Owners and Boards - Part 3 - Finances and Fees

This post is about fees, and the impact of fees on reserves. Ultimately, inadequate reserves will impact fees, and for a decade or more. It's what we call a "vicious circle." Low fees which cannot fund reserves, and then low reserves which force higher future fees. We're moving toward the post "A bright future for BLMH?" as I do the preparatory work. Note: Some edits and additions were made to this post on September 1-2.

Key Points
This post provides a great deal of information. The purpose is to provide a compelling financial report of how any condo association can make poor decisions to support the infrastructure and service, and the long term financial consequences of those decisions. Decisions made in 1982 and which persisted until 1998 have shaped this HOA's finances for not only those 16 years, but for 32 years! This post will push a few buttons, and I think that's both necessary and appropriate.

Where do we stand today? Some owners are in awe of that recently announced $1.7 million reserve balance. I suggest they ask what will this really pay for, and when. A few years ago, some obviously thought that $400,000 in reserves was excessive. Some owners today think the same of that $1.7 million. What needs to be asked is this: Will reserves, at the annual rate collected, assure sufficient savings to replace infrastructure when it becomes necessary? Stuff like roofs, streets, driveways, walks, unit patios & decks, entry doors and so on?

Today. the current reserve balance at BLMH represents the consequence of a real change for this HOA. It began about 14 years ago, and it has stalled at times and proceeded with "fits and starts." Was that change 14 years ago a temporary one? Are the amounts collected and fees sufficient to complete the necessary tasks? If you are an owner in a HOA and you don't know, or are guessing, or are parroting someone else then I suggest your HOA may be in serious financial difficulty. Is this important? Your personal financial health will be determined by your ability to manage your finances today, and for the foreseeable future. If your HOA is a "loose cannon" then your financial future may be in jeopardy.

Each owner in an HOA must decide what kind of future they want to achieve and what kind of HOA they want to live in. With any future comes a price. For owners to vote for lower fees while also arguing for gardens and perfection is irresponsible. That's the way it was in 2008. Have we at BLMH learned anything from this? Apparently not enough. The arguments continue about the necessity for planning, preparation, replacement in cycles and so on. For example, should we replace something as simple as hallway carpeting every 8-12 years, or wait until it becomes a "trip hazard?" Somewhere between these two points of view is a reasonable compromise. But, "If we don't spend it, we don't have to save it." I guess that's a bit of an improvement as compared to 1985-1998 when the argument seemed to be "Just pass the hat to the future owners."

Am I concerned? Yes I am. This HOA built a financial hole which has not yet been filled. The hole was created over a period of 17 years from 1982-1999. It will require at least 15 years to fill it, and the task, which began in 2000 is not yet completed. It has been a slow, tortuous financial journey. Yet, in 2008 this HOA attempted to return to a more comfortable fee approach called "pass the hat to future owners." Such an approach is guaranteed to require higher future fees or special assessments. Some of our owners will say "I won't be here in five years." I am concerned because I don't think most current owners are really aware of the price they have been paying for the past decade because of financial decisions made for a period of 14 years from 1984-1998. That was a long time ago and that is my point; decisions can be far reaching. I am concerned because I think some owners are unawares of the details of our fees, how they are derived and why they are necessary. I am concerned because I think some owners are unawares of how our fees are really spent and why. I am concerned because I think some owners don't care, or are absorbed by their personal lives. Finally, I am concerned because all owners can vote in this HOA and owners may again, in the near future, elect boards which will fail to run the numbers, fail to communicate the financial necessities and realities to owners, and then choose to roll the dice or simply take the easy or popular financial route.

Confusing Reserves Numbers
Our most recent HOA newsletter included a report from the treasurer on our reserves. It included a brief list of categories and a large number saved for those accounts. The treasurer stated in the newsletter that $1,724,285 had been accumulated. The newsletter is in the public domain and is on the official HOA website, so I feel free to reproduce those figures here. This post also contains information gleaned from our Welcome Packet on the website and the budget sheets I get as an owner each year, and balance sheets included in newsletters, etc.

That reserve number might be seen as "good news" by some owners, and perhaps that was the purpose. However, a reserve number such as the one above is just about meaningless, unless we know a lot more about the reserve categories and the funding levels achieved for each category. I don't ever expect to see a series on this in the BLMH newsletter and so I provide an example later in this post in the section Reserve "Funding" or How to Pay for Reserve Capital Projects. I also provide a more complete list of reserve categories in the section "A More Complete List of Reserve Categories".

Reserves and Budgets - Owner Preferences and A "Reality Check"
HOA finances have been an issue for some owners for as long as I have lived at BLMH. In 1997 our average HOA fees were about $144 per month. By 2007, our fees had increased to about $266 per month. Seven years later, in 2014 the average HOA fees are about $333.22 per month. That's a 231% increase in 17 years. Simple inflation would have increased these fees from about $144 in 1997 to $218.87 today. But our fees are $333.22 per month.

Why is the average owner today paying about $114.35 more per month than could be attributed to simple inflation? There are several reasons. 1) The cost of Operations & Maintenance budgets can be expected to increase about 2.5%  per year as the cost of insurance, electricity, water, gasoline and so on continue to increase, which influences the price of labor and materials at the HOA. 2) The HOA infrastructure is aging and all infrastructure has a finite usable life. 3) At 40 years of age, some things previously ignored or deferred will or should be replaced and it will take reserves to do that (trees, entrances, water mains and so on),  and 4) Past reserve funding was insufficient and some infrastructure funding needs were ignored. This HOA has been required to raise fees to "catch up" for reserves. Back in the "good old days" at BLMH fees were low, and this was accomplished by deferring reserve funding. There are only two ways to catch up and build reserves; higher monthly fees than might otherwise be required and for long periods, or special assessments, or both.

Here's a chart of actual fees including reserves (red) compared to an alternative chart including reserves (blue). This is for the period 1978 to 2014. The chart illustrates and compares the actual fees collected (red line), month by month to an alternative fee approach (blue line). Both of these trends would have collected the same amount of money since 1978 and would have resulted in exactly the same reserve balance BLMH has today. That balance? $1,724,285. Using the method of the blue line, our average fees today would be significantly lower with an average monthly fee of $288.60.  Instead, the average monthly fee at this HOA is currently $331.12 per month. That's $42.52 per month higher than the blue line, or about $510 more per year per owner.

