Owners and Boards - Part 4 - A Bright New Day?

On August 8 I received this comment:

"BLMH is a lot better than it used to be, and I think there's a bright future ahead for this association. Not all associations are perfect, all of them have their issues. As for my own experiences, these past few years have been a lot smoother than the 'hope and change' board from 2008. I can only imagine how the fireplace issue, lakecliffe repaving, roofing projects etc. would have gone with that board in place."

I appreciate the author's comments. Is there a "bright future ahead" for this HOA? That's a good question. I assure the reader that is what I've been striving to accomplish since 2008. I want each owner in this HOA to get value from their fees. I am concerned that our fees are higher than necessary. I have not been alone in this, but there has been resistance and owner apathy. Politics does have an impact on each and every one of us. In all candor I'm surprised I remain here.

There are several aspects to the question "a bright future." We have the well known financial and infrastructure aspects. I'll be looking closely at this later in this post. Another aspect is this HOA as community. In recent years, owners have expanded their demands. A significant percentage of owners have been delinquent. Yet, all owners expect results, some demand service and nearly all avoid assisting as board members or on committees so that the potential of this HOA can be realized. Some of our owners now insist this is a retirement community while others insist it is an apartment community where owners pay their monthly fees and do nothing more. They will say "I paid my fees so I've supported this HOA and I've done my fair share."

I consider all of these positions to be aberrations. They do not reflect the reality of what is required to run this condominium HOA, what is available or what is possible with the resources of this community. These opinions nevertheless may be representative of the majority. These opinions do reflect what owners are willing to provide to their HOA. In other words, for about 85% of us "I'll pay my fees." Wow, thank you so very much! To extract their pound of flesh, some owners have had no hesitation in telling board members exactly what they think, demand and expect. That has been mostly  a demand for "lower fees" and special treatment. "What do I get for my fees?"  With so very little owner involvement and demands over decades for lower fees, is it any surprise our fees are higher today than would otherwise be necessary? Is it any wonder our infrastructure funding plan was failing in 2001? Is it any wonder in recent years that owners have had to pay the piper?

A View To A Future
To look into the future we also need to look at who are these owners on our boards. I'd suggest to owners that "the motivated" are on the boards. In the past, "the popular" were also on the boards. Neither of these approaches may be the best way to run a HOA, and there is evidence that motivated boards are not necessarily the best boards. In recent years with board vacancies, anyone who showed up at BLMH was given a position. Is that any way to run a HOA with a $1 million annual budget? Apparently, our "apartment" mentality owners decided it was completely adequate. Well, those duly elected boards spent every dollar you gave them.

A few years ago, the rumor was promoted that there would be a special fee for dog owners. That got a lot of people to swarm the management office. As a consequence we also got that "change" board of 2008. I think we would all agree we got "change" but did we get a better run HOA? In 2008 the owners of this HOA got exactly what they wanted, demanded and elected. It happened then and it will probably happen again. Do you or I want to be here when it again occurs? Who will play the part of the "little dutch boy" with their finger in the dike when it again occurs? I assure the reader, it will not be me.

I don't know what the motivation of future boards will be. I don't know what their skills will be. I do think that motivated owners will vote and put in place like minded boards. Will we become a "retirement community" or a "rental community" or something else? Is that a problem? Not necessarily, if we can pay for it at current fee levels.  However, at BLMH many of the motivated owners have expected someone else to pay for their grand ideas. Many have exhibited no financial acumen. They voted for anyone who promised lower fees.  In other words, these owners and their elected boards are willing to mortgage your future. Owners and boards did it in the 1990s, failed to match reserve savings to infrastructure requirements in the early 2000s, attempted to cut fees in in 2008 and if allowed they will do it again, and again, and again.

A Financial Reality
Will this HOA have a "brighter financial future?" Some see our recent reserve balance of $1,754,285 as announced by our treasurer to be good news. In fact, this HOA will use about $600,000 in reserves this year, and most of that had been committed by July 2014. It took about two years to collect and save that amount. The funds for the street replacement project will require about four times the total 2002 reserve savings of this HOA. I provide this information to indicate how far this HOA has actually come in 10 years. Yet, in 2008 at about the half way point, the owners folded and this HOA turned back. It took extraordinary effort by a very few to avoid a financial disaster.

