One of a board of directors’ most important functions is to plan long term. Yet, that task is one many boards ignore or won’t discuss. Additionally, the level of long-term planning seems to vary depending on the community’s size. Larger communities (100+ units) tend to have better long-term planning than smaller ones do. Plus, Illinois does not require a long-term plan, reserve study or minimum reserve for homeowner associations, making planning easier to overlook.
So why not simply pay for a capital-reserve study? Shouldn’t it be that easy? For larger communities, that is a necessity. Presenting homeowners of a large-scale community with a sudden “unforeseen” large special assessment would be devastating, given that capital repairs often cost millions. Properly planning and funding large-scale expenditures also occasionally requires a bank loan. In these circumstances, proper long-term planning is essential.
Proper long-term planning is not as simple as paying for a reserve study, which alone doesn’t ensure the association plans correctly. I have had many circumstances where I convinced boards of directors to pay for reserve studies, yet the board did not follow the study’s advice once the report was provided.
Regardless of the situation, the board must keep long-term planning front and center in discussions. At minimum, that means reviewing the capital plan during the operating-budget review season. At that time, the board should closely consider future large-scale projects and firmly decide when they should take place. While some undertakings may be more cosmetic than structural, all projects are important to plan well in advance. For example, the board should plan to refurbish the stairwells and lobby foyer on a regular cycle. They should not wait until the walls are badly scratched and deteriorated and the lobby is severely out of date. They certainly should proactively replace roofs, hot water–tank systems and boiler heating systems well before their life expectancies to avoid emergency situations.
One hurdle seems to be the mistaken belief that waiting another year or two to repair or replace a capital item is good business practice that benefits the homeowners. For example, I recently met with an association board with a common boiler heating system that was about 20 years old. When I advised them to replace it as soon as possible, I was shocked to hear them respond that it was working fine and there was no need to replace it. In another scenario, I was advising a board to replace their hot water–tank system because the storage tanks were about 17 years old. I mentioned it for about a year and then once again at a board meeting I attended. The answer was always the same: We’re GOOD. No need to replace them. The day after the meeting, the board president frantically called to say the hot water tanks were leaking. Now that the problem was an emergency, in their eyes, I of course could not respond fast enough.
So what’s the best way to plan long term? It’s simple. Roll up your sleeves and take a long, hard look at the capital items that need repairing and replacing. Then set exact timelines for completing these projects. A reserve study takes all the guesswork out of this exercise. However, even if you don’t have a reserve study, the board should develop a basic five-year capital plan that defines the timeline for capital projects.