Extending the trend for the red "actual fee" line of the 1980s and early 1990s indicates a plan for a maximum $225 average monthly fee in 2014. Extending the red fee line for 1993 through 1999 indicates a plan for to achieve a maximum $240 average monthly fee in 2014. Unfortunately, that would not have paid for streets, roofs and so on. Using simple and reasonable inflation projections it's questionable that such annual fee increases would have provided sufficient funds to support the Operations & Maintenance budget of 2014. So what were the boards using to make their decisions? It is a fact that our actual 2013 costs for Operations & Maintenance was $223.70 per month for the average owner.

Management in 1999-2000 must have influenced the board (was it a "kick to the head?"). The red line on the chart shows the direct influence of new professional management which arrived about 1998. By 2008 some owners did everything possible to fire that management.The chart is an illustration, but it does serve a purpose. Owners have argued and will continue to argue for lower fees today. Owners will elect boards to carry out these schemes. Doing so will avoid paying for reserves for capital replacements and will also achieve lower fees for a time. If saving for reserves is again avoided then some day in the future, owners will be paying much higher fees than might otherwise be necessary,  just as we are today. My point? It happened in the past and it could happen again. [Click on image to enlarge]. For a similar chart with recessions overlayed, see the notes in this post.

This post is about how and why the owners in this HOA do today pay the larger monthly fees. We cannot go back in time and correct the decisions of the past. We, the owners can take responsibility for what we created and we can learn from this. We can avoid making similar decisions today which would have a similar future outcome. If we do, we can smooth fees and we can avoid such financial pain for future owners, including ourselves. We do really face some choices in 2014, and the decisions made will determine our fees, as owner for the next 5-10 years and beyond. Some of our owners today will say "I won't be here in 5 years."  So who is to carry out this difficult task? It will be the boards who are fiduciaries. But, should boards cave in to popularity, this HOA will continue the financial struggle. It has for nearly 30 years, so why change now? I'll address this in my future post "A Bright Future for BLMH?"

Most of us will probably be here in 5 years. Many of us will probably be here in 10 years. What we do today will benefit us. Apparently, back in the 1980s when the problem began, owners and boards took the easy route and gambled. As you can see, the problem did begin in the 1980s. The average annual fee increase from 1982 to 1992 was 1.82% per year. That's insufficient for replacement of roofs, streets, driveways, unit patios and decks and so on. For the following decade, 1993-2003 the annual average fee increase was 6.66%, or three times greater. Some owners were probably in shock, just as our owners are today a decade later. But in 2003 reserves remained insufficient to pay for the infrastructure tasks immediately ahead. Take those two decades of fee increases and what do we get? An average fee increase of 4.24% for 20 years. By recent standards not so bad.  But owners in the 1980s were greedy and boards didn't do the numbers, or perhaps they too were greedy. So the boards went for the lowest possible fees, which did not include adequate funding for reserves.

Where do we stand today? Some owners are in awe of that $1.7 million reserve balance. I suggest they ask what will this really pay for. and when. A few years ago, some obviously thought that $400,000 in reserves was excessive. Some today think the same of that $1.7 million. What needs to be asked is this: Will reserves, at the annual rate collected, assure sufficient savings to replace infrastructure when it becomes necessary? Stuff like roofs, streets, driveways, walks, unit patios & decks, entry doors and so on?

Is there something worse than insufficient reserves? Yes, there is. Collecting fees for reserves and then refusing to spend the money on designated reserve items is worse. After all, why are owners paying those fees? Are they not to get the benefit of those fees? Which is the worse situation; a failure by boards to collect and save reserves, or a failure by boards to spend those reserves for their intended purposes?

An Emphasis on Low Annual Fee Increases
The HOA website "Welcome Packet" provides a table of fee increases going back to 1978. It does not contain any information about annual reserve amounts, or increases and decreases in saved reserves. From this I construe that boards were interested in the annual fee increases.

From 1991 to 2001 the average annual fee increase was 5.00%. Yet, the reserves at the end of 2001 were $222,421. For a HOA with infrastructure valued at about $80,000,000 replacement cost in 2000, that would seem to be a bit low, wouldn't it? Let me say it this way. What does it cost to maintain infrastructure which is valued at about $80 million? Would you think an annual savings of 0.278% of the value of infrastructure is sufficient?  Today, our reserves are nearly 8 times greater than they were in 2001. Why is that? I'd say this HOA was not collecting and saving enough prior to 2001. After 2000 larger fee increases funded capital spending. That which wasn't immediately spent did find it's way to reserve savings.

The HOA website doesn't provide statistics about reserves, or even better, the funded reserve levels year by year by year ("Danger, Will Robinson").  Looking at what was published by the HOA prior to 2001 it would seem that maintaining fee increases within a tolerable band while paying the bills was what mattered. Accumulating sufficient reserves was an afterthought or simply undesirable if it meant compromising current owners via larger fee increases.

Fees have increased more or less steadily, but various boards have decided on 0% annual fee increases. The most recent was in 2010. Why did they do that? In 2010 the word was "We have enough money."

Over the decades, owners were provided information which compared fee increases year by year to use as their compass. There was no corresponding information provided about long term costs and savings necessary for infrastructure. The Balance Sheet provided a snapshot. It was up to individual owners, such as myself, to assemble data to trend the changes. Data assembled this way painted a far, far different picture.

Is it surprising that the fee increases became a problem for some owners? By 2008 some owners had enough. Unable to sell their units at what they decided was a "fair" price, they decided to do the next best thing, and that was elect a board to return "to the good old days" when this HOA had insufficient reserves. In  other words, the decision of owners was to allow future owners to deal with the assessments when the streets needed replacement, etc. Many believed "we have enough money" and so these fees were unnecessary. In fact, the exact opposite was the truth, but most owners were unawares because that information had never been assembled and provided to them in an easy form. Fee levels should be determined to properly fund immediate capital projects and Operations & Maintenance budgets as well as medium and long term reserves. Those longer term reserves are for more distant infrastructure replacement and repair. If the balance sheets and other information ignores longer term liabilities, such as long term infrastructure repairs, then how is anyone to make a good decision? Owners and boards can use this as a loophole to escape responsibility. "We didn't know" and "How could this happen" are the two most used excuses at our HOA.

