Real Time HOA Management - Updated

This post is not about professional managers. It is about management of HOAs in real time by the boards which direct management. It explains what that means and how it may be practiced. It focuses on fees, reserves  and maintenance which are ongoing things in a HOA, and addresses some differences of opinion about whether fees are "too high" or "too low." Yes, there are some in our HOA who have expressed the opinion that our fees should be higher. So what are the driving forces?

A diagram of the current street replacement project is included at the end of this post, for reference.

Why "Real Time" Management?
Real time management requires that we avoid automaticity, perform frequent reassessment and reappraisal of HOA conditions, adapt a flexible position, stay in action and use 5 year plans for many programs so as to smooth finances. Our HOA doesn't exist in "La La Land." What was the norm 5 or 10 years ago may not be relevant today. It is true that our facilities are aging. For example, we have lost many trees to disease and the EAB (Emerald Ash Borer). I see many scotch pines which seem to be in serious trouble, and I've reported my observations to boards for eight years. These observations have come to fruition.

As we remove dead trees, we leave scars in the earth.  Some owners have noticed this. One wrote to the Landscaping Director on March 13:

"I am a 16-yr resident.......... I spent some time on my balcony today and am feeling so sad at the loss of the 2 ash trees and 1 large pine on the south side of the building. Plus 2 crabapples and a pine behind the waterfall have died and not been replaced either since I've lived here. Would you be able to tell me if there are plans to plant new trees soon in the beds where the trees were? It's getting rather barren out there. I would be willing to chip in a few hundred dollars if it would help get the process going. My concern is that if we don't start in the near future, any further loss of trees would be devastating to the view and property value........I think it's important enough to plant trees to add the line item of a donation to my budget......."

Is our HOA typical? Difficult to say. Our HOA has 336 units in 44 buildings and occupies about 40 acres, which includes most of two "lakes" which are a significant component of the City of Wheaton's storm water system, about 15 acres of turf and more than 600 trees; only seven years ago it was about 800 trees.  I have no doubt that most of our owner/residents purchased here because of the ambiance. This is a unique property, but it remains so because it is maintained. Sadly, those recent piles of wood chips are a symbol of maintenance reality as well as of age. Yes, my condo is nice and I did upgrade the kitchen, floors, etc. However, the real draw is the property. That includes the view from my kitchen window and balcony. I publish photos of that view on this blog with regularity. It's not perfect. Sometimes there is snow, ice, mud, and a dying or dead tree. However, my spouse would not have purchased here but for the walks and landscaping. In fact, she absolutely hated the 1978 kitchen, which I immediately replaced in total, Nor did we move here to convert this property into a retirement community. Looking at reality, it is doubtful we will live here until the day we die. This is a HOA and it lacks the services and was not built with the needs of the elderly in mind. Owners will not pay the fees required to accomplish such a conversion, either.

So what is the relevance of the above to this post? Many owners expect our HOA to maintain this property, as required by statute, and it does. But not necessarily to individual liking.  Many also expect the board to do this while keeping fees manageable and reasonable. To do these things is an allocation, project management and cash flow problem and with $1.3+ million in reserves, it is doable. That's my opinion. I think the majority of our owners would agree with me, although some may not be aware of how this is possible. There may be an underlying assumption that "we have enough" in the bank. That assumption is not helpful unless it is backed by a realistic maintenance program supported by realistic fee collections and with knowledge of future obligations and requirements. This requires flexibility. That too is a component of "real time management" of an HOA.

There are also a few who are concerned that this HOA may not have enough funds. In fact, during the 2014 budget meeting, three board members were of the opinion that a larger fee increase was required. It is my opinion that the numbers don't support that position, or a concern that funds are inadequate. However, it is possible to overspend and drive a HOA into debt. That is one of the problems in any HOA; look at the bank account and flush it. Again, flexibility is required. For example, we have not yet begun the entry replacement in the buildings. This is an acknowledgement of financial reality. In fact, if we did everything we certainly wouldn't have enough money. But that is not a requirement. We do have time on our side. Time to accrue reserves, time to allocate funds to all of the various projects and sufficient time to implement most of these projects. In fact, even in the face of these concerns this HOA found the wherewithal to spend a lot of money on knox boxes. Where there is a will, there is a way. So, if budgets are so tight, if the HOA is so fund limited, than how can it spend tens of thousands of dollars to purchase and install knox boxes? The answer lies in real time management, as well as setting priorities.

