2015 - Another Year to Plan

It's a new year and so we will have a new plan. This is a natural occurrence in a HOA, isn't it? Boards come and go and new members join. Plans are made but don't always come to fruition in the time anticipated. Sometimes the can is kicked down the road. The hat too!

2014 was like that. Some things planned did not occur. Some things unplanned did occur. The plan was adhered to with adjustments.

Each year can seem to be starting over. Sometimes the HOA gets a reset. That's what occurred in 2007-8 when a new board came to power. Simultaneously there was an economic meltdown. Not quite a great depression, but close. For a time the combination gave us chaos, However, time waits for no one. Reality is an interesting phenomenon. We, as human beings can promote anything we want. Politicians can obfuscate and confuse and misdirect. At some point in time reality will intervene. "We have enough money" will be either proven or disproved. The actual condition of infrastructure will reveal itself. The finances will become apparent. When these things occur then it will really be time to pay the piper. (Note 1).

That's the way it is in HOAs. Do you think I'm kidding? I know people in other HOAs. Some here in the midwest, some on the east coast and some elsewhere. Some live in HOAs of 20 units, others in large HOAs. Some live in high rise buildings, some in HOAs on the shore. Owners in each of these are pretty consistent. They do what they can to keep their personal fees low and avoid long term planning. The desire seems to be to move on before the bill comes due. This is often wishful thinking. (Note 2).

After a lot of soul searching this HOA decided to open "Pandora's Box" to quote a former manager. So about 5 years ago we finally got a serious and far reaching reserve study. Some things take 35 years to accomplish. That study was flawed and it took a redo to get one that made sense. It wasn't pleasant. So it is with things we avoid. That study is being honed and improved. It's a continuous process, like a road trip. We may have our plan but at each leg of our journey we see how far we have come, how much further we have to go, what it took to get where we are and what are the future conditions. (Note 3).

Yes, we can pretend that we know the future, but we don't. Financial planning is really about cash flow. A HOA may pretend it knows the future and avoid doing the things to reveal what it truly so. However, as the clock ticks the infrastructure ages. The future bills, those required by the infrastructure will accrue. Eventually they do come due and woe to the owner who thinks otherwise.

That's the point of all of this planning. To generate an income stream and savings which balances the costs of maintaining the HOA. It's time for our board to discuss the details for 2015.

Tonight, after a one-week delay
Tonight at the first association meeting of 2015 I'll present to the board and any owners in attendance the state of architecture and projects. It is a 5 page list, larger because of photos. Just a summary and incomplete, at that.

It is a work in progress, which I began in 2005, some years prior to achieving a seat on the board. Some things on that original list have been completed or are nearing completion. I include the roofing project, although it may be another three years before that is completed. We have eight large and three smaller roofs waiting. Too much to complete in one year, but certainly these can be completed within three (2015-2017).

However, in this game of catch-up, new problems occur at a pace more rapid than old ones are completed. No driveways were replaced in 2014, nor were any garage floors. It is a fact our infrastructure is aging, As we approach 40 years of age, some of that is accelerating. We lost about 35 large trees last year. There will be more.

That acceleration is the primary reason some things are deferred each year. There are plans and then there is reality. Reality can alter priorities.

Plans and Reality
The plans can be made each year, and they are. Those plans paint a picture which is limited by time and money and other realities. By reality, I mean the unexpected failures that do occur each year. Water main breaks is one such example.  Time available each year to accomplish what is contained in the plans is another.

A few years ago, there was a plan afoot in our HOA to take out a very large mortgage and do it all "at once." This does not stop the clock. It resets some parts but other aspects of the HOA will continue to age. Can we do it all in one or two years? Is it possible to complete the roofs, replace the streets, replace garage floors and remaining driveways as well as the entrances? We did eight roofs last year and about one-half of Lakecliffe Drive. This was a major disruption for residents. The roofing project was delayed to keep contractor vehicles off the property and free as much street parking as possible. The roofs were completed as temperatures fell below 50F. It was very, very difficult. We have about 80% of our streets to do over the next 5 years or so. Think about it.

Each year, this HOA collects fees and allocates them to Operations, Maintenance and Reserves. Reserves are collected in anticipation of capital projects. Most important is the period from today to 10 years hence. We surely have a good idea of the condition of infrastructure and needed repairs 2015-2024, don't we? If we don't then I suggest the question to ask is "Why don't we?"

Of course, everything can't be anticipated. Nor is there any desire to do so. We don't know the precise weather in 2015. We don't now the cost of utilities in 2015. We don't know precisely which garages, driveways and roofs will actually be replaced in 2015. We don't know how many foreclosures will occur in 2015, in any; these things sap the budget. And so on.

Why not? We don't have a crystal ball. Nor can I state with any certainty precisely which roofs will be replaced in 2015. I can say that recent boards have made it a commitment to replace roofs before failure. But it remains for the current board to decide what to do in 2015.

Dealing with Limitations
A few years ago this HOA found itself in a difficult place. A multi-year roofing project had been begun and simple arithmetic revealed to me, a mere owner, that we had a serious cash flow problem coming our way. While I do think some of this can be avoided and should be, I also do think there are limitations to planning.