And that was the problem. Today. the current reserve balance represents the consequence of a real change for this HOA. About a decade ago this HOA called the reserves a "Replacement Fund" and it was spent nearly as fast as it was received.  Some owners and board members had become accustomed to this style of financial management. Why not? It seemed to work. But it really didn't. It was a fiction and a short-term anomaly and there was a serious consequence coming. At it's 20th birthday party for this HOA the owners had grown accustomed to a ten year average fee increase of 3.8% annually, These fees were insufficient to build reserves but did cover short term capital expenses while avoiding special assessments.

The consequences of the "pay as you go" mentality began to manifest itself in 2001 when this HOA required new streets, the first of the next phase of roofs was replaced and the HOA was about 25 years old. Yet, the fee increases for the previous 20 years had averaged 3.75% annually. On face value, such annual fee increases seem like a lot, don't they? But the reserve balance and near term capital replacement requirements told a very different story.

This HOA and its infrastructure was aging and this approach could not continue, yet the boards attempted to persist. That same approach didn't work quite so well for the next five years, and most of the fees were expended to meet current Operations, Maintenance and Capital budgets. This required an average fee increase of 6.32% annually,

The owners and the boards really didn't get it.  The reserve balance was finally above $500,000 but the HOA was aging and the benefits of the original new roofs, streets and so on had expired. These had reached a condition called "end of useful life." In 2001 the HOA entered the middle aged, replacement phase. That's a time when all of those things which might have a 25 year usable life expire and we approach the 35 year mark, at which time a lot of other infrastructure reaches "end of useful life." That is the time that streets and other infrastructure begins to fail and require replacement. It really doesn't matter what boards and owners wanted or expected, the serious financial requirements began to change in 2000.

By 2000 a new management began addressing the reality of longer term reserves to accommodate the aging infrastructure. By the time this HOA was 25 years of age, we finally reached and continuously exceeded a $400,000 reserve balance, which continued to grow. Imagine, 25 years to accumulate $400,000, or about $1,200 per owner. I could say that the amount accumulated in reserves per year was about $48 per year per owner at the end of that 25 year period. In other words, this HOA managed to save about $3.97 per month per owner over 25 years.

The reality in 2000? More than $2,000,000 would be required and spent for infrastructure replacement within 10 years. Far more than was being saved or collected for this purpose.

So how did this HOA achieve the current reserve balance? It was via recent, steady fee increases which recognized the requirements of reserves and included them in the fees. Some owners, however, saw no need for this and loathed the larger fees. They argued about maintenance costs, etc. while the board looked primarily toward the funding requirements of the next year. They all ignored the elephant in the room. That mentality persists to this very day as some owners support old habits. Some owners really don't get it, and I suspect some never will. Yet, everyone want new roofs, good streets, good driveways, good walks, entrances which work, unit patio & deck repairs, good garage floors, repaired walks, functional streams and so on.

Who Really Got the Job Done and Did the Heavy Lifting
So how was that large 2014 reserve balance accomplished? I'd say a big "Thank You" goes to the professional managers from 2000 to the present who have stayed the course. This was done even with an incredible amount of resistance including owner and board attempts to fire them. The managers maintained perspective.  If there are any heroes in this HOA melodrama, it is the managers. The boards are largely comprised of amateur volunteers and I don't care how many years someone has been on the board, its the managers who really set this course in motion and persisted. I can't say this for all of the various board members I have known since 200, and some may not be fully on board to this very day.

Next, a big "Thank You" also goes to those owners of this HOA who from 2001 to the present have paid their fees and supported the professional managers and those board members who had the courage and vision to plan for the future. Those board members supported the managers. It was a partnership of some board members and the managers. The managers could not have gotten the job done without some board support. Back in 2001 there were more than a few owners who could have cared less about the future owners of BLMH in 2014. I thank our owners who have continuously and unselfishly paid their fees during those years while supporting the management and boards. Those owners  are the ones who really made this HOA what it is today. It was those fees that accomplished this. The fees collected since 2001 have paid for the earlier, complete redoing of our streets in 2002-2004, the current roofing project, the repaving of driveways, the maintenance of streams, the completion of concrete patios repairs and so on. Those owners also provided the funds saved for the coming street project, which began earlier than expected with north Lakecliffe in 2014. They paid for the new bridge at Thames, the new benches, the landscaping maintenance and improvements, the stream and pump replacements, and the numerous drainage improvements on this property. These owners made a incredible difference in this HOA.

I would also say a big "Thank You" goes to those board members who have learned and grown by this experience, and to those who did their fiduciary duty in the face of significant unpopularity and owner resistance. I do know it was difficult for all of us.  I played a part. However, the "pull" at BLMH is to be popular with a few, persistent owners. Since 2001 a variety of board members have taken the popular route. At least one thought this HOA is a social club. Why would they choose such a path and throw us under the financial bus? "These are my neighbors and friends" goes the refrain. That pull, or agenda, continues today and will probably continue for another decade.

A final "Thank You" goes to boards which pressed for change, but didn't see the big picture, were at times misguided and misinformed and lost their way. I suppose it can be said we all play a small part in these HOA dramas.  Those boards provided at the very least a stark contrast. It made some owners question the situation and allowed them to see that there was a much, much larger issue here than a social agenda and immediate fees. Those board members didn't intend this. However, the presence of such contrasts does allow true choice for owners and also true change. Yet, I must ask. Was it really worth all of the drama, unnecessary hard work, the bitterness, the angst? I think not. There really must be a better way to run a business! In particular, one staffed by volunteers.

I suggest that any current, former or future board members who read this should do some soul searching before anyone goes around getting an "attaboy" or "attagirl" or congratulatory backslapping about the current reserve balance for "a job well done." I think getting to where we are today was far, far too difficult. It could very easily have gone another way, and in 2008 it very nearly did.  Looking at all of the boards and owners, there are no heroes or heroines in this story. Without the pressure of the professionals, each board member could have caved in to the whims of popularity and many did. It's 2014 yet it is not yet over. Each year is another election and another opportunity to move forward or recreate past mistakes. What would you do? Vote for someone who promises lower fees with a hope to sell your unit before the bill comes due? Or honor your financial obligations; those obligations which literally pay for the roof over your head, the water mains that bring Lake Michigan water to your tap and the street you drive upon?.

As for me, I simply did what I do best.  I looked to the horizon 10-30 years distant, looked at where were were in the present, charted a course and then did what I thought necessary for that course. I went for the distance and for transformation. Having a vision and doing that which is required to achieve it, even if unpopular, is what it takes. Some of us have what it takes and are willing to do it. Others don't, won't, or can't. Ultimately, it's about planning, preparation, making choices and then taking positive (life affirming) action. Such a path is neither a popular one nor is it inexpensive.

