Spring Has Arrived!

The pond I can view from my kitchen and living areas has finally thawed, and the ducks have moved in. Yesterday we had a really good spring rain. The grass should begin greening.

The photo at the top of this blog was taken on the walk approaching Waterfall #2 in March 2012. We had some unusually warm weather last year and so the ornamental trees bloomed early. At BLMH we have hundreds of trees.

I'll be changing the blog masthead photo from time to time, in sync with the seasons.

HOA Financial Challenges 2013

A recent post delved into the challenges facing HOAs in 2013. Financial challenges are worthy of this separate post.

Finances and maintenance including long term capital projects are probably the two most important tasks facing boards. The operating budget, capital projects, maintenance, reserves and fees are all interlinked.

Our board attempts to balance the spending, saving (for reserves) and fee levels while keeping a long term perspective. We attempt to create an annual budget that realistically depicts the Operating and Maintenance costs for the coming year. We take into account anticipated changes including utility increases, contractor costs and new contracts, insurance fees, etc. We also look at what unusual and one-time maintenance may occur in the next year; for example, specific tree removal as occurred with the willows on Gloucester. We also plug-in annual reserve updates, which we generate. However, I don't recommend avoiding professionally prepared reserve updates and suggest doing so every five years.

Budgeting is a continuous process and so we are today collecting information on possible 2014 increases or decreases to our costs so that when the October "Budget Workshop" arrives, the board in place at that time will have information available to assist making a realistic budget.

Our budgeting really does attempt to "keep fees as low as possible" while avoiding special assessments, nasty surprises, or creating imbalances that could punish future owners because of short-falls, or reward future owners because of over collections.

It is a balancing act and our budgets are "tight." That's one of the reasons we currently fund a relatively small "contingency" account each year. It's based on recent history of water main breaks, fire hydrant failures, and so on.

Step Changes Do Sometimes Occur
As I stated in that earlier post "Our board has faced many challenges in recent years. A terrible economy, an aging infrastructure, the need to accumulate reserves (via higher fees), some unhappy owners, battling agendas, issues with a neighboring college, disastrous fire at a nearby association that ensnared us, board issues, delinquencies, foreclosures, and so on."

It's my understanding that our earlier boards didn't have to deal with delinquencies of any consequence, or foreclosures. That changed after 2006. It may have caught some boards by surprise. Setting fees and collecting fees are two different matters, as many associations have discovered!

As I have stated in other posts, there is nothing better than a chart to get the point across. As an owner, I had begun a spread sheet looking back to 2006 using the newsletter information and published financials. This was so I could trend the changes to determine the financial consequences of the recession. Once on the board, I could monitor this on a monthly basis. When a new treasurer came to the board it provided an opportunity.  I broached the subject and my concerns about some aspects of our finances. Together we did the digging and developed a spreadsheet to track delinquencies and differentiate trivial amounts from more serious ones. For example, it's not unusual to have a small dollar amount listed on the delinquency report. By small I mean $0.08! These are best ignored for determining statistics and trends, although the board is aware of the status of each owner's account. That spreadsheet is updated each month and is presented as part of the treasurer's report during each association meeting.

It's my opinion that a watchful board will always have concerns. We've taken some positive steps. I assert that the quality of information is essential for making quality decisions.

Financial Challenges Include Both Obvious and Subtle
We're all aware of the low interest rates on our savings accounts. This is one of the subtle ways in which associations which have reserves have been punished by government policies. All HOAs should have adequate reserves and ours is no exception. Because most of this money will be spent on large. property wide projects at BLMH in the near future, it's a necessity to keep the funds somewhat liquid and also as safe as possible. Note: In 2013, we will have reached 60% completion levels on major projects including roofs and driveways, and should complete an additional 15% each year, thereafter.

A few years ago, we could expect 5% via safe CDs. Not today. Of course, inflation is supposedly low, but our association doesn't directly benefit from a low CPI. At some point in the future, inflation should return to historical norms and when it does, or the price of energy spikes, the cost of a lot of the materials that HOAs use in various capital projects will also rise. However, for the moment, inflation is tame and because of the recession many contractors have held the line on prices.

This should not continue forever,and so, an important question to ask is "How will our financial plans prepare for this?"

Possible Concerns About Inflation
When inflation and/or energy does rise, it will influence the cost of many materials. Cement manufacturing is an energy intensive process. Asphalt for streets and driveways uses refinery byproducts. So too for asphalt based shingles and driveway sealcoating.

Here at BLMH we've been keeping a wary eye on both the economy and the prices of materials.

Associations that are waiting for the economy to improve so they can proceed with their projects might get a nasty surprise as demand and prices increase. Those medium term and long term budgets assume specific price increases, usually somewhere between 2.0% and 3.0% annually. Those reserve budgets also assume a certain interest will be returned on those reserve balances.

Low interest on reserve balances and replacement costs higher than the current annual increases can stress the budgets. Our board is walking the tightrope between the current reality, and future possibilities.

My crystal ball doesn't work very well. So I use a range of future possibilities, so I can judge the impact and possible responses. I also evaluate and update the reserve spreadsheets each year. This includes current costs, possible changes to future replacement costs, and project timelines.

Driving While Looking in the Rear View Mirror
If we use "last year's budget" and an old reserve study that is not updated annually, then we are figuratively speaking, driving with the rear view mirror as our guide. Any association that operates that way expects that next year will be exactly like the year that preceded it. The future does not mirror the past. Step changes do occur. Furthermore, errors can accumulate, creating serious discrepancies. Any association which has fallen behind in its reserve collections, and continued to do so for 5, 10 or more years, knows precisely what I mean.

In other words, sometimes we may do our finances as if the road ahead is exactly as the one behind us, which we can see in that 'rear view mirror.'

When a curve occurs, or there are potholes or stop signs we may simply drive straight ahead, into the ditch or we may experience "an accident."

The Price of Failure
There are four possible outcomes to this year's budget. The first is unlikely if the board does a credible job:

• Expenditures lag the budget by a wide margin; in other words, we overbudget.
• Expenditures are closely aligned with the budget
• Shortfalls this year
• Shortfalls in the future via underfunded reserves.

The consequences of failure include:

• Significant fee increases next year and years thereafter
• Borrowing from reserves, to be paid via higher future fees
• Special assessments.

Certainly, we should strive for an outcome where the expenditures meet the plan. Of course, if we are under budget in November, that is not a reason to spend money.

Budget Hazards
There are a lot of ways to slip in a budget, even one which is a good one. Here are several subtle ways in which a budget may go awry:

• Failure to account for all expenditures in the current calendar year.
• Inability to pay all of the bills in the current year.
• Failure of the board to effectively communicate.

Not all bills are received by December 31. If we don't take into account those uninvoiced bills for goods or services received in the current calendar year, but allow these bills to go against the next calendar year, there is a real risk of surprises in the next calendar budget. Here's a suggestion based on procedures at BLMH. Check with vendors before closing the books for the current year. It is not unusual for contractors to control both their cash flow and taxes by delaying some invoices into the next calendar year. For an business using the accrual accounting method, receivables occur when invoices are issued. So this may be a good business practice for those companies that experience slow winters and peak summer and fall business activity.

Avoiding Surprises
At BLMH, the Treasurer, the Architecture & Maintenance Director and Management exchange budget information freely and have good communications. This provides for a more aware board, and prior to the budget workshop a series of emails are usually sent to the entire board with a list of additional items to be addressed during that workshop. For example, in 2012 we became aware of a pending change in the water and sewer rates by the county and the City of Wheaton. Each year we monitor the electrical utilities for pending rate hikes, insurance premiums, and so on.

Each year we update the reserve study. That's another way to stay ahead of the curve. Individual projects are reviewed, actual costs are used to update the projections and so on.

Upholding the Illinois Condominium Act (ICA)
The ICA prohibits the creation of sub-groups of owners. The mandates governing the HOAs in various states probably do likewise.

I think that a board is required to do a good job in the creating of budgets and should inform the owners if there are anticipated budgeting issues.

