the various elements on the property must be known.  This includes roofs, driveways, garage floors, streams, streets, lamp posts, water mains, etc.
3. A site review and condition analysis is made to determines the actual condition of each of the elements.
4. Using Items 1, 2  and 3 above, an estimate is made of the remaining useful life of the various elements on the property. The elements includes roofs, driveways, garage floors, streams, streets, curbs, walks, entries, lamp posts, water mains, etc.
5. An estimate is required of the annual cost to maintain each element, and an estimate of the cost to replace at end of life. This includes roofing replacement, driveway asphalt replacement, curb repairs and replacement, etc.  It is prudent for boards to consider annual cost to maintain when determining the actual time to replace. There is a point at which risks of failure and annual maintenance costs are excessive. Someone has to monitor and make that determination.
6. A calendar is constructed, year by year which determines a schedule for the replacement of each element over a period of years. A long term calendar has a span of 30 or 40 years. 
7. The repair and replacement plan is accomplished in groups of elements according to the schedule.  The initial schedule and grouping is called a phase. For example, the initial cycle of driveway replacement may be a plan to replace 1/8 of the driveways in a single year, let's say in 2009, and to repeat for for 8 consecutive years until all driveways are replaced in. Therefore all driveways will have been replaced in a single 8-year period. Subsequent cycles may be different.  For example, with all driveways replaced and in "good" to "excellent" condition, they will be allowed to age for 15 years with minor repairs and sealcoating, until the next cycle begins in the 16th year after the previous replacement. That next cycle may use a future plan to replace 1/10th of the driveways each year.
8. Using the schedule above, an Expenditure plan is determined. This indicates the monies that will be spent to replace each element at end of useful life. The expenditure plan will indicate the annual amount for each element of each year of the calendar.  Summing those annual amounts will give a total expenditure necessary each year, according to the plan.  
9. A Funding Plan is created to determine the costs each year required to pay for the Expenditure Plan. The funding plan will include an amount required each year of the calendar.
10. A Fee Schedule is created to allocate sufficient fees to the Funding Plan. 
11. Scenarios are constructed to include end of life deadlines, determine annual expenditures and the fees to be extracted each year from owners. The scenarios provide a range of possible solutions and of course, boards must select solutions that keep fees reasonable. The board then selects a scenario comprised of all of the elements that meets the criteria.
12. The entire Expenditure Plan is added to projected (estimated)  Operations and Maintenance (O&M) budgets. Doing so determines the total fees required from owners. 
13. With all of the above information above, boards then revise the scenarios and plans to accommodate the financial ability of owners while maintaining the entire property.  The calendar or schedule of the Reserve Study is a guide for the board.  Boards must establish priorities. A failure to do so will result in a defective implementation of the plan. For example, various reserve studies have included complete replacement of all of the exterior panels on the buildings, entire replacement of entries, etc.  Boards 2010-2018 continued maintenance efforts on those elements as an alternative to replacement.  If a board chooses otherwise, an additional 
14. should be reviewed annually and updated frequently based upon the current realities.

As noted above, all similar elements are not replaced simultaneously. To control expenditures, a variety of techniques including repairs are used to stagger replacements, based upon age and condition. 

Condition surveys are also a determination of when replacement is necessary.  For example, the association has 84 driveways.  If we assume each driveway has a minimum useful life of 15 years, then all driveways may be replaced at end of useful life.  In fact, some driveways may require replacement in less than 15 years, while others may provide good service for 20 years. The board should use a variety of methods to maintain the various elements of the property and stagger replacements so as to control expenditures each year, while providing good service and maintaining the property.

Some boards prior to 2009 "kicked the can" down the road and made the situation even worse. 

Driveways and Roofs - an example

Upon election to the board in September 2010 I began researching what was known about the reserve study, the replacement fund and anticipated expenditures.  As I stated at the beginning of this post, it became apparent that replacement of all driveways was recommended "immediately" and all roofs were to be replaced within five years.

