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

The Replacement Fund and Owner Fees

 

Recent years - Leadership makes a difference

Note: click on images to enlarge.  This post will look at the impact of board leadership on owner fees, as well as the disproportionate share of fee increases attributable to funding the Replacement Fund. It will delve into the background of the annual fee increases at BLMH.  There are extensive notes in this post, which include supplemental data about fees, annual fee increases, annual Replacement Fund changes, various scenarios and differing approaches, etc. My approach while a board member was to determine overall performance, which necessitated substantial financial review. What I call "number crunching".  That approach has substantial benefit to owners. 

There have been several reserve studies completed since 2010 and each provides a different view for boards to consider. Scenarios include billing owners more than $4 million ($12,000 per owner) for long term replacement of water mains. (Note 1 ). Two of the current board members were present during all of the board discussions about this, which occurred in 2011-2018. In other words, they are aware of the costs and the fees required from owners if the association retains control of the water mains.  I would assume they passed that knowledge on to others who were with them on the boards of 2019-2021.

Definitions (per audit statements):  

• Operating Fund [Operations & Maintenance].  This fund is used to account for financial resources available for the general operations of the Association.
• 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. 
• Member Assessments.  Association members [unit owners] are subject to monthly assessments to provide funds for the Association's operating expenses, future capital acquisitions, and major repairs and replacements.  Assessments receivable at the balance sheet date represent fees due from unit owners.  The Association's policy is to retain legal counsel and place liens on the properties of homeowners whos assessment are significantly delinquent. Any excess assessments at year end are retained by the association for use in the succeeding year. (emphasis mine).

Using the 2011 study, over a 10 year period using reserve study data for 2013-2022, $4,160,000 was projected as a possible contribution to the replacement fund. That's $416,000 per year. Obviously, if a board allocated $416,000 per year to the replacement fund the projections would be met.  However, that study included a plan to increase funding annually peaking at $496,000, and then decrease it by 38% in 2018.

Boards from 2011-2018 instead ran additional scenarios and studies and chose a path for stability. They avoided the gyrations in funding and fees had that study been followed.  In doing so, the possible negative consequences upon the finances of owners was also avoided.  Those boards designed fees to allocate $408,865 each year to the replacement fund. From 2014-2018 an additional $381,000 may have been added to the replacement fund via O&M surpluses.

Including the projected surpluses above, these boards allocated fees of $454,100 each year to the replacement fund over the period 2011-2018.  This greatly exceeds the $416,000 recommended by the study cited above.  Furthermore, this was accomplished with modest annual fee increases of less than 1% per year while accomplishing all identified maintenance and capital projects.

In fact, according to the audited statements of the association the Replacement Fund balance was $1,057,921. The O&M Fund had a positive balance of $159,163 on December 31, 2017.  The replacement fund balance was prior to stream repairs and other capital maintenance completed in 2018.  

Factors included in the financial planning by the boards 2010-2018 included:

• Annual fees required to fund the Replacement Fund.
• Annual expenditures required to perform identified maintenance in a timely manner via the Reserve Studies and my supplemental reports.
• Extensive and thorough annual on-site condition surveys conducted by management and I, and also sometimes accompanied by the maintenance director.
• From time to time specific guidance would be sought from engineers and specialized contractors.
• Replacement fund balances, year by year.
• Future long term requirements.
• In 2014-2015 the board began an endeavor to turn over the water mains to the City of Wheaton.

In fact, professionally prepared studies provided a wide range of possibilities. For example, there were several scenarios prepared by several professional firms. Looking at each of these suggested the following would occur in the year 2016:

• A reserve (Replacement Fund) balance of $984,290 and contribution of  $406,900 to the fund in that year.
• A reserve balance of $75,670  and contribution of  $484,000 to the fund in that year.
• A reserve balance of $0 and a contribution of $464,799 to the fund in that year.

The Boards of 2010-2018 reviewed all of these studies and many scenarios, and generated even more scenarios.  Those boards discussed with other experts including management and maintenance, suggested improvements and alternative approaches, provided additional information to the professionals who made the studies and proceeded with a responsible plan, acting on behalf of all owners in the board capacity as fiduciaries.

That is how, in part, by separating replacement fund issues from O&M budgets the extraordinary became a reality at BLMH.  It wasn't easy, and it did require an investment of time, by me, of as much as 1,000 hours in a single 12-month period. It required a substantial portion of about 10 years of my life. That included several years of preparation and 8 years on the board.

A number of scenarios were made over a 9 year period. In 2011-2014 scenarios were updated and one selected.  The next graph was made 8 years ago and is that scenario.  It is interesting how the present correlates.  This chart does provide some insight into the strategies followed by the board in the period 2011-2018.  I'll post additional charts in the near future.  The current reality does deviate in several ways (click on the image to enlarge):

• The current Replacement Fund balance is about $1,100,000.  My chart indicates a possible 2020 year end balance of about $1,050,000 and a 2021 year end balance of about $1,341,000. 
• The Operating & Maintenance budget for 2020 was $981,654 according to the data submitted to owners. The chart projected a possible 2020 O&M budget of  $941,385.
• The fees assessed per the budget of 2020 were $1,374,692.  The scenario below projected fees of $1,341,385 for that year. 
• The peak in Replacement Fund spending was anticipated because of the push to complete the Roofing Project before costly failures occurred. It also included the replacement of Lakecliffe as well as other expenditures for driveways, garage floors, etc.  Actual annual spending probably did not reach that peak value.  The roofing project was anticipated to complete somewhere in 2016-2017. 
• Note that the scenario below does not include any surpluses.  In fact, budget surpluses did occur in the period depicted in this chart. The boards used projected and actual budget surpluses as part of the budget planning process each year until September 2018. In November, 2018 the board of 2019 did not and chose instead to increase fees. In fact the audit revealed that the O&M surplus for 2018 was $85,163.
• The spreadsheet behind this chart spanned a 30 year period.  These spreadsheets were adjusted annually by the boards of 2011-2018 to reflect the current reality. These sheets were tools used by the boards. There were many additional spreadsheets created.
• It is unrealistic to assume that there will be fee increases of 0% each year.  In fact, you will see in the chart below that the plan included a fee increase each year.  However, budget surpluses if they occur can supplant the requirement or exceed the benefits of modest fee increases. With my departure from the board, the efforts to implement improved cost controls ceased.  Those controls are what generated the surpluses with no tricks or alterations to maintenance.  

