 Welcome to the Condo Insider. I'm your host Scott Shirley, presenting to you a program for condo board members, condo owners to understand the joys of condominium living. So today I have a special guest with me. I'm so pleased that she was able to join me. I'd like to introduce Polly Wong, who is the immediate past president of Community Associations Institute, otherwise known as CAI, among other things. I've known her for a number of years, have a lot of respect for her, and she's going to be talking with us today in regards to budgets and reserves. But before we get into that, why don't you give us a little background on what you do at CAI? Sure, and first of all thanks for having me today. CAI, basically, simple terms, is a nonprofit organization aimed to provide education for board members, owners, managers. And what I did, I was like you said, I was the president of CAI. I also volunteer regularly on their seminars to help them out on the seminars, check-ins, and you know answer questions that owners may have or board members may have at the same time. Been in the industry for about 15 years, so hopefully I am able to give them some info that they need. It's funny you bring that up because normally when I do get the chance to run into you, it's at the luncheon. True. When you're signing. People like to eat. Yeah. Oh, you're allowed to eat there. Yes, you didn't know. Not that. Well, they never give me a plate. Oh, I'm sorry. I'll make sure they give you one. Paper plate next time. And you know, when you and I were talking on the phone, you were commenting that you're the past president of CAI. And I pointed out that I've been a past president of a number of organizations. And one of the keys there is I've always learned that there's nothing more past than being a past president. It's like they forgot your name the day after your term was up. I forgot my name before the term was up. So today our topic is talking about budgets and if we have time, we may even go into the issue of reserves. So we'll start you off with a real easy one. What are the requirements to have a budget? Uh-oh. That's not a easy one. Numbers. Well, you have operating budget and you have a reserve budget for most condos. You start out with your income, of course, what you collect from the owners and your expenses such as utilities, your landscape expands. So basically that's your overall budget. What I find interesting in my 15 years of experience is that a lot of boards, when they do their budget, they kind of sort of work backwards. They would have a figure of how much I want my maintenance fee to be at and then they work the numbers into it. So a lot of times it doesn't quite work out that way and I'm sure you understand why. But you know working the numbers into what you want it to be is not realistic. You have to look at what is realistic and then see if it is possible to increase your maintenance fee and what are the consequences of increasing the maintenance fees say 10, 20, 30 percent. Well, you know, interesting aspect of that about what percentage that may be. Years ago I had a fiscal manager who was a CPA and he always recommended that a good run association is probably raising their fees about 4 percent a year. Just to keep up with inflation and things like that. Unfortunately, both you and I have seen the associations that don't and then five years later, they're hitting everybody up with a 15, 20 percent increase. So he used to refer to that as do you pull the band-aid off slowly or do you pull it off quickly? Most people probably wouldn't notice a 3 or 4 percent. But when you get hit with a 20 percent, everybody notices. And it hurts. And it hurts. The 4 percent doesn't hurt that much. They can still afford and budget for it. Now one of the things to consider in preparing a budget is there is a percentage of that budget that you have very little control over. And one of those that we saw a number of years back was the common area electric which is based on the electric company bases that on the cost of a barrel of oil. And at that point it was like a hundred and forty hundred fifty dollars a barrel. And the original budget at this particular association had based it on a much lower electricity cost. So what happens in a situation where a board has made their budget and six months later they're already seeing that they're not going to make it? What I would suggest to the board as a manager is to redo their budget and revisit the budget and reevaluate the maintenance fee to make sure that the next six months you'll be able to survive so to speak. Now that you've brought up the electricity topic it's actually it's fun for me. I like numbers. When I usually crunch numbers for budget especially for electricity a lot of the managers go by historical data in terms of the amount spent. They don't look at the usage and base their budget based on the usage and the per kilowatt expense you know rate for example. So I find that interesting that a lot of times utilities is actually a difficult item for them to budget on. It really is yeah and then you know another area that too is insurance because you never know even if you've had no claims your insurance can still take a job. Because it's affected by others. Yeah well what we used to always say that flood in Mississippi is going to affect your policy. Oh yeah definitely. And people don't realize that they get upset because we didn't have any claims we didn't have any problems. Why is it increasing? Exactly. What other areas of problems do you normally see when you're working with an association preparing a budget? Not putting enough aside for reserves and also afraid to increase it to a realistic maintenance fee amount where they can survive. You know like I said before a lot of the boards will think of a number where they wanted to be at and then