Doing the Numbers
Here's some numbers and statistics the reader may find interesting and which provide some insights into this HOA and my position:

• For a period of 17 years from 1982-1999 this HOA built a financial hole. I will require at least 15 years to fill it, and the task, which began in 2000 is not yet complete.
• In 2000, the average owner in this HOA was contributing $8.03 per month to reserves, which was less than 5% of fees. 
• In 2001 the average owner in this HOA was contributing about $37.86 per month to reserves, or about 28% of fees. Yet, the reserves on 12/31/2001 were $222,421. 
• In 2002 the average owner in this HOA was contributing about $30.53 per month to reserves. Unfortunately, reserves had been spent nearly as fast as they were collected. Reserves on 12/31/2002 was $257,763.
• I closed on my unit in February 2002. My monthly HOA fee, which is higher than the average at BLMH, was $204.64. 
• In 2003 (12/31/2003) the reserve balance was $369,101.  
• In 2004, the average owner in this HOA was contributing about $41.67 per month to reserves. We had just completed a major street replacement and the next roofing project was beginning. The cupboard was just about bare. It was absolutely essential to increase fees. If not, it's reasonable to assume that one or more special assessments would be required in the not so distant future of 5 years. 
• In 2005, the average owner in this HOA was contributing about $49.35 per month to reserves. The reserve balance on 12/21/2005 was about $405,470.
• In 2006 the average owner in this HOA was contributing about $58.39 per month to reserves, or about 23.5% of fees. Nearly all of the fee increases were going toward reserves. A substantial portion of reserves would pay for the immediate roofing project. The reserve balance was $544,899. 
• In 2007 the fees for reserves were about $62.00 per month per owner. 
• In 2008, several of the board who were involved in these fee increases and saving for reserves were replaced in an election. Some owners wanted to turn back the fee clock. Nevertheless, with perseverance and persistence the program continued and that attack on HOA finances was repulsed in 2011. By the end of April, 2011 five of the revolutionaries had resigned for a variety of reasons. 
• From 2008 to 2010 I took on the stated positions of the board. I was generally ignored and ostracized. Other, more compliant candidates were appointed to any vacant board positions. 
• The average monthly fee in 2010 was $294.96. The current phase of the roofing and driveway projects were underway and the reserve study was a "debacle." The roofs were to reach "end of life" in three years, but most remained to replace. The reserve balance was insufficient. The board wanted to hold fees constant and decided on a 0% annual fee increase.
• In September 2010 after two years of constant pressing and a private mail campaign I was elected to the board of BLMH.
• In 2014, the average owner in this HOA is contributing $111.17 per month to reserves, according to the information in the treasurer's newsletter report. That's 32.6% of current fees. Reserve balance in our newsletter and according to the treasurer is  $1,724,285. That does not reflect the capital expenditures for 2014, most of which have not yet been paid. Not included in the current reserve balance is the cost for reconstruction of north Lakecliffe in 2014, the replacement of eight roofs in 2014, the removal and replacement of 40+ large, dead trees and the bridge at Thames. 
• In 2014 my HOA monthly fee is $349.69. Twelve years earlier, in 2002 when I closed it was $204.64. Since 2000 the amount paid toward O&M budgets has increased about 35% while the amount paid to fund reserves has increased about 1,384%. Reserves are why fees today are where they are. My comment? "There is a price to pay for "kicking the can down the road." 

I'll let the reader think about the above for a moment. Each owner in an HOA must decide what kind of future they want to achieve and what kind of HOA they want to live in. With any future comes a price. For owners to vote for lower fees while also arguing for gardens and perfection is irresponsible. That's the way it was in 2008. Have we at BLMH learned anything from this? Apparently not enough. The argument continues about the necessity for planning, preparation, replacement in cycles and so on. Should we replace something as simple as hallway carpeting every 10 years, or wait until it becomes a "trip hazard?" Somewhere between these two points is a reasonable medium. But, "If we don't spend it, we don't have to save it." I guess that's a bit of an improvement as compared to 2001 when the argument seemed to be "Just pass the hat to the future owners."

Some Comments on the Statistics
Here are some comments on the above numbers. With such low reserves in 2001, there were insufficient funds saved for the street replacements of 2002-2004 and the roofing project which had begun with one roof in 2001-2002. That is one of the reasons the first reconstruction of Lakecliffe was done the way it was. Owners have said they "want fees as low as possible" and would rather pay monthly fees than face special assessments. The fee structure at BLMH from 1981 to 2000, a 20 year period with an average annual fee increase of 4.55%, was designed to give owners what they wanted. It was an attempt to get the best of both worlds; low fees while supporting current maintenance.

With new management an attempt began in 2000 to 2007 via higher fees to really build reserves and move from a cash and crash basis. Of course, it's very, very difficult to grow reserves when faced with immediate street replacements and very low savings. Fees increased to cover immediate capital requirements and to build or save a portion for reserves. It's also very difficult to reeducate owners, who had come to expect service and low fees. One real tool is the newsletter, but it wasn't effectively used.

Owners did an about face in 2008. This was after ten years with an average annual fee increase of 7.16%, 88.4% higher each and every year than the 3.8% average during the 10 years prior to 1998. I'd suggest that our owners were conflicted. Conflicted about what or who to believe and conflicted about HOA finances. The newsletters of this HOA did not support the owners in making some of the more difficult financial decisions.  Board members stated during HOA meetings that dates, etc. could not be provided to owners for projects, etc. because that would be "making promises." Perhaps, but I don't think the boards were willing to make a commitment to the owners, because they couldn't. That's my opinion and what occurred in 2008 was inevitable.

Prior to 2006, it seems that most fees collected for reserves were spent almost as soon as they were collected on immediate capital projects. Balances seldom (once?) exceeded $400,000. That's reminiscent of promoted plans to do things at the last possible moment. However, larger capital projects require a decade or more of savings, so such "last minute" approaches do not work unless HOAs contemplate spending every dollar as it is received and supplement that with special assessments.

Some owners have complained about fees each year I have been here.  By 2007 this HOA was collecting about $250,000 annually for capital projects and reserves. One year later the owners fired the board which had raised fees steadily for about 7 years to accomplish reserve savings and pay for the current roofing projects, the street repaving and new driveways. In 2007 about 25% of fees were going toward reserves, so as to avoid special assessments. Eight years prior, only 5% of fees were going toward reserves and capital projects.