Example: One scenario, from planning in 2014
This GRAPH created from one of my spreadsheets includes the 
entire Funding Plan, Expenditures, Reserves and Fees.
It is merely a snapshot of a larger scenario 2014-2041

The actual fee increases

These were the actual fees increases enacted by boards prior to 2009 who repeatedly promoted 3% annual fee increases to the owners:

Year - Percent Fee Increase

2002 +6.0% increase
2004 +6.5%
2005 +5.8%
2006 +5.4%
2007 +6.0%
2008 +7.9%

The condition of the Replacement Fund was the elephant in the room

When I put in a bid to purchase my unit in 2001, my accountant flagged the amount of the Replacement Fund as a serious issue.  I agreed that reserves were too low. G and I discussed this, and we decided to plan for significant fee increase.  In fact, fees have nearly doubled since 2001; that's not tied to inflation. The numbers in the budgets reveal that the increases were largely because of Replacement Fund inadequacies.

Here are the actual Replacement Fund Categories and Amounts, according to the 2004 budget:

Paving $75,000
Lake Restoration $15,000
Carpet $5,000
Roof $50,000
Concrete $20,000
Masonry $3,000
Total allocated from fees = $168,000

In 2004 the board put aside an amount for roofs equivalent to replacing one roof per year.  Yet, they had already begun the roofing project, and had little in the Replacement fund for roofs. I concluded their publicized plan could require 40 years to replace the roofs. Not a good plan, considering the remaining useful life and all roofs in the association should be replaced no later than 13 years in the future, in 2017.  Owners really weren't paying attention and were accepting the assurances of the board. Not much different than 2019-2021.

Here are the actual Replacement Fund Categories and Amounts, according to the 2008 budget:

Paving $60,000
Lake Restoration $15,000
Carpet $5,000
Roof $160,000
Concrete $35,000
Masonry $25,000
Total allocated from fees = $300,000

Here are some reported replacement fund budget allocations using budget information provided to owners by the association. A significant board change was made in 2008 and I joined the board in 2010. 

2001 $57,181 allocated that year

2002 $148,108

2003 $156,000

2004 $168,000

2005 $185,000

2006  $240,000

2007 $263,915

2008 $300,000

Over the above 8 year period, $1,518.214 was allocated to the entire replacement fund, barely sufficient to cover the cost of the roofing project initiated by the board in 2003. One way to accomplish the roofing project with the funds available was to stretch it out as long as possible and ignore or delay all other capital maintenance.  That approach was unacceptable to me.  The allocated amount for this 8-year period was about $189,776 per year. That is less than one-half of the budgeted annual contribution to this fund over the period 2011-2018, when new boards took the reigns.

According to a verbal statement by the Treasurer, as of September 30, 2021 the amount in the Replacement Fund is now more than $1,100,000.   In 2001 that balance was $295,451 and the association, according to my numbers, was facing at least $5,000,000 in backlogged maintenance and the roofing project. 

Running the Numbers

With ownership in early 2002 I began building a series of spreadsheets about the association. Several were about the budget.  One focused on separating the Replacement Fund increases from Operations & Maintenance fund increases. We walked the property and interviewed owners. (Note 2).

When G and I attended our first HOA meeting early in 2002, we were the only owners present in the audience. By 2006 that audience had swelled to 30 - 50 owners.  Why? Because of relentless fee increases and the condition of the property. That's why some owners shouted during meetings "What do we get for our money?" Some owners were frustrated because while the fees increased and the amount in the Replacement Fund grew, the maintenance problems also escalated.  The boards seemed reluctant to perform needed maintenance.  The plan for the roofing project, when discussed before the owners, was described as something that would be accomplished "at the last possible moment" so as to extract the longest possible life out of the existing roofs.  But failures don't occur on schedule and tackling roofing failures that occur in winter is not a good strategy. It was difficult to determine the board's overall plan.  

From 2006-2008 boards deflected the owners concerns about the annual fee increases as more and more angry owners attended association meetings.  The board promoted these as "small, annual increases".  Generally 3 to 5% was discussed and promoted as ideal.  But in fact, the fee increases were much larger. (Note 2, 3). 

The consequences of board mandated fee increases will accumulate. 

The numbers for 2001-2008 which are earlier in this post do indicate how this accumulation occurs. In fact, by September 30, 2010 the amount of the Replacement Fund allocated to roofs had swelled to $921,920.  As of spring 2010, 39 roofs remained to be completed.

With a large maintenance backlog, most of the money collected from owners and allocated to reserves was quickly spent in the period 2011-2018. The board that initiated the roofing project in 2003-2004 had to know this was coming.  They knew the age of the roofs, the number of roofs on the property and the cost per roof because of the completion of that first roof at 1775-1777 Gloucester.  According to information by management, roofs had been re-shingled during the period 1993-2000.  Replacement of the earliest roofs would be in 2008, the last in the group would be replaced in 2015.  With luck, roofs might survive for another 5 years, but physical condition indicated that was not likely.  The board replaced one roof in 2003-2004, one in 2006, two in 2009 and four in 2010.  Time was against the association.

By 2007 the board was also aware of the problems with Lakecliffe street, the condition of the streams and common decks and the gazebo, and the water main failures.  Ditto for driveways and garages.  For example, by 2009-2010 the board indicated that 14 driveways were in need of immediate replacement, while others were in poor to fair condition. In 2009 the board by vote, decided to replace 9 driveways. In 2010 the board, by vote, decided to replace an additional  14 driveways.  

In 2010, 45% of the roofs were more than 15 years of age, and the oldest was 19 years of age.  The shingles had a projected useful life of 15 to 20 years. The average age of the roofs remaining to be replaced was 14.5 years.  The board was faced with the reality that 39 roofs were approaching end of life and that only 5 had been replaced. 

One incentive for me as a board member in the period from 2010-2018 was to take advantage of low inflation.  Labor and material prices normally increase, year after year.  Boards may use anticipated inflation as a reason to increase owner fees.  It was an incentive for me and the boards I was a member of to avoid delays and do the work with alacrity while price increases had stagnated.  I argued to take advantage of the situation each and every year. Talk by the board of 2008-2010 about a possible mortgage to fund maintenance was avoided. Fees were stabilized and today the replacement fund is growing. The maintenance backlog was eliminated with the exception of guidance I provided to the board and owners in 2018.  The long term decisions of boards do make a difference.  

Of course, low interest rates also decreased returns from the savings accrued in the Replacement Fund.  Boards built CD ladders to extract the best, safe returns for the association.  However, low inflation and prices provided a larger benefit.  

Since 2010 a combination of factors, including replacement of all roofs, major street renovation of Lakecliffe and Salisbury, minor repairs to Dover and Harrow streets, unit deck replacements, common area deck replacements, drainage improvements (many to resolve issues created by the roofing plan of the board of 2003-2004), stream repairs and pump pit replacements, water main replacements (as opposed to bandaid repairs), garage floor and driveway replacements, building stabilization, wing wall repairs, electrical power repairs, etc. has certainly spent a lot of money.  However, with the completion of these the association is on a path of normal annual maintenance, rather than catch-up. It also has a real possibility of turning the water mains over to the city of Wheaton. It only required eight years of my life to do this. 