I think it could be argued that in a HOA there will never be enough money. Why do I say this? Is it because of a lack of planning? Is it because of unforeseen circumstance? Is it because of owner pressure? Is it  because of the boards?

I'd suggest that it is because of all of the above. I'd suggest that with proper planning it is possible to have sufficiency with limitations. Our reality here has revealed that low fees may be a mirage. That of course would cause one to ask "What are appropriate fees?"

The answer to that question is why we do this annual planning and do attempt to keep current with maintenance and capital projects. Delaying capital projects can inflate the reserve balances as money is collected and saved, but not spent. That's one of the reasons our reserve balance at the end of 2014 was about $650,000 greater than planned. Another was cost accounting and a third was some projects coming in under budget. In fact, that reserve balance includes a sizable expenditure for a street replacement in 2014 that wasn't planned to occur until 2020 or so; if that street replacement had not occurred the reserve balance would be even greater than it is.

The replacement of Lakecliffe is my poster child for reality. Yes, owners can argue for lower fees and put in place boards to do just that. Boards may get a reserve study. Yet, the infrastructure may not age in accordance with our wants. It is a near certainty that the current street project will be completed before it should even have begun, if we look at the plan that existed in 2010.

The Ultimate Challenge. 
As HOAs age, there comes a time when really serious infrastructure replacement becomes necessary. That boiler I mentioned is an example, Our water mains are another. However, there is a problem.

How far into the future should a HOA plan? For example, how many years distant before entire buildings may require replacement? When and at what cost? That is the dilemma. What's reasonable and what is not? Not everyone will like the answers to that question, and there are multiple answers.

Collecting money for far distant issues may seem prudent. But is it? Consider this. Accruing reserves for something that may happen in 30 years will result in larger reserve balances. Add that to human nature and I ask this question. "What assurance do owners have that money collected for a specific purpose will be spent that way?" The answer might be unsettling, because there is no assurance. The history here at BLMH indicates that some owners will do anything to keep fees as low as possible. Lower than required for infrastructure repair and replacement.

That means that accumulating $millions in reserves will create a temptation for some. That $1,500,000 balance some will say is "enough money" and our fees are too high. Is $2 million a lot of money? Yes it is, but it's a drop in the bucket for the maintenance requirements of 336. It may seem like a lot, but in fact it is less than $6000 savings per owner. That's an amount barely sufficient for an owner to buy a new fireplace and take a nice vacation. It's not sufficient for a new furnaces and HVAC system. Or a simple kitchen do-over. And that is my point. It will take $hundreds of thousands to replace our streets, finish the roofs, deal with masonry issues and so on.

The challenge for boards is to collect and save amounts for reasonable reserves while developing plans for infrastructure replacement. And to do so while keeping owners and future boards from destroying those plans for short term gain. When some owners see large balances they are inclined to think "I could do a lot with that money." (Note 4). It's useful for owners to do a little arithmetic. Multiply the cost of replacing one medium sized driveway by 84, or the cost of one roof by 82. Or one garage floor by 84. Only then does one get a realistic idea of the true costs facing their HOA.

It is a challenge. Overshoot (collect too much) and current owners might argue they are being penalized. Undershoot (save too little) and special assessments or large fee increases become inevitable. Some avoid reality.

Notes.
1. Timing of owners can sometimes be terrible. Throwing out a knowledgeable board at a time when there are rising delinquencies, foreclosures and reserve issues to contend with was not one of our more brilliant moments here at BLMH. However, there will always be a few owners who will argue their personal position while planning their escape. 2008 made that difficult. It forced most owners to come to terms with some realities.

2. Some of those whom I know in other HOAs admit they have low fees and even lower reserves. Not all have low fees. For example, a large multi-story building with a doorman and $20,000 in reserves. Owners want that benefit and prefer it to reserves. Another HOA recently gave the owners a $20,000 special assessment to replace an aging boiler.  Another did the same to replace windows. Not all had low fees. The one with the window replacement assessed about $20,000 on top of the monthly fee of $450. These numbers may seem large, and they are. $20,000 is equivalent to my entire fee here for 5 years. In other words, such a special assessment would effectively double my fees for 5 years. Now that's an incentive to get it right for all of us.

3. I was very apprehensive when the board announced the plan to go for a reserve study. I was even more apprehensive after watching the contractor selection process. I took the manager's caution about "Pandora's Box" quite seriously. After all I had been running my own numbers using the stuff tossed out by the boards. I knew it would not be pleasant and I was reasonably certain there would be some "bad news." However, owners need to be made aware was my position and so I let go of my apprehension. Besides, the residential real estate implosion had already wreaked havoc on values and so how much worse could it really become? Referring to that allegorical road trip,  I have always found it interesting that many of us will spend more time watching the weather on TV than on doing our financial and future planning. Should we be surprised if the results are less than wonderful?

4. I've read and heard some real horror stories. Some HOAs have problems which become so severe they are unsolvable. There will always be a temptation to kick the can down the road. Some owners will experience personal misfortune and hardship. If a HOA acquiesces to the needs of those who are experiencing financial difficulties, then future problems are created. I have yet to read of any solution to the "kick the can down the road" situation in HOAs in which future fees did not increase significantly or there were no special assessments.  Each HOA faces a choice. Build a future or destroy it.