The financial well being of this HOA, and the fees required of current owners will be largely determined by how this HOA manages it's finances for the next 5 years and beyond. The condition of our infrastructure will be determined by how and when our boards spend the fees that are collected. There is a plan and current fees collected for reserves are intended to fund that plan. Boards may adjust the dates of certain infrastructure repairs. There are good reasons to do so, including my goal to achieve a glide path for fees. Future boards may discard all or part of any plan. Some will be inclined to. After all, with election to position comes financial power. With election to the board of a HOA does not come good judgement, wisdom or financial acuteness.

To determine our current financial position requires knowledge not only of the check book balance, but also of the financial commitments that have been made and are required to maintain this HOA. Our reserve balance on December 31, 2014 will probably be about $1,250,000. That is not a trivial amount, but it is a lot less than our current $1,754,258. In my projection I include the remaining reserve collections of 2014 and the estimated financial commitments made in 2014. I assume all financial commitments made in 2014 will be paid in 2014.

For the period 2015 to 2025, this HOA will spend about $3 million in reserves on infrastructure replacement. Most of this will be spent after the completion of the current phase of the roofing project and driveways.

What would you prefer as an owner? A snapshot of our checking account from time to time, or a reliable description of our plans and our financial ability to achieve those plans? These are the things that determine your fees.

What should owners demand of boards and management? What support of management and boards are the owners willing to provide? In the dark days I made a reserve study and created many charts for presentation to the owners during an official HOA meeting. Fewer than a dozen owners attended and that included several board members. Have things really changed at BLMH?

A Possible Financial Future
Financially, I'd say this HOA has turned a corner. Politically, I am less optimistic; many of the same owners who elected that board of 2008 remain here. I don't trust any of them. They did their bad deed, and then sat back and said "How could this happen?" How indeed!

I am of the opinion a financial "bright future" while possible cannot be achieved automatically. Six years ago this HOA stumbled badly. I am of the opinion that BLMH does have another 5 years to go before we can say that our reserve program, infrastructure work and finances have stabilized. That's based upon what I currently know and have generated. We'll have moved beyond the fireplace problem, beyond the dam study and we'll know how Wheaton proposes to responsibly run their retention system.

My personal financial projections assume this HOA will continue to be run as a condominium community. That is not assured. If voting owners decide they want the amenities of a "retirement community" then we will quickly run out of money. If voting owners decide our fees are too high and decide to cut back on reserves, then we will also quickly run out of money. I emphasize "voting" owners because those are the owners who control this HOA.

"Financial stability" cannot be guaranteed. I'm cautious and cautiously optimistic. Current reserve funding levels may be adequate and annual fee increases for reserves may not be required. How is that possible? We've gone from 5% of our fees dedicated to reserves to 33%. In other words, this HOA today collects nearly 7 times more each year in fees dedicated to reserves than it did a few years ago. It allocates twice as much per year to reserves than it did a less than a decade ago. In fact, I think in 2002 it saved nothing for reserves.

It is true that this HOA has been spending some of these reserves as rapidly as they were collected. It had to. Remember, in 2001 the total reserves were slightly more than $222,000. In 2002 they were $258,735. Yet we needed new streets and driveways and began a $1.7 million roofing project. The "replacement fund" was spent as fast as the money came in.

The combined, total reserves of 2001, 2002 and 2003 were less than we will spend this year on the roofing project. With a $1.7 million roofing project beginning in 2002 this HOA was cashing checks which it couldn't pay, yet the owners were oblivious. In 2003 the board of this HOA had no choice but to increase fees simply to cover immediate infrastructure requirements. In other words, many boards had delayed far too long. They kept fees "as low as possible." The owners loved it. Some boards obviously refused to save for reserves. It was a facade and the bill had come due.

Why do I remain cautious? Many of the owners who facilitated the "smoke and mirrors" budgets of the past remain here today. They will vote. They did so in 2008 and the results were a disaster. Their "hand picked" board attempted to reduce fees even with about $2 million in near term reserve spending facing this HOA. What were they thinking? Who knows? It was a near miracle it didn't happen. We are proceeding with roofs, driveways, a major street replacement and the removal and replacement of 40+ dead trees.

Some Financial Details - My Educated Opinion
It's possible that there will be no fee increase for reserves in 2015 and any fee increase will be that required by the Operations and Maintenance (O&M) budget.

It is my opinion that this HOA is catching up and has finally built a true savings reserve; it only took 37 years of trial and error! The current reserve funding means that this HOA will probably have $1,250,000 in reserves on December 31, 2014. With the identified plans and at current reserve fee (funding) level that is sufficient to pay for those street replacements from 2014-2021 which began 7 years earlier than anticipated as well as current identified reserve requirements. It is probable that this HOA will be able to complete all necessary and anticipated infrastructure repairs from 2015 to 2026 with no further increase to fees for reserve funding.