The boards of 2019 to 2021 largely ignored the maintenance initiatives I provided to them in the "Guidance" in the Association newsletter in August-September 2018. This is why street repairs to Dover and Plymouth, as well as crack filling and preservative were not applied on Lakecliffe.

Click for link:   Final Newsletter and Guidance

With the completion of significant projects 2011-2018, reserves should accumulate.  Such accumulation is essential for the next phase of repairs.  With 84 driveways with 15 to 20-year projected life, at least 4 driveways must be replaced annually.  We have garage floors more than 43 years old. These may have a projected useful life of up to 65 years.  However, many have already been replaced and when catching up we were replacing 3 per year. The next round of roofing replacements will commence as early as 2029, but if those architectural shingles achieve the desired life of 20-30 years, most will be replaced after the year 2035. 

The savings required and the expenditures are manageable numbers and do not require extraordinary annual fee increases to accomplish.  However, if boards skip maintenance of certain common elements for 5 or 10 years, then a backlog accumulates and costs escalates.  4 driveways annual replacement becomes 20 requiring replacement after 5 years, as an example.  It is prudent to realize that delaying necessary maintenance does not save money.  It puts the costs on future owners, and because of inflation it is likely those costs will be higher in the future.  I abhorred the "kick the can down the road" approach of the boards prior to 2009, which hamstrung the boards that followed.

Actual Numbers

Over a 16 year period, roughly from 2001 to 2018, these fee increases did accumulate, but the amounts to the replacement fund increased much more as a percentage of fees:

Accumulated fee increases 2001-2018 for O&M = +65%
Accumulated fee increases 2001-2018 for Replacement fund = +148%

Annual fees paid by owners for the replacement fund excludes any O&M surpluses passed to the reserves:

• 2000 $169 approx. per owner to the replacement fund.
• 2008 $893 approx. per owner.
• 2013 $1,306 approx. per owner.
• 2019 budget approx. $1,182 per owner.

Replacement Fund allocation according to budget numbers released to owners.  Bear in mind that these numbers do not include the transfer of O&M surpluses to the Replacement Fund:

• In 2000 the board budgeted about $57,000 to the Replacement Fund ($169 per owner). 
  
• In 2008 the new board allocated $300,000 to the Replacement Fund ($893 per owner) . 
• In 2013 the board allocated $438,852 to the Replacement Fund ($1306 per owner).  This allocation was 33.7% of the annual budget. That amount was a peak value.

There were no extra-ordinary factors that required these increases.  The requirements were normal maintenance. In 2002 The association was 24 years of age and needed street repairs, the roofs were approaching end of life for shingles, streams were in disrepair and so on.

Reserve contributions for the Replacement Fund can increase each year

Boards, using data from reserve studies will increase the annual contributions to reserves. One method is by raising fees.  However, it is not the only method.  Good financial controls can accomplish more. 

However, even if a 2% inflation factor is used and fees were raised to accommodate the impact on reserves, fees would only increase as a fraction of the budget.  Why? because if the reserve contribution is 33% of the annual fees, a 2% increase to the reserves in any given year would  be actually a 0.66% annual increase:

• 33% of 2% = 0.66% increase to the total budget.
• A 2% increase to a $330,000 reserve budget requires a $6,600 annual increase. 
• A $6,600 fee increase for a $1,352,277 budget is a 0.49% increase. 

However, if a board can generate surpluses each year, then an annual fee increase may not be necessary. Those surpluses are retained by the association.  As noted in an earlier post,  $400,000 in surpluses were apparently generated in recent years. Any surplus was passed to the Replacement Fund.  For example, using the numbers in the board's annual budgets, these were the projected surpluses as of September-October of each year.  The information at that time was used by boards to determine the budget for the following year:

• Projected surplus 2014 $22,000
• 2015 $30,000
• 2016 $80,000
• 2017 $125,000
• 2018 $124,000
• 2019 $58,214

Boards have latitude when determining annual contributions to reserves. Owners will note a baseline amount for the replacement fund in the budget each year plus additions. For example, here is the allocation per the 2019 budget:

Reserve allocation 2019: $374,136

Added for trees: $22,902

Total reserve (replacement fund) budgeted: $397,038

Previous reserve studies made some unusual recommendations.  Boards 2011-2018 made adjustments to avoid fee gyrations and punishing owners as a consequence.  All identified maintenance projects were completed, future repairs scheduled, including Dover and Plymouth streets, etc.  Subsequent boards 2019-2021 have taken a different, old, path.

For example, here are some possible reserve contributions, by year, according to one study scenario:

• 2012 $440,000
• 2013 $456,000 +3.64% increase
• 2014 $472,000 +3.51% increase
• 2015 $488,000 +3.39% increase
• 2016 $504,000 +3.28% increase
• 2017 $520,000 +3.17% increase
• 2018 $320,000 -38.5% decrease
• 2019 $320,000 +0% increase
• 2020 $320,000 +0% increase
• 2021 $320,000 +0% increase
• 2022 $320,000 +0% increase
• etc.

Using the study, over a 10 year period above, 2013-2022, $4,160,000 could be contributed to the replacement fund. That's $416,000 each year. Obviously, if a board allocated $416,000 per year to the replacement fund the total funding requirement would be met.  

Boards from 2011-2018 chose a path of stability. They avoided the gyrations in funding and fees had the plan in above table been followed.  In doing so, the possible negative consequences upon the finances of owners was also avoided.  Those boards allocated $408,865 each year to the replacement fund. From 2014-2018 an additional $381,000 may have been added via O&M surpluses.

Including the projected surpluses above, the board allocated $454,100 each year to the replacement fund over the period 2011-2018.  This greatly exceeds that required by the study cited above.  Furthermore, this was accomplished with modest annual fee increases of less than 1% per year. 

The actual contribution for the subsequent board of 2019 was $397,038. That board of 2019 did follow the funding guideline established by preceding boards.  Yet, in 2018 they felt compelled to raise fees 1.88% even in view of a substantial budget surplus.   They raised fees, but apparently contributed less to the reserve funds than did the previous boards.  We'll see what the projected surpluses are in the proposed budget for 2022. (I left the board in September 2018).