Here's a point of reference. In 1978, the monthly fees were about $50. I understand there was a waiting list to purchase here. Of course there was; wouldn't you want to live in a brand new landscaped community with lake views, streams, walks and so on with monthly fees of $50? What a bargain. Considering inflation that would today require about $200 per month. Just enough to cover operations & maintenance, but little or nothing for capital expenses and accumulating reserves. That's how this HOA began.  That is also how this HOA got to where it was by 2000; collect fees and spend most of it as soon as it was collected. Reserves? What reserves? In 2000 it was called a "replacement fund" and such funds can be spent immediately, and were.

Ten years after formation of this HOA, in 1988 the fees were about $100 per month, an increase of about 100%. But what were the reserves? By 2000 fees had reached about $183 per month which is another increase of about 83%, but reserves continued to languish. They finally began growing in 2002-2003 and by 2005 the "reserves" were $405,470. But this HOA was facing some serious infrastructure replacements, including the current roofing project. So, in 2008 the monthly fees had reached $280.65. In 2014 the average fees are $329.92. That's how this HOA achieved the current reserve savings and has paid for capital replacement projects.

Managing the Operating & Maintenance Budgets was Successful, Reserves were Not
For the period 2000-2013 the increase in annual Operations and Maintenance budgets was a modest 2.25% per year. The total O&M cost increase over that period was  33.43%. In other words, the boards seem to have done a good job containing Operating and Maintenance costs. The problem was the "replacement" and "reserve" amounts saved. After meeting the annual Operations and Maintenance requirements the remaining fees collected since 2000 have gone to fund current capital projects and to save for reserves for other, imminent projects, such as the coming street replacements.

Boards prior to 2004 struggled with communications, to set budgets, to set fees to accumulate reserves. That's what boards must do, and they were less than successful. You disagree? I'd suggest you find some of the old newsletters and read them. Also look at the old budgets, balance sheets and so on. Any board member from that period could retort "I did what the owners wanted."

It normally takes 15-20 years to save for most large projects. Instead, this was done in about 10 years. Those fees paid for all of the driveways and roofs replaced since 2002, that's two-thirds of our roofs and two-thirds of our driveways.  These were not the only projects. Others included about 12 water main repairs in 2001-2014. In 2014 we will replace another 8 roofs and  one-fifth of the streets. Each and every dollar for this was collected after 2001.

Why was only $8.03 per month per owner going toward reserves in 2000? This HOA had two consecutive years of 11% fee increases (1999 & 2000 according to the Welcome Packet). When I interviewed owners in 2001, two-thirds of the owners I met and discussed fees told me and my spouse that "Our fees are too high." I'm sure the board was pressured by unhappy owners. Some of board probably agreed "Our fees are too high." What was really so? For the decade 1990-2000 this HOA had annual average fee increases of 4.6% and that includes those two 11% increases. It also includes two 0% increases. This HOA began with no reserves and failed to accumulate sufficient reserves by 2000. Such collection needed to occur in fees from 2000 to the present, and has.

Reserve Categories - A Matter of Opinion? A Very Short List
I've always had a concern that boards will drop out certain financial necessities. That can be by accident or by design. When saving for reserves, the board only saves for identified infrastructure requirements. That provides a wonderful loophole in which boards can make mistakes or play mischief. If a board wants to "keep fees as low as possible" then reducing the list is one way to do this. Dropping things from the list may reduce current fees. Nevertheless, at some time in the future, all infrastructure will require replacement or serious repair. Most infrastructure requires replacement over long periods of time. For example, most shingled roofs must be replaced in 15-20 years. Ornamental trees may survive 40 years. concrete garage floors may survive 35 years. And so on.   To accumulate sufficient reserves HOAs must set aside a proper, realistic small amount each year and earmarked for these things. If done properly, by the time the infrastructure requires replacement the necessary funds to do so will be available.

Not all HOA boards do this. So perhaps some HOA boards should declare that it is their desire to "keep current fees as low as possible." That desire would mesh perfectly with the desires of some BLMH  owners, both recent and current. This approach proved attractive in 2008.

Financial documents do contain distillations which are legitimate and serve a purpose; the balance sheet is an example. On the other hand, the less precise the financial categories, the greater the possibility for mistakes, omission, or mischief.

HOAs should have an extensive reserve list of accounts, and  realistic costs to accomplish everything on that list, year by year. HOAs should also have a funding plan. If available, boards are required to use these and owners should closely monitor boards to assure they do so. That's one component of a program to keep "fees as low as possible."

The funding plan determines how much is to be collected as fees today, next year and for 30 years into the future. Of course, these lists become more and more imprecise each year we extend into the future. So using an old list and old financial data can mislead a board or introduce inaccuracies. Lists and funding must contain both current reality and projected, or anticipated future realities. That's why many experts recommend a reserve study be updated every 5 years, or more often if there are significant changes.

The approaching completion of the roofing projects and the early commencement of the next phase of the street project (2014 instead of 2020) are both valid reasons to do a reserve study update. So I recommended we do so and the board and management agreed.  The forthcoming engineering study of the remaining streets and recommendations should also be incorporated into the reserve update.

Here is the list of "Reserve Accounts" as stated in the most recent newsletter by our treasurer. The newsletter stated that our HOA has accumulated $1,724,285 for these accounts:

1. Paving
2. Lake
3. Carpeting
4. Roofs
5. Concrete
6. Contingency
7. Masonry
8. Lighting
9. Interiors
10. Landscaping

The above list is a condensation and is incomplete.  Later in this post is a more extensive list, from which the above list was condensed. It's in the section "A More Complete List of Reserve Categories"  That more extensive list is the purpose for which money is being collected and saved as reserves.  Will the money be sufficient and available when necessary and spent this way or not? How it will be spent is entirely at the discretion of the boards, both current and future. It is within the power of any board to spend reserves for capital improvements as they see fit. Owners can elect boards to exercise the will of the voting owners. Owners can also take charge and recall a board. So whatever happens is entirely with the consent of owners.

