Should Unit Owners Be Concerned?

That’s a good question, and one that seems to be on the minds of some of the owners here at BLMH. Upon reading the candidates’ forms, it’s difficult to determine in which direction the board will go. From the perspective of a lack of knowledge about their business agenda, we’ll have to wait and see. Here are a couple of thoughts.

Some unit owners ask “how quickly can our association disintegrate” and others ask “just how bad can it get?”

Our newly elected board members now have fiduciary duties. It is immaterial if they are even aware of that. They are legally accountable for their actions. To Quote Sima L. Kirsch of the Law office of Sima L. Kirsch P.C. in Chicago “"Being a fiduciary means that you have an obligation to take off your hat as a homeowner and put on your hat as an officer of a corporate board and use your best business judgment." About using business judgment he goes on to state "That's the judgment that best applies to the facts you're dealing with and protects the fiscal and structural security of the building and the association and the well-being of its inhabitants." (Reference 1).

Michael S. Hunter, an attorney and partner at Horack Talley, which represents “more than 500 community associations” adds "When you're acting as a fiduciary, you're serving in a representative capacity, and you must put the interest of the association's homeowners collectively first….You must also exercise sound business judgment and a healthy dose of common sense." (Reference 1). For more information and examples of breach of fiduciary duties, go to the link for Reference 1, at the end of this post.

As for the finances of the association, we have historical information for this association, which provides a possible glimpse into the future. Using that information may answer the question: "Can the board wreak havoc with the finances of our association?" The simplest answer is "not easily". First, our current professional managers would have to be fired and replaced with someone less capable. That would create the possibility of a sudden "step" change. Alternately, the board could repeatedly vote for much lower fee increases for a period of years. In that case, it is possible for our finances to degrade.

I suggest we use the historical data for this association to see how board actions, over long periods of time, have affected our finances.  You may then draw your own conclusions regarding the future.

Financially, for a period of about 15 years our reserves were underfunded because fees were too low to support the association. At the time, this may not have been readily apparent; I wasn't present during association meetings at that time and so I can't comment on what pressure unit owners brought to bear on the board. However, we do have the data and an analysis to substantiate my statement was posted earlier this year.

To further substantiate this, I’ve attended several association meetings in which our professional managers have stated several times, in response to unit owner questions about why the fees have been increasing at the rate they have been and why (in the opinion of the unit owner asking the question) our fees are higher than some “comparable” associations in the area.

In each case, the manager stated that this association is “playing catch up” and that our fees are about 5 to 7% higher than associations offering comparable amenities. It was also stated that when making fee comparisons, unit owners need to remember that this association is a PUD and that we own 40 acres and all streets, buildings and grounds.

It would seem that some unit owners refuse to believe that. Our official communications, which is our newsletter, also avoids this subject. From this and what does appear in our newsletter, it seems some on the board also refuse to accept this.  I suggest this is an example of allowing personal viewpoint to overrule fiduciary duties. Unit owners can take any perspective they wish, but Board members may not.

During the November, 2008 association meeting, our professional manager stated that our "assessments are stabilizing and reaching equilibrium". I assume by “equilibrium” it was meant that the funding of reserves had reached a point that expenditures would be satisfied by receipts and the funds in the reserves.

Using this information and additional historical data, I draw a few conclusions, which may help up in discerning the future and answer the question "How bad can it get" and also determine how quickly things might change.

The chart above shows the erosion of our finances which occurred during the period 1983 to 1998. It shows a gradual and continuous accumulation of a shortfall, which reached $1,472,168 in 1998 and peaked at about $1,600,000. This is derived from the data in my post of March 26, 2009. How did this association accomplish this? The simple answer is that unit owner fees from 1983 to 1998 were, on average, about $25 per month too low. It doesn’t take very much over long periods to create serious financial problems! What does $25 per month buy a unit owner? Well, it’s just about enough for a new roof every 20 years. If you need one in 15 years, well, too bad! That would require a special assessment!

In a post dated September 7, 2008, I noted that I had been “alarmed” when I reviewed the finances of this association while considering a purchase in 2001. As I stated in the post “We were alarmed by the state of the cash reserves, which were only $297 per unit!” Unit owners who were present when garage doors were replaced in 1997 or so, may recall that the price of each door, which was levied in the only special assessment I am aware of here at BLMH, was $300 per unit. So if unit owners don’t want to fund reserves, the implication is that they want special assessments.

Of course, you could retort that "fees can't be so high as to place an unusual burden" on unit owners, and that is true. However, it is important to remember those definitions of "fiduciary duties" as posted above and in other posts on this website. I'm not making any of this up. Our board has a legal responsibility to protect the finances of this association, and that includes our investment here. They must maintain buildings and driveways. If they don't there are legal remedies for unit owners. Being a board member of an HOA "carries legal consequences if you—even unknowingly—breach that [fiduciary] duty" (Reference 1).

Should we be “alarmed” today? I don’t know. The information I have indicates that it would take time to again erode our finances, if there are no unforeseen or unusual expenditures. That does not mean that we should sit back and assume it will all turn out. Nor should we lie awake at night in our beds, worrying about the roofs over our heads. Here is another chart, from the same data used for my post of March 26, 2009:

As you can see, this indicates that in 2000 the shortfall stopped increasing, and for the next nine years, it steadily decreased. This corresponds to the change from "low" assessment increases, for example, 3% each in 1997 and 1998, to "high" assessment increases of 11% each in 1999 and 2000, which have steadily decreased in the years since. By 2009 the shortfall was eliminated. The fees collected have been spent on projects to date and saved in our “reserves” for funding roofs, driveways and so on. To provide some perspective to the chart above, in 1999 we were in arrears about $1,600,000. How could that be? Well, for example, if there is no item in our “reserves” for roofs, that is money that is not being collected and saved for the day that our roofs will need replacement.

That’s a lot of money, but how much is it really? $1,600,000 distributed among 336 unit owners is about $4,762 per unit owner. How much “extra” have we paid each month to accumulate that? Over 10 years, we each paid on the average $39.68 per month additional, to accumulate this amount. Comment: So it would seem that all of this complaining has been about $40 per month!

Of course, it may come to pass that we will be paying slightly higher fees AND special assessments. That possibility would occur if our board of managers is not prudent in managing this association. However, I see no possible excuse for this. We are well funded at present and there is absolutely no valid reason or excuse for our projects not to be completed in a timely and effective manner and with the funds and fees available. Based upon statements made by our professional managers in November 2008 and during several association meetings thereafter, the rate of fee increases should abate and we should still have the financial resources to accomplish all that is required at BLMH. My independent analysis substantiates this.

A recent, posted comment stated "Unfortunately, many people in this complex want everything under the sun, and don't want to pay for it." That may be true. However, it would seem that in fulfilling their fiduciary duties, our board is required to maintain our property.

In conclusion, I suggest that concerned unit owners compare financial reports from month to month. If projects are not underway then reserves should be accumulating and increasing. Also attend association meetings and observe the operation of the board. Finally, read this blog and post your comments.

References:

Posts about reserves:

http://briarcliffelakes.blogspot.com/search/label/Financial%20Reserves

Post about Comparing our Fees and Reserves 1983 – 2008:

http://briarcliffelakes.blogspot.com/2009/03/method-for-arriving-at-assessment.html

Reference 1: Living Up to Your Fiduciary Duty as an HOA Board Member: http://www.hoaleader.com/public/206.cfm

Note: Some clarifications added Oct 6, per comment.