In several months there will be a budget meeting by the new board. At that meeting the operational, maintenance and reserve (capital project) requirements will again be reviewed. This review is an essential part of "real time" management.

I'm of the opinion that one of the factors that drives positions is emotions including fear. It's not helpful to be fearful of large numbers. For example, this HOA is spending hundreds of thousands of dollars on street replacements nearly a decade earlier than planned. Should that cause fear?  Why or why not?

Emotional Responses
Fear is frequently the emotional response to the unknown or unexpected. Looking at HOA finances, one might be concerned about spending because of a fear that one's personal finances cannot support future fee increases. As spending increases, so does fees. Or is that simply a generalization? A concern that fees may rise to "too high" levels is possibly a fear generator for some owners. Another fear generator for a board may also be a belief that there is insufficient funds for projects for the next 10 years and beyond.

Are such fears warranted? Let's look at some of the facts and some of the assumptions owners and boards may be making, which may stoke one's fears:

1. Fees will continue to increase beyond my ability to pay them.
2. We have a lot of things to do, including replace streets, finish the roofing projects and replace dying or dead trees. Do we have the money to do this?
3. Our water mains and infrastructure are aging. We may not have sufficient funds to deal with these problems of aging infrastructure. 
4. If I look at the worst case scenario there won't be enough money.
5. We can't predict the future. 
6. The board isn't capable of dealing with the problems. 

1. Fees will continue to increase. The concern may be that I as an owner may not be able to handle these increases in my personal budget. This fear assumes that fees may increase faster than my income. Or there may be other personal costs which make it difficult or impossible for one to handle any fee increases. 

I can't say what the personal financial situation is for each and every owner in a HOA. But here is the broader reality. Fees at BLMH increased about 70% since January 2002. That's an average 5% annual increase. That may not be typical for the future and here is why.

One could assume that the HOA fees will increase by 5% each and every year, but that's not supported by current reality. Since about 1999 reserve collections actually increased by about 500%, or at a rate of 30% per year. Over that same period nearly $1,600,000 was spent on a very large roofing replacement project. At the end of this year nearly 89% of the roofs will be completed. In addition, several hundred thousand dollars has been spent on street repairs or replacements, years earlier than projected. Simultaneously, water main issues have been forcefully addressed. Other maintenance is underway at a pace that is as rapid as practical.

My point is, fees were increased as required for reserve replacements because of the roofing project, driveways, streets and so on. That rate has been generally sustained since 1999. Initially a lot of the money collected was spent almost immediately  because this HOA had set begun a large, nearly $2 million project for which it not only didn't have the funds, it didn't even have a collection program to achieve the necessary funds. Worse, the boards didn't communicate what the consequences would be. But that was then, and this is now. In recent years a significant amount collected has not been spent and is accumulating steadily in the reserve accounts. In fact, this HOA is currently collecting about $376,000 annually for reserves. That's double the collections about 12 years ago.

That increase in reserve contributions has been the largest single contributor to fee increases since about 1999. In fact, so much has been collected in that period that is has paid for the roofs, replacement of a significant number of driveways, streets (as of 2015) and even water mains, etc. Simultaneously the reserve fund has tripled in size, even with the huge increase in projects and spending required for these tasks.

The board has the discretionary power to determine the pace of projects and that means the board will determine a lot of the spending, just as it is now. Some things are vital and some are not. The pace of spending for non- vital capital projects is controllable in real time; some projects can be done at a slower or faster pace.

To summarize, the spending in recent years has been skewed by 1) catching up on projects which had been ignored or delayed, 2) the roofing project,  and 3) early or premature failures of some infrastructure. There is no evidence to support an opinion that spending will have to continue at this rate each and every year in the foreseeable future. In fact, some things can be paced while others are addressed by means other than passing the hat to the owners. 

