Why HOAs need competent boards and financially astute owners

Why is financial diligence an absolute necessity for an association? Here's an example of  what happens when an association pays attention to the minutia and ignores the elephant in the room. It is what happens when budgets are viewed as annual problems rather than long term issues.

In 2002 this association set aside $148,000 for reserves. That was a lot of money and it was about 15% of the entire annual budget. In fact, fees set aside for reserves were increased that year. These reserves were intended to be saved and dedicated to infrastructure replacement, Things like streets, streams, driveways, garage floors, patios, decks, roofs, etc. As I recall at the time the association had less than $400,000 in savings for reserves and was about to replace all of the streets.

At that rate of saving the association could accumulate $2 million for infrastructure over a period of about 10 years. That too sounds like a lot of money, and it is. But collections, or reserve funding is only a half of the picture. The other half is planned expenditures. These two items must be balanced. At BLMH they weren't and in 2003 the board made the decision to replace the roofs with a project that was determined to require $2 million or more. A little simple arithmetic reveals that this roofing project would absorb all of the fees collected for reserves for at least 10 years into the future. Would that be a problem? Yes, because there would be absolutely no savings available for streets, driveways, water mains, walks, bridges, decks, patios, special projects, etc.

It is also a fact that the existing roofs were designed for a life of 18-20 years. Many would reach 20 years of age in 2011 and 2012.  Anyone who attended association meetings prior to 2011 heard board discussions about the plan to replace roofs at the last possible moment. This was promoted as wringing as much life out of them as possible. No one knows how to predict the precise year of failure for an aging roof and so there was significant risk in this approach. By risk, I mean roofs that would fail at inopportune times and leak.

Delay, however would have the real benefit of allowing reserves to accumulate. That is essential if an association lacks the money for a large project. An association can't spend money it doesn't have. Boards are left with four options. 1) Delay or extend the completion of the project, 2) Raise fees annually while delaying the projects, 3) Do special assessments, 4) Borrow the money.

One other consideration would be the age of the roofs. It is also a fact that the existing roofs were designed for a life of 18-20 years. Many would reach 20 years of age in 2011 and 2012. So even if allowed to exceed the design life of 20 years, most would have to be replaced by 2015.

By doing a little arithmetic, it would be obvious to the casual observer that saving at the annual rate of $148,000 was unworkable. It was no surprise to me that the boards set about raising fees. But how to save $2 million in less than 10 years and continue to maintain the property? It wasn't possible. So in order to stretch the budgets, beginning in 2002 some boards apparently did so by curtailing a lot of work. Cutting corners resulted in streets destined to fail in less than a decade while work was suspended on streams, garage floors, patios, driveways and so on. Boards apparently “kicked the can down the road.” I assume they hoped that things would stay glued together long enough to allow fees to catch up and reserves to grow before the roofs, etc. failed. Or perhaps someone else would deal with this. Some sold their units and left the ship.

To accumulate the funds and run a minimal infrastructure program the boards raised the fees an average of 4.5% each and every year for more than a decade. Most of the increases went into reserves, and from there into the roofs.

Average fees per owner increased from $195.11 to $330.44 per month from 2002 to 2016. Because of the fee increases, the association now has reserves of about $1 million, but barely. While this collective sum seems large, it is in fact about $2,976 per owner. To put this in perspective, this is approximately the amount I spent to have the fireplace in my unit removed. In other words, not really a lot of money if properly and evenly shared throughout the association.

By 2008 owners were upset. "How could this happen?" A new board in 2009 had some concerns about the finances. Did we have sufficient funds? Some suspected that fees were too high. In 2009 the average fee per owner per month was $292.84. In 2010 it was the same. Apparently the board didn’t do the arithmetic for the roofs, but then, neither did the owners based upon the clamoring in 2009 for the board not to raise fees. I overheard a board member commenting to an owner that “we have enough money.” That apparently was determined to be untrue because in 2011 the fees were increased by about 7%.