It also became apparent that the association faced a financial crisis.  We were in the "great recession" of 2007-2010, with mounting delinquencies:

• Cost to replace roofs and driveways:  $3,651,000 to $3,752,000.
• Amount in the replacement fund: Insufficient.

Driveways

The board replaced seven driveways in 2010.  Upon my being elected one owner asked me ""What percentage driveways, based on the total area of driveways, has been completed in 2010?" This question was prompted by the information presented by the board at a meeting in which it was stated that "53.5% of paving reserves was spent on driveways in 2010."

So, how much did the association actually spend to do seven driveways? We spent 53.57% of the paving reserves on 14.59% of the driveways,  as based on area of all driveways and the area of the driveways replaced in the 2010 contract. 

Yes, there were serious budget problems.  The replacement costs exceeded the funds available. 

Shortly after joining the board in September 2010 I conducted a detailed survey of all of the driveways.  The association has 84 driveways and adjacent asphalt, ranging in size from about 1,100 square feet to 3,000 square feet.   Here's a portion of my survey spreadsheet from October, 2010. I determined sizes using my 50 ft. tape measure as well as aerial photographs:

Portion of my Driveway Survey spreadsheet, October 2010

Using the above spreadsheet, and costs from 2010 proposals, I was able to determine the replacement costs of all of the driveways, on a per square foot basis, using 2010 dollars.  However, what was unknown was the actual amount of asphalt to be removed, precise amount of underlayment to be replaced, and so on:

• Replacement cost, at 2010 prices = $6.71 per square foot.
• Cost per ton, CA6 Road rock (underlayment).
• Cost per ton, removal of unsuitable materials.
• Cost per unit, asphalt, installed.

Using my spreadsheets, and actual costs 2010, I determined that total replacement of all driveways would have a cost in 2010 dollars of between $800,000 and $900,000.  

Of course, not all driveways would be replaced in 2010.  I want to note that it is a mistake to create annual budgets using average numbers.  With such a large difference in square footage, there is a corresponding large difference in replacement cost of individual driveways. I created my spreadsheet to get a better idea of the costs each year when discussing which driveways to replace. A goal was smoothing of the annual budgets. When preparing recommendations the board was advised of the quantity of driveways in "Poor", "Fair", "Good" and "New" condition.  Using a numeric rating system, it was possible to create a further distinction of any driveway somewhere between "poor" and "fair". The boards were advised of the estimated costs to replace all "poorly" rated driveways during discussions.  Similarly the estimated costs of "fair" driveways were discussed.  The board made decisions to maintain the property and knew the estimated costs to do so, year by year. The board was enabled to make reasonable, informed annual decisions in these matters. While the roofing project was underway and garage floors were rated, some driveways were delayed a year to avoid contractor conflicts. However, all "poor" driveways were addressed quickly while I was Architecture Director and/or Maintenance Director. I usually had two responsible positions each year. 

Prior to 2010 the driveway replacements had been deferred.  The board elected in September 2008 scheduled seven to be replaced in 2009.  Due to circumstances this did not happen. So, in 2010 fourteen driveways were scheduled, but in total fifteen were replaced. Nearly all driveways were repaired or replaced in 2010-2018. 

In August 2010 a Reserve Study said this about the driveways:

"Deterioration of the asphalt driveway surfaces has progressed to the extent that partial replacement and/or complete overlayment of the pavement will be required to restore the integrity of the pavement. Installation of pavement patches and surface applied repairs must be performed in a manner which integrates these repairs into the existing pavement system and does not negatively impact surrounding areas or cause accelerated deterioration of the pavement due to moisture infiltration into open "seams" around applied patches / patch areas. " As for the remaining useful life of the driveways, it was stated: "0 years" (none remaining, immediate replacement required).