Here's a question to ponder. We usually think of "owners" as the current owners. However, if an HOA deliberately underfunds its reserves or passes budget shortfalls forward, is it not creating two distinct groups of owners which I will call "current" owners and "future" owners?

I suppose that it could be argued that most of the current owners will be here in a year or two. However, that, in my opinion, is a very dubious argument.  For one thing, this is a great way to blind side a new and future board. For another, Reserve Studies use a 30 year projection. Any board that uses a one or two year planning calendar is a scary board!

Here at BLMH our board is currently committed to all owners, both present and future. That's what fiduciaries are expected to do, isn't it?

Final Notes
If you have elections in the fall, as our association does, it would be wise to determine how to "hand off" the critical information amassed by the current board to the new board.

I also suggest we also keep the "Mack Truck" scenario in mind. I'm referring to the situation in which a board member for whatever reasons, leaves the association unexpectedly. As for example, if "Norm" were run over by a Mack truck!

I made this post "short and sweet." I realize that financial details can be both confronting and difficult. A few years ago, while observing during an association meeting, I watched a board member dozing. Yes, this can be really dry and boring stuff! Maintaining focus and priorities is why the board is here. It's easy to be blindsided if we don't do these things.

Continued in "Somewhere Between Bulletproof and the Titanic"
(c) 2013

HOA Challenges 2013

Nearly one in three owner occupied residences in Chicago is multi-family. In the U.S. as a whole, the number is about one in five, according to recent statistics. Many experts are convinced that condominiums and their associations will continue to expand, and to improve.

However, there are a lot of challenges for HOAs in 2013, and our association is no exception.

Our board has faced many challenges in recent years. A terrible economy, an aging infrastructure, the need to accumulate reserves (via higher fees), some unhappy owners, battling agendas, issues with a neighboring college, a disastrous fire at a nearby association that ensnared us, board issues, delinquencies, foreclosures,  and so on.

Nationally, the price of residential real estate is 26% off its 2006 peak, according to a report issued April 3. Yet, Zillow predicts that real estate will increase in price by 22% as of 2017. The fact is, overall households have been "deleveraging" for 5 years and debt, as a percentage of household income, is in the best situation in 30 years! However, unemployment overall remains higher than normal and student debt has risen.

There is no doubt that the board at BLMH is taking positive actions to improve the association. You might ask "What have we done and are we making progress?" There are specific answers to that question, but first, it's necessary to set the stage.

It's a Jungle Out There? Perhaps Not!
If I look at the list of things "to do" it sometimes seems overwhelming. This is partially a consequence of owner pressure and board compliance about 20 years ago. At that time people were apparently unhappy about "high fees" and by 1998 the board found itself in a difficult position. Reserves were low, infrastructure was aging and with the perspective provided by a new management team it became necessary to increase fees to build reserves. For most of the next 10 years following 1998 there were annual fee increases.

So, how does one "keep fees as low as possible" while building reserves? One method is to do only essential maintenance, to keep the Operating and Maintenance (O&M) budget as low as possible. In this way, reserve contributions can be increased while O&M items are decreased.

However, by using this approach some things don't get done, or are done with a band-aid approach. This is a "kick the can down the road approach." I think this association did what it had to, and attempted to balance the needs for maintenance and reserves and to avoid special assessments and unreasonable annual fee increases. To accomplish this, restoration project for unit patios was suspended. Ditto for some much needed stream work. The roofing project began very slowly, with one roof one year and after several years, two roofs in one year. Then it was planned to do three roofs. In other words, extend the life of existing roofs as far as possible while building reserves. With 44 roofs in the association, we certainly didn't have an additional  12 years. Landscaping was maintained, but a lot of mulch was spread around to give a crisp, neat appearance.

Owners noticed the growing account balances and after a few years some began questioning the board in a belligerent manner. "What do we get for our money" was the rallying cry, as was some debate about "fairness." The board held its course, until a new group came to power in 2008.

Management has consistently coached the board that the property must be maintained, even in the face of the terrible economic situation in the U.S. in 2008. Real estate may have been "down" but it wasn't out, was the argument, and once we fall behind in these things, catching up is difficult or impossible.  Some board members understood this, and some didn't.  BLMH had a series of discussions about "austerity measures" in 2009 and 2010. We discovered that there were limits to what could be done unless there were major changes in the association. There were serious board and management discussions about what it is that makes BLMH the association it is. Some things were considered unpalatable. Shutting down streams, for example. About 50% of our units are either on a stream, or have an excellent view of one. We might as well chop down the trees, rather than maintain them!

A reserve study raised more questions than it answered. A second, internal study was completed by me with management support. Finally, to get the definitive answers and armed with what we had learned with those two earlier studies, the board commissioned a third study. It was difficult to spend that money, but we needed an unbiased professional opinion with not a hint of any conflicts of interest. It was a difficult decision because we needed that money for other things.

While this was going on, we surveyed the condition of 84 garage floors, surveyed all of the patios and so on. We also accelerated the completion of roofs to 6 per year and accelerated the replacement of driveways. We also began sealcoating new and "good" driveways. Drainage improvements began because the new roofs include additional gutters and relocated downspouts to get water off of the new driveways. We have replaced those garage floors that were surveyed as "poor condition" and we've completed the concrete patio work; all unit concrete patios have been upgraded. We have also begun replacement of the bridge, walks and patio/seating area at Waterfall #2.  Normal maintenance continued, as did the painting and repair cycles. At one time the association began replacing brick windowsills with limestone. The spalling brick was becoming a maintenance problem and there was a legitimate desire to avoid water damage to units. This was suspended for several years, but it is on the agenda for 2013 and we expect to continue this project. Etc., etc.

All the while, I've been seriously engaged in a review of "what's missing" and "what must be done" while doing my utmost to shift the conversations here to "This is a business."

I feel that it has been a race against the clock. I have felt, since 2006, a real  need for urgency in this association.

A Reality Check
This has not been greeted by all owners. I think the best summary of the situation is a recent report by the Employee Benefit Research Institute (EBRI). "EBRI’s 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many." In that study, 51% of workers felt "very confident" or "somewhat confident" that they would have enough money for a comfortable retirement while 49% were "not at all confident" or "not too confident."

In other words, about half of us workers seem to be doing sufficiently well to feel confidence in our ability to save for retirement, while the other half is not. That's probably the way it is in most HOAs. This difference can create tensions between owners. Add retirees, and we now have three distinct groups of owners. Why stop there? Let's add offsite owners to the mix and voila' we have four groups with differing perspectives.

Yes, there will be challenges in 2013!

I have no precise idea of how owners in our HOA are doing. Yes, we have delinquencies and we have experienced foreclosures. However, it is also true that in the U.S. 32% of us own our place of residence and fully 85% of us are not "underwater" (as of November 2012). That means about 15% are underwater and a portion of that is distressed. We probably have some here at BLMH.

I keep these statistics in mind when I listen to owners.

If you want to criticize my lack of knowledge about the financial standing of owners here, let me point out that this is personal information. Some of our owners feel strongly that this is their business and none of the board's and that is true. What matters is simply "Do they pay their fees and keep the rules?" To provide some idea to the reader of how some owners view their personal information, the new board of 2008 promptly remove the "age" information from the census form. So the board doesn't know the age distribution of the owners on site.

One way I get "out of my head" is to walk the grounds and look at the financial statements. Most of our owners don't complain and keep the rules. They are simply going about their day to day business, as I am. That includes paying their fees on time and turning in their census forms.

Walking the grounds, I see the new roofs, driveways and drainage improvements. I see the progress in a new patio area at Waterfall #2. I see the new pond landscaping after we removed the willows at Gloucester, and new patios. Then there are the new emergency access Knox boxes for keys. As I recently stated in our newsletter "There are more maintenance initiatives underway than I can possibly state in one newsletter."

Yet, if I were to empower the positions of the few, it would be very different. Yes, there are some things that fail and we need to address them responsibly, and this board will. Some owners do what they can to push themselves to the front of the line.

