Annual Meeting 2012 - Part I

The association annual meeting was held on September 27, 2012. As is required personal notices and invitations were mailed to all owners. We also posted notices in the lobbies a few days prior, as a reminder.

This meeting provides the owners with the opportunity to hear the "state of the association" in the boards' own words. This year the meeting spanned about 2-1/2 hours and included summaries provided by each board member, as well as extensive information on finances, projects, fireplaces, details pertaining to COD construction on our eastern property line, and the future. There were no free donuts and no koffee klatch (it's never "free" because fees would pay for these things.)

I'll provide some observations of the meeting in this and the next few posts.

Topics for the meeting included:

• Introduction of the board and our manager
• President's Comments
• Treasurer's Comments
• Welcoming Director's Comments
• Rules & Regulation Director's Comments
• Landscaping Director's Comments
• Architecture and Maintenance Director's Comments

Other special topics included:

• Fireplaces Moratorium and Status Update
• College of DuPage Construction Update

Low Turnout Disappointment
This year, the meeting was lightly attended. I do want to publicly thank every owner who attended. As a board member I appreciate your interest in your association and your willingness to set aside an evening to spend with your board and management.

The low turnout was not surprising, but a low turnout is always disappointing. The majority of owners did not attend.

Why was turnout so low? Perhaps the lack of freebies? I'm not sure what was on TV that night, and that's always a factor. I've noticed that attendance seems to be better when there are "significant personal issues" for owners. For example, in 2008, with the mushroom cloud of the financial meltdown hanging over our heads, a national presidential candidate running on the platform of "change" and a group here at the association promising the same, we had higher turnout and more interest.

This year, even with a problem with our COD neighbor, the continuing fireplace moratorium, and so on, there was not a lot of interest. Is this possibly a consequence of other, better forms of ongoing communications, specifically our expanded and more detailed newsletter? Or is it simply apathy? I don't know.

Two Upset Owners
Before the meeting even began, I had two individuals "in my face" to complain about a lack of seal coating on their driveway this year. It was not a discussion. It was a demand, as in "What are you going to do about this NOW?"

Note: This year we seal coated all driveways that has been replaced in 2010. The selection process for those driveways was made by an earlier, wiser board which included one individual who was sometimes described by other board members as the "sage" of the board! The purpose of this seal coating is to preserve and protect. It is not about beautification. At this point in time 2/3 of all driveways have been repaired including crack filling and seal coating (this began in 2011), or have been replaced and seal coated. The project will continue next year and additional driveways will be repaired or replaced in 2013. This has been communicated via the newsletter and described in depth during association meetings. Of course, most owners don't bother to attend these meetings.

Was this particular exchange of any significance? I think it was. My initial response to our dear, irate owners who were in my face at the meeting was "I suggest you talk to the board that made that decision." One of that former board was seated a few feet away and I made it a point of responding at a volume so that person and anyone else within earshot could hear the conversation. Then the method for selection this year was questioned. My response "Do you read the newsletters?" When this also failed to get me to make the concession that was demanded, one owner made the remark describing the association as a "Project." That was the last straw.

I'll have a post devoted to this particular exchange, owner demands and hostile, belligerent behavior.

Finances, Architecture and Maintenance (A&M), and Rules & Regulations (R&R)
I'm going to skip ahead of the meeting to the presentation I made to the attendees. I had prepared a detailed, 13-page report for the meeting. This included sufficient information were it necessary to provide details to owners. However, my formal presentation was a verbal summary. Anyone who reads the newsletters and association meetings did not get any surprises. However, I did elaborate on a few things. The report I delivered was very brief but did include these areas:

1. Financial support of A&M.
2. Progress in major projects - 2 year summary.
3. Progress in other maintenance areas - 2 year summary.
4. The near future - What should be expected. 
5. Cost increases for Owners and the Association - Water Rates.
6. Observations on Rules and Regulations violations.

Finances as the Foundation for Architecture and Maintenance
I very briefly discussed finances from the perspective of "What do we get for our money." Our budget has two components. 1) Operation and Maintenance, and 2) Reserves for capital projects.