Roofs

As of 2008 one roof at 1775-1777 Gloucester had been replaced. The association has 44 roofs; 40 large and 4 small (half size).  In 2009 two additional roofs were replaced.  In 2010 four were scheduled for replacement.  The roofs scheduled in 2009-2010 are per official Association Newsletters.  The boards of 2019-2021 have been less forthcoming with owners about their plans. For example, street repairs had not even been mentioned. (Studies  after 2013 indicated that all streets should be completely replaced by December 2022).

I was involved in the replacement of 39 roofs. In 2011 we faced 37 remaining roofs nearing end of useful life or at end of life. 

Driveway replacement Schedule 2009-2010, my spreadsheet

Roofing Replacement Schedule per Newsletters 2009-2010, my spreadsheet.
This does not include 1775-1777 Gloucester, replaced 2003-2004.

Two Roofing and Driveway Scenarios - 2008

As an Owner I constructed a number of scenarios prior to achieving a board position. My ability to do this was limited by the information available about the current condition of various elements.  My exploratory conversations with board members were limited and were not helpful to me. 

However, the condition of driveways was visible to anyone who looked and carried a clip board and kept notes.  The roofs were also easy.  I couldn't see them from above, but edges were visible and I also knew their age and useful life.  For example, the association was constructed in 1978.  In 2008 the oldest roofs were 30 years of age.  The roofs appeared to be constructed of two layers of basic Asphalt 3 Tab Shingles.  The useful life of each layer is about 18-20 years.  In other words, some roofs would be at end of life by 2014.  

Photos I took confirmed there were some serious problems with the roofs:

Examples of Damaged Roofs and Missing Shingles
 2008-2009 "Visible to the naked eye"

Two Charts from Replacement Fund (Reserve) Scenarios - 2008

In 2008 I created a study with several scenarios. I was not on the board at the time.  I'm including the charts I made which indicated the dollar amounts necessary to replace the Roofs and Driveways.  

In these charts, there are some background assumptions:

• Two roofing costs. I used $40,000 and $45,000 each. This did not include attic insulation nor did it include drainage improvements required by the relocation of downspouts to the building entries. Visit 1775-1777 Gloucester for the drainage improvement made for that first roof, completed 2003-2004.  In 2011 the association was experiencing flooding at entries and I had a backlog of such improvements to do because the boards of 2006-2010 didn't include that work. 
• Driveway average costs of $6,000 each. In fact, there are a range of sizes at BLMH. I made later, more sophisticated analysis using aerial views and actual measurements. 
• In 2007 the board had allocated $263,915 in fees to the entire Replacement Fund. This included all elements of the association such as driveways, streets. roofs, streams, concrete, lighting, carpets, etc.
• I used an annual allocation addition of $330,000 via fees.  That was unrealistic, but seemed to be where the boards of 2001-2008 was going.  
• The amount in the Replacement Fund in fall 2008 was about $1,000,000 according to information revealed by the board and official documents.
• This was a "best case" scenario looking at the condition of the Replacement Fund.  The approach used the entire Replacement Fund to replace the roofs and repair or replace driveways. To accomplish this in a reasonable time little or no reserve funds would be available for other elements prior to December 31, 2013.  This was an unrealistic approach, but this seemed to be the direction of the boards prior to 2008.
• The analysis and charts indicated that sufficient funds might be collected and accumulated by year end 2013, if no other elements were replaced or repaired. However, that was a "best case" scenario. Thereafter, a surplus might be created and available for repairs and replacement of other replacement fund elements.  Of course, the magnitude of the backlog could absorb all fees collected for the Replacement Fund for a number of additional years. (I flagged Lakecliffe street as a serious problem and it was failing).
• From January 1, 2013 to December 31, 2020 these scenarios could increase the Replacement Fund balance. If all roofs and driveway repairs were completed by December 31, 2013 the Replacement Fund balance would be nearly $0 as of 12/31/2013.
• Replacement Fund surpluses would accrue commencing January 1, 2014, but might be spent on other maintenance issues as soon as collected.  If unspent, these scenarios could grow the Replacement Fund to $2,378,337 or $2,588,000 as of December 31, 2020. However, other repairs and replacements throughout the property would require all of these funds, and more.  In other words, all Replacement Funds collected would be spent on streets, water mains, lighting, carpeting, decks, concrete patios and walks, etc.  
• It would take further analysis to determine the costs to replace Lakecliffe, garage floors, repair streams, ponds and 30 year old pump pits, replace common area decks and bridges, large outdoor lighting poles, the gazebo, concrete patios, unit decks, and accommodate garage floor replacements, etc. My list and surveys was extensive. Which is why I categorized my charts for roofs and driveways as "best case scenario".  I estimated 8-10 years to catch up with the backlog and address other elements nearing end of life. 