It might be a jungle out there, but this is also a beautiful, great place to live. As an owner wrote "may I also say, I absolutely love it here, and encourage my friends to move here also." Another wrote "Thank you.....especially for all you and the Board do to make Briarcliffe Lakes a great place to live."

Most of our owners understand the issues and remember why they bought here. Some of our owners forgot why they purchased, or had unrealistic expectations for what "ownership" would entail and what they could expect from their association and of the obligations they have. Some think it's the equivalent of buying an apartment where someone else maintains the buildings and the grounds and pays for that maintenance, too!

One of the duties of the board is to remind owners of why they bought here.

Step One - Remind Everyone of Why They Purchased Here and What BLMH is
A condominium is a place to live. It is an alternative to a single residence and to living in an apartment. It can provide a deeper pool of resources for common maintenance issues. Everyone who purchased at BLMH did so of their own free will. Yes, their expectations may have changed in the past five years. But this association has gotten better and we have the evidence of this.

Some might not like the "weeping mortar," tudor style exterior or the meandering streams. However, they have been here for 35 years and were here when each and every owner purchased a unit. Replacing these things, while a possibility, is not realistic with the current fee structure. Amen!

The first step with a disgruntled or unhappy owner is to remind them of what this association is and what it is not. We've done that as responsibly as we can. However, this requires constant reinforcement. How to do that? At BLMH it's a newsletter that is just that and nothing more. It includes financial information, details of various maintenance and project initiatives, rules emphasis, information by management, and so on. It reveals some of the issues we all face and it provides reserve updates, finances and the goals of the association in a realistic and responsible manner. Of course, if every owner attended every association meeting they would know this. But most do not. Each member of the board is requested to author an article. It's not easy and the newsletter certainly isn't a popularity contest. For example, the current article by the treasurer is about "bad debt."

For a short time, the newsletter became the "good news" newsletter. Sort of a rosy tinted perspective which was long on curlicues and white space, and short on information. This was an attempt, I guess, at making people "feel good." A perfectly adequate approach for a social club, but not acceptable for a not-for-profit business with 336 shareholders and a $1 million annual budget.

But I persisted and the news is accomplished in a 4-page document which is issued about every other month. It's been called "Manor Briefs" but is currently simply called the newsletter.

Graphics consists of a masthead photo taken in the association, and perhaps additional photos to clarify the contents of an article. Where necessary, "pie" or other type of chart may be included to assist owners to understand the problems of this business in which they are shareholders. The newsletter neither paints a rosy picture or a dismal one. One of the tasks for the board is to provide factual information.  Our association is 35 years old and it is aging. We have a financial plan, reserves, professionals to guide the board and do the heavy work. We're neither a social club, or a "Club Med" or a "Retirement Community." We're a self-sufficient PUD and we do most of our maintenance with little financial assistance from anyone. We're probably the best kept real estate secret in Wheaton, with private streets and extensive grounds.

Five Years After the Great Recession 
Before continuing, it's useful to note the current reality. At present, we're all a bit weary. Weary of politicians in Illinois who squander our taxes and make false promises. Weary of hearing bad or disturbing news from "talking heads" who offer no solutions beyond "tune in at 5 pm." Weary of "change" which it seems was no better than that which preceded it.

That's the psychological morass that we find ourselves to be in. Not a great place for one's mind to be! Today, the economy is slowly, tortuously improving. For a culture that is steeped in "instant gratification" and a "just go do it" mentality, dealing with the consequences of the recent financial melt down has been agonizing for some. Most 30 somethings have never experienced an economy like this, and some of us expected real estate to increase in value, at a good clip "forever."

Something that everyone, it seems, said was not possible did occur. Residential real estate collapsed in 2007. This was something that was on an upward trajectory and seemed unstoppable. With that collapse, a lot of people were trapped. Trapped in their poor decisions, their homes, their HOAs and trapped in that mortgage.

In part, it's psychology. Some of those who feel trapped decided that it was someone else's mistake. They insist they had done everything right. They expected the value of their residence to increase 5 to 10 percent a year. They expected to use their equity as a piggy bank. They expected to sell and retire somewhere else. They expected to flip in 3 years and make a nice bundle and move into something better. Unfortunately, the real estate bubble "popped" and the economy turned against their goals and dreams.

During the heights of the real estate bubble, some buyers didn't do their homework. They purchased a unit without checking the Bylaws and Declarations. They didn't read the Rules & Regulations. They didn't consider the age of their furnace and air conditioning. They may not have checked the finances in that HOA. Why bother? It was a "feeding frenzy" and there was a lot of short sighted thinking.

The consequences of the real estate bubble are still reverberating and have certainly contributed to the challenges here at BLMH.

Those challenges include the perceptions of owners:

• Owners who want to sell and can't at a price that they feel is "reasonable" i.e. back to the 2006 highs. 
• Owners who feel they made a mistake and are trapped in the association.
• Owners who are simply unhappy.
• Owners who are simply uninvolved, oblivious, or apathetic.
• Owners who expect the board to do the "dirty" work for them.

Living with Two Realities

One of the things about the last five years is how polarized it seems to have become. This might be in part due to this economy, in which some people seem barely touched financially and yet others have faced severe financial setbacks and a few, ruin. 

We have some owners who seemingly are doing fine and may be oblivious to the nature of the problems around us. Others I suspect are financially struggling.

That makes for an interesting community. And so it is in the U.S. as a whole.

One of the questions I've had since 2007 is how is an association to deal with this? Here at BLMH we found out when some owners began talking loudly about "fairness." I can only surmise the source of that conversation, but it seems to have been grounded in the economy and the "unfairness" of it all. However, it morphed into some nasty stuff.

I concluded that some may have decided that fees were "unfair" if one was having difficulty paying them.

The crash of the real estate bubble was certainly unfortunate. But nothing that this association did contributed to it. Our fees had been increasing for about 9 years as the board struggled to improve our reserves and prepare for some really major projects. Those projects are underway and about 50% complete. It took about 14 years to prepare for this, in an association in which some expected to sell before the bill came due.

Step Two - Develop a Long Term Plan
When an association is confronted with problems, a potential financial shortfall, a few very vocal and unhappy owners, and a contentious, divided board, what is it that must occur?

The foremost thing is to establish certainty. Now, when we hear the use of the word "certainty" we might think of "predictability." I'm using it from the view of "Certainty is perfect knowledge that has total security from error." In an HOA we are attempting to avoid errors in judgement and miscalculation. We certainly don't know the future. The topic "establishing certainty" will be more deeply explored in a future post.

We all hate surprises, so here at BLMH, budgeting is a continuous, year long process that culminates with a "budget workshop" in October. Then the cycle begins again. There is no end to the budgeting process.

To avoid error, at BLMH the board decided to fund a reserve study. That was a courageous move. Some on the board were convinced that "we have enough money" and "our fees are too high." In other words, the fees were higher than was necessary. Others were of the opinion that the fees were necessary and used some arithmetic to support that position (for example, number of roofs multiplied by the cost per roof divided by years to complete and compared to reserve contributions).

It was acknowledged that "the reserve study may reveal things that the board and owners would not be happy about."

Why did we fund that reserve study? I suspect is was because the "we have enough money" faction really believed that to be true. It was expected a reserve study would "prove" this position to be correct. I was present as a bystander for part of the debate during an association meeting. As I recall, a manager cautioned the board "This could open Pandora's Box." I was concerned, but I am convinced that time is the enemy of any financial plan, and delay can prove financially fatal. So when that board decided it was better to proceed, I said to myself "I'll keep my fingers crossed." I'd been running my own numbers on this association and I knew there was a possibility of hidden flaws.

The conclusion? This association needed to continue on it's course to build up reserves to do the identified projects. In fact, we had "adequate" reserves as per a second professionally prepared study, but we certainly did not have "too much money," nor were our fees "too high" considering the amounts required to continue the various projects.

So we did establish certainty. It wasn't the "good news, we can reduce fees" proclamation as expected.