2. We have a lot of things to do, including replace streets, finish the roofing projects and replace dying or dead trees.  That is true, however, it is also a fact that the roofing project will be completed in 2017. For example, nearly half of our annual reserve collections are being spent each and every year on the current roofing project. That's because this HOA failed to achieve sufficient reserves at the time the roofing project began. That time is nearly past. Within three years, about one-half of all fees collected annually will be freed up for other projects. That is an amount greater than was being collected in total each year for reserves just a few years ago.

It is also useful to realize that this HOA is saving a modest amount for the next roofing project, which will begin as early as 2027, but could also begin as late as 2032. Why that time difference? This HOA is installing high quality architectural roofs with significant weather enhancements and warranties. These roofs could do well for 30 years, It is very possible some will not require replacement for 35 years. (Currently, some of our basic roofs, with an intended 18 year life span have made it to 23 years). 

The street project has accelerated and the final portion of the major thoroughfare is scheduled for replacement in 2015. It is probable that the remaining four cul-de-sacs will be resurfaced within 5-8 years. Some will be earlier than planned.

Drainage improvements will be completed with the completion of the roofing project, or shortly thereafter. 

When we look at the streets, one thing to realize is this. Completing these projects earlier than planned should not be a cause for concern if 1) reserve levels are not drawn down below a "safe" level, 2) other projects are not harmed, 3) proper engineering and project management techniques are used, and 4) if we consider that once spent, these projects are complete. For example, there will be no need to do the major thoroughfare again for another 20-30 years although maintenance will be required. Roofs too will be complete. Driveways also continue to b  e replaced each year, etc.

In other words, once the money is [properly] spent to complete these projects, the next phase of these projects will not be required for decades. Is this significant? Yes it is, because the problem facing HOAs are frequently the result of a lack of savings (reserves) , delayed spending, premature failure, improper installation, ignoring maintenance and a failure to properly handle delinquencies. These things combined will create impossible pressures on the HOA. That is not happening today at BLMH.  In fact, reserve levels are substantially above the "minimums" established by the board two years ago and meet or exceed those recommended by the professionals. And that is after the replacement of streets, some water mains, and the knox boxes. These minimums were established with management and professional input. The actual, current reserve levels would be higher if we realized the amounts spent on projects completed years ahead of schedule, which I do. That too is a requirement of "real time" management; projects completed properly are complete. Beyond routine maintenance there should be no requirement to revisit them until the next phase is required, which can be decades in the future. In other words, once completed, reserve requirements should be adjusted to include only the financial requirements of the next phase.

Some fears may be simply an emotional response to perceived scarcity or personal situations.

3. Our water mains and infrastructure are aging. There may be a fear that the HOA will not have sufficient funds to deal with these problems, which are a consequence of aging. In other words, the fear may be that there is so much to do and there may be insufficient funds to do it. For example, we have had water main failures in recent years and we have lost 100 or more trees in recent years. 

Yes, there is a lot to do and yes, we can't specifically predict these failures. But that does not necessarily mean that there will be insufficient funds or special assessments or large fee increases. Nor does it mean that we must sit idly by and take whatever the universe dumps on us. 

How to manage the unknown? In recent years the board has taken several significant steps. These include 1) Reserve studies, 2) Pro active (preventative) maintenance, 3) Better engineering and project oversight, 4) Improved management. 

We can't predict certain types of failures. Water mains do age and do fail. As with everything from personal air conditions to fireplaces to hot water heaters, these things do have a finite life time. Recognizing this and acting accordingly can spread out the financial spending and avoid larger breakdowns. It also can be accomplished with proper savings. 

For example, in recent years several sections of water mains have been replaced prior to failure. Doing so was a huge shift for this HOA's boards. For decades the approach was "if it isn't broken don't fix it." That ultimately became "to keep costs (and fees)  down, we'll delay maintenance and replacement as long as possible."