In the more complete list of reserve categories you will see these types of categories:

1. Phased
2. Phased, subsequent
3. Remaining, and "Phased, Remaining"

"Remaining" categories are replacements scheduled in the present and identified as part of a current project, or phase. For example, we are nearing the end of the current phase for roofing replacement. Those roofs which are yet to be done are called "Remaining." We do have numerous projects which have stalled, or don't proceed in accordance with the category schedules. These include stream repairs suspended about 1999, but recently restarted. There exists no board consensus to continue or complete those repairs. Replacement of brick sills with limestone has also stalled, but the board has stated the intention to restart this. Four garage floors are to be replaced each year from 2012 to 2032. However, none were replaced in 2014 but more than four per year were replaced in 2012 and  2013.

In other words, boards decide when and how to complete remaining projects.

"Phase"  A typical  reserve study includes 30 years. In that period, some infrastructure may be replaced several times. Each complete replacement, or cycle, is called a "phase." For example, hallway carpeting may have a service life of 10 years. If so, the complete replacement of the carpeting in a single 10 year period is called a "Phase" and the study may contain three phases for carpet replacement.  If a phase is underway but incomplete, the remaining carpeting to be replaced will be called "Phase, Remaining." Carpeting which is to be replaced in the next cycle, after the current phase is completed is called "Phase, Subsequent."

Here are a few other examples. The street repaving at BLMH is officially a "phased" replacement beginning in 2020 with completion in 2022. It actually began this year (2014). Here's another example. The first roof replaced in the current roofing project will be 15 years old in 2016. Roofs have a "useful life" of 15-20 years, and so money is currently being saved to replace that specific roof in 2021 (or sooner). Funds will need to be spent on each roof in the future when it reaches the end of its useful life. The current phase of the roofing project will be completed in 2016-2017. A roof replaced in 2009 will have a life of up to 20 years. The next replacement of such roofs will begin in 2029 (or sooner) and will require about 7 years to complete.  That replacement is called the roofing "Phase, Subsequent."

A More Complete List of Reserve Categories
The following list and accompanying dollar amounts were not provided to owners in the newsletter, and should be considered typical for this HOA. There are four broad categories:

1. Exterior Building Elements

• Balconies and Patios, Wood, Phased
• Doors, Front Entrances
• Drainage, Front Yards, Remaining
• Entrance Roofs, Reconfiguration, Remaining
• Light Fixtures, Front Elevation
• Roofs, Asphalt Shingles, Phased, Remaining (including insulation)
• Roofs, Asphalt Shingles, Phased, Subsequent
• Walls, Masonry, Window Sill Replacement, Phased, Remaining
• Walls, Masonry, Inspections and Partial Repointing

2. Interior Building Elements

• Floor Coverings, Carpet, Phased
• Floor Coverings, Ceramic Tile
• Intercom Panels
• Light Fixtures
• Mailboxes

3. Property Site Elements

• Asphalt Pavement, Mill and Overlay, Streets, Partial
• Asphalt Pavement, Total Replacement, Streets, Phased
• Asphalt Pavement, Total Replacement, Driveways, Phased, Remaining
• Asphalt Pavement, Total Replacement, Driveways, Phased, Subsequent
• Catch Basins, Inspections and Capital Repairs, Phased
• Catch Basins, Replacement, Partial
• Concrete Curbs and Gutters, Partial
• Concrete Garage Floors, Phased
• Concrete Patios, Partial
• Concrete Ponds and Creeks, Phased
• Concrete Sidewalks, Partial
• Concrete Stoops, Remaining
• Concrete Stoops, Partial, Subsequent
• Gazebo, Decks and Pedestrian Bridges, Wood
• Lakes, Erosion Control
• Landscape, Partial Replacements, Initial
• Landscape, Partial Replacements, Subsequent
• Light Poles and Fixtures, Short
• Light Poles and Fixtures, Tall
• Signage

4. Contingency

Reserve "Funding" or How to Pay for Reserve Capital Projects - An Example
How to pay for the above list? That's called "funding." Using the balance sheet or reserve totals can be very misleading.

For example, if roofs require replacement every 15-20 years, then it is essential to commence saving 1/20th of the price of each roof each and every year after replacement. If this occurs then thee full required amount will be available via reserves 20 years into the future when the roofs are again to be re-roofed. The amount saved each year must include an adjustment for inflation. Roofs will cost more in 20 years than they do today. How much each year should be saved? Here's a simplified version of the annual amounts to be saved. These are included in our current BLMH reserve fund balance. The next roofing phase is projected to require an average $2,750 to be saved for each roof each year for 20 years, and savings should have begun when the first roof of the current phase was replaced and each year thereafter.

Our current reserve balance includes savings for the next roofing phase, and we have not yet completed the current phase. Why is that? One of our roofs was replaced in 2001-2002; it may require re-roofing in 2021 at the age of 20. More than half the possible funds to re-roof it in 2021 should be currently saved in our reserve fund. If boards and owners don't understand this and see only the reserve balances, they may be blindsided by large numbers.

The next three roofs were done in 2009, 5 years ago. Using those three roofs and all of the roofs done from 2009 to 2013, the HOA should have saved about 1/20 (one year of 20 years of savings) of the price of each of the completed roofs for each year. Here's what that means. For the three roofs of 2009, that would be 1/20th each year for five years to date. In 2010 four roofs were re-roofed and so that would require saving  about 1/20 of the price of these four roofs each year for four years to date. In 2011 six roofs were re-roofed and so that would require saving  about 1/20 of the price of these six roofs each year for three years to date.  In 2012 six roofs were re-roofed and so that would require saving  about 1/20 of the price of these six roofs each year for two years to date. In 2013 six roofs were re-roofed and so that would require saving  about 1/20 of the price of these six roofs each year for one years to date. To determine how much should be currently saved, all of the above are added, as follow:

2002 = 1 roof x 13 years x $2750 = $35,750.
2009 = 3 roofs x 5 years x $2750 = $41,250.
2010 = 4 roofs x 4 years x $2750 = $44,000.
2011 = 6 roofs x 3 years x $2750 = $49,500.
2012 = 6 roofs x 2 years x $2750 = $33,000.
2013 = 6 roofs x 1 years x $2750 = $16,500.

If we add the above, it will indicate how much we should currently have (end of 2014) in reserves for the next replacement projects for the roofs, when these roofs are each 20 years of age and at the end of their useful life.  One roof may be replaced in 2021-2022. The replacement of the remaining roofs will begin in 2029. The amount of reserves which should currently be saved for this purpose is:

 $220,000 should be currently saved for future roofs (2021)

That's an approximate number.