Why the ILCA describes the board as a "Board of Managers" 

Boards are not supposed to blindly follow the information provided by experts.  Those "experts" are not fiduciaries. Boards must take into account the condition of owners and the financial value of their units, according to the ILCA. Some boards ignore this. As fiduciaries, the boards from 2010 to 2018 worked to stabilize fees while addressing a serious maintenance backlog, and established a viable and sustainable Reserves funding program. They used expert opinion and an incredible amount of data accumulated via condition surveys and reports, and multiple reserve studies. They used facts, rather than opinions, or wishes or hopes. And, they had to operate within the confines of the banking disaster, the "great recession" of 2007-2009, and the financial carnage wrought upon unit owners.

Board decisions do have consequences

The decisions of boards do have very long term consequences, particularly if boards keep the contributions to the Replacement Fund unnaturally low.  Doing so penalizes future owners and hamstrings future boards. Eventually boards have no choice but to raise fees by significant amounts to make up for funding shortfalls and catch-up on delayed maintenance. In extreme situations special assessments or HOA mortgages may be required.  Such loans were discussed by the board of 2010-2011. 

The roofing project at BLMH was a watershed moment, requiring more than $1,600,000 to complete. The association did not have that money in the Replacement Fund.  In fact, in 2003-2004 when the board began that project, the association Replacement Fund total balances were $368,568 and $396,412.   That was the total of the Replacement Fund.  A fund necessary for all long term maintenance in the association. Should anyone wonder why all but necessary repairs in the Association came to a complete halt from 2001-2009?

The boards prior to September 2010 did not have a thorough and complete reserve study to use as guidance.  Later boards, particularly those of  2012 - 2018 based fees did have such studies available . Using reserve studies and Operations & Maintenance (O&M) requirements those boards were able to work to reduce operations and maintenance costs and stabilize fees. This is why from 2012-2018 fee increases moderated as identified maintenance issues were addressed. 

In simple terms, the association was run as a business from 2011-2018 by the board of fiduciaries, using improved data and financial controls while shedding personal anxiety and opinions about fees.  Those boards shared this knowledge with the owners via expanded newsletters and thorough annual meeting presentations to the owner-shareholders.  It is to be noted that not all board members were aligned with this approach during that period, and some actively undermined efforts.

I'll  make the case about how it is very important to  separately track O&M expenses, O&M surpluses and Replacement Fund (reserve) contributions.  Boards prior to 2008 failed to do so, or if they did, they failed to reveal the details and the motivation for their fee decisions to the owners.  They adhered to the minimum legal standard of publishing budgets.  The board of 2019-2020 also failed to do so, which is why there was an unnecessary fee increase in the 2019 budget.

In this post I'll be looking specifically at the period 2000-2019.

I could say that the numbers speak for themselves. But if owners are unaware of the numbers and the trends, they can be manipulated. In other words, boards that are unwilling to reveal to owners basic financial information during association meetings are manipulating the owners.  Boards that don't reveal the costs of anticipated projects are manipulating owners. 

For example, during the annual meeting in September 2021 an owner asked for some simple financial information about the association. The board couldn't answer these simple questions, including the reserve balance. The exasperated owner said "I'll send you an email."  It is my understanding that owner has yet to receive an email response  from the board, although during the next Zoom meeting of the HOA in October the board did reveal these numbers and some other pertinent numbers.  The problem with this approach is most owners don't attend these Zoom online meetings and the information, if presented, is read quickly by the Treasurer. 

Owners who cannot attend these meetings are left in the dark. During the Zoom October HOA meeting, only 2% of the owners who are not board members attended the meeting.  An association that does not take sufficient steps to include all owners is, in fact, creating separate classes of owners. This is one of the reasons the boards of 2010-2018 took steps to expand the content of newsletters, which were distributed to all onsite owners, offsite owners via US Mail, and posted on the official HOA website.  

The Illinois Condominium Act (ILCA) is specific: 

(Text of Section after amendment by P.A. 102-162)     Sec. 18. Contents of bylaws.  (21)(b)(2) that the association shall have one class of membership;

Keep in mind that boards are to be comprised of fiduciaries who work on behalf of all owners who are to be treated equally, fairly and impartially. To do otherwise does create classes of owners, which is prohibited. Boards are to be mindful that owners are the shareholders in a corporation such as Briarcliffe Lakes Manor Homes. In other words, the board works specifically for and at the behest of the owners. It is the owners who pay the fees and ultimately pay the bills. 

The Illinois Condominium Act and the Replacement Fund

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." (Note 6). 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. 

How did boards promote one series of fee increases while enacting much higher fees?

Shortly after I purchased a unit I attended my first board meeting in early 2002.  As an owner I attended many meetings from 2005-2010.  It was an eye opening, learning experience.

I've included a table in this post showing annual fee increases 1978-2019. I've also included a table of percent changes to Replacement Fund contributions over a period of years.

As I attended meetings I heard board members attempt to explain their philosophy about annual fee increases.  I heard it explained that 1) Small annual increases are preferred and 2) Small annual increases can avoid, or prevent special assessments. 

Okay, in general that's a wonderful statement to present to owners.  But, what is the reality and what steps did boards take to make that "small annual increase" a reality?

The level of annual fee increases proposed by those boards was about  3% per year.  As I recall 5% was acknowledged as a peak possibility. 

This all seemed reasonable to owners, such as myself. But that is not what happened. 

The actual annual fee increases were much higher than that 3%. The  annual increases exceeded that 5% peak number for a 11 consecutive years, and peaked at  11.0% for two consecutive years, 1999 and 2000. 

I don't know what boards told owners prior to 2002, because I wasn't at BLMH.  I do know what transpired from 2002 to 2019. Furthermore, the reserve study of 2010 recommended a special assessment in addition to to a large fee increase.  That recommendation and a 10% fee increase was despite all of the pap to owners by earlier boards about how moderate 3% annual fee increases  will avoid special assessments. 

==

As a mere owner I attended a lot of association meetings. The board always discussed small annual fee increases, but declined to discuss during open meetings the fact that the elephant in the room was the condition of reserves. In fact, the budget meetings were not open meetings until 2008 or so.

I pointed out to anyone who would listen that the real problem at BLMH was the condition of the replacement fund and the project/maintenance backlog. I was ignored.  Boards continued to promote small 3% annual fee increases as preferred to special assessments. However, a 3% annual increase could not pay for the roofing project.

Annual fee increases may grow the Replacement Fund. One might say that there are benefits to the association.  Owners, however, see the cost of living in the HOA increase.  

Is there a benefit to owners? If the board continues to maintain the association there is. However, repairs may be deferred or delayed in an attempt to increase the amount held in the Reserves.  Prior to 2011 this is the situation the association was in, according to my condition surveys and the numbers. The numbers and condition reports I made as an owner prior to 2010 indicated that the board was accruing funds for the roofing project, and deferring other needed maintenance. In such circumstances property values may be reduced, or may not keep pace with the values in the neighborhood. 

