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.