The above is an example of why, when we look at a reserve balance, it is meaningless unless we also know the items contained and when replacement is scheduled to begin.

For the complete picture, we would do the same for each and every item in the "Reserve Category" list. We would then determine the actual funding level achieved. I did just this several times, most recently in the fall of 2010. Some of the data was used to produce charts and graphs for this website, and some was given to owners during HOA meetings.

Here's a chart from my post of October 23, 2010. Owners were give much more in-depth charts if they attended a HOA meeting in the fall of 2010, and stayed after the end. About eight did stay. This chart compares roofs completed in the current phase to those remaining. It was a projection:

Here is a second chart from that post. It indicates cash flow, which is the amount collected and placed in reserves per year for roofs. It also indicates the amount spent each year on roofs. It also shows how reserve requirements would decrease year by year. In 2010 this HOA did not have $800,000 for the current phase of the roofs. The chart indicates that the roofing reserves would have about $300,000 at the end of the current roofing phase in 6-7 years.  That's money required for the subsequent phase, which would begin by re-roofing the roof which was done in 2001-2002. That roof might be re-roofed in 2021.

If you want to see that post, it's one of several with the label "budgeting", or clicking will open a  New Window> Roofing Budgeting 2010

What Are Reasonable Reserve Contributions? Is $8.03 Per Month Reasonable? 
That's a good question to ask. I'd suggest that the "reasonable" reserve contributions from monthly fees should be realistic contributions.

I define realistic fees to be fees that pay the bills and meet reserve requirements.  I'd say that $8.03 per month per owner for reserve contributions  is far, far too low and is not only unrealistic, but is also unreasonable.  Why do I say say this? At $8.03 per month, or $32,377 per year for 336 owners, how can replacement amounts be saved for the following: About 2/3 mile of streets, 42 large roofs (actually 40 large + 4 smaller), 84 4-car driveways, 84 4-unit garages, 84 entrances and halls, 336 patios and decks, about 1000 feet of streams, about 1/3 mile of walks, 700+ trees, 15 acres of turf and landscaping, lakes, etc.?

Yes, for as long as I have lived here, which is only about 13 years, various owners at BLMH have argued about what's fair or reasonable. In the period 2001-2008 those same owners argued that our fees were too high  Apparently $8.03 per month to replaces all roofs, streets, driveways, etc. was considered by them to be "fair and reasonable." I suspect some readers would say such an amount is ridiculous. Of course, you and I have the benefit of hindsight. Today in 2014 we have the benefit of recent history. What HOAs really require is foresight. That's my  opinion of a necessary component of any HOA plan to keep fees "as low as possible."

For this HOA the answer is, the required amounts cannot be saved at $33,000 per year, or $100,000 per year or even at $250,000 per year in 2014. Our HOA today is approaching 40 years of age and so are the entry doors, mailboxes, intercoms and so on. A reasonable reserve amount in 1985 would be insufficient today, even if adjusted for inflation. If this HOA had persisted at a savings rate of $33,000 per year, after 15 years the reserves accumulated would be $495,000 plus interest.  That accumulation of $1,473.21 per unit would be used for the replacement and reconstruction of all roofs, streets, driveways, garage floors, patios, walks, streams and everything else. The reality? The amount collected might be sufficient for the complete replacement of 84 large 4-car driveways.

What Are Reasonable Reserve Contributions? Is $111.17 Per Month Reasonable? 
That's another good question to ask. I'm comparing a range of $8.03 per month in 2000 to $111.17 in 2014. What changed?

Let's be real, shall we? Collecting $111.17 per month from 336 owners for 10 years will generate $4, 482,374. That's more than the total reserves collected in the first 30 years of the existence of this HOA. In other words, that's a really large amount. In my opinion, it could be an excessive amount. I remind the reader that I did generate a reserve study in 2010. I do run the numbers.

So why is this amount being collected? Check the category list. It is to replace streets, lighting, entrances, provide masonry repairs, stream repairs and so on. Reserves should be designed to recognize capital replacements for 30 years. That's what the experts say. Our current fees and reserves are being collected to cover short and medium term capital replacements. Most, but not all of the fees collected for reserves are earmarked to be spent withing 20 years. A lot will be spent to finish the current phase of the roofs, driveways and do the next phase of the streets which began in 2014, 6 years earlier than planned. Some of the funds collected for reserves in 2007 will be spent next year, but not all. That's a significant improvement over a few years ago when fees were spent almost immediately for capital replacements. Some of the things on the list haven't been done for 15 years, or the phase was never completed when started in 1990. For some of these items, earlier boards neglected to put aside funds. When that occurs, current boards are faced with a difficult decision. Drop the item from the list and pray it doesn't fail next year, delay the collection of fees and hope that the infrastructure lasts until some future board can collect the necessary fees, or delay the collection of fees indefinitely. Owners can hope to sell before the bill comes due.

Today, we have reserves accumulated which provide a cushion, or what I prefer to call "some latitude." For example, the premature requirement to replace the north section of Lakecliffe is certainly a financial breakdown. However, it is not a disaster. Yes, future boards will have to figure out how to pay for streets failing 6-8 years earlier than anticipated. However, instead of replacing four garage floors per year perhaps only three will be replaced. I caution owners that this approach may become a "kick the can down the road" approach and could create future financial distress. Garage floors should be replaced when necessary. So too for everything else in this HOA. Applying maintenance band-aids while waiting for the funds to arrive is not a good way to operate a HOA. It didn't work before, it doesn't work today and it won't work in the future. Why do I say this? Why do you think we today are paying $111.17 for reserves?

Our entrances and front doors, mail boxes, intercoms are nearly 40 years old. Creek concrete repairs were suspended about 1999. Garage floors are failing and about 1/3 of driveways need to be replaced in the near future, as well as the remainder of the streets. The windowsills are of 40 year old brick and should be replaced with limestone. Need I go on? These are all on the reserve list and that's why this money is being collected.

Not all board members or owners agree these replacements or repairs are necessary.  I suspect some owners see personal opportunity in our current reserves. Please don't waste this opportunity.

The bottom line? Money will be spent as future boards decide. Considering the history of this HOA I caution all owners to closely monitor the boards to assure that:

1. Boards communicate specifically why funds are being collected. 
2. Boards communicate when reserve funds will be spent.
3. Monitor that funds are being spent for the purposes collected.
4. Monitor finances to assure that sufficient funds are collected and saved.
5. Beware that excessive or unnecessary funds are being collected.  