What had happened? To determine an answer about the adequacy of our reserves, a reserve study was commissioned. To my knowledge the study of 2010 was the first one professionally prepared by an outside firm in the entire prior history of this association. It is my understanding that reserve study recommended a series of 10.5% annual fee increases and a $1.5 million dollar loan to be paid via special assessment.

While fees did increase dramatically until 2015, the increases have moderated. But that has been the source of much contention between two factions on the board. One is backed by a short view "raise fees by 3% or more each year" leader who led the 4.5% annual fee increases. The other view is mine and this it is preferred by some but not all on the board. My view is a dynamic one which realigns annual priorities while accomplishing necessary maintenance and growing long term reserves via moderated fee increases below 3% annually. Most recently a 1.5% fee increase. In fact, this approach has been put into practice beginning in 2011.

So the important question to ask is why didn't the 10.5% annual fee increases commence in 2011? Why was there no need for a $1.5 million loan and special assessments? I was elected to the board in the fall of 2010. My first task was to determine how to do this another way. It took hundreds of hours of number crunching but I did come up with a solution which neither penalizes current owners or future owners. No more "Kick the can down the road."

How was this possible? First, by working diligently to firmly address maintenance problems the cancer was stopped. The decisions since 2011 have been to forcefully address infrastructure problems and an incredible amount work has been accomplished. We hired engineers and other competents to determine how to build a street designed for 30 years. Modern maintenance methods could extend that to 40 years. We conducted many condition surveys and these continue each year. There is no more "head in the sand" approach to the condition of our infrastructure and the "wait until it fails" mentality was replaced with preventative maintenance where appropriate.Water mains were replaced pro-actively. The roofing project was accelerated and as some roofs reached 23 years of age, that was essential as these roofs were designed with a life of 18-20 years. Some garage floors were replaced. Annually some driveways were replaced.  A failing bridge was replaced. Streams have been repaired and decks and patios replaced, And so on.

Condition surveys and serious number crunching continues each and every year. This is absolutely necessary and it does provide an excellent picture of the state of the infrastructure. Problems are pro-actively addressed annually, It isn't possible to do everything and so issues are prioritized and prudent decisions to delay a year or so are made where practical. Yet myriad capital improvement tasks are accomplished each and every year.  As a consequence the association no longer has a decade long backlog of maintenance issues. Collections and expenditures are more balanced. The association is today able to focus on current issues such as dealing with the more than one hundred scars caused by the removal of dead or dying trees. Is the work done? No. the association is nearly 40 years old. We have failing mailboxes, antique intercoms and electric door openers. But we have a plan and we are using it. It doesn't sit on a shelf nor is it ignored.

The association has a 10-year plan to address all of the identified issues and grow savings for reserves. This is an important part of the larger in scope 30-year plan. Information from annual condition surveys are fed into the plan and the plan is updated annually with newly identified issues and to recognize the work completed and the money spent. There are frequent reserve study updates prepared by outside, unbiased professional firms. One question owners need to ask is this: Will future boards use these plans and continue them? Who knows; recent budget planning has been contentious. Do owners know about it? No they don't because so very few are involved. 98% don't attend the budget meeting. The plan can work without raising fees by 3% or more each year. But it will require diligence and some serious financial acumen. It won't happen by "kicking the can down the road" and cookie-cutter annual fee increases. It will also require some human capital. That could be too much to ask of modern owners.

Are there other obstacles? Lack of a transition plan for new board members is a problem; in the past board members simply walked and took their knowledge with them. Understaffed boards and lack of technological ability are certainly problems for any large association. After all, this is 2016! Running an association via word of mouth, pencil and paper, and US mail won't get the job done. In a association in which only about 1% of the owners have ever served on the board getting the job done might be impossible. There are serious consequences to owner apathy.

For the 16 years I've lived in a condominium I've heard a lot of owner complaints. Yet it is true that each and every board member was elected by owners. Owners made all of these decisions and owners are fully responsible. Most never even bothered to serve on the board. In other words, what we need isn't necessarily what we get.