Here are the scenarios depicted as charts:

Scenario 2. Initial Replacement Fund balance $1,020,000
Annual fees of $330,000 added each year.
Projects commence in 2010, 11 years of accumulation indicated.
Fees accrued finally exceed expenditures in 2013.
Expenditures of $2,604,000 required for these projects.
Reserve balance $2,378,337 on 12/31/2020 if no other capital spending.

Scenario 1. Initial Replacement Fund balance $1,020,000
Annual fees of $330,000 added each year.
Projects commence 2010, 11 years of accumulation indicated.
Fees accrued finally exceed expenditures in 2013.
Expenditures of $2,394,000 required for these projects.
Reserve balance $2,588,000 on 12/31/2020 if no other capital spending.

A Range of Scenarios were created using Reserve Studies 2010 to 2015

In 2010 the board commissioned a formal reserve study.  That study indicated there were problems and confirmed my earlier, personal studies. Using that 2010 study I created a number of spreadsheets and using these I created scenarios to present to the board; I had been elected to the board in late September 2010.

I discussed my plans with the board and on October 12, 2010 I discussed some of the details of the roofing project with our manager. He suggested that I create a budget to complete the roofing project over a period of five years. I did that and also expanded it to future phases until the year 2041.

I also created cash-flow projections.  My final spreadsheet was created in December 2017 for the 2018 calendar year.  It included cash and CDs on hand, the fees collected, O&M expenditures and the anticipated project expenditures for 2018.   It indicated the balances of cash plus CDs month-by-month. This cash-flow spreadsheet was instrumental in making the decision to complete major stream repairs in 2018.   I ended my board commitment at the end of September 2018.

Here is a snapshot from a scenario I created in 2015-2016.  It provides a chart of the possible reserve expenditures over a 10-year period, 2015-2025.  This was created from a series of spreadsheets I made using previous reserve study data. I then printed and pasted sheets together for board discussion during open Association meetings. The board made recommendations, the sheets were modified and I created a series of charts.  This chart was presented to owners during the September, 2016 Annual Association meeting, as part of a 20 minute in-depth presentation:

Anticipated Reserve Expenditures 2016-2025
The "unallocated" category was for landscaping, trees and miscellaneous.
The sheet actually had 40 rows of various elements of the property
If the board did turn the mains over to the city, a portion of
those funds would be available for other areas.
 In 2016 some on the board were obstructionists.

Before building the graph above the board had to approve a realistic and attainable Expenditure Plan for 30 years.  This was balanced against a Funding Plan for that same period.  These plans were adjusted and a "final" plan agreed upon by the board. However, because all plans are imprecise and we cannot predict the future, honest boards need humility.   Keep in mind that good boards need the most accurate information.  That's why in 2010 I began thorough surveys of all manner of the infrastructure at the Association.  Those surveys and reports did facilitate adjustments to the annual expenditure plans.  In some cases work was accelerated.  I decided to tackle the more difficult projects.  The president, maintenance and architecture directors and the treasurer agreed upon priorities. Some aspects of the easy projects such as window sill replacement were given to future boards. My "Guidance" published in the Newsletter of August-September 2018 was a summary of some outstanding plans, discussed at length with the boards until my departure:

Click For:  Newsletters 2018 and then click on "2018 Guidance Insert"

Here's a portion of a spread sheet used to create the chart above.  The sheet had more than 40 categories of elements on the property. The shades of yellow indicate adjustments made by boards 2015-2016:

You will notice a tab in the spreadsheet "Water Sewer" because I was 
delving deeper into costs at BLMH and was actively working
on transferring the mains to the City of Wheaton

Boards may delay or accelerate repairs and maintenance

An example is the signage at the entries.  The plan above included an expenditure in 2025 for signs at entries.  The board of 2019-2021 decided to accelerate this and upgraded the sign at the north entrance in 2021.  This is incomplete at this time and the board stated in the most recent newsletter it will be completed in 2022.

Another example is streets. The plan above recognized issues with streets on the property.  In fact tests had been made by an engineering firm to determine the thickness of the asphalt. The plan depicted above anticipated an expenditure of up to $125,000 for major repairs.  Dover, Plymouth and Gloucester would be repaired in phases during the period 2018-2021.  This was considered essential to avoid damage to the base of the street and provide good service to owners.  Such damage would require an even more expensive repair.  An additional $50,000 was anticipated to be required in 2023 to complete this phase of repairs, which would include Harrow Ct. and Thames.

The boards of 2019-2021 decided not to do this work during that calendar period. 

Incomplete south entry signage replacement to be completed in 2022.
The board of 2021 decided to make this a priority.

Roofing Replacement Example

The cost of the roofing replacement projects is an example. There were a range of cost projections for replacement of the roofs.  Actual costs were probably higher than the projections because the relocated downspouts required a lot of drainage work to avoid flooding building entries, damaging entry walks and wingwalls. To my knowledge boards prior to 2011 did not include the cost of the drainage work in their planning and budgets.

One reserve study indicated this was the situation facing the board of 2010 and the roofing project:

• Projected Reserve shortfall over the next 5 years:   more than $1,130,000
• Projected Reserve Balance December 31, 2015:  $0 (all reserves spent by 2016)
• Reserve Funds required within 5 years, excluding streams, water mains, trees, garage floors: $4,185,000.
• Total of the Replacement Fund available (Reserves):  $1,550,000.
• Possible additional reserve collections within 5 years: $1,500,000.
• Roofs requiring replacement: 43
• Roofing Project costs, excluding drainage: $2,850,000.

Here's what was also noted in the information about the roofs in the reports:

• Condition: Fair. Weathering and deterioration of the exposed shingles has progressed to the extent that the roof system (43 of 44 roofs) is approaching the end of its useful life. 
• Useful Life: 15 to 20 years when new.
• Remaining Life of roofs on the property: a range of from - 3 years (condition of some roofs 3 years beyond useful, immediate replacement required) to others with 7 years remaining (maximum life).

My initial graphs created in fall, 2010

Upon being elected in September 2010 I was able to access all of the financial data of the association. I created a series of spreadsheets using information from a Reserve Study.  That study had some problems and didn't include the garage floors. In fact, all studies are "guesstimates" and it is prudent to supplement with additional surveys and data, which is what I did in fall of 2010. I created a lot of spreadsheets and reports.  I spent more than 1000 hours in that first 12 months do do this, conduct the many surveys on the property to get detailed condition reports, and so on.

Roofing Program - My Partial Spreadsheet 2010
Not shown: Reserves accumulated 2010-2041 and annual expenditures,
Those amounts are in another row of cells.

Roofing Program - My Expenditures Spreadsheet

My "plan" deviated in some significant ways and was adapted by the board.  Here are a few graphs presented to the board and to owners who attended meetings. I provide these as examples:

2010 - Driveway plan. With a large backlog of driveways in "poor" and
"fair" condition a plan was necessary. (c) N. Retzke 2010-2021

2010 - Possible Roofing Project. I was able to determine the age of the roofs and
there was ample evidence that these were nearing end of life. (c) N. Retzke 2010-2021

2010 - Possible project cash flow. This began with initial replacement fund
amount, added an amount collected each year via owner fees using the approach of the boards and then deducted the amount spent each year on a variety of projects
flagged as requiring attention from "immediate" to within 5-years.
(c) N. Retzke 2010-2021
.