It is my personal concern that a very large reserve balance will prove too tempting for some here at BLMH.

A Bright Future for BLMH?
If you see the balance provided by the treasurer and feel that it is a good number, I suggest that is an appropriate emotional response. It might not be an accurate one.

Boards decide how much to save for each reserve category. Boards also decide how to collect the fees to save these funds. It can be accomplished gradually, in fits and starts, with special assessments, or by applying all of these methods. Doing so is entirely up to the boards and as we know, boards are elected by owners.

I'll take a look at this in my coming post "A bright future for BLMH?"

Coming: 

Parts 4 and 5 of this series will look more closely at the role of owners in HOAs, and at the possible future for BLMH.

Note:

1. Fees at the rate of the blue line in the first chart would have actually achieved higher reserves than this HOA has today. But why quibble? The trend for the red line in the 1980s and 1990s indicated an desire to run this HOA with a $225 monthly fee in 2014. Unfortunately, that would not have paid for streets, roofs and so on. In 2009 there were a few here at BLMH who were promoting a mortgage to pay for these things. 
2. There are no "heroes or villains"  in most HOAs among boards and owners. Owners vote and pay fees. The boards also pay fees and do the work the other owners are unwilling to do. As I am fond of saying "All boards are comprised of amateurs."  If owners expect better they they had best step up to the plate and hire the necessary professionals. It is a fact that each and every board member is an amateur. Some board members, or former board members will use this as their defense and as an excuse. However, I suggest to owners that they realize "You get what you pay for." HOA fees are used to hire a variety of professionals who are "licensed, bonded and insured." Not a single HOA board member is licensed. Board members do have to use good judgement, whatever that is. Each must operate as fiduciaries and with experts to guide them. But boards can pick and choose the experts and they can also influence them. Owners can pick and choose the boards. I doubt that the management in 2002 forced the board to forego engineering and project management for the street project. That was a board decision. Looking at the finances at the time, I'd guess that the board decided to avoid collecting the fees for such experts and decided to do the street in such a manner so as to "keep current fees as low as possible" because "If we don't spend it we don't have to collect it." 
3. The dilemma for amateur boards is deciding where to properly spend the money and who to listen to. We've had boards at BLMH who decided that the owners were the experts, and the professionals were not to be trusted. 
4. Each and every owner at BLMH is welcome to do their own financial analysis of this HOA. In fact, each and every owner at any HOA should be doing this. If you can't or won't then you should find someone to do it for you. "It's your money."  I realize that doing this prior to purchase is just about impossible. Prior to purchase here at BLMH I was limited as we all are, but I did note that the reserves were abnormally and alarmingly low. I wrote a letter of questions to management. I did purchase because I was lured by the siren call of the streams and waterfalls. Nevertheless I did know there would be special assessments in the near future or much, much higher fees. Many of my fellow owners in 2002 apparently didn't comprehend that. Why should they? This HOA had miraculously dodged the bullet for 20 years. 
5. The information contained herein isn't really "news." I did my numbers in 2000 prior to purchasing a unit and I've continued to "do the numbers" each year I've been an owner here. One of the reasons I ran for the board was because I saw that this HOA was about to make another about face. Unlike 1980 and 1990 this HOA had run our of financial time. It's also pointless to do this only for oneself. I wanted to share what I was doing. I also wanted to influence the boards. I had been told as an owner that "we don't read your blog." Boards can ignore letters and emails, too. I decided a board position was the only way. It was that or sell my unit. There were no other options; I didn't want another weird financial decade at BLMH. I also knew it would be an uphill, arduous struggle. "You can lead a horse to water, but you cannot force him/her to drink." We've got some really, really stubborn individuals here. 
6. There is a time for everything and I think this is an appropriate time to provide the numbers. I did my first simple reserve study in 2004; it was for personal use and I was convinced the board wasn't really interested. I did the next simple one in 2008-2009. I did a thorough one in the fall of 2010. The current opportunity was created by the BLMH treasurer who decided to publish an article with the current reserve numbers in the HOA newsletter. I did not ask for that or influence that article. However, with that information, it frees me to provide what I have in this post.
7. In 2008 I began raising "alarm bells" about reserve shortfalls and the failures to smooth fees. I had not yet done my own thorough reserve study. However, in 2008 and 2009 I did publish some posts about fees. I saw two issues 1) Smoothing fees to avoid this "yo-yo" that past boards had created and 2) I wanted to avoid special assessments or large (10%) fee increases as I was of the opinion this would devastate some owners. I was also very concerned our board would continue past HOA mistakes, and sure enough the new board passed a 0% fee increase. That board was hell bent to reduce fees, but they hadn't run the numbers and were oblivious to the reserve requirements. Here's a link to a March 2009 post in which I argued about the "evils" of a failure to smooth fees. I had not yet done that reserve study and so I really didn't know precisely how much we needed for reserves. I also didn't want to scare the owners. I wrongly assumed the boards would steer a prudent course. 

Clicking will open a  New Window> Alternative Assessment Approach

     6. Did the recessions prior to the arrival of new management have an impact on the decisions made by boards? Notice this chart [click to enlarge]. We experienced recessions in 1980, 1981-1982, 1990-1991, 2000-2001, 2007-2009. During the recessions earlier than new management (1998), the fee increases were moderated with the arrival of or during recessions. With new management after 1998, fees were not influenced by the occurrence of recessions, and continued their upward trek, influenced primarily by the HOA reserve level and the needs of capital projects. In 2007 a serious economic recession occurred. "The Great Recession" had a duration of 18 months. Management and the board did not moderate fees as occurred during recessions prior to 1999. In 2008, the owners fired most of the board and the new board attempted to replace management. Here's a couple of observations 1) In the 1980s fees included 5 years of 0% fee increases; 2) the 1990s began with two years of 0% fee increases. Fees collected tapered off. The 1980s set in motion expectations of owners at BLMH for low fee increases. The 1990s reinforced those expectations and cemented the problem. It is an unfortunate fact but there will always be recessions, and when they occur some of us will experience economic and financial hardship. BLMH continued to dig a long term financial hole until 1999. Fees, of course provide one-half of the information. Fees are collected to pay bills, both immediate (O&M) and to save for long term capital projects. Many of these large, expensive projects require continuous saving for 15 to 30 years.