It's my personal opinion that we will probably be able to maintain at least $780,000 in reserves each year from now until 2025. In other words, fees may increase to deal with changes in Operations & Maintenance budgets, but I see no need to increase fees to accommodate reserves.

I want to emphasize that with the current reserve fee levels and savings this HOA should be able to do all infrastructure replacements, including our entrances. It will remain  for future boards to properly spend those fees which were earned the hard way by each of our owners, and provided by most owners to this HOA as demanded. Asking boards to do this is not a lot, if they are provided quality professional management and frequent reserve study updates. (About once every 5 years). If there are significant infrastructure changes or changes to reserve requirements, then a more frequent reserve update would be necessary.

The chart below depicts one possibility and includes my funding glide path. This chart allows for the completion of roofs and drainage improvements between 2015-2017, the completion of driveway replacements 2015-2017, the continuation of the replacement of garage floors, perhaps four 4-stall garages per year, the completion of all streets in 2017-2022 and the continuation of stream concrete repairs 2015-2020. It also addresses the problems of entrance doors & doorways, intercoms and mailboxes. It also includes longer term funding for the next phases of roofs, driveways and so on.

I could provide a chart to 2042, but the farther ahead we attempt to project the infrastructure and O&M fee requirements, the more difficult such predictions become. I think for the purposes of this post a 10 year projection is more than adequate.  Note: This may be adjusted by the reserve study update that is underway. I have no idea of the outcome of that study; the following is based solely on my financial observations and the studies of 2010 (mine) and 2011 (HOA). (click to enlarge):

Fees - What Is Being Attempted? A Glide Path into the Future
A financial glide path has been one of my personal goals for this HOA. What is that?

Our fees are determined by the condition of the infrastructure in this HOA, by our annual Operations & Maintenance budget and by the percentage of owners who do actually contribute their fees each year.

Our O&M budget is based upon annual operating realities. The cost of electricity, water, insurance, oil and so on. We don't directly pay for gasoline in our HOA budget, but our contractors and supplies do. Material costs will rise with the price of oil. Inflation takes a toll. Health insurance costs impact our contractors and suppliers. It is necessary to increase our O&M budget to deal with this, and such increases occur annually and are determined by the current reality.

Our HOA provides owners with the details of annual fee increases. This information is displayed on the HOA website. What most owners are unawares of is the true impact of infrastructure repairs on our fees. That information is provided to owners via the budgets and balance sheets.

In the recent past (2000 to the present), reserve contributions were called "replacement fund" and that is how these fees were used. In some recent years there were no contributions made to replenish these funds. We today have a fund called "reserves" and these are collected annually, accumulated and saved for near future infrastructure replacement. We no longer have "zig-zag" fees which vary from year to year to pay for infrastructure. In other words, this HOA has achieved stability in reserve funding. This achievement is having and will continue to have a profound impact on owner fees.

The board has set a minimum for reserve savings balances; that's prudent. It is possible to adjust fees for reserves and infrastructure replacement to accommodate this. Of course, if a street requires replacement, then it must be done. The challenge for all boards is to anticipate these things and set the required fee levels and savings levels. This anticipation must occur over decades. It cannot be properly done year by year. In 10 years our reserve contributions went from near zero to over $400,000 per year.  In other words, in 10 years our fees for reserves went from near zero per month to about $100 per month. That's what happens when boards fail to set fees and save for reserves.

The good news is we've passed beyond that.  We're currently nearing the completion of driveway replacements and roofing replacements. These could be completed within three years. We have begun street replacement this year. These are each major infrastructure projects.

Other aspects of our infrastructure are approaching 40 years of age. Reserves will be required to pay for these. Many of our garage floors and building entry doors, for example. There is a plan underway to replace garage floors a few each year. The failure and maintenance issues of entrances and exterior doors has been recognized and there is also a plan for these. If we begin today it will require 10 years for these projects.

One of my goals has been to stabilize fees, establish priorities, maintain the property and give owners value in the process. I also want to achieve a glide path for fees, in which spikes or significant changes can be avoided. This HOA has been largely successful at managing Operations & Maintenance fees. The past problem has been Reserves, which in recent years have been as little as 5% of the fees and as much as 33%. In other words, it's been my position that additional emphasis must be placed on the accumulation, managing and spending of reserves.