Replacement Fund (reserves) Allocations - 2002-2011

I created a series of spreadsheets to monitor changes in the O&M budgets. I'll post a few of those later.

One thing that boards had to do to achieve the annual Reserve Expenditures per the studies 2010-2015 was to increase the annual allocation to the Replacement Fund:

Allocation of owner fees to the Replacement Fund, 2002-2018

Owner fees did increase 2008-2014. Fee increases were unavoidable to increase the annual allocation to the Replacement Fund (reserves):

The average owner's monthly fees, 2008-2014

Annual fee increases continued to moderate:

The average owner's monthly fees, 2008-2014

Fees continued to moderate. I left the board prior to the budget for 2019:

The average owner's monthly fees, 2008-2018

Considering the amount work necessary in the association from 2010 through 2018, the actual fee increases don't look too bad, considering what the boards from 2001 to 2009 did:

The increases in the average owner's fees actually moderated after 2008

A sampling of additional graphs created in 2015

The expenditure schedule balanced with the funding plan will produce a possible Replacement Fund balance each year. If boards delay expenditures then an artificial Replacement Fund balance will be created.  Why? Because a backlog of maintenance and replacement issues will be created. 

I created a series of spreadsheets and graphs to illustrate the alternatives and the consequences or results.

In this graph, the reserve expenditures decrease as the roofing project.
the replacement of Lakecliffe and streams are repaired

In this graph, reserve balances are compared using 
two different funding and expenditure scenarios.
Other scenarios filled the gap.

What about the value of the units, and annual sales?

One of the things that boards are to take into consideration when determining budgets and setting fees is  "the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves;"(Note 3).

I did create a series of spreadsheets to illustrate this, published them and provided to the boards.  In fact, management did provide unit sales information each month to the board. I assume it continues to do so to this very day.  All boards were aware of the situation.

Average unit selling prices, 2009-2018

Unit sales at BLMH were brisk until 2009 and only recovered to pre-financial crisis levels in 2016:

• Units sold 2004: 21
• 2005: 29
• 2006: 23
• 2007: 26
• 2008: 18
• 2009: 11
• 2010: 9
• 2011: 16
• 2012: 10
• 2013: 12
• 2014: 16
• 2015: 17
• 2016: 30
• 2017: 25

One owner who purchased before the 2007 financial crisis and recession recently complained that he is still "under water" even with the recent real estate price increases in the area, including at BLMH. 

Notes:

1. Click for the link to the earlier post: the-replacement-fund-and-owner-fees.html

2. The Illinois Condominium Act (ILCA) does have stipulations about reserves.  They are to be used "for capital expenditures and deferred maintenance for repair or replacement of the common elements." In other words, the replacement fund should not be used for whimsical, capricious projects that embellish and expand the maintenance costs and owner fees, or move beyond the existing architecture. Maintenance and embellishment are very different.  The board is only empowered to maintain the association. 

3. The Illinois Condominium Act provides stipulations to boards regarding budgets and reserves.  The ILCA includes considerations to be give by boards when considering budgets. Regarding the Replacement Fund the ILCA stipulates that the board determined reserves are to be reasonable and the board is to consider "(iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing."  (emphasis mine):

 (765 ILCS 605/9) (from Ch. 30, par. 309)
    Sec. 9. Sharing of expenses - Lien for nonpayment.

2) All budgets adopted by a board of managers on or

after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

4. Newsletters. Recent boards have removed the BLMH.org website and the links to the earlier Newsletters contained in that website.  I did post links to most of the newsletters 2008-2018 in this blog.  Currently, owners can access a limited number of recent newsletters via the Association online portal. 

(C) 2021 N. Retzke