I expressed to the owners who were present that I see some "daylight." In other words, I am cautiously optimistic. This optimism has nothing to do with the economy, or how I or anyone else "feels." It's all about the numbers and the current completion levels.  I also expressed to the owners who were present the dangers of "falling behind" in finances or maintenance. Once we fall behind it becomes difficult to catch up. After two or more years, it may become impossible. Why? Who has the financial resources to pay extra each month to make up for that funding shortfall? I'm one of the owners who is on the board who is absolutely opposed to "special assessments." These are to be a last resort, and are to be avoided. I'm going to elaborate on the presentation and provide some background information in this post.

What's the Meaning of a Word - "Difficult"
When describing finances, or a financial situation, or to describe an architectural or maintenance issue, we will sometimes use the word "difficult." That is a really rich word and it has a deep, significant meaning behind it. During meetings, owners seldom get a 5 minute dissertation on a problem by the board. So certain words are used such as "difficult" to embody the complexity, cost and issues. I'm going to elaborate here on the meaning of the statement "difficult" as it pertains to some aspects of finances in the association.

Finances are a long term proposition. It requires collecting a fee of about $50 a month from each owner and saving that amount for at least a decade to pay for roofs. Ten years ago, this association was collecting less than $200 each month from most owners, and had no reserves of consequence for roofs. The reserves were not sufficient to replace streets, roofs, driveways, water mains, exterior and interior painting, garage floors, patios and decks, shoreline maintenance, tree care and landscaping improvements. Those monthly fees also had to pay for electricity and street lighting, association water, stream maintenance, landscaping and mowing, snow removal, and for any and all other repairs, including temporary roof repairs, doors, etc. .

In 1999 with new management to provide guidance the board began ramping up fees to pay for ongoing Operations & Maintenance, and save for identified projects including roofs.  There is another way, and that is to simply make special assessments each time a roof is done, or a driveway, or a water main blows, etc. Of course, owners don't like that either. Some owners have promoted the idea that the association should take on a mortgage or loans when necessary. I've published the higher costs for owners if the association chooses that financial path. Banks do charge interest to provide us the use of that money, and fees from owners will be required to repay any loan principal and interest.

Borrowing and going into debt seems oh, such a comfortable way to deal with today's problems. Or at least it was for a decade. That "lost decade" was the one in which people racked up $tens of thousands in credit card debt and used their home equity like a piggy bank. Then in 2008 the music stopped. This is precisely why so many "homeowners" in the U.S. found themselves in a very "difficult" situation as serfs on property owned by the banks.  It seems it wasn't "free money."

Maintenance Update; "Save and Spend"
Our last major roofing project, which added a second layer of shingles on top of the first, occurred during 1991-2000. Roofs can be expected to last about 18 years. Our new roofs may last longer because they include ice and water shield, improved attic ventilation, etc. The present age of the second layer of shingles on our existing roofs is in the range of 12-21 years. Overall age of our existing roofs is 35-36 years.

Selection and replacement is not based on age. It's based on condition, and we had a roof fail at about 11 years, while we do have several over 20 years of age. The goal is to avoid damage to the building, owners contents, moisture and mold damage, and so on. Leak reports, exterior and interior (attic) inspections, etc. are all guides for determining possible remaining life, and dealing with problems. I've been tabulating problems for several years so I can track leaks and problems. While it is the goal to replace, this association continues to do roof repairs where necessary. This project will continue for another five years or so until all roofs are replaced.

Our driveways had not been seal coated for years. Some were being patched. We did have some garages with problem floors, we did have some driveways with problems, some concrete patios and last year a complete wooden deck was replaced, and so on. As downspouts are being moved off of driveways, drainage improvements are made to carry water away from the new downspout discharge. After doing the roof, serious driveway repairs or replacement usually occur. We've had a few gutters relocated prior to roofs, if the condition of driveway warranted replacement. Water standing on driveways is a serious problem.

Many of these maintenance items are predictable. We can determine with relative ease how long these things will last, and we can budget for their repair and replacement. That's actually the easy part. The difficult thing is collecting fees and amassing the reserves to maintain this association.