However, the board had also identified two key financial issues:

• Owners were overwhelmingly opposed to special assessments, and
• Gradual increases, even 1% or 2% annually, are loathed by some but may be unavoidable.

Step Three - Improved Communications
The board of 2008 took some fresh steps to improve communications. However, that communications didn't address the concerns of owners. A get together with free donuts, the formation of a very small "neighbors club" and a more colorful newsletter weren't all that helpful to assuage the concerns about how this association was to deal with the fallout of the "Great Recession."

In fact, one of the problems in our association is its sheer size. 336 owners, most on site with 6 or 7 board members. It's easy for boisterous, belligerent or noisy owners to run over the board. It's sheer numbers. Even 20 unhappy owners provides a 3:1 advantage and yet represents less than 6% of the ownership.

That has been a real problem from time to time at BLMH.

I suppose, some associations may have the opposite extreme where 94% are aligned and agree to "keep fees low" and kick the can down the road. I've often wondered how some associations can survive in modern America. Yes, we have the Illinois Condominium Act (ICA), the Bylaws, Declarations and Rules & Regulations. But what happens if an entire association decides to toss out the book?

Returning to our boisterous few, the question here is how to counter the 6%?  The board decided under continuous pressure, to alter the content of the newsletter. Real financial concerns needed to be addressed. The question "What do we get for our money?" needed to be answered, and the requirements of the ICA to avoid creating special groups of owners needed to be upheld. Altering the newsletter was the best means to do this.

It began with more in-depth articles about Architecture & Maintenance; after all that's where most of the visibly spent money goes. Then expanded financial information. Yes, each owner gets a budget and association finances each year, but a pie chart is somewhat more useful and graphically indicates "where exactly does the money go."  I'm convinced that a few owners really believed that something had to be wrong with our finances; how else to explain why it costs what it does to run this association?

The board decided to begin a website. All newsletters are posted there. This allows others outside of the association to view our workings and to get a handle on what is occurring  It also allows new or potential owners easy access to the older newsletters, as well as the Declarations, Bylaws, Rules and Regulations and the "Quick start" documentation, etc.

An explanation of what this association really is also ensued. It is a Private Urban Development; a PUD. We own our streets. Many owners didn't understand that. I know, because when a water main broke, some of the owners standing by stated "It's not a big deal; the city will take care of it!" I heard this and said "Whoa!"

Yes, it really does take a substantial amount of money to maintain about 40 acres, including 15 acres of turf, the lakes and their shorelines, the streams, waterfalls, paths, 44 buildings, streets, street lighting, and so on. We do the snow plowing, too!

Shifting the newsletter wasn't easy and it remains difficult to this day. It takes a real commitment to communication on the part of the board to make this happen, to take the time and to express the knowledge responsibly and to provide both the good news and the not so good to our owners.  However, I view it as an absolute necessity.

 Step Four - Staying the Course
"Staying the course" is an expression sometimes used to mean "to pursue a goal regardless of any obstacles or criticism."  This goes beyond any one board.

For example, our association has a reserve study. "Staying the course" means it has to be used! It also has to be updated annually so that it reflects current reality and was not simply a "snapshot in time." A board that has computer literate skills including spreadsheets can do this each year. However, this is another task to be added to that never ending "task agenda."

Step Five - Establishing Priorities
Our board is comprised of volunteers. We have a lot to do in our personal lives, and being of service to the 330 other owners is not our main task in life.

It's essential to achieve and maintain a balance.

As a board member, one's time is limited. That means, each of us has to prioritize how we spend that time. Owners are a diverse group. There is a possibility of unlimited criticism from owners. Here at BLMH, six board members have 330 critics in the stands. It is not possible to keep them happy. It's best to to remind them upfront and repeatedly of this.

Here are the priorities as I see them:

• Run the business. 
• Manage the managers.
• Maintain a long view perspective.
• Closely monitor the finances, including delinquencies. 
• Prepare monthly budget updates and monitor for deviations.
• Prepare various, detailed monthly reports so the entire board is informed. 
• Avoid entanglements with owners, or groups of owners.
• Uphold the Rules & Regulations. 
• Operate the association in accordance with the ICA, Declarations & Covenants, and the Rules & Regulations.
• Avoid diversions. 
• When all else fails, remember why we purchased here, and why we are on the board. 

April 2013

Thanks to my friend for this April calendar.

Is Your Association the Titanic?

The object in the title was a ship, a transportation vehicle that ran afoul of some serious difficulties. When we use the name "Titanic" as I am using it in this post, we usually think of that voyage which was to be an extraordinary, pleasurable trip. But it encountered grave difficulties and has become the stuff of legend and also the object of several films, both romantic and documentary.

Using the term "Titanic" to describe one's condominium association is a metaphor that brings up an image worth thinking about. Is your association on a collision course with disaster?

Most of us will say "Of course not." Others may say "We're doomed!"  Yes, there are a lot of "horror stories" out there since 2008.  Not all are representative of reality. It's useful to remember that in 2012, about 85% of all the "homes" in the U.S. were not underwater. That includes townhomes and condominiums. If you think most of us are "underwater" then you can blame the politicians and the news media for misleading you with statistics that were not representative of the entire home market. The overwhelming majority are not underwater, and weren't in 2008, either! How can that be? A lot of people own their homes outright (32% in November 2012). A lot of people have paid off a substantial portion of their mortgages. A lot of people purchased homes with 20% or more down. Many apparently bought a home for that old fashioned reason "to have somewhere to live" and as an alternative to renting; they were not overextended in real estate.

Financial conditions have improved. Apparently, many of us have been paying down our mortgages for the last 5 years. However, individuals and associations face a lot of challenges in 2013 and beyond.

If you compare a home or condominium to a transportation vehicle and consider it to be a place to spend a significant part of our lives, then I suggest you also consider that travelling on a commercial airliner with professional crew is safer than flying on a small, private plane. In other words, there are advantages to condominium living with professional managers, a board to monitor and direct maintenance and finances, and a community to share the financial burden and the financial risks.

The naysayers will point to the Titanic, and to the headlines and say "But commercial crashes do occur on airplanes and on trains." Yes they do. These are the exceptions to the rule. It is a fact that in 2003 there were 22 people who died in commercial airline accidents in America. It is also true that in that same year 44,757 died in motor vehicle accidents, excluding motorcycles. (Note 1). In an average year, 82 die in commercial airline accidents. The number of automobile fatalities is pretty constant at about 40,000 per year. My point? Commercial travel is safer, Titanic or not. So operating our life out of specific events might not be the wisest way to go. Today, some people say that owning real estate such as a home or condominium is a big mistake. Really?

Residence or condominium, we also sometimes think of our "home" as somewhere to rest our hat during our journey of life and escape from the outside world with a nice warm hearth in the winter and other comforts. It is somewhere in which the problems of the larger world, the financial issues of our country and countrymen and women may seem far, far away. In other words, if we are attempting to find a means to achieve solace and comfort, including financial security, then there may be value in owning an abode. However, a private residence might not be the wonderful place that some have promoted it to be. Nor is it the automatic disaster that others now say it is. The fact is, we all have to live somewhere and a condominium can offer real financial advantages over renting. That includes an advantage called "strength in numbers."

However, real estate never was a sure thing, and with that signature you could be buying a ticket on the Titanic. That's what those who are deeply "underwater" in their mortgages may think. This applies to both single residences and town homes or condominiums. So if you are a home owner, you also might want to read this post and see if the concerns it raises should also be applied to you.

Rugged Individualists? 
Ah yes, this is supposedly a nation of free thinkers, of rugged individualists with a "can do" mentality.

That's a wonderful, romanticized version of America. What does that mean? Does the ability to sing like a canary guarantee a slot on "American's Got Talent" and a financially successful life? Well, that's not quite what I was thinking about.  I was raised by my parents to be self sufficient. My kindergarten teacher once told us "You are Americans" and she went on to point out that the word "American" ends in four letters "I CAN." In other words, it was in our national identity! The pioneers came to this country and saw a magnificent bounty. That manifested itself as near limitless opportunity. They lived that opportunity. We've all read the stories.

