BUDGETING FOR THE FUTURE

At the Oak Brook Club, it’s a Cardinal Rule:  Avoid special assessments at all costs!

Having been a condominium owner for nearly thirty years, I well know the unpleasant “bite” of unexpected extra assessments.  So, when I became involved in the management of my building condo, then our master association board, I was committed to forward budgeting, to avoid such nasty surprises.

So far, so good! We’ve succeeded in maintaining our reserve funds so as to avoid hitting our owners with special assessments.  I realize that extraordinary circumstances can arise that necessitate levying special assessments to meet totally unexpected expenses for emergencies.  When those situations arise, a board has no choice,

in the exercise of its fiduciary responsibilities, but to special assess.  But the “name of the game” - again, in fiduciary responsibility - is to carefully plan ahead, anticipate such exigencies, and maintain adequate reserve funds to cover them.  Fine, every board member and condominium owner will readily agree with that philosophy.  Who wouldn’t? But just how does a board or management accomplish that “ideal” goal, given the certain unpredictability of the future?

There’s no quick and easy solution to that question.  But there are some techniques that will help.   At the Oak Brook Club, it is a five-step process:

First, our managers and maintenance staff perform ongoing inspection, testing and record keeping on all components of our common area assets.  Our manager and assistant manager make regular walking inspections, noting any developing problems. Our mechanical equipment is regularly checked and tested. And, importantly, accurate records are kept of the replacement cost of equipment and components.

Second, while this ongoing effort by our own staff gives us a pretty good idea of when an item may require replacement, and at what cost, we also regularly bring in various experts for their professional assessments. Every five years, each of our five building associations and our master association bring in an engineering firm to conduct a full-blown reserve fund study. This team of structural, mechanical and civil engineers goes over our buildings and grounds from sewer lines to roofs, from elevators to hallway decorating. They then provide us with studies that detail the condition, estimated remaining useful life, and estimated replacement cost of each common area component.  In addition to these five-year comprehensive studies, we also regularly bring in experts to inspect and report on particular components. For example: our elevators are inspected each year, our roadways every two years, our concrete balconies every five years. Periodically, we bring in an arborist to inspect our trees and aquatic specialists to inspect our ponds. From each, we receive comprehensive reports of conditions and prospective replacement needs. Aggregating our five building associations and our master association, we spend an average of about $20,000 per year on these professional inspections.

Third, while these two steps are fine and dandy to show us what’s required to maintain what we’ve got, they don’t show the whole picture!  Managers and outside experts can reasonably be expected to tell boards the “whens” and “how muches” of keeping even, but we all know that many condominium residents and board members understandably seek improvements and enhancements!  Recognizing this, our master association board decided in 1995 to develop a long-range plan for capital improvements. I think it’s the smartest thing we’ve done. We began by asking each of our six standing committees to present the board with their well-considered “wish lists” - recommendations for capital enhancements and improvements to the Oak Brook Club, looking ten years our.  The committees devoted much time and thought to what should be done in their respective areas of responsibility and presented the board with reasonable sets of objectives. The board then conducted a lengthy open session at which these many recommendations where thoroughly reviewed and discussed, with full opportunity for committee and resident participation.  The board made tough choices, deciding which projects were meritorious and assigning priorities to each selected project.  The result was a Long-Range Capital Improvement Plan.   Over the past six years, the board has worked its way through the approved projects, and is near completion of the Plan’s objectives. These is a clear advantage here: the Long-Range Plan has given us (board members and residents) a focus and an agenda.  Despite the usual rotations on the board, the committees and the community, the master association has stuck to the plan! While there has naturally been timing and other adjustments to fit changed circumstances, we have advanced the projects approved, and not been diverted by the whims of individual residents, committees or board members.

Fourth, we incorporate all these inputs into Reserve Fund Schedules for our master association and each building. Our schedules look forward twenty years and show, for each component, when it likely will require replacement or refurbishment, and the estimated cost.   For the master association, the schedule also incorporates the approved Long-Range Plan improvements. The schedules project year-by-year cash flow, based on the yearly expenditures anticipated and a planned assessment rate.  The preparation of these reserve fund schedules is both art and science! It requires much judgment.  We find that engineers and other experts typically are conservative in estimating useful lives of common area elements (such as hallway and lobby decorating).  So, the expert studies and reports require some “massaging”, such as stretching out the schedule for expensive redecorating and other discretionary items.   (On essential components, such as roofs, elevators, roadways and critical mechanical equipment, we tend to take the experts literally.) Typically, our Property Manager takes the first crack at that.   For our five buildings, he works closely with the respective building treasurers. For our master association, he works with our Finance/Management Committee.  Ultimately, the reserve schedules are presented to the respective boards for approval.  The reserve schedules approved each year are not “static” - they can’t be! We consider them “works in progress”. Every two or three months, our Property Manager updates each schedule to reflect expenditures made, changes in conditions of elements, etc.  Thus, each board regularly receives a refreshed assessment of the reserve fund’s status and projected cash flow.

Fifth, our boards exercise discipline in setting reserve fund assessment rates. All I’ll say here is: it takes common sense and sometimes courage.

Now, does all this work? The answer at the Oak Brook Club is a resounding YES!

Sure, I occasionally get questions about how much balance an association is carrying in its reserve fund - or general grousing about overall assessment levels.  But I think the overwhelming majority of my constituents feel very comfortable that management and their Boards are keeping atop the future replacement needs and maintaining adequate reserves.  The process I’ve described takes a lot of time by management, committees and boards. It costs some money for the expert inspections and studies. In my view, the time and money are well worth it!  In the past - years, only one of our six associations has had to make a special assessment. The proof is in the pudding!