Reserves and Roofs - Financial situation 2008

This is the lead-in post to Part Two of a two-part post about the roofing project and the reserve situation in this association.  I include some photos of the street situation and also financial background information. These might be useful when considering the issues that were faced to deal with the infrastructure backlog and the roofing project.

The following provides a snapshot of actual association "reserves" per a management letter dated October 23, 2008. At the time I was just an owner. The reserves according to the letter totaled $978,944, allocated as follows:

• Paving (streets and 84-driveways) $90,208
• Lake Restoration $27,405
• Carpet $45,083
• Roof $562,833
• Concrete (curbs, basins, walks, 84-entries, streams, ponds, 42 4-car garages)  $171,920
• Masonry $43,732
• Contingency $37,763

The above might seem like sufficient reserves, but it wasn't. The board had been raising fees for nearly 10 years to get reserves from about $200,000 to that $978,000. Owners were demoralized and  by 2008 there were ugly confrontations during the association meetings.

The board couldn't or wouldn't explain their "plan".  We were told that the replacement of roofs would occur "at the last possible moment, to get as much life out of them as possible".  But how does one schedule roofers "at the last possible moment"?  One cannot replace roofs in the winter. What about the other failing infrastructure, the problems with streams, common decks, the failing Lakecliffe Drive, etc.?

I concluded that the boards up to September 2008 couldn't tell the owners what they were doing because they didn't have a plan, beyond balancing the Operations & Maintenance budget and raising fees to accumulate reserves.  The board was apparently convinced there were insufficient reserves, but that was never stated. The board allowed other infrastructure to decay and delayed capital work because the reserve funds were required for another purpose; that was readily apparent walking the association. The board delayed the roofing project too. All of this led me to wonder just how serious the financial problems really were. What was really going on? What was the real spending plan for the reserves? I'm sure I wasn't the only owner with these questions. At one Association meeting an owner shouted to the board "What do we get for our money?"

I understood the necessity to increase reserves. At the time I was considering a purchase my accountant and I agreed that reserves at BLMH were very inadequate (2001 Balance Sheet). Before making an offer to purchase I sent a letter to management and discussed the situation. The management advised me that the board was committed to getting the finances in shape. At the time I told my spouse that if we purchased we should expect large fee increases.  We decided we could afford this, but knew there would be problems for other owners; not everyone can handle 5-7% annual fee increases. In fact, I told G "You should expect fireworks in a few years" and I was absolutely correct. The fees climbed steadily and by 2007 the owners were upset.

With a new board in October 2008 which seemed to be woefully ill equipped to deal with the problems I decided to look into this further. Using the above reserve numbers and what little I knew about the condition of the association I made a spreadsheet on November 13, 2008 (as an owner). I wanted to determine projected reserves collections per year, reserve balances and capital expenditures from 2009 through 2014.  I did this to provide some insight into how the roofing project might be financially accomplished. I wanted to have a serious discussion with the new board. I projected a probable collection of $330,000 per year or a total   $1,650,000 contributed to reserves from 2009 to 2013. If such a collection occurred, then the following were possible amounts accrued to reserves from 2008 through 2013, before expenditures:

• Paving (streets and 84-driveways, see Note 4) $330,208
• Lake Restoration $102,405
• Carpet $70,083
• Roof $1,462,833
• Concrete $371,920
• Masonry $193,732
• Contingency $37,763

Rationale for the above; my first 5-year plan: 

1. The above could be distributed by the board as necessary; the board can choose where to spend reserve money, and when. A thorough survey of infrastructure condition was vitally important, and was lacking.  Such a review would allow the board to determine what the priorities were to be, based on condition of the infrastructure. Then the plan could be communicated to the owners. 
2. Where boards failed prior to 2009 was the long term planning; they seemed to be incapable of this. What was urgently needed was viable, reasonable and effective  5-year and 10-year plans. That really didn't occur until I achieved a board position and made such a plan in 2010-2011. I spent about 6 years refining it, with the help of the Finance Committee (our president/Architecture director, Treasurer and Maintenance Director of 2015).  However, I simultaneously pressed forward with infrastructure improvements. 
3. The plan above would increase the contribution to reserves in 2009 from $300,000 to $330,000. There would be a reserve contribution of $330,000 to reserves each year 2009 to 2013. This was my first 5-year plan. That amount would be stable for 5 years. It would require a $7.44 monthly fee increase for each owner (average fees) in 2009. No other fee increases might be necessary if the board also worked diligently on the Operations & Maintenance budget.
4. The above "plan" indicated sufficient fees to do the roofing project at the rate of 4 or more per year. If necessary a board could do roofs at a faster rate of 6 per year, thereby completing all roofs by 2017. That might be necessary and the actual pace would be determined by the condition of roofs. I estimated that by 2016 some existing roofs might be 25 years of age. These were designed for 18-20 years. Urgency was required. 
5. I included additional funds for paving to deal with Lakecliffe which was already showing signs of distress and to do driveways. In fact, the street condition was the primary reason for the $30,000 annual reserve increase. I had no idea of the true condition of the cul-de-sacs. With less traffic they seemed okay, but it would take further research including core samples to determine the actual construction. There was no opportunity or opening to discuss core samples with the current or previous boards. My warnings about the imminent failure of Lakeciffe had been ignored. More bad news was simply too much for earlier boards, or the board of 2008-2009 to handle.
6. I anticipated that as the roofing project progressed the reserve balance would gradually decrease. I also anticipated further expenditure as the failure of Lakecliffe Drive was addressed. I was unsure of the actual cost to replace/repair Lakecliffe. I projected a reserve balance as of 12/31/2013 to be $400,000 to $750,000 as determined by other capital work completed during that period.  That would be an adequate balance, and the balance would increase from 2014 and thereafter.
7. The above plan would spend as much as $2,250,000 on infrastructure by 2014. 
8. The reserve balances would grow from 2014 onward as the roofing project was completed. I was assuming 4 to 6 roofs completed each year, 2009 onward. That would allow other needed capital repairs and replacement to occur. Logistically and financially such an approach was possible, practical and desirable. Expenditure for roofs would be no more than about $240,000 per year, allowing the reserve balance and an additional $110,000 collected each year for other capital projects. 