Where are we today? Has the opportunity evaporated? I think we forget about the reality of some of those romantic tales. The reality is life in this United States has been difficult from time to time, and there have never been guarantees. It was difficult before we were a nation. The Jamestown Colony perished. The Donner Party perished. People lived difficult lives, died on the prairie of starvation, in childbirth, in Indian wars, or in the influenza epidemic of 1918. If we compare the "Great Depression" to the "Great Recession" current times look like a cake walk. Furthermore, there have been not one, but four recessions since 1980!

Why do I say these things here? Because I think it's important to understand that we are probably living a life grounded in fiction. Contrary to some beliefs, we do need community. We need infrastructure. We need deep pockets. We need so much we take for granted, and yet many of us pretend we can do it on our own!

"A man's home is his castle" is the old expression. That may be, but it may also be a "money pit." Our personal reality probably lies somewhere between those extremes, but from time to time it may seem that we have moved closer to one or the other. If things go bad, would you rather be alone, or have professionals to support you and neighbors to share in the burden? Would you prefer to be a loner, or have the support of a larger group including professionals in your immediate community?

Unreasonable Expectations
Everyone who purchased a condominium did so with some expectations of what community living would be like. They also came with expectations of costs. Every association is unique, and so too are the expectations and built-in costs.

Here at BLMH, we have 15 acres of turf, hundreds of trees, two lakes, three ponds with meandering streams and waterfalls, and a mile or so of walking paths. Yet, we're not an arboretum, or a park, or a retirement community. Other associations may have a pool or pools, a sand volleyball court, cabana and a clubhouse. Yet, they aren't a "Club Med."

Owners may not understand this. Offsite owners may have little interest in maintaining some of these amenities, as their personal agenda might be simply extracting as much cash as possible from their personal business, which is renting their unit.

Condominium associations are communities. Ours is actually larger than some villages. Yet, we aren't a social club. Primarily, condominium associations are businesses in which each owner is a shareholder. Ours is a not-for-profit corporation. The primary duty of the board of directors is maintaining the property and operating the association as fiduciaries while upholding the declarations, the bylaws and the Rules & Regulations. That puts the board in the crosshairs of owners from time to time. It is not a popularity contest, and funds are spent to maintain the entire property. Not simply to maintain or improve the view of a group of owners, or on personal whims. Further, in a large association such as ours, it's impossible to do everything "at once." We paint the exteriors and halls on a 6-year cycle, for example. Large capital projects are also done in phases. We have 84 driveways which we are replacing. We're replacing 44 large roofs. Stream repairs which include large patio areas are also being done on a rotation basis. Yet, some owners will say "Why are you doing that patio over there, with my money!"

Some owners do not understand the purpose of the association in which they belong and some will promote a personal agenda and a political position. For example, we are not primarily a retirement community. Yes, they persist and in so doing, they are probably doing a disservice, and contributing to the tensions that will always be present in a diverse group.  They certainly make the job of the volunteer board more difficult.

It is a fact that most associations have "adequate" finances. That's true here at BLMH. We don't have excess funds for personal initiatives and any "new" initiatives will require reallocation of funds,  reducing spending in other areas, or increasing fees or levying a special assessment. It's untrue to say "We have enough money" to do whatever, unless it's already in the budget, in the maintenance and reserve studies, and also in the current fee structure.

Yet, owners from time to time will pretend they aren't aware of this, or make a fuss to get their way, or undermine the board. Owners will sometimes fall behind in their fees, and may feel that "There is enough money in the association" and so, being late or a month or two behind should be acceptable and tolerated.

If an association doesn't properly manage these expectations, it should expect difficulties.

The Current Reality?
Here are a few statistics to think about. I chose these because they are general in nature and are commonly quoted statistics and headlines. I suggest that the reader avoid drawing any specific conclusion from these and I'll explain why later in this post.

"Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute." This from a March 19th article in the Wall Street Journal.

"There have been approximately 3.9 million completed foreclosures in the U.S. since the economic crash squarely began in September 2008." This from CoreLogic’s National Foreclosure Report for October 2012.

Let's look at one more statistic.

The total number of foodstamp recipients as of November, 2012 was 47.7 million.  At that time the total number of U.S. households on foodstamps hit an all time record of 23,017,768! (Here's an aside statistic; the cost to the taxpayer to keep these 23 million households fed was $281.21 per month per household.)

What's My Point?
My point in the previous statistics is this. First, there are some real problems in society and the U.S. economy. These problems permeate all aspects and every segment of our society. However, generalities don't do justice to individual condominiums or personal plans. Yes, there is a lot of populist fiction out there and politicians who exploit it. We do get conflicting information. Which is it, are we a nation of underwater homeowners living in foreclosure with foodstamps, or are we the stuff of the pioneers?

I suggest that in each of us, there is both possibilities, and that we're a bit of both. That is also true for each household and each condominium association. For example, the statistic on savings provides a dismal picture. It implies that 57% of those workers approaching retirement have a bare minimum of savings, and that's untrue. A recent Employee Benefit Research Institute survey was the source of that statistic. That survey also stated that 51% of us are either "very confident" or "somewhat confident" that we will have enough money in retirement.

How can that be? Well, there are a lot of workers out there and most are in the age group 18 to 70. If we are younger we usually have fewer savings because of school debt, the costs of raising a family and we might be putting up to 41% of our income into a home. However, as the children age and the home is paid off, many of us divert that cash to retirement funds and savings. Yes, specifics vary all over the map. And so too for condominiums and homes.

Yet, if we read the headlines which focus on misfortune we may conclude that most of us are underwater and in foreclosure, that we subsist on food stamps and have no retirement savings. That is certainly true for some of us and for those who are that situation, we may have gotten there by accident, misfortune or bad luck.

This is not a personal finance post and so it will focus on condominiums and other forms of residential property ownership. Yes, as with individuals, an association may find it doesn't have the funds available to maintain the property and deal with necessary repairs and other normal costs. I suggest that poor planning and an inability to act in accordance with plans also contributed to the "hard times" some are experiencing.

Your Association is Somewhere between "bulletproof" and the "Titanic"
Just as it is with the individual households in this economy, condominium associations lie somewhere between well run and a disaster.

On the Titanic, we had a ship which was piloted in possibly treacherous seas. (Are there any seas that aren't possibly treacherous?) There were a number of mistakes made:

• It was considered to be "unsinkable." In other words, the plan couldn't fail.
• It had design flaws. In other word, there were incompletions. One was a rudder too small for a ship that size, and the absence of "bow thrusters."
• It didn't have a contingency plan. After all, who needs one in an "unsinkable ship"!
• It was running at a speed at night which meant it could not avoid an iceberg if one were visually spotted directly ahead. Oops, is that a symptom of poor judgement?
• It didn't have sufficient life saving contingencies, such as lifeboats.
• Passengers weren't briefed on life saving and other issues, and told "In the event this ship sinks, you may have to swim for it." In other words, inadequate communications. 

What does the above mean in general terms for your association? Here are a few questions to ask:

• Does your association have a 30 year, long term plan? One that can identify "icebergs" ahead?
• Does your association have supplemental 1-year, 5-year and 10-year plans?
• Are these plans updated every year, so that current conditions are taken into account?
• Does your association have professionals who take an objective look at the plan and its conclusions?
• Does it also use reserve professionals to provide an independent, unbiased review?
• Does your association use an accountant and are your finances independently audited?
• Does you board include a treasurer who scrutinizes every bill and signs every check?
• Does it view the plan as "unsinkable" or does it consider it to be only a possibility and "adequate?" In other words, is your board cautious or arrogant?
• Is your association outspending its finances? Are you pretending "icebergs" don't exist?
• Do you have a contingency plan to deal with any flaws in the plan?
• Does your association honestly communicate the issues to the owners?
• Have you, as an owner, attended numerous association meetings so you are aware and understand the issues facing your association?
• Have you studied in detail the documents that govern your association?