work the numbers back into the budget. Not putting enough we'll talk about reserves later I guess. Not putting enough money for the reserves is a big mistake I guess you can say that I saw over the years that board had made. Of course you know you have to have the right items in your reserve study to make sure that you are putting enough aside but yeah overall not putting enough for reserve. Well and like you said we'll get to reserves a little later one of the things that I've witnessed over 20 some odd years of this type of work is people wanting to run for the board and actually campaigning just like it's a real election. To lower their maintenance fees. To lower their maintenance fees. Exactly. elect me and I'll lower your maintenance fees. It's very rare that I've ever seen maintenance fees lowered. I don't think I've ever seen it lowered. I've seen it not being raised zero increase but not lowered. Well the two times I've actually seen it in 20 years was an association that had one meter. One electric meter and then at some point technology got to the point where they could sub meter each unit and so you don't want to continue to charge the same maintenance fees now that you're not paying that electric bill and so there I saw the decrease but the other thing that I noticed and I lived in the building is since electricity was included in the maintenance fee you have a tendency not to turn things off and the the sub metering happened after we had moved and a neighbor condo that I did manage called me one night and asked if anybody still lived in the building and I said what do you mean and he goes there's not a single light on anywhere and I said oh that's right they sub meter they have to pay their own electric bill now now they're not turning anything off now they're conserving so taking that from the aspect of an owner in a unit can boards do more to conserve energy I think boards especially now technology so advanced in terms of saving energy boards should explore what the best options are for their association not not to say that every technology suits every single association I'll give an example I recently was helping out an association and the board president came to me and says well I really want the PV on my on my roof it's okay let's let's look at what has been proposed well looking at you'll be you'll be paying for about four five thousand dollars a month to these PV companies and your electric bill is only four thousand a month where's your saving she looked at me she said I never thought of that nobody ever pointed out to me and told me these things I said yeah and she said I said I asked her why did you think about PV well it's the latest everybody's going into I said okay but just because everybody else is going into it doesn't mean that it fits your needs so obviously in this case it doesn't fit your needs why don't you take that money and invest in someplace else like windows replace the buildings windows a 40-year-old building well and of course you remember what your mom always said if everyone else jumped off the bridge would you and that's that actually I was seeing a lot of that well the condo next door got PV why can't we yeah you know it wasn't a matter of really looking at it as what savings we're going to get we want to keep up with the Jones yeah exactly exactly and actually that was the other association that I saw that had a reduction not a big one but a slight reduction in their maintenance fees because they did go PV but again it was a hotel that converted to a condo so it was one meter well this one meter too really that's one meter and I like I I'm puzzled yeah yeah interesting so what other pitfalls do you often see in a in a in preparing for a new budget a lot of times boards are afraid when we talk about being realistic being realistic in terms of maintenance fee they're afraid to make that move to increase it a substantial amount because they know they need it but they don't want to face the owners boards needs to be a little favor in terms of taking a stand and say no this is what we need in order for us to survive don't rob Peter to pay Paul don't rob your reserves that the reserves funds especially to pay for your operating expenses number one is against the statue number two is not going to work for long term yeah yeah and the other thing that we all face and it doesn't matter if you're a condo owner or just a regular homeowner you have emergencies that were not planned for or not budgeted for and those are going to happen I had one association on Maui actually the entire street of condos was on their own sewage treatment plants each and every condo there was no county sewer there and this one association had budgeted emergency repair and three years no emergencies happened so the fourth year they took that out and that was the year that they needed the money for the emergency repair that's always going to happen of course you do that okay well we're at the halfway point right now so we're going to take a quick break and when we come back we're going to talk to Polly some more about some of the pitfalls in budgeting and then on to reserves as well welcome back to the condo insider I'm your host god surely and they have us our guest today Polly Wong and she has been talking to us about budgeting and and actually I think the focus of our show has been more towards some of the pitfalls that happening with budgeting so before we went on break we discussed the fact that sometimes you budget for things it doesn't happen as you expect it so you decide oh we'll take that out of the budget so we won't need to increase maintenance fees but I think the more important thing you had mentioned is boards need to be a little bit braver when making these decisions and on top of that they have a fiduciary duty to the owners yeah to maintain to