In a society which generally does not believe in saving, getting owners to contribute extra money for fees so we can save for these required (by statute) repairs is not easy. Board members are owners. So we bring our baggage and personal beliefs with us. I imagine it's been difficult for some board members to consider saving for the association if they themselves don't practice personal savings. For anyone living out of a checkbook and with little personal savings, seeing an association with a significant sum set aside as "reserves" can be considered wasteful. Some of these people will become board members in associations and when they do, they'll attempt to run the association in the same manner as their personal lives.

Once the association savings begins to grow, some owners will covet that money. After all "I could use that for a new furnace, or a new car" Yes, but where will the money come from for that replacement roof? "Oh, that's someone else's problem," or "I don't think I need a new roof this year." Sure, and when the roof leaks and damages the owner's contents, the association will be required to replace to primed drywall. So not only will your fees be used to replace a roof, additional money will be required to replace ceilings, walls and possibly even electrical "owned" by the owner of those units. In other words, the money required to do repairs and replace roofs is greater than that required to simply replace roofs.

We're a Nation of Gamblers
So while saving may be relatively straightforward, more difficult is getting a board into place that will do these things, rather than run a "popularity contest." Collecting money does not make one popular in an association. Saving money for the future does not make one popular with owners who want to flip or bail. I think the reader gets my drift.

When we read about HOAs which are financially struggling, or are dealing with special assessments, I can understand how that happened. It's a difficult and fine line to determine how much to collect from owners. Too little and special assessments are guaranteed. Too little and the association will fall behind, then have to catch up by raising fees higher than might be expected. This may financially stress the owners.  Most would agree that small and steady fee increases are easier to deal with.

Once an association falls behind there are really difficult choices to be made. None are easy or good. Raise fees in large steps to catch up, have special assessments, or delay maintenance and repairs are available choices. In extreme situations, all of these may be used simultaneously. In such a situation the board faces the difficult decision of balancing fee increases and assessments with delayed projects. While this occurs, the association may struggle to keep up with repairs. In extreme situations, it may not be able to pay monthly bills. Board members should not have to be the only ones who make these difficult choices. Nor should they be the target of unhappy owners. But sometimes they are. After things fall apart, in my experience there will be endless owners who will say "How could this happen?"

Financial planning is a long term requirement, and a long term commitment.  Yes, sometimes things can occur that create a step change in the finances of the association. Most situations occur gradually. Occasionally an association may fall behind in finances and then, at the most inopportune time, will encounter something financially unexpected. Murphy's Law is well understood and "The worst possible situations will occur at the most inopportune time." Even if sudden problems don't occur, an association may bleed to death, while the board and owners argue about how to deal with the situation, or the owners are unawares or unwilling to face the future. After all, some will say, "I don't plan on being here in five years." Back in the "good old days" of house flipping, it was easy to walk away and leave others to hold the bag. No longer.

It was pointed out during the annual meeting that all board members are owners, and pay fees. We are in exactly the same situation all owners find themselves to be. We all deal with the financial consequences of fee increases or breakdowns. But the board is a group of "fiduciaries" who are supposed to be stewards for this association. In 2012, as in 2008, that's much easier said than done. Unlike 2008, the problem today isn't the board. It's a few of the owners.

Savings for a Decade
This association has been collecting fees and saving money for a decade while ramping up the roofing and driveway projects. In 2007 we did not have nearly enough. But owners were a bit fed up with rising fees, and swelling coffers. A problem in an HOA is this. Back in the "good old days" prior to 2008, some owners didn't want to contribute their fees for reserves. I guess the idea was to sell before the bill arrived for that new roof, driveway, etc. For a short time we had a board that was willing to tell people what they wanted to hear, and that was "We have enough money."

The financial meltdown and real estate implosion put an end to that scheme, but it did take a while for the reality to sink in. People could no longer flip out. People couldn't sell their unit for what they believed it was worth. Some were trapped here, and some were angry. Most settled down once the reality sunk in, and things shifted slightly. 1) Some owners got serious about finances and maintenance, and 2) Some owners decided to lash out at the board prior to 2008, or anyone who talked about fee increases. After all, "They did this to us."