The Black Swan
This is a term which is taken from the title of the book "The Black Swan: The Impact of the Highly Improbable" by Nassim Nicholas Taleb. That book has become quite popular because it delves into the occurrence of improbable and unlikely events, both positive and negative, which result in massive consequences.

It has been used as a crutch to explain everything from the recession of 2007, the stock market panic that followed in 2008, and even the rash of home foreclosures since then. In fact, it has even been used as an excuse for these failures.  What rubbish!. I am of the opinion that if the book had existed back in 1912, it would have been used by some to explain the sinking of the Titanic.

Here's a fact. While hitting an iceberg is improbable, running at high speed in a ship which can't turn quickly in the dead of night in seas with icebergs and no radar is a risky venture. It would have been darn near impossible to hit that iceberg if the speed of the ship had been a correlate to its turning radius and the visible distance, with a margin of safety.

The real question to ask about Black Swans is this "What is a Black Swan?"  It is an event that is highly improbable. Most such events are avoidable. When people take the perspective that "it was unavoidable" or "it could never happen" and then, after it does, describe that so called impossible event "A Black Swan" I suggest that they be questioned in depth. Most of the time we will discover that they didn't plan and mistakes were made. The larger question is "What steps need to be taken to avoid this."

Everyone, from homeowners to condominium owners, should be able to have a responsible conversation about this.  I suggest many can't and many won't, preferring to quote some politician or other and saying "It can't happen because "so and so" said it can't."

A Personal Perspective
Most of us know what we have to do. We can read the papers and the internet and the various financial data provided by many accountable sources. But we may not take the necessary actions.

You want proof? Then answer these simple financial questions, and these are every day, household budget type questions

• Do you have a realistic household budget?
• Do you have a 5-month "emergency fund?"
• Do you have a savings plan? 
• Do you have a retirement plan? 
• Do you fully fund a Roth-IRA each year?
• If you have children and expect them to go to college, do you have a funded "529?"
• And, the biggest question of all is this. If you have such plans do you live your life in accordance with them? 
• I'll take it up a notch and ask "Are you debt free?" 

If you can answer "yes" to all of these, then "kudos" to you. If you have no idea or answer "no" to all of them, then you should be living with your parents. If you are somewhere in between you have some work to do, but that's okay because for most of us we do have time to put good plans into place and achieve them. If you don't understand the questions, then you probably lack the financial skills required to strike out on your own and succeed, or to live the life of a "rugged individualist."

If we have difficulty with a household budget, don't plan to accumulate the savings for a new furnace or roof, then we'd better have someone around to do the "heavy lifting" for us. I know, we will argue and complain, but in the end I assert it's better to be in a responsible community than to be a single, do-it-alone individual in current day America when it comes to housing. Unless, of course, we really are one of those "rugged individualists." However, I'm talking about accomplishments, not our personal thoughts or ideas on the subject.

Many  people think "I can go it alone, I'm capable and I'll make it work." There is a reality that indicates that a lot of us can't and many of us won't do the planning or the work or whatever it is that is necessary to succeed. That's one of the reasons that many businesses fail in the first year, and nearly 65% within the first four years. Thinking "I can do it" is no substitute for actually doing the things it takes to accomplish one's goals.

In the next post on this topic, which I'll call "Somewhere Between Bulletproof and a Disaster" I'll compare some lifestyle possibilities, and I'll also give everyone something to think about.

Final Thoughts
One of my philosophies about living is "Generalities are wonderful pipe-dreams, but specifics are reality." As applied to one's abode, there is a point of view that owning one's home gives one ultimate dominion and control. That's arguable. If you live in Wheaton, IL as I do, there are specific codes and ordinances to be upheld and adhered to. I can't let my abode fall into the state of being a dump. If I do, I can expect the local inspector to knock on my door.

That's the problem facing individual homeowners. Yes, we can make certain decisions, but then we discover that we are responsible to a "higher power" and we are solely responsible for making all of those financial decisions and performing the necessary maintenance. Those financial decisions include designing a life that allows saving to deal with the consequences of home ownership.

Oops! That means that when the driveway develops a hole, the roof leaks, or the exterior needs repairs or landscaping, that "Sally Homemaker" gets to pay the bills and/or do the work. Of course, "Joe Homemaker" has been planning and saving for this for the last 5, 10 or more years, hasn't he?

The fact is, we can live our lives to a certain extent as we wish. However, if we want to be a "home owner" there are specific obligations, and not a lot of help in satisfying those obligations, beyond our family unit. Perhaps "Mom and Dad" can help out, but more than likely they have their own issues.

In 2008 a lot of people discovered they were serfs. That was the year it became apparent that they lived in that home, paid the taxes, mandatory insurance and did the necessary maintenance. But in fact, as they had no "equity" they were in fact, serfs. With that realization and "no skin in the game" a lot of people decided to walk away and toss the keys at their lender. Today, there are ads on various radio stations and the gist is "Honey, we're okay financially, but that decisions we made to buy this home is really killing us. We're underwater and it will take years to pay off enough of this debt to get to where we expected to be. We made a mistake and we need a way to get rid of this financial responsibility." The solution in the ad? "Call XYZABC-Lawers and we'll get you out of that mortgage, so you can live a happy, carefree life!"

As so many have realized, with ownership comes financial and other responsibilities. That being the case, would you rather go it alone, or with other owners to share the risk, and with professional management?  Do you want to avoid being on a financial Titanic?

Continued in Part II "Somewhere Between Bulletproof and the Titanic"

Note 1. Statistics from Time Magazine article on risk dated December 4, 2006.

(C) 2013

What, Why, How?

I read an interesting article this morning. The article was written by a financial planner and was based on an earlier one in the New York Times. It asserted that most of us are absorbed asking "What" and avoid asking the really important "Why?"

For example, "What am I going to do today?" is a popular question. The unanswered one is "Why am I going to do that?"  I was struck by how true that is.

So many of us become absorbed by the result. We don't always think about the plan and "why" we take specific actions.

Plan + Process = Product

In any endeavor, we can spend a lot of time, energy and resources thinking about the results we want. Some call that result the "Product."  However, there are two preceding steps which are:

• Plan
• Process

The third step, which is the result or outcome of the previous steps, is what some call the

• Product

I know this might appear to be jargon, but if one wants to get a grip on the fundamentals of planning and project management, then getting familiar with the terms is a necessary step. 

Here at BLMH, our board is constantly operating in the question "Why?"  It's a fundamental for any maintenance and financial planning. Those are the primary tasks facing a HOA board. BLMH is not a social club and there are serious decisions to be made. Some of the consequences of these decisions may not show up for years. That includes both the physical, which is to say, the physical condition of the infrastructure of the association, and the financial, which is to say the amount in the reserves and other financial accounts.

This is obvious if anyone delves into the answer to the question "Why are my fees where they are?" Those fees are not the consequence of the actions of the board in 2012 or 2011. However, 5 years does make a big difference. 10 or more years can result in huge fee differences.  A substantial component of our fees is reserves, and as we all should know, 30 years is a long term planning issue. That is the standard duration used by professional reserve planners. 

Where to Begin?

In this planning process and in response to the question "Why?" the board begins with the Illinois Condominium Act (ICA), the Bylaws, Declarations and Rules. These things do provide the framework for the "why." Of course, if a board or board member is oblivious to these documents and what they contain, then one shouldn't be surprised if it gets a bit strange or murky in your association.

The board also has available what currently exists in the association. Those physical assets are what is to be maintained, and are "why" there is a financial plan. 

Why? Because its necessary to take certain steps in order to maintain a community. There are documents that stipulate why a board must take those steps. 

The "Why" is the First Step

Why are we going to build a financial and maintenance plan, particularly one looking 30 years into the future? After all, as individuals we probably won't be here in 30 years. Yes, that's absolutely true for a typical condominium owner. But we're not talking about our personal wants, needs and desires. This is a board issue, one for fiduciaries to consider. Of course, we have similar long term planning decisions to make in our personal lives. Those decisions include retirement planning, accumulating savings for that retirement, long term care issues and so on. Those are really important personal issues and could be the subject of numerous posts. But this post is from the perspective of a condominium association.