The Association was not interested in my numbers, or my plan.  I attributed that to 1) A belief by the board of 2009 that we had sufficient reserve funds, 2) A desire to stop the fee increases,  and 3) No interest in anything that might indicate differently.  In fact, a reserve study was commissioned in 2010, but the word being passed on the street by the board was "We have enough money."  However, there was fear among owners and underminers on the boards. In 2009 and 2010 I was told that the word being passed among the owners was "Elect Norm and your fees will increase."  Owners and boards made a serious mistake.  I compared what happened between 2008 and 2015 to my 2008 plan and it is likely that fees would have been at least $27 lower each month for each owner had my plan been adapted.

My analysis also indicated there was no need for panic, but a lot of board work would be immediately required, including a ramp-up of the pace of the roofing project. But only two roofs were done in 2009. First and foremost a thorough analysis of all infrastructure was necessary to assure sufficient funds for all infrastructure repairs.    That analysis and the detailed surveys required waited until the spring of 2011, when I did it.  That's immediately after I achieved a seat on the board. I then began the serious work I had laid out two three years earlier.  In late 2011 I was assigned to Architecture & Maintenance Director. I'd already begun the required surveys and using the 2010 and 2011 reserve studies as a starting point I was on my way. Things finally began to change in 2012.

It is not a coincidence that my being on the board straight lined fees.  I was elected to the board as of October 2010. Here are the fees that ensued.  The board fired in 2008 was on a trajectory of unlimited financial pain for owners.  With the return of one to the board, the arguments for significant annual fee increases also returned, and by 2015 there was a serious confrontation.

I'd  been informing owners via the newsletter and also during the annual meetings. But so few owners attended the meetings that the majority were unaware of the infighting and the consequences. Nevertheless I persisted. Here's a chart I presented during the Annual meeting of 2016 to show owners just what a return to large annual fee increases would look like (Hint: click the images for full screen):

Here's the chart of fees, and the red line indicates the trajectory we were on. The blue is the actual fees.  As you can see, the fees began to moderate in 2009-2010. That's the year a revolt by owners removed most of the board:

The Roofing Project - A slow death for the Association?
This next post will include several charts I prepared for the board and for owners about nine years ago, immediately upon joining the board. I prepared these to calm owners.

In 2008 after ten years of large fee increases and readily apparent infrastructure problems the owners were desperate and frustrated. The reserves were growing but the board seemed unwilling to spend the money.  The frustrated and angry owners replaced most of the previous "old guard" with an entirely new, unseasoned, and unprepared board. I considered that election to be an act of desperation by the owners. I was gravely concerned at the time and a new, unseasoned board didn't do much to assuage my concerns.

This election "reset" of the Association allowed the new board to issue a contract for the first ever formal reserve study in the 32 year history of the association. I can't understate the significance of this. The study did not solve any problems, it simply put a spotlight on the financial reality, while the roofing project slowly continued.  As I was to find out in October 2010 the study actually created as many questions as it answered and the board was nearly catatonic with the result. That study indicated even larger fees were necessary and a special assessment. 

The situation at the Association had worsened and by 2010 the full implication of the "Great Recession" in the U.S. was impacting the owners. Bankruptcies and delinquency were a serious problem and becoming difficult for the board to shield owners from. In fact, by December 2011 the delinquencies were more than 6.5% of the annual budget. But that's for another post.

Despite some board assurances, the owners knew the Association was in serious trouble. All one had to do was drive through the potholes on our major thoroughfare, Lakecliffe Drive which sat waiting for someone, anyone, to deal with and correct. And that was the highly visible tip of the iceberg.

Here's a few photos of a portion of Lakecliffe, taken in March 2010. That "stick" is 36 inches in length:

Lakecliffe Drive - street in crisis

Next post: 
Part Two of a two-part post about the roofing project and how it was largely the reason for the fee increases.