Financial Impact of Fees for Reserves

 

Unit Prices at BLMH  2009-2018
A total of 165 units sold, 2009 through July 2018
Boards 2019-2021 aren't as transparent.

Boards determine the annual budgets, including the Operations and Maintenance (O&M) budget as well as the allocation to the Replacement Fund (Reserves).  While I was a member of the board I created a series of spreadsheets. These were produced with the information management provided to the board each month.   

Looking at the charts I publish here may be considered a waste of time.  I know, this is "old stuff" and some on the board have argued that owners are already aware of it. One board member used that argument as the basis not to publish information in the Newsletter.  

In fact, 165 units were sold in the period 2009 to July, 2018.  I don't have the unit sales from August 2018 until October 2021 at my fingertips.   More than half of the units at BLMH have been sold since 2009.  Since 2015 about one-fourth of the units at BLMH have been sold.   

So, this is "new" to many on the board as well as to recent owners.  I doubt if the "old timers" on the board, those who lived here 20, 30 or more years, have spilled the beans to the others on the board. After all, for some information is power.

My point in saying the above, is that a substantial number of owners are unawares of the issues that transpired at BLMH prior to 2015.  They may think that the situation of the last six years is typical. It isn't. (Note 1). 

While I was a board member I created hundreds of spreadsheets and charts so the boards could make the best possible decisions. Some were also part of the annual meetings in special presentations to owners. 

I also concluded that for some board members it was an "out of sight, out of mind" situation.  Graphs can  consolidate and present reams of data with a chronological context. My experience has indicated that we have difficulty comprehending columns and rows of numbers. To really understand tabular data may requires better conceptual and critical thinking skills. Boards are no different than anyone else. Nor are boards good at retaining information.  I realize my limitations which is why I keep notes and build spreadsheets and charts and do additional data analysis. 

Nor do board member pass what they know on to the boards that follow them. Information in monthly packets seems to be quickly forgotten. I think sometimes that is deliberate.

I provided insights on this blog and when I was president of the association I presented to owners who attended the annual meeting. The chart above was part of a presentation to owners and was published here in September 2018.

The board is provided sales information, month by month, which is how I created the "Average Unit Prices" for 2009-2018, above.

A few additional annual budget inputs.
There weren't significant surpluses from 2000-2013.
Some data for 2019 is unknown, because the board didn't publish it
and provide it to all owners.

The chart above was useful for determining the financial health of owners, because it included the number of owners significantly delinquent and the amount owed.  The number of owners owing small amounts (less than $100) and those small amounts were ignored because that eliminated minor fines, etc. What remained was the number of owners significantly in arrears. 

A part of a monthly spreadsheet I prepared showing owner 
delinquencies, 2008-2018. I also presented to owners,
last time was during the September 2018 annual meeting.

The banking crisis occurred in 2008, and the "great recession" occurred between 2007 and 2009.  There were a significant number of foreclosures at the association and that continued for several years after the recession ended. I don't show the amount of "bad debt" which is the amounts never collected from owners. (Note 2, 3).

The boards were given all of the details by management via monthly packets of information. The packets were to be studied by board members and then discussed during open sessions, unless there was a specific prohibition as per the Illinois Condominium Act. I noted board members were inclined to only talk about some of the new that they felt was "good news".  

I used data provided by management to the board each month. I tracked the amount owed by owners and the number owning, month by month.  I provided a printout of a customized, updated spreadsheet to the board each month, in the period March, 2011 until September 12, 2018.  The sheet was useful when doing the budgets.  The unit prices, delinquencies and fee increases indicated the plight of owners.  

When serious delinquencies peaked at nearly 16%, it meant that one over in each building was seriously delinquent (40 8-unit and 4 4-unit).

The charts clearly illustrate the financial problems faced by owners in the period 2010-2014. Not all board members were empathetic to the plight of owners.

Using the information, on unit price declines, delinquencies and foreclosures I petitioned the board to tread carefully when raising fees to accommodate increases to the Replacement Fund (Reserves). Unit prices bottomed in 2012, but didn't recover until 2015. I don't think prices have returned to the peaks of 2006-2007.

So how did boards respond?  That was determined by leadership and board makeup.  In any board, some members coast and follow a leader. That may be the president, or not. As a board member I was obviously concerned about the financial impact of fee increases, etc. on owners.  Which is why I took the time to build spreadsheets, and issue specific charts to the board.  It didn't sway all board members.