The problem with these types of aphorisms, or general truths is they are only useful in general. They fail under the spotlight and are sometimes contradictory. For example one can use the following to justify just about any position taken:

1. Look before you leap.
2. He who hesitates is lost.  

Using HOA funds to get better professional guidance has been a huge shift. Engineered drawings, true professional project management, reserve studies and so on are examples. However, this does not relieve the board of its responsibilities. Oversight is required, and expected of stewards. 

3. Continued. We may not have sufficient funds to deal with these aging problems.  That is a truism. We may not have sufficient funds. However, it is also possible that we will have sufficient funds. What can we do about this? 

First, it's useful to consider the underlying causes for concern. These causes include:

1. Recent history and performance of past boards.
2. Recent infrastructure failures.

History suggests that boards (and the owners that elected them) were penny wise and pound foolish. Infrastructure projects were begun before the funds were collected. Projects were undertaken with insufficient professional guidance.  Boards operated automatically, were blindsided by the "unexpected" and at times ignored signs of infrastructure failures. There is an argument to be made that there was insufficient planning and preparation. 

When looking at the numbers for the past 10 years, with little or no analysis, a grim picture may be painted. However, a holistic view, which includes contributing factors as well as the current financial and maintenance position of the HOA provides a more rounded view. That's an example of "real time management."

The contributing factors do include infrastructure age. Owner "angst" about fees has been fueled by significant fees to fund the large roofing project, the funding required to deal with the premature street failings, water mains and so on. Some of these failures were a result of lower than necessary quality. Now, some owners have taken the approach "we should sue." Baloney. owners also pushed for the lowest bidder with no engineering guidance on some projects. Remember the 2007 arguments promoting "All we need is a bunch of handymen?" If we want to promote blame I suggest we look in the mirror. Boards, management and contractors all respond to owners. In 2001 people were complaining about fee increases while a huge roofing project was coming toward this HOA. Yet owners pushed for lower fees. I know, I was here.

But today is not 2001, or 2007. It is essential to adapt to current reality. That too is an example of real time management. 

4. If I look at the worst case scenario there won't be enough money. That certainly is true. Yes, the worst case is that all water mains fail in one, two or five years. Or half our owners go bankrupt. Or all of our trees die. Or a major fire or natural disaster damages the property. Of course, it can be argued that this could happen simultaneously. Perhaps we should all simply slit our wrists today and avoid this outcome? I don't think so. If we maintain the property, it is impossible for everything to fail simultaneously. Looking at the opposite argument, as an example it is also possible that the new roofs will perform well for 35 or 40 years. 

So how do we prepare for the unknowable? 

1. Plan.
2. Prepare
3. Prioritize
4. Communicate
5. Save
6. Use professionals with proper oversight. 
7. Adapt and adjust to current realities. 

The reader might say "We can't plan and prepare for the unknowable." Not really true. That's another generality. In fact, the less we plan and prepare, the greater the unknowable becomes. For example, the fear may then grow because in a vacuum created by a lack of planning there will be a concern that 1) We lack the funds to deal with problems, 2) we many not understand what is going on, and 3) we are spending a lot of money.  These things when combined may feed into the fear.   Oversight also requires frequent analysis of current conditions. As an example I personally use digital photos, tabulated condition reports and so on to determine not only current condition but also "the rate of change" or "rate of deterioration"  to assist in predicting infrastructure remaining life. This must be done annually in some cases and semi-annually in others. As conditions deteriorate, more frequent monitoring is required. In other words, waiting until it breaks is far too late to plan.

This means that waiting until owners complain is really a failure to manage in real time. 

Let's look at a current problem. We've lost at least 100 trees in recent years. Some were large pines and ash. These failures have left the property dotted with odd piles of wood chips and strange landscapes. So what to do? 

Some residents on seeing this are concerned. Concern is justified, fear is not. With minimal information in the newsletter, I can appreciate the concern. One of my coachings to owners and boards has been this. In the vacuum created by a lack of communications, we will each make up stuff. That's the way it is. When fear is a generator, we may go for the "worst case" scenario. 