The board is a group of fiduciaries who are looking at the entire association. This association has been here for 35 year and it may well be here for another 100 years! We can quibble about the dates, but the board acts as fiduciaries and they must think long term and they must think of the association. For one thing, the ICA says we must maintain the property. We must maintain this community. We must plan for the future. We must put into action the necessary financial steps. In other words, we must set fees and save for reserves.

Owners can take a perspective that an association should be maintained “differently” or is well maintained or not. That’s a different issue. That’s a perspective about both the plan and the process to achieve that plan. As some cynics have said, if you don’t have a plan, any road will get you to where you are going.

It is a fact that some associations "roll the dice" and simply levy special assessments from time to time to handle significant financial issues. That might be acceptable to all of the owners in some associations. However, it certainly isn't acceptable to most of the owners here at BLMH. 

Boards have difficult decisions to make. First, anyone who ever says “We have plenty of money” in an HOA probably doesn’t know what they are talking about. Some may say that, as a means to justify a position they have about fees. For example "We have enough money" is sometimes promoted with a position "Our fees are too high." The fact is, any well run association will have a detailed reserve study and capital expenditure plans. It will have a maintenance plan and it will have the facts and details to back up those plans. If the financial plans are substantiated by the reserve, capital and maintenance budgets, then it is possible to say “We have adequate funding.” That’s as far as a responsible board member can go. Why? Because all of these plans are based on assumptions. They include the “Why” as well assumptions about the state of the association and also assumptions about the future.  This is one of the reasons BLMH has a "contingency fund" which is the equivalent of a homeowners "emergency fund." That association fund isn't excessive, and we can't say that it's adequate. However, it is there in recognition that unexpected and sometimes expensive things do happen, and they are an aid for a board to avoid a special assessment, or juggling funds in other areas; e.g. driveway and roofs. It is a fact that "reserves" cannot be used for day to day maintenance. At best, an association can borrow from reserves, but it must implement another plan to replace any  funds so borrowed.  

"What an inconvenience" some owners may say. Yes, that's true. It’s much easier if one only thinks of themselves because one only has to make plans for oneself. If we fail in those personal plans then we can always apply for Medicaid, food stamps and so on. In extreme cases, we can “walk” and let the bank take our unit. However, there is no government mandated "social umbrella" for associations. If your association fails, it will be entirely on its own. No government and no social organization will come to the aid of your association. If your association fails, then you can expect special assessments and much larger fees, as the hat is passed to the individual owners. Owners are shareholders. They aren't tenants!

If you read this you may wonder "Is this association failing?" Absolutely not. But I can't speak to the condition of other HOAs in the country. There is a checklist to review, and the board of BLMH does review it. Adequate reserves is simply one piece of the financial problem.

So the board is charged, as fiduciaries, to look at taking actions with the best interests of the association in mind for this year and for 30 years into the future.

That's a challenge. It might be impossible for any individual who doesn't think beyond the next paycheck, or next year to apply a mindset different than the one they use in their personal life. Here's a question. How would a board operate if they were each either delinquent or in foreclosure? That is not a rhetorical question but it is a serious one. It's also why there are conventions that restrict board members with personal issues or financial incentives from being involved in certain discussions and votes. I think it's also why it is best to have professional managers involved in the operations of HOAs. There is a need for checks and balances!

That's an extreme question but how many of us have a real, long term financial plan? A plan that predicts what our financial condition will be in 30 years, with inflation, financial setbacks and so on. Not a "rose tinted" plan that expects 10% on our savings accounts, 1% inflation, no recessions and 10% annual wage increases or 5% annual social security COLA increases "forever." I'm talking about a plan grounded in reality and reviewed by experts. A plan that adjusts spending and saving to accomplish that goal 30 years distant. That's what a board is expected to do, with the assistance of management and other professionals.

While doing this, the board comes to a conclusion about this year's finances, and plans in detail for the next 5 years and also come up with a really long term 30 year plan. When owners want to run an association as a popularity contest what do you think happens to those 5-year and 30 year plans? I suggest they get dumped and the emphasis becomes "What are you going to do for ME today!"  That is not to be a part of any serious or credible discussion about "Why." But then, owners are voters and we may vote for good things today with the expectation that "someday" someone else will deal with the problems, or "we'll worry about that in 5 years."

Individual owners can ask "Why did I buy here." They can ask "Why do I have to pay a monthly fee." They may also ask "Why are the fees what they are?" They should also ask "Why am I here and what kind of a difference will I make while I am here?"

The board takes a different perspective. That includes less of the "Me" and  "My unit" and more of the "How." Yes, an HOA board should ask "Why are we doing these things?" The board can look at the documents previously mentioned and discuss with management the "Why." It is in part due to precedent.

For example, "Why will we allocate funds this year to maintain the property?" It's not simply because the tress, shrubs and so on are there. It's because they have been there for 35 years. Every owner who purchased here drove on our streets, saw the trees, the landscaping, the streams, ponds and waterfalls.  They do so each and every day. They purchased with that as an expectation of what is "normal" here at BLMH. Some still talk about our "award winning" grounds. The board is not here to achieve awards, and that is not a consideration in the day to day operations or how we spend money month in and month out.

The board is here to maintain that "normalcy" that we've come to expect and that some demand.

That's an example of precedent. I think owners do expect the board to take reasonable steps to maintain that "normalcy." Using our landscaping and grounds as an example, that means collecting the necessary fees, saving some for unexpected issues (removal of a dying tree, storm damage, or a water main break, etc.) and then spending sufficiently to maintain the grounds. I can also say it means doing so in an orderly fashion to avoid decay or damage and sudden changes in funding (fees) and spending.  We all want "smooth and steady" and prefer to avoid fits and starts, sudden stops or changes in direction.

The Plan - A Combination of How and What
Once that we are clear about "Why" we are doing things, then the next step is to develop a plan. At BLMH this does not occur in a single step, or in one month. It begins with the annual election here at BLMH. Owners step forward and say "I'm willing to be of service to your association." The unit owners each vote, or not, and ultimately a handful of owners are selected for the board of directors. They are the "lucky" ones who get to deal with the problems.

The board term at BLMH begins with a budget workshop under the guidance of professional management. Consider that for a new board member, this is really a challenge. It doesn't matter how smart one is. There is a lot of information behind the worksheets. We can put the annual budget of this association on two pages. Behind those two pages are thousands of work orders, myriad projects, and the accumulated history and condition of this association of 35 years. And yet, we summarize it in on a couple of pages. I defy anyone to walk in and say "This is simple." But, some have!

The budget workshop builds upon previous budgets and plans. It sets in place a short term plan with a long term component. That plan includes "What" will be done, "How" it will be accomplished and "How" it will be paid for. A good board will also review the reserve study, update it with current information and compare the current reserve funding level to the plan. That should deal with longer term financial issues. With this plan, decisions are made about collecting and spending money for the coming year. It's a challenge, because it's also a goal to keep things steady and that means avoid large fee increases, both today and in the future. If this doesn't appear achievable, the board has the option of adjusting project time lines and running the numbers again to review the impact on fees. But it would be irresponsible to hold fees constant today and plan on large increases "in a few years." It would also be irresponsible not to do sufficient planning. Ignorance might be an acceptable excuse for individual owners (I don't think it is). However, a board is required to look at both the short and long term consequences of its actions. If there are serious financial problems on the horizon, should a board announce them? Why not?

Planning and budgeting has become more difficult and complicated. A few years ago, no one thought about delinquencies or foreclosures. Bankruptcies were few and far between. We didn't know what a "deed in lieu" was, or the legal details of "forcible entry and detainer judgments." We didn't think about such things as "bad debt" and the consequences to association finances. The recession of 2007 ended that. In 2008 some associations tightened up while others partied. Today the parties are but memories.