attack and exactly so you run into those those issues now some of the other things that I've seen in budgets well let's push that out another year let's push that out another year and for certain repairs that may already even be in the reserves but let's push it out a little more if you run into that well push it out a little more where things are actually falling apart and then it takes it it will take more money actually unfortunately to repair it rather than maintaining it yeah yeah the sad truth is about it and one of the other things that boards face and I see this quite often is you have aging in place you have some owners that are on fixed incomes they may not have been when they first got there but now they are and even the slightest increase in maintenance fees have a big effect on them and they're usually the most vocal ones at the board meetings and the annual meetings about the increase but when the board's making that decision on whether or not to have to increase the maintenance fees they have to think of the association as a business you have to balance your income and your expenses if not your business is going to fail and and it's sad that sometimes this happens where I can't afford that extra increase but it's not just one person who lives there it's the entire association so yeah budgeting that's so much fun it's fun it's heartbreaking sometimes because you have to make hard decisions but you know is you have to make those hot decisions no matter what and you know when I was growing up we still had this thing in school called home economics I did too yeah and they taught you to sew and they and then they also taught you how to balance a checkbook oh I remember that and for unfortunately I don't even remember how to I just log in and say how much money do I have left an association can't do that so let's say that the statute actually allows them to go over budget by how much 20% okay so if you are ending up it looks like you're going to go over that 20% you should remit you have to yeah so remit and readjust the budget and again like I said emergencies do happen that you we're not going to be prepared for and in some cases I've seen boards that even with their reserves they've planned out something to be done in five years but they've done such a darn good job of maintaining that they are able to push it out a little longer which brings us into this issue of reserves a lot of people do not realize that a chunk of their maintenance fees is actually earmarked for the reserves what I've seen the pitfall is this is the worst I've seen okay so there's a building with an elevator and I was looking at the reserves for as a as a favor for board president and I said to her I said where's your elevator in your reserve study I don't know I said okay as a board member you guys need to look at your reserve closely I'm not saying you shouldn't trust your manager but you should you know look at your reserve closely or higher higher reserve specialist to do your reserve so that you can make sure that you have all the items that you need to budget for include to be included yeah it's funny you mentioned that in your particular scenario the elevator was missing yes I was doing something similar helping out a board president and they lived in a two-story walk-up complex and there's an elevator and there were two and I said you know I've been to this property many times where are the elevators hidden so you know again and so they're reserving something that they don't really don't even have in actuality when they went back and redid their reserves they were able to reduce the amount of contribution because each of those elevators was earmarked at about $86,000 to replace and wow okay I'm in shock that nobody noticed that well again you know board members need to read you know when you do your budget just reveals reviving the items now you had pointed out that you're not supposed to use reserves for operating but can you in emergency situations borrow from the reserve certainly yeah so let's say major roof leak that wasn't planned for plus it didn't plan for the rain that had come at that particular time and they're looking at a fifty sixty thousand dollar bill that in the reserves is another five or six years out they can they can borrow or actually push it up it push it up is another good way to do it and then what should they do once they've done that repair they need to replenish your the reserves well not only replenish but isn't it time to relook at those reserves and say oh now we've got something that has a 10 year lifespan to spread out but you made a good point earlier about making sure you have all the components and I think this is why it's important to hire a professional yes I went into one complex and they had listed down 14 components and so I had recommended the board they hire a professional and the professional ended up with 35 components yeah you know there were certain things that were actually obvious that weren't even in the original reserve study well here's one thing one down one downfall of reserve study over the over time board members change and they forget what they have removed from the reserve because they wanted to meet a certain maintenance fee level so after they remove it they might say oh this item I could fund it through operating is actually operating item but somehow that get lost in transit as well so you know it's good to keep things my suggestion is good to keep things on the reserve even though if you're going to fund it through operating just notated that it's being funded through operating you know budget rather than the reserve budget but it's still there for as a reminder well you know what's interesting and I've run into this a couple of times we have to realize these board members are volunteers they're not getting paid for this and