Annual Fee increases under various board presidents

I do have figures going back to 1978 but I am unaware of who was president or on the board for many of those earlier years. It is my understanding that the longest serving current board member has accumulated about 30 years on the board. So I suggest owners ask that individual for details.

Keep in mind that association elections occur in September, and the board determines the budget and owner fees in October-November.  In other words, the fees for 2015 were decided in October-November of 2014.  I've included figures for the average and total fees during the tenure of recent board presidents. Bold years below are the years I was on the board. S. LaFortune, a CPA, was on the board 2010-2015 (thanks to my enrollment of him).  When I joined the board I had nearly 4 decades of business and upper management  experience (CEO and President).

Year - Percent Change - board president

• 2001 +9.0  S. Bailey 
• 2002 +6.0  S. Bailey
• 2003 +7.9  S. Bailey
• 2004 +6.5  S. Bailey
• 2005 +5.8  S. Bailey 
• 2006 +5.4  S. Bailey
• 2007 +6.0  S. Bailey
• 2008 +5.5  S. Bailey (average 6.46% per year, +51.7% total)
• 2009 +5.1   J. Holben
• 2010   0.0  L. Richmond
• 2011 +7.0  S. LaFortune
• 2012 +3.0  S. LaFortune
• 2013 +2.0  S. LaFortune
• 2014 +1.0  S. LaFortune
• 2015 -2.0   S. LaFortune (average 3.0% per year, +15.0% total)
• 2016 +1.5  N. Retzke
• 2017 +1.5  N. Retzke
• 2018   0.0  N. Retzke  (average 1.0% per year, +3.0% total)
• 2019 +1.88% S. Bailey

Separating the Budgets

The budget has two components. These are the Replacement Fund and Operations & Maintenance Budgets.  Using budget information provided to owners I separated those and tracked the amounts and percentage increase and the percentage of the budget for each in a spreadsheet, year by year. 

That is how I know the dollar amount and the percentage of the budget allocated to the Replacement Fund, year by year.  This is also how I know why boards promoted one level of fees to owners while enacting budgets with much higher fees. 

Before continuing with some numbers, I need to say a few things about them.   Some board members had difficulty comprehending this: 1) A change of 0.00% means that the contribution was identical to the previous year. However, the previous years increases will continue to accumulate. 2) A change of 100% means that the contribution was double that of the previous year and that too will continue, indefinitely.  3) In 2001 the board budgeted about $57,000 to the Replacement Fund. 4) In 2008 the new board allocated $300,000 to reserves. That's about three times the allocation in 2001, when I purchased. (Note 5). 

If you compare the  Replacement Fund contribution percentage to fees, you will see that contributions to the Replacement Fund increased substantially each year over the period.

You will notice two things. 1) Contributions to the Replacement Fund increased by a much larger percentage each year than did the overall fee increases passed by the board and extracted from owners (Note 2 and 3), and  2) Fee increases were largely due to the board's decisions to increase the contributions to the Replacement Fund.  

Had boards communicated this fact in 2000-2010, expressed the amounts required for major maintenance and done a bit more work to build the replacement fund and stabilize fees, the large overall fee increases during my ownership 2002-2011 might have not been so great and owners might not have been so angry 2006-2008. The following chart shows how boards decided to skimp on building the replacement fund and then switched.  It was too late and owners got large fee increases and the bonus of the 2007-2009 Great Recession and all of the related financial carnage:

Fee Analysis 2014
Had Boards from 1984 to 2006 done a better job of planning the budgets
Owner fees would have been substantially lower 2005-2014

Please be aware that these increases ignore any O&M surpluses which were transferred into the Replacement Fund.  Year end budgets indicated that from 2009-2018 those surpluses may have totaled $439,000. Of course, these are unaudited numbers because the numbers are from official, annual, association budgets. Those budgets wee used by boards to set fees, etc. and they indicated the projected budgets and surpluses as of December 31 of each year. It is to be acknowledged that the accrued surpluses during the 6-year period prior to 2019 may have provided the equivalent of an additional year's contribution to the Replacement Fund.

In other words, the annual contribution to the Replacement Fund by owners via their fees, during the period 2009-2018, may have been more than 12% greater than called for by the budgets passed by the boards. 

Yet, during the discussions held during the budget meeting in Fall of 2015, there were recriminations by one board member against others because our HOA fees weren't high enough.  (Note 3).

Replacement Fund Changes, by year

Percent change to Replacement Fund (reserve) contributions, each year:

• 2001      +9.00%
• 2002 +100.00%
• 2003     +5.06%
• 2004     +7.15%
• 2005     +9.19%
• 2006   +22.92%
• 2007     +9.06%
• 2008   +12.03%
• 2009    +9.09%
• 2010    0.00%
• 2011  +22.9% (with reserve study data)
• 2012    0.0% (with additional reserve study data)
• 2013    +4.81%
• 2014     +0.64%
• 2015    +5.03%
• 2016    +2.48%

Upon achieving a position on the board after September 2010 I provided my conclusions about the fees compared to the funding of Reserves to the Boards. Each board member could have run their own numbers each and every year.  I did give my charts, etc. to the board  and while on the board I did discuss this thoroughly and completely with the entire board.

Is there a benefit to Separating the Budgets?

In fact the two components of the budget are very different, as described in the definitions at the beginning of this post.  The components are the Replacement Fund (reserves) and Operations & Maintenance Budgets.  When combined the total each year will equal the fees levied by the board. Annual increases in Replacement Fund budgets will result in equal dollar amounts levied via fees, unless O&M budget surpluses occur.

The O&M budget is one year in duration and has short term implications for owners. Ideally, all money in the O&M budget will match the expenses of that calendar year.  Because it is undesirable for expenses to exceed the budget. it is prudent to construct an O&M budget which can achieve a small year-end surplus.

The Replacement Fund (reserves) budget is designed to deal with long term maintenance of the association.  This budget is to provide funds required by the board using the Reserve Studies.  Those studies are very long term, and look 40 years into the future. 

In fact, prior to 2010 this association never had an independently prepared Reserve Study. That may explain some of the fee increases 1984-2009.  Without the benefit of very long term, complete studies with 50+ categories and detailed condition reports, the boards operate using a more short-sighted approach. There is a tendency to collect fees for the Replacement Fund determined by short term maintenance requirements with little consideration of expenditures more than 5 years into the future.