The financial situation of owners is one of the reasons I worked double time to manage fee increases. I recall an association meeting when an owner came to the meeting and petitioned the board for some relief from the fee increases each year.  The owner said "I'm retired and living on fixed income." The president responded "We all are. We all have a similar problem. Simply because some of us aren't retired and work doesn't mean we can ask the boss for a raise every time we face a financial issue."  However, the board did work to reduce the fee increases because we saw the financial carnage inflicted upon owners in the management packet each month.  This was a motive force for the improved controls to better manage fee increase 2012-2018.  However, not all board members were empathetic and at least one was of the opinion their first responsibility was to the association. I argued that isn't what the Illinois Condominium Act states. That too didn't influence all board members. (Note 4).

In a seven member board, four must be aligned and vote together to pass a directive, etc. We have had boards with only six members and that can result in tie votes.  Such ties can only be broken when one board member switches sides in the vote, breaking the tie.  We have had board members who are committed first and foremost to their personal agenda. These board members attempt to build a coalition aligned with their agenda and beliefs. In the ugliest situations they will drive off other board members who aren't aligned with their position, so as to build a coalition. The association has lost some good board members that way. Owners are oblivious. 

If a tie vote occurs and a board member switches their vote and goes "to the other side", thereby breaking the tie, it may be treated as tantamount to treason.  On one occasion a board member decided to vote for a lower fee increase. The coalition leader who was pressing for a larger fee increase attempted to have the vote nullified.  Then attempted to get the rebel to declare it to be a "mistake" and change his/her vote.  The goal was to require a re-vote in which the larger fee increase would be passed. 

The Illinois Condominium Act states that Boards must consider the value of the units as well as the financial impact on owners when determining reserves via the annual budgets:

(765 ILCS 605/9) (from Ch. 30, par. 309)
    Sec. 9. Sharing of expenses - Lien for nonpayment.

2) All budgets adopted by a board of managers on or

after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

Notes:

1. Owners think that future fee increases will be less than 1.5% per year.  They are unaware of the consequences of some of the horrific water main breaks that occurred prior to 2015.  The recent newsletter mentioned a cost of $50,000 for one break, but in fact, a few years ago the association spent about $65,000 for the plumber plus asphalt replacement and lawn repairs as well as maintenance workers to clean up the mess.  Recent buyers aren't aware that owners described Lakecliffe Blvd as a "minefield" in 2013 or so.  They are unawares that as early as 2011 real estate prices were much lower, and one unit sold for about $60,000.  They are unawares that today, units are selling for 80% more in price than they were 9 years ago.    They are unawares that the City of Wheaton condemned all of the fireplaces on the property, and the struggle it was to get that addressed. It took more than four years, coordination of unit owners on the first and second floors, letters by me to the City to get better guidance, etc.  I suggest owners, and the board, are unprepared for the future at BLMH. There's an old expression "Those who are unaware of history are inclined to repeat it".  Even the old timers seem to have forgotten, or would prefer to forget, rather than be implicated by the earlier issues.  
2. A "contra" account was added to the 2013 annual budget and budgets thereafter until the budget of 2019 by a new board. The "contra" amount is a negative number which reduced the amount of budgeted income to the Association. This was considered necessary because in bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  The amount used by the Board in the budgets to owners was -$4,000, although significantly higher amounts were not recovered in a number of years. The annual audits reveal the actual amount of the contra amount as "Bad Debt".   For the year 2010 the "bad debt" per the audit was $6,575.  For the year 2012 it was $7,000. For the year 2013 it was $24,563. The most recent audit I have been able to get was for the year 2018. The bad debt that year was $3,943. 
3. Under the Illinois Condominium Property Act, if a unit is foreclosed and sold to a third part, the Association may be able to collect six (6) months of common expenses and court costs, provided certain steps are taken by the Association. Those steps include initiating its own collection action. If no action is taken and an account is or becomes delinquent, the association attorney recommended that the Board proceed with a forcible entry and detainer action, so that it may collect some funds, even if the foreclosure is completed. 
4. I left the board for a variety of reasons. One was because during my final year I decided the board makeup for the next year would comprised of passive-aggressives with increased covert, undermining  activity. I'd experienced that for a few years and as I am fond of saying "Owners get the boards they elect". So, I let the owners choose the new board.

(c) N. Retzke 2021