a lot of times they're dealing with stuff that is probably outside their expertise of what they do in life and so it's easy I think to make mistakes or overlook something but the statute also gives the fact that if you're using good business judgment judgment that you're not necessarily going to be held responsible for that mistake and I think one of the things you and I have been seeing over the last couple years is owners trying to hold their board members responsible responsible for something that they didn't even know was going to happen like plumbing failure or window failure that nobody knew was going to happen well I'll give you an example about a couple years ago we had that 40 day rain one of my building actually had is right across from the loading zone the street somehow slanted toward that building don't know why but they do have an underground parking structure I mean parking area so needless to say I have frogs tires coconuts floating in the water I didn't have cars floating in there actually I can see the top of the car by this much that's the deepest so you know again it was an emergency like you said nobody can foresee people grumble people say well I'm going to sue the board but they couldn't have honestly predict that's going to happen and I think it may just be the way the world is working but I'm hearing more and more people owner saying I want to sue my board because they did this well there's no way even with a crystal ball that they could have predicted something like this was going to happen I mean one of the issues we're seeing now is a cast iron plumbing has suddenly become an issue and a lot of boards and owners as well and even reservists did not foresee that happening because in the mainland those same cast iron pipes last 75 to 100 years and now we're discovering that they don't last that long in Hawaii well in Hawaii because our climate and also depending on where it's manufactured most of the pipes in the mainland that's being used in the mainland were manufactured in mainland here's a little bit different so it's being manufactured different parts of the world so it's sort of like the issue where we have the problem with drywall exactly coming now to China that was a problem in all cabinets termited yeah well you know it's interesting you bring that up too because I can remember early on in the 80s when I first got licensed you always had a termite inspection on a house but you didn't in a condo yes but what people fail to realize is that they can bring all these pests in with them with their furniture in the groceries and a very dear realtor I knew on Maui was sued over this the cabinets were infested but there was no termite inspection done because it was a condo nobody thought to do that and she lost the case wow and so from that point on industry standard changes and now you usually have a termite inspection no matter what no matter what it could be a steel and concrete building they're going to chew on it just to spite you they'll find their way no um in your experience especially in the last 10 15 years are you seeing any um spike in certain areas of reserves in regards to problem issues or um I'm still seeing here locally because you know everywhere else the regulations is different but here in Hawaii I'm still not seeing the board utilizing reserve specialists more than they should and that's actually a shame yeah um the statute does allow the board to do it in good faith on their own but again that might be out of their expertise because I can remember when the reserve study law came into effect there were a number of community managers who said absolutely not I'm not doing reserves wow because they knew that at that time the liability was a little higher than it is now um but thanks to the statute and laws that have been passed but you know I actually had a board that had all experts an architect an engineer a plumber they came up with a wonderful reserve study and found that they were over reserved oh until I looked at it and discovered that they forgot the most expensive component and again this was on Maui the replacement cost of the private sewage treatment plan oh it was about 150,000 wasn't in the reserves oh boy just out of sight out of mind yeah no you're right but pointing that out though they as a board they actually did an excellent job they just forgot one of the biggest components so again I still would recommend that you hire a professional to do this they know what to look for we've only got about a couple minutes left do you have anything you want to say more about reserves or even CAI but you remember you're past president so I'm the past well overall I just want to say to you know owners that if you're concerned I would encourage them to to attend board meetings or even budget committee meetings to understand process and if you don't if you see something that's not going right well it means be professional but point it out for the boards make the hard decisions that you have to make I think out of everything you said that's probably the most important make the hard decisions because that's going to affect everything in the long run and then to add on to that owners should attend board meetings because then they have a better understanding of exactly what's going on rather than getting a notice in advance saying your maintenance fees are going up this much then they show up for a meeting it's a little bit backwards well it's been my pleasure today having Polly Wong as our guest and hopefully we will have her again on someday if I haven't ruined this for her and it's been my pleasure having the opportunity to be your host today and I look forward to doing it again in the near future and I'd like to say thank you again for watching the condo insider and always be ready for an exciting show when you turn us on thank you