Here is a summary of my experience 2001-2010: When the Sword of Damocles is swung over their heads the board may react; some board members will depart. Fees may be ramped up when boards realize that the amount in the Replacement Fund is insufficient to meet the needs of the next 5-10 years, particularly if there is a single, large project such as the roofing project to be done.  For owners, the problem is that reactionary boards, when confronted with a greater than $1million project will simply raise fees each year to raise sufficient funds for that specific project.  That's what happened 2000-2008.  However, those boards continued to talk about 3% annual fee increases. Obviously, $1 million or more can't be raised in 5 years with an annual Replacement Fund contribution of $108,000. One projection indicated the roofing project could require about $2,200,000 or more.

To shed some light on what the board was doing I separated these categories, O&M and Replacement Fund to get a better understanding of the operation of BLMH. I tracked the amounts and percentage increase and the percentage of the budget for each in a spreadsheet, year by year. 

That is how I know the dollar amount, the percentage of the budget allocated to the Replacement Fund, and the percentage increase budgeted to the fund year by year. 

In doing so and by simply adding up the costs to replace a driveway, or a garage floor, or a roof, I was able to get a much better understanding of short term (10-year) expenditures facing this association. The board did not reveal these numbers to owners.

In doing so, I also got a better picture of what the board was actually doing with those annual fee increases.

Is there a benefit to tracking O&M budget surpluses?

On a positive note, a portion of  O&M fees may flow into reserves if there was a surplus. I'm not aware of that occurring in any year prior to 2012. 

On a negative note, in my few years on the board I was aware that for some board members, there will never be sufficient funds because they prefer a position that we need to be financially prepared to deal with "The worst case scenario", whatever that is.  That imprecise criteria will always raise fees, even if surpluses occur and the Replacement Fund is fully funded.  Furthermore, owners may be considered to be chattel, the sole purpose of which is to pay fees, for the benefit of sustaining an object called "the association".

I would suggest that if O&M surpluses occur, the board should pay closer attention to the fees required for the Replacement Fund. In my experience, many boards ignore and don't comprehend the consequences. They ignore surpluses, and pretend there simply isn't sufficient money.  Oh, and lets keep owner paying for water main repairs, etc.  These things will certainly demonstrate that fees need to be increased much higher.  

Is Raising Fees a preferred approach?

I have observed a prejudice among certain boards which prefers to raise fees. I do get it, "Raising fees is easier than doing the heavy lifting and the homework to develop and maintain the association in accordance with a good long term budget."

Year, after year, after year, simply raise fees.   They are their own worst enemies, and the owners pay, literally.

And of course, the owners will pay because the board will raise the fees, and paying fees is a rule in the association. The owners have no choice after electing a board which provided pap in their Candidates Form.  

Notes

1. Over the years, boards have used a number of different resources for determining the annual allocation to the replacement fund. Prior to 2010 management was the source.  To determine replacement fund requirements it is essential to note the condition of the property, as well as the actual amount in reserves as well as the addition, year by year.  

Some boards kicked the can down the road.  Delays simply pass the costs into the future. 

Boards from 2009-2018 used several professional sources, other than management, for determining reserve requirements.  The studies completed from 2010 - 2018 included 40 years of maintenance.  For example, in 2011 the study included annual expenditures for the period 2012 to 2041.  Those expenditures were broken into 37  categories.  A funding plan was constructed for that same period.  The funding plan provides a framework for determining annual fees to be allocated to the Replacement Fund.  Of course, boards can adjust the time frame for maintenance and also the fee structure.  If a board chooses to do so, adjustments must be made to a variety of spread sheets to determine the consequences for both current and future owners. 

For those who are inclined to blindly follow the experts I do want to point out that the plan in one study resulted in very low reserves.  How low?   $75,670 in 2016 and $87,480 in 2017.  The boards I was on chose another approach and decided that $450,000 was a minimum acceptable level. To do this required that I build additional spread sheets and present alternative funding plans and expenditure plans to the board. This was done several years in succession, as projects progressed and were completed.  I printed and pasted together spread sheets marked for discussion during open association meetings.  S. LaFortune, a CPA,  was president during one of these periodic reviews.  In fact, the reserves were maintained above $600,000 and yet all the goals were achieved.  

The Illinois Condominium Act (ILCA) states that an association can only have one class of owners. I always took a view that to kick the can down the road did create separate classes.  The current owners would be a class with lower fees, and future owners would be another class, and would be penalized with substantially higher fees.   

It takes a lot of work to determine present costs and the condition of the association, and then determine future costs and design a 40-year maintenance plan.  That plan will change year by year. It took me more than 1,000 hours in my first year on the board.  I was also working full time. However the association had serious financial issues during the great recession and owners were foreclosing and going into bankruptcy.  I viewed each day that transpired as another nail in the financial coffin of owners. The bleeding had to stop, and the course reversed.  In total, I expected this would require 10 years to complete the current maintenance phase.  Turnover of the water mains to the city would be a necessity. These challenges were considered to be impossible, by some.  I attribute that to their lack of skill and knowledge and inability to prioritize and put in what was necessary to accomplish this task. Board lack of vision and active undermining is why I left that board in September 2018.

I also began serious, annual reviews of all expenditures; any O&M savings is passed into the Replacement fund.  However, I did not want to repeat the mistakes of earlier boards and delay maintenance. The challenge, rather, was to identify all cost centers and manage each of them.  The Board in 2010 did discuss an austerity program and contingency plan. This included turning off the streams.  However, because those streams are a major architectural feature it was designed to replace a failed pump while making a long term plan to repair the streams.  The poor condition of streams contributed to excess water usage and owner fees pay for each gallon used. Obviously, repairing streams and reducing water usage would reduce that cost in the Operations & Maintenance (O&M) budget.  To aid in accomplishing this I took many photos and made a video of the condition of the concrete in some severely damaged stream sections.  These were shown to the board and became an integral part of the discussions about where and when to do repairs. In fact, major repairs to all streams were completed by 2018. However, there are still some areas requiring repairs.

In 2010 upon achieving a seat on the board I made my own study and constructed a series of spreadsheets which detailed the funding plan and expenditures necessary to complete the roofing project, driveways, garage floors, and Lakecliffe street replacement. That plan recognized the issues with the streams and other common elements and spanned 2011-2041. To my knowledge I am the only board member to have ever done this. However, Lisa Richmond, who was president in 2010 also created a number of spreadsheets. Her 2010 sheet included all budget categories.  I volunteered to assist her in this endeavor, but she proceeded alone. In reading it I saw $65,938 for a plumber to deal with two water main repairs.  These numbers were all gleaned from monthly management reports provided to all board members.   But some board members don't comprehend the numbers or retain the information provided in the reports.  Which is why spreadsheets and historical charts are so very useful. 

2010 is when I began an initiative to turn the water mains over to the city of Wheaton. It was my sole initiative and one board member actively enrolled other board members in the "impossibility" of doing this.  Which is why, as of the date of the post, this transition has not yet occurred. All the pieces were in place three years ago. LOL.