Ah yes, some politicians tell us that we live in the age of victims, where the rich did it to the rest of us! I'm a firm believer that there is no place for politics in an HOA. It would be oh, so much easier if we could get owners to stick to the numbers!

In 2007 management was publicly speaking about additional reserve requirements. So it seemed there wasn't enough money to do the really important projects including roofs. So what can an individual owner do? One can sell, but if that isn't possible, as occurred in 2008, there remain a number of options and one of the more effective ones is to get a board in place that can be manipulated and is compliant. In other words, one that will "take care of the squeaky wheels." No one really expected this terrible economy to last very long. Even President Obama said he'd get the job done in three years. So all that was necessary was to "kick the can down the road" for five years or so, real estate prices would be back and then owners could bail and leave the new purchasers holding the bag. Sounds elegantly simple, doesn't it?

Well, it wasn't simple, and I didn't buy it. Not the politics, the quick fix or the "squeaky wheels." I was one of those who expected it would require at least 5 years, and could take 7-10 years for the economy to recover. Real estate prices will eventually turn up. But how long will it take for them to return to the stellar prices of 2007? I won't be holding my breath. With this comprehension I shifted my plans accordingly. It was very apparent that parties, daffodils and mulch were not going to handle the problems facing this association.  As a former board member who had been "run off on a rail" in 2008 was fond of saying, "You can paint a pig, but it remains a pig." In other words, paint is not a substitute for a new roof, driveway and street repairs.

By 2010, I and a few very concerned and financially savvy owners prepared a "wake up call" of a financial letter, which we sent to all 336 owners via U.S. Mail at our personal expense. I may publish a few excerpts here as a reminder of the facts.

So here we are, five years after the onset of that terrible recession, and the association is making great progress, and there has not been a special assessment. For each owner this means that when they do make that decision to sell, there will be no lien on their property, and no assessment balance to pay off.

Are Things All That Good?
Well, let's see. The economy continues to struggle with really high unemployment, real estate continues in disfavor and prices are low, people everywhere are generally disgruntled and there is a national election about a month away. The international scene is a mess. I think that there might be "bad news" or "negative news" overload for a few of us!

So how are things in this association? Well, the fees saved as reserves have been ramped up are being used to fund the roofing and other projects. About 2/3 of our driveways have been repaired and seal coated, or replaced and seal coated. About 1/2 of the roofs have been replaced, and the accompanying front drainage improvements will be completed before winter. Lakecliffe has been repaired, two pump pits have been replaced, there is a plan to complete the repairs to the stream in the vicinity of waterfall #2 with a new patio with walks to replace stairs and an old bridge in that area.   The longest duration project is the roofs which could take another 5 years to complete. The board will conduct a budget workshop in October to review all of this and develop the budget for 2013.

Are People Happy? 
Who knows? As a board member, I'm not here to make your life work, or anyone else's, for that matter. When I purchased, I don't recall reading in the Bylaws about how we should all "be happy and completely satisfied." I've got my hands full dealing with my own problems. My spare time is completely absorbed being of service to this association.

"How are people doing?" That's possibly a more relevant question. We do have some statistics which can guide us as board members. Each month I prepare an updated spreadsheet of delinquencies since January 2008, with information provided by our treasurer. This is distributed to the board. Our treasurer provided owners at the annual meeting with a good summary.

We have delinquent owners and some disgruntled owners, we have experienced foreclosures, we have had modest sales.  I suspect some owners remain here simply because they cannot sell their units for the price they would like. Prices are substantially below the peak of 2006. It's a great time for recent buyers.

Asking owners "how are you?" can be construed to be a request for complaints. "I live on fixed income," etc. Because not one of us in this association is authorized to print  money, we each live on "fixed income." What varies is the source of that income. For many it is from work. For some it is from pensions, annuities and social security. With thanks to the politicians who were complicit in creating this mess via their easy money for homes schemes, and to the Federal Reserve which regulates the currency, savers are being punished. That includes this association which gets little interest on its money. Thank you, Congress, Mr. Greenspan and Mr. Bernanke!