One of the current challenges is the creation of a "glide path" for reserves, in which fees for this purpose match reasonable and realistic infrastructure requirements while avoiding financial issues. In the past, these swings were from 5% to 33%. For a number of decades in this HOA the emphasis was on the lowest possible fees each year and reserves fell where they may. I prefer a glide path approach which emphasizes the achievement of reserves, addresses contingencies (water mains) and which anticipates requirements in five year increments, with close attention to the needs of the next five years. Large infrastructure projects must also be accommodated. A failure to do so is precisely why our reserve budgets had to ramp up beginning in 1999. Our new roofs will again require replacement in 25-30 years and it will require more than $2 million to do this. Saving a small amount each year is a necessity and preferred by current owners who do not want special assessments.

I assert that a good glide path can stabilize fees and it is possible our annual fees increases will remain moderate for a decade. This can be accomplished while also accomplishing the identified infrastructure replacements and repairs. 

Not everyone has had the confidence that our HOA can achieve this. A former treasurer, who declared at an annual meeting that she "did not want to live in a ghetto" decided to sell her unit in 2010.

I do think the necessary tasks can be accomplished and that includes some infrastructure work that has been avoided or delayed. To do so will take more owner involvement via fully staffed and competent boards to do this.

Possible Fees For This HOA to 2032
Here is a chart of possible fees. The increases are attributed completely to O&M budget requirements. There are no fee increases required to accommodate reserves for infrastructure. In other words, this chart indicates financial stability. With good management and foresight, it is possible that our fees will not exceed what is shown on this chart. With really good board oversight our fees could decrease in the future. Would that be a good thing? Not if it means shackling future owners with the onerous burden of excessive fees. Our greedy owners did it before and I suppose they may do it again. (click to enlarge):

Here are a few things I consider in this post:

1. Major infrastructure replacements for the current phases are not yet complete. This includes drainage improvements, roofing and driveways. The streets are failing earlier than expected and the next street replacement phase, scheduled to begin in 2021-2022 actually began this year. This work must continue to avoid resident disruption. 
2. We do have a professional, unbiased reserve study. It was prepared in 2011 and it will be updated in 2014.  However, boards must use these studies as the tools they are intended to be. 
3. We do not yet have a course of committed action. We really do need a long term plan that the boards can agree upon while preserving flexibility. For example, our building entrance doors and frames, mailboxes and intercoms are about 40 years old. They will not last forever. Replacement should commence as soon as the roofing project is completed. It will require 10 years to do this. Yet, each board picks and chooses projects and initiatives. That approach is why garage floors, concrete patios, brick sills, masonry repairs and even a building foundation lift and a truss repair were delayed. 
4. We took serious steps to deal with delinquencies in 2011. Boards must continue this. It is not easy, it can upset a variety of people, and it can take a lot of management and board time. Boards should allocate the funds to accomplish this. However, a failure to do so can increase fees by hundreds of dollars per owner per year. Allowing delinquent owners to absorb the fees of the other owners is reprehensible. What are the priorities? 
5. It is true that our reserves have improved significantly. A recent newsletter article implies we have adequate reserves ("We have a good plan"). Do owners know what that plan is? How would you define a "good plan?" My recent post provided a lot of information on funding versus spending. What is important is the amount of reserves and the funding requirements ahead, while maintaining the property. I've provided additional insights in this post. 
6. It really has been very difficult. Difficult for owners, more difficult for boards and most difficult for me; I'm ready to sell or rent my unit and "move on." I've had enough of this. My experience in this HOA has not been a good one. There are many thousands of quality places to live in the U.S. I've traveled extensively and I do know reality, nor must I live here. 
7. There remain some serious obstacles for this HOA. One is the lack of consensus about what is a "good plan," Another is a hesitation to use and pay for qualified professionals, another is a desire to avoid programmed maintenance in preference of micromanagement, and yet a fourth is understaffed or struggling boards. 
8. A "cookie-cutter" approach to some aspects of maintenance and landscaping will not work in a HOA with 40+ unique buildings, three meandering streams, 15 acres of bermed and landscaped turf, about a third of a mile of walks, etc. It does require serious attention to detail and we have not had the board members to accomplish this. 
9. Communications has improved via a reinvigorated newsletter. However, most newsletters don't include a report from every board member. There is a real difference of opinion about what should be communicated in the newsletter and why. 
10. Some owners continue to view BLMH as a retirement community or an apartment complex. In recent years owner involvement has been very low. I include participation on boards, committees and voter turnout. In order for this HOA to succeed, more involvement will be required and certain opinions and positions cannot be the prevalent ones at BLMH. We are a condominium HOA. Nothing more and nothing less.