Here are some charts published at this blog and presented to owners during an association meeting:

2010 Roofing Project Plan that I constructed

Several charts from Replacement Fund cash flow and funding plan that I designed

My information was incorporated into the professionally prepared reserve study of 2011. That study included extensive site surveys and condition reports.  These were conducted by the professional firm and by management and I. 

Actual costs to replace the water mains would require an engineering study, and with that proposals to accomplish the replacement in phases over a number of years.  My numbers are based upon reserve studies and actual repair costs, which are less precise.  

2. When the newsletters were expanded not all board members were in favor of doing so.  In fact, one board member argued against.  Her argument was "Most owners don't read the newsletter."  The counter argument was "It is the board's responsibility to inform and provide the information to owners.  What they do with the newsletter after they receive it is not the board's responsibility."  Once I left the board, the newsletters reverted to the minimalistic information preferred by that board member. 

In 2010 not all owners were pleased with the expanded newsletter. I am aware of several complaints by owners who preferred the association be run as a "Neighbors Club" with a social newsletter, rather than a business one.

3. G and I interviewed owners at the time we were considering a purchase in 2001.  There was a consensus among them that the recent fee increases were an issue:  Here's the numbers for three years that led owners to that conclusion:

• 1999 +11.0%
• 2000 +11.0%
• 2001 +9.0%

We studied the financial documents including the Balance Sheet and Budget.  We did this after we tendered an offer.  It is one of the oddities that this was not made available to us until after we made a commitment.  We realized that reserves were inadequate, and I spotted maintenance shortcomings as we walked the property.  I told G 1) Be prepared for many years of larger than normal fee increases and 2) Be prepared for fireworks among the owners. 

By 2006 there was a large group of very unhappy owners.

4.  A table of fee increases, by year. Note that budgets and fees are determined by the board during a budget meeting held normally in October. In other words, the budget for 2019 was determine by the board elected in September 2018. I included some notes. For example, a reserve study in 2010 impacted the budget and fees of 2011. I departed the board as of September 28, 2018. Owners are allowed to comment on budgets prior to formal vote and passage by the board, but the board is under no obligation: 

Year  and Percent Fee Change 

• 1978 +35.0
• 1979 +22.0
• 1980 +26.0
• 1981 +25.0
• 1982 -12.0
• 1983 0.0
• 1984 +10.0
• 1985 0.0
• 1986 0.0
• 1987 +5.0
• 1988 0.0
• 1989 +12.0
• 1990 +5.0
• 1991   0.0
• 1992   0.0
• 1993 +6.0
• 1994 +3.0
• 1995 +4.0
• 1996 +5.0
• 1997 +3.0
• 1998 +3.0
• 1999 +11.0
• 2000 +11.0
• 2001 +9.0

I purchased a unit in February 2002, so this was my experience:

• 2002 +6.0
• 2003 +7.9
• 2004 +6.5
• 2005 +5.8
• 2006 +5.4
• 2007 +6.0
• 2008 +5.5
• 2009 +5.1 (New board September, new 2010 budget)
• 2010   0.0  (I joined the board September 2010, after completion of reserve study)
• 2011 +7.0 (First reserve study used to determine; study flawed)
• 2012 +3.0 (Subsequent reserve study used)
• 2013 +2.0
• 2014 +1.0
• 2015 -2.0 (Updated reserve study)
• 2016 +1.5
• 2017 +1.5
• 2018  0.0 (my last year on the board)

5. I've completed course work about our relationship to money and have been a paid financial writer.  On a personal level, we will either succeed or fail in our financial endeavors.  We will then bring all of our baggage to the board when we achieve status as a board member. Fiduciaries should check that baggage at the door.  But my experience is that more than a few cannot do this. 

For some on the board, who can afford fee increases, budgeting will be about the impact on their personal lifestyle, which is nil. The lens is "I can afford a fee increase". For others on the board who are struggling financially, doing budgeting and determining fees may be through a more personal lens "Can I afford this?".  Neither group may be able to operate in the capacity of a fiduciary.

6. Numbers provided here are from information provided via budgets, or gleaned from boards as a mere owner by observing association meetings and taking notes. 

7. I observed the board spend about a third of the time spent during meetings discussing work orders in the monthly packet provided by management.  

Work Orders are observed maintenance issues on the property, or specific owner requests, such as "I want a tree".  When an issue is determined a work order is issued to Maintenance, to Landscaping, or to the plumber, etc. Some are flagged for board discussion, so that direction may be given to management, but many are automatic.  

Each monthly packet given to the board included two groups of work orders,  "Open" or in progress and "Closed" or completed. 

In order to streamline the meetings and come better prepared, the Management went so far as to request, in writing on a monthly basis, that Board Members send him their questions "In advance of the meetings."  

But one board member refused to do this, steadfastly spending up to an hour of the meeting on discussing any and all work orders.

As president I asked the Maintenance Director to prepare a summary each month.  That summary gave statistics such as number of open orders, the number allocated to Landscaping, to Maintenance and so on. The Maintenance Director flagged orders for further discussion and provided status reports as to how some were resolved.  This did streamline the process, management was given an opportunity to better prepare, and banter was reduced. 

However, my actions created additional enmity and rancor among some on the board. There's an old expression "No good deed goes unpunished."

8. For example, during the budget meeting held in the fall of 2018 the president promoted a fee increase.  However, the budget numbers indicated a large surplus was achieved in the prior year. Even though it was in plain sight, that surplus was ignored when discussing the budget.  When it was time to vote, a board member asked the president "Is a fee increase necessary?" and the president responded "Absolutely".  The entire board then voted for the 1.88% fee increase.  Any surplus was automatically passed to the Replacement Fund.  There was no mention of this during that budget meeting, nor were the reserve balance cited as inadequate during that meeting.  

I sent a stern email to management to be given to that board.  It was an angry and stern email about their decision.    

This is why I left the board.  It is impossible to work with some board members who operate on opinions and ignore the facts.

9. 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.

10. Illinois Condominium Act pertaining to providing owners with financial documents beyond the annual budget and making these available to owners. I'll post more on this later:

 (765 ILCS 605/9) (from Ch. 30, par. 309)

 (Text of Section after amendment by P.A. 102-162)
    Sec. 18. Contents of bylaws. The bylaws shall provide for at least the following................

(7) that the board of managers shall annually supply      to all unit owners an itemized accounting of the common expenses for the preceding year actually incurred or paid, together with an indication of which portions were for reserves, capital expenditures or repairs or payment of real estate taxes and with a tabulation of the amounts collected pursuant to the budget or assessment, and showing the net excess or deficit of income over expenditures plus reserves; [emphasis mine].