If an owner has a concern which is not addressed via the normal semi-monthly newsletter, I suggest they come to a HOA meeting. That's far better than worrying. The questions to ask the board in any of these situations, be it water mains, streets, roofs, driveways, garages, streams and landscaping are: 

1. Do we have a plan?
2. Are we prepared? 
3. Do we have priorities and how do these influence the plan?
4. Are the plans being communicated to owners?
5. Is the board saving to deal with this problem?
6. Is the board using professionals and is the board providing oversight?
7. Do we have a board in place that can and will do the above?

In fact, the issue of dying trees was discussed before the board in 2008. The current reality didn't just happen in one or two years. Not all of the boards felt there was a need for concern. Not all board members have been committed to the use of a newsletter for communications to owners and residents. This is as old as the HOA. So owners who have concerns should come to HOA meetings and voice them in a responsible way. But let's take a look at landscaping, for example. 

There are a number of projects underway which influence landscaping and contribute to the immediate appearance. These include the street project, roofing project (drainage), driveway replacement project, and the removal of dead and dying trees. Other factors include the weather, cash flow and available manpower.  These combined factors dictate how rapidly landscaping repairs and replacement can be undertaken. In fact, it will require in total, several years to remove trees, remove the stumping, do the grading, add sod and plant replacement trees. In other words, the elves won't show up tonight and make it all right. That's the reality. Owners may complain that boards simply don't move fast enough. That's a part of setting priorities and available man- or woman-power on the board. It is also a reality of budgets and fees. However, planning for certain types of failures certainly makes dealing with them easier. Earlier boards decided to ignore the age of our trees and also decided to take a position that we could win the fight against the Emerald Ash Borer, Professional arborists agreed. Unfortunately, the drought of 2012 provided the EAB with an overwhelming opportunity.

It this a failure? I don't think so. It was a calculated risk. The HOA has the reserves to deal with this, and it will collect more each year. So why be fearful? We kept the foreign scourge at bay and protected our trees with careful application of funds via owner fees. We may have a few ash trees on the property in the future. Yes, it is a disappointment. So was Elm disease and a number of other tree diseases. However, boards make decisions about just how much money to spend to maintain the ambience. Owners push for lower fees. These opposing positions frequently collide.

Some owner have complained that money spent on maintaining our trees and keeping the EAB was money poorly spent. Let's look at reality, shall we. It can cost $1,000 to remove a tree. 100 dead trees represents a possible $100,000 in expenditures for which no value is created. The board has discussed this at many meetings. Furthermore, tree removal may require grading and sodding just to make the area presentable. That's additional cost. Finally we can plant new trees. So where should money be spent? Maintaining what we have, or just sitting back and dealing with the consequences of failure? The owners who complained about the landscaping budget were saying "We shouldn't be spending money on maintenance; just let it all die." 

In fact this HOA has been catching up on landscaping related to drainage improvements since 2010. Earlier roofing projects did not allow for the consequences of more extensive gutters and relocated downspouts. Simultaneous, we have had some roofs predicted to have a lifespan of 18 years reach 23 years of age. The relevance: Setting Priorities:

1. Cash flow and fees.
2. Critical infrastructure.
3. Phased implementation,

We're currently correcting some previous oversights. Cash flow dictates how much money can, should and will be spent in any one year in each infrastructure area. Phased implementation dictates that not everything can and will be done in one year. There are practical considerations, too.

In fact, the recent activity level has angered some residents, who want to return to the "good old days" or that sweet spot when the HOA was younger and we weren't dealing with "end of useful life"issues. That time is past. 

Some owners and some residents don't like the ongoing, phased approach. A few have taken the position that their problem should be addressed today if not sooner. Playing catch up makes that impossible. Period. When boards and owners procrastinate that puts in place some problems. These things cannot be corrected in one, or two years. Getting the reserves in place to do what is being done has taken a decade. A lot of time was lost while a variety of cans were kicked down the road. Many of those boards moved on and left others to clean up the messes that were created. There have been turf battles (no pun intended). Does anyone really think the recent flurry of activity is simply a diversion and a hobby? Or was it really necessity? How did this confluence of events occur? 

