Capital Improvement Projects Making the Case to Owners

Capital Improvement Projects

Lucky are the board members of co-ops and condos who are able to play a purely supervisory role, simplyoverseeing the work of the managing agent who has the serious job of taking care of the building. In the vast majority of cases, however, board members find themselves facing one crisis after anotherthe boiler breaks down, the air conditioning chiller fails, the roof leak keeps getting worseand maintenance expenses that are consistently over budget.

This predicament is made even more challenging by the fact that individual boards must not only decide what to do, and figure out how to pay for it (often without a lot of first-hand expertise or prior experience), but must also communicate the news to the other building residents. In a major repair situation, such news is most often presented as a fait accompli. Though it may not be their fault personally, board members are likely to be treated as the messenger bearing bad news to the king. And woe to the messenger who must bear the king's wrath!

The good news is that smart boards can avoid the above scenario. With some careful planning, a little strategizing and ongoing communications with shareholders, they can cease being mere caretakers of a property which is depreciating around them. They can head off these inevitable crises by planning ahead for capital improvements and, most importantly, selling the plan to the shareholders or unit owners.

Planning is Crucial

The first step in gaining approval for a capital improvement plan from building residents is to make sure the plan is a good one. This may seem simplistic, but a good plan will likely sell itself. Developed with input from the managing agent, the accountant, various design professionals and the residents themselves, a strong plan will present various options and will identify specific recommendations for capital improvements which will improve the building's performance in the most cost-effective way.

The board must be the driving force behind the planning effort. When the time comes, it will be that much easier to convince others of its merit, because board members will be thoroughly familiar with all the details and will be comfortable with the plans themselves. The first step should be to establish a board committee whose primary task is to brainstorm a list of all of those components, systems or materials for which the building is contracted that have been problematic, have caused the expenditure of excessive funds, have been the object of complaints or have, in any way, impacted the value or image of the property.

After developing a list that the full board has had an opportunity to review, the committee should meet with the superintendent, managing agent and accountant to review the building's performance over the last five years. This exercise will identify areas of the building where higher than normal maintenance and repairs have been occurring (i.e. heating and cooling systems, elevators, plumbing) and where expenses have been consistently over budget. With this information, the board can further refine the list of problems. This is also a good time to anticipate future improvements required by law, such as building facade repairs to comply with New York City's Local Law 10, as well as those projects which will require long lead times (i.e., boiler replac ffb ement or new windows).Poll the Unit Owners

The committee is then ready to gather opinions and comments from the unit owners themselves, giving them an opportunity to vent their complaints and contribute their ideas early in the planning process. Any professionals with related experience who live in the building may well have valuable insights to offer, and this is a good way to enlist their support for the plan, which will be extremely helpful in getting the approval of other building residents.

A very important psychological strategy here is that the board is not asking them for solutions, but is asking them for problems. An effective way to get resident input is to hold several small meetings for this purpose. A large meeting of all residents can become unwieldy with less opportunity for individuals to speak. These meetings will also give board members an opportunity to explain the purpose of the plan, what they intend to accomplish, and what benefits can be expected.

There are no hard and fast rules on what form the ultimate plan takes. Whether the plan is short range or long range, the basic elements of tasks, schedules and budgets are still the same. Reviewing the recent history of the building's performance, looking to future needs and polling the shareholders will help the board identify which items on the list are serious matters from the standpoint of owner concerns, operating costs and reliability. Now it is time to prioritize each improvement project in order of urgency. At this point the board will have developed a preliminary capital improvement plana priority list of what has to be done and when.

The Development Phase

Once the board has agreed on a preliminary plan, it is time to move into the more detailed development phase, which will require the assistance of professionals such as architects, structural engineers, mechanical/electrical engineers, interior designers, etc. Always remember that the professionals will be advising the board on the best way to address the problem, and that this advice could have a significant impact upon the cost and success of the building's overall program. So, be sure to seek out the best professionals you can. The best will cost a little more than the mediocre, but keep in mind that shopping for this type of professional is not unlike shopping for a lawyer or doctor. Talk to other people who have gone through the process and ask for recommendations. Then have the board interview three or four firms to find the individuals with whom they feel they can establish a level of comfort.

Retaining high quality design professionals is one of the cornerstones of developing a good plan and helping to sell it to unit owners. Also, their advice and consultation will be essential in helping prepare a credible budget for the plan. Good designers can save a co-op or condo money in the long run by providing objective, professional advice which can have a direct impact on the cost of the improvements to unit owners either in the form of reduced maintenance increases or assessments.

For example, one midtown co-op had been limping along on a chiller that had long passed its useful life. After investigating the cost of replacing the existing steam equipment with a similar unit, the board decided they could not afford it. Finally, they commissioned a top flight engineering firm to study the problem and recommend a solution. It was found that an electric chiller could be installed for significantly less cost, with less disruption to the building and with a resulting decrease in operating cost. This, in turn, helped fund the replacement. Competent professionals first study the problem carefully before recommending the best solution. Their supporting data and calculations can be made available to unit owners to help sell the plan.

Identify Financial Options

At this point in the process, the all-important question must be asked: how to pay for it? Now that the building has a good plan, the key to selli ffb ng it is to select a financing program that is palatable to the residents. The board must evaluate all options for both long and short term financing based on how much money is needed and when. Existing loan commitments, reserve fund balance, current net operating income, and all available forms of collateral must be examined. Then a financing program that is least burdensome to the ownerswhether it is a maintenance increase, an assessment, a refinancing, a loan or a combinationshould be selected. The board must be prepared to explain in detail why it is recommending that particular approach. Remember that it is the responsibility of all board members of co-ops and condos, just as it is the responsibility of the directors of business corporations, to represent the financial interests of all of the shareholders or unit owners. This is no easy task, but this fundamental concept should drive any financing program.

Communication is Key

If the board has followed the above steps as described, the job of selling the plan is nearly accomplished. Should the time expended in developing the plan exceed a few months, owners should be kept informed through the building's in-house newsletter, a special capital improvement update or periodic informal letters from the board president to explain key elements of the plan (i.e. high priority projects, selection of design professionals, results of feasibility studies, financing opportunities etc.).

When the plan is complete, the board will present it to the owners, preferably as a written package delivered to each apartment. The package should include a list of priority projects, a budget, a timetable for the work and the financing program. The financing options should be clearly explained, including why the board's recommendation will be the least burdensome for unit owners. After people have had time to review the package, a series of small information meetings should be held at which the design professionals, the managing agent and board members are on hand to answer questions.

Each building should implement a communications program that works well for its particular group of owners. No matter what the news, no one likes surprises. While the owners will never be unanimous in their support of the plan, the majority will appreciate the board's candid approach and will be pleased that the board is working toward enhancing the building's performance and value. Remember, the plan was developed in an effort to solve a problem; but the board is not submitting the problem, it's submitting the solution. Unlike the king's messenger, this board is bringing good news!

Ms. Sagan is president of Sagan & Associates, a real estate consulting firm specializing in capital improvement planning, financing and project management.

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