(765 ILCS 605/19) (from Ch. 30, par. 319)
    Sec. 19. Records of the association; availability for examination.
    (a) The board of managers of every association shall keep and maintain the following records, or true and complete copies of these records, at the association's principal office:
        (1) the association's declaration, bylaws, and plats

of survey, and all amendments of these;

        (2) the rules and regulations of the association, if

any;

        (3) if the association is incorporated as a

corporation, the articles of incorporation of the association and all amendments to the articles of incorporation;

        (4) minutes of all meetings of the association and

its board of managers for the immediately preceding 7 years;

        (5) all current policies of insurance of the

association;

        (6) all contracts, leases, and other agreements then

in effect to which the association is a party or under which the association or the unit owners have obligations or liabilities;

        (7) a current listing of the names, addresses, email

addresses, telephone numbers, and weighted vote of all members entitled to vote;

        (8) ballots and proxies related to ballots for all

matters voted on by the members of the association during the immediately preceding 12 months, including, but not limited to, the election of members of the board of managers; and

        (9) the books and records for the association's

current and 10 immediately preceding fiscal years, including, but not limited to, itemized and detailed records of all receipts, expenditures, and accounts.

    (b) Any member of an association shall have the right to inspect, examine, and make copies of the records described in subdivisions (1), (2), (3), (4), (5), (6), and (9) of subsection (a) of this Section, in person or by agent, at any reasonable time or times, at the association's principal office. In order to exercise this right, a member must submit a written request to the association's board of managers or its authorized agent, stating with particularity the records sought to be examined. Failure of an association's board of managers to make available all records so requested within 10 business days of receipt of the member's written request shall be deemed a denial.
    Any member who prevails in an enforcement action to compel examination of records described in subdivisions (1), (2), (3), (4), (5), (6), and (9) of subsection (a) of this Section shall be entitled to recover reasonable attorney's fees and costs from the association.
    (c) (Blank).
    (d) (Blank).
    (d-5) As used in this Section, "commercial purpose" means the use of any part of a record or records described in subdivisions (7) and (8) of subsection (a) of this Section, or information derived from such records, in any form for sale, resale, or solicitation or advertisement for sales or services.
    (e) Except as otherwise provided in subsection (g) of this Section, any member of an association shall have the right to inspect, examine, and make copies of the records described in subdivisions (7) and (8) of subsection (a) of this Section, in person or by agent, at any reasonable time or times but only for a purpose that relates to the association, at the association's principal office. In order to exercise this right, a member must submit a written request, to the association's board of managers or its authorized agent, stating with particularity the records sought to be examined. As a condition for exercising this right, the board of managers or authorized agent of the association may require the member to certify in writing that the information contained in the records obtained by the member will not be used by the member for any commercial purpose or for any purpose that does not relate to the association. The board of managers of the association may impose a fine in accordance with item (l) of Section 18.4 upon any person who makes a false certification. Subject to the provisions of subsection (g) of this Section, failure of an association's board of managers to make available all records so requested within 10 business days of receipt of the member's written request shall be deemed a denial; provided, however, that the board of managers of an association that has adopted a secret ballot election process as provided in Section 18 of this Act shall not be deemed to have denied a member's request for records described in subdivision (8) of subsection (a) of this Section if voting ballots, without identifying unit numbers, are made available to the requesting member within 10 business days of receipt of the member's written request.
    Any member who prevails in an enforcement action to compel examination of records described in subdivision (7) or (8) of subsection (a) of this Section shall be entitled to recover reasonable attorney's fees and costs from the association only if the court finds that the board of directors acted in bad faith in denying the member's request.
    (f) The actual cost to the association of retrieving and making requested records available for inspection and examination under this Section may be charged by the association to the requesting member. If a member requests copies of records requested under this Section, the actual costs to the association of reproducing the records may also be charged by the association to the requesting member.
    (g) Notwithstanding the provisions of subsection (e) of this Section, unless otherwise directed by court order, an association need not make the following records available for inspection, examination, or copying by its members:
        (1) documents relating to appointment, employment,

discipline, or dismissal of association employees;

        (2) documents relating to actions pending against or

on behalf of the association or its board of managers in a court or administrative tribunal;

        (3) documents relating to actions threatened against,

or likely to be asserted on behalf of, the association or its board of managers in a court or administrative tribunal;

        (4) documents relating to common expenses or other

charges owed by a member other than the requesting member; and

        (5) documents provided to an association in

connection with the lease, sale, or other transfer of a unit by a member other than the requesting member.

    (h) The provisions of this Section are applicable to all condominium instruments recorded under this Act. Any portion of a condominium instrument that contains provisions contrary to these provisions shall be void as against public policy and ineffective. Any condominium instrument that fails to contain the provisions required by this Section shall be deemed to incorporate the provisions by operation of law.
(Source: P.A. 100-292, eff. 1-1-18; 100-863, eff. 8-14-18.)




11.  The Illinois Condominium Act pertaining to a board's failure to provided documents when asked:

  (b) Any member of an association shall have the right to inspect, examine, and make copies of the records described in subdivisions (1), (2), (3), (4), (5), (6), and (9) of subsection (a) of this Section, in person or by agent, at any reasonable time or times, at the association's principal office. In order to exercise this right, a member must submit a written request to the association's board of managers or its authorized agent, stating with particularity the records sought to be examined. Failure of an association's board of managers to make available all records so requested within 10 business days of receipt of the member's written request shall be deemed a denial.
    Any member who prevails in an enforcement action to compel examination of records described in subdivisions (1), (2), (3), (4), (5), (6), and (9) of subsection (a) of this Section shall be entitled to recover reasonable attorney's fees and costs from the association.

12. Illinois Condominium Act pertaining to open meeting requirements:

(Text of Section after amendment by P.A. 102-162)
    Sec. 18. Contents of bylaws. The bylaws shall provide for at least the following:

(9)(A) that every meeting of the board of managers

shall be open to any unit owner, except that the board may close any portion of a noticed meeting or meet separately from a noticed meeting to: (i) discuss litigation when an action against or on behalf of the particular association has been filed and is pending in a court or administrative tribunal, or when the board of managers finds that such an action is probable or imminent, (ii) discuss the appointment, employment, engagement, or dismissal of an employee, independent contractor, agent, or other provider of goods and services, (iii) interview a potential employee, independent contractor, agent, or other provider of goods and services, (iv) discuss violations of rules and regulations of the association, (v) discuss a unit owner's unpaid share of common expenses, or (vi) consult with the association's legal counsel; that any vote on these matters shall take place at a meeting of the board of managers or portion thereof open to any unit owner;

13. Click for Illinois Condominium Act

(C) N. Retzke