Priorities also dictate recognizing severity issues. Water mains, streets, roof failure, draining issues and so on take precedence over many other issues. Safety comes first, but this is a temperate zone. We do experience ice, snow, heaving and so on. It isn't Arizona or San Diego.

Protection of the buildings and their contents comes second. That's the way it is. This is a long term project called "Maintaining this HOA." It will continue for decades. Certainly if we were collecting $100 more each month from each owner we could do more in each year. "We an do anything, all that is required is time and money." It takes time for these projects and owner fees dictate some of that. Owner involvement does, too. We don't have owners in the HOA fighting to do the work. About the only fighting I've experienced in this HOA in the past decade was a desire by some owners to put in place board members to do their bidding. In other words "I want a board in place that will take care of my personal wants and needs (to hell with everyone else.)"

Real time management dictates that we plan, prepare and be fair to everyone. In the worst case, and I could say having our ash trees decimated is an example, the HOA will have to do some things immediately (remove and stump within a year) and then grade, sod and plant over a period of years. And yes, it will take decades for these new trees to become tall growth. That's precisely why protecting the existing, healthy trees is worth the time, effort and money. 

5. We can't predict the future. That is true, and this may promote a fear of the unknown. But there are things we can prepare for. Even children learn this in the Boy Scouts of America. They learn this and they practice it. "Be Prepared" is the motto and that isn't a buzz word. A lot of those boys take this very seriously and become very skillful. If you think the BSA is about camping, then you have missed the entire point. 

If a HOA has knowledgeable and supportive owners, if boards take planning and preparation seriously and look at cash flow, treat all projects as requiring project management and cost accounting, then things become much easier. The unknown becomes an issue of planning and resource allocation.

When we have plans in place, it then becomes possible to look beyond the nine dots. We can then look more realistically and less fearfully into the future. That's a consequence of real time management. 

6. The board isn't capable. Some owners may have a concern that the board isn't able to deal with the problems their HOA is faces, or can't make good decisions. That can certainly create a confidence issue for owners. It can also feed financial fears. 

I think there are several ways to address this. 

1. Reasonable board turnover.
2. Adequate communications. 
3. Board and owner preparation. 
4. Appropriate use of skilled professionals. 

Board turnover might seem counter productive. However, every time a board member leaves the board, he or she will be replaced. The replacement will ideally be an owner who has never served on the board. This serves two purposes. An owner takes on a higher level of commitment and learns in the process. Former board members can assist as committee members. Over time, the entire HOA is strengthened by more knowledgeable and responsible owners. Unfortunately, there is a tendency in HOAs to rely upon a few stalwarts. After all, some may say "If I wanted real responsibility I would have purchased a home." Some HOAs now have a large percentage of owners with an investor, apartment, or retirement community perspective. There is absolutely nothing a board can do about that but talk straight and be firm about the realities of HOA living. That includes telling all owners "what we are not."

Adequate communications also requires providing explanations to owners for the how and the why. Boards will say "This is a difficult job." Well, why not use the newsletter and any other forms of reasonable, universal communications to express why it is difficult? Why not express this during regularly scheduled HOA meetings, as well as the annual meetings? Why not educate the owners so they too are better aware of the planning and preparation? This too prepares them to serve on the board. I will say this, the reader would probably be astounded about the amount of resistance I have been given by boards about providing a newsletter that provides real communications. This includes both overt and covert resistance; the easiest way to torpedo a newsletter is to simply avoid writing articles. Some owners too have resisted this, preferring a "feel good" rag.

Board and owner preparation are important factors. It's common to say that "Each board member must have duties and responsibilities and prepare for each HOA meeting." However, what some may not realize is that preparation may require a lot of long walks on the property. It requires involvement by all board members. Some of these duties are best accomplished while we are physically able to walk and during hot weather, or cold, or buggy or wet or whatever. In other words, owners should plan on serving when they are physically and mentally able. It is a fact that for most of us, we begin experiencing some decrease in cognitive ability at the age of 55. This accelerates as we continue to age. So too for physical limitations.  My point is, procrastination is not good for HOAs. That includes procrastination by boards as well as owners.

Real time management dictates that we observe the HOA, walk the grounds and so on.