These annual plans are discussed openly during association meetings at BLMH, are published in the newsletters, and proposed annual budgets are subject to discussion and are mailed to owners. There is an opportunity for owner comment and for the board to reconsider. With the aftereffects of the economy of 2008 and current realities, there remain difficult decisions to be made. Your unit, the infrastructure and the HOAs are not getting younger. It doesn't really matter if one lives in a private residence or a condominium. The building, grounds, driveways, roofs and so on are all aging. Ditto for the furnace, air conditioner, hot water heater and other appliances in your residence. With that aging comes maintenance requirements and decisions about how to allocate funds.

Here at BLMH, we have also completed several reserve studies. These look at both short and  long term issues. A total of three were prepared; two professionally prepared studies looked at each year for the next 30 years. The professionals surveyed the grounds and infrastructure. They looked into details of the budget, interviewed management and the board, and made specific recommendations. Those recommendations included identifying those areas for which money should be collected, saved and spent in a gradual manner to maintain the "normalcy" here at BLMH.

A middle study was completed by a board member (me) and was the subject of a lengthy report to the board and to the management in 2010. That study was prepared after the first professional study and was included in a meeting several years ago. It propelled the board to seek that third professionally prepared study.

The reserve study is an integral and very important part of the "plan of action" for this association.

The board has also made a commitment to take steps to avoid special assessments. One year cannot achieve that. Any board that looks at the  bank balances and this year's bills as the basis of making budgeting and fee level decisions is making a serious mistake.  Boards must think at least 20 years into the future if the pitfalls of short term planning are to be avoided.

The How, or "The Process"
Once a plan is arrived at, the question then becomes "How to achieve that plan?"  That's what some call "the process." It's the many steps, both small and large, and the discussions that led to those decisions, over years.

Let me state that these are not "cast in stone." They are a work in progress, and they are made one at a time, with future goals and present reality all a part of the evaluation.

Any possible plan which is made with integrity is based upon the goal, but there are a lot of circumstances that can interfere with that plan. There are a lot of decisions to be made, each and every month. In a large HOA with reserves we do have options.

Each month, the manager provides the board with a packet. That packet is usually somewhere between 65 and 100 pages in length. That packet asks the question "How?" and each month the board makes decisions to decide "What" we will do to achieve the plan.

That plan includes maintaining goals with the fees we are collecting. That's another way of saying that stability is a goal. And yet, the board has to decide how to do so with things that occur outside the plan and with delinquencies, foreclosures while avoiding special assessments and unusual fee increases!

This happens one month at a time, and one step at a time and year after year.

For example, we do know that we want to complete the roofing and driveway projects in a timely manner. That means avoid the inconvenience of a failed roof for our owners. We do know we can anticipate about 18-20 years of leak free living. But in the past, some roofs have failed in 12 years, and others are apparently going strong at 20!

It could be concluded that generalities are fine for developing a general plan of action. But for specifics, and using this example, any roof that has an "active leak" or other serious problems and has been determined to be near the end of its useful life should be considered a candidate for replacement in the current year. That means that the current plan to replace 6 roofs each year is a tentative one. Yes, we might have to replace more than 6 roofs in any one year. On the other hand, to maintain steady fees, that might not be possible.

Somehow, the board has to navigate the conflicting demands of owners who want dry units and also want fees "to be as low as possible." And, just to make things interesting, let's throw in a few delinquencies and a few foreclosures for good measure!

The Product
Eventually, decisions about the future and current reality coalesce into the present situation. Some call this the "product." What you see when you walk outside your unit and even the roof over your head, is directly the consequence of the planning of the boards in your association. That current reality is "the product."

That product is a result of asking "why" and coming up with a plan which includes the "how" and "what."

In our association, that "product" is not only a result of current planning, but also a consequence of plans made 5, 10 and even 20 years ago.  We most certainly didn't get here because of the decisions of 2012. This association, the "product" is the culmination of the work by the builder and that includes the selection of materials as well as the actual construction techniques used. It is also a result of the age of the property, the maintenance accomplished over decades and the amount of money saved over that period and spent on the property. If you don't save for it, you certainly can't spend it as an association because BLMH for example, doesn't have a wallet full of credit cards. A very few owners have said "No problem, the association can get a mortgage or a loan." Yes it possibly could, and each owner will be responsible for the repayment of their share of that mortgage. That will be due in full at such time as they decide to sell their unit. Does the expression "Mortgaging one's future" sound desirable to you?

I've been told that a couple of decades ago, there were owners complaining "our fees are too high." I definitely know there were more than a few who said this in 2001 and as recently as 2008. It is also true that a couple of decades ago, we didn't have much of a reserve funding program. Are these two things related and was the status of reserves the consequence of owner position and board compliance? Today we do have the advantage of hindsight and the knowledge gained running this association for 35 years. That's also a part of the product.

The good news is this established association is pretty aware of the problems it faces, both internally and externally. The bad news is it took 35 years to get to this particular place in association history. As some would like to say "If I only knew then what I know now!"  But human beings being human beings, we probably would have ignored the sages among us and gone for the "rosy projections."

There was a time when there wasn't a lot of knowledge about the specifics of the reserves. Conveniently, most owners did not ask the difficult questions such as "How much money will it take to replace our roofs, when will that occur and are we saving enough each year to do that?" Likewise, most didn't ask the hard questions about driveways, streets and so on.

I suspect it was probably because they didn't want the "bad news." Some probably  thought "I'll sell in 5-10 years, so why should I care?"

So today, we are where we are.  Our boards do have the knowledge gained in the last 35 years, and they are required as fiduciaries to use it. We also have some additional things to deal with, such as delinquencies and foreclosures. 10 years ago, those were not a problem. Today they are a way of life and common everywhere.

Some owners would like to believe that guiding a large association is like driving an automobile. One simply has to respond to traffic and steer, brake and use the gas pedal. What they fail to understand is that while they are in their automobile, those decisions are made because of roads built by someone else, and an automobile built by someone else. The concern of the driver is only the condition of their automobile. "If I step on the brake pedal, will this automobile stop and if I step on the gas, is there fuel in the tank?"

In fact, in a large association such as ours, we are building the roads. We are, figuratively speaking, installing and maintaining the traffic lights. We deal with the snow plowing and even the condition of the streets.

Many owners don't even think about that.

From a Personal Perspective
I'd suggest most owners in an HOA consider "why" they live there. Why did they make that decision to purchase? If one truly hates where they live, then they should consider moving on. Of course, it is entirely possible that the "grass is not greener over the hill." My experience is that there are no easy answers to difficult questions. There are no quick solutions. There really is no better place "over there." I say that because in my profession I've traveled extensively and spent time in most parts of this country from California to Wyoming to New Mexico to Louisiana to New York and Florida and lots of points in between. I've lived in some places for weeks and others for a year. I'm of the opinion that there are compromises to be made everywhere.

I know exactly why I purchased at BLMH and I'm still here. As I told an owner recently "If I really didn't like it here I would move." There is nothing that forces any of us to live where we are. We may decide we're comfortable where we are, or we might move if someone offered me a specific price for my home or unit. That's my point. If I can say "I would move if I could get $xxx for my unit" then I am acknowledging that being where I am is my decision. I could just as easily decide to move on. I could also simply decide that "This is it" and stop complaining.

I also suggest that owners have a personal financial plan. That plan should be anchored in financial reality. Such reality includes "What is long term inflation?" "Can my budget support cost increases due to inflation, and that includes energy, other utilities, and fees?" "Do I have a realistic financial retirement plan?" "Do I have a plan to deal with unexpected financial expenses?" "Do I have an emergency fund?" "Is my budget sustainable?' and so on.

Of course, the final question is "Does my personal financial plan take into account probable long term financial consequences?"  From my experience, too many people fail to consider that they might be living on this planet for 95 years. If so, can I afford to retire at 62 or even 65? If I should be so lucky as to live for 30 or more years in retirement, will my financial plan deal with it? Can I also deal with financial setbacks and financial surprises?

(C) 2013