Prewar Finances Older Buildings, Special Needs

Prewar Finances

With all the luxury condos going up in New York City today, many people still maintain a soft spot for the city’s prewar apartment buildings. You’ll see them all around town—on Central Park West and Fort Washington Avenue in Manhattan; on Pelham Parkway and the Grand Concourse in the Bronx; and on Eastern Parkway and Ocean Parkway in Brooklyn.

When people say “prewar,” they usually mean buildings constructed between the two World Wars—between 1918, when World War I ended, and 1941, when the U.S. entered World War II. True, there were many elegant, luxury apartment houses built before World War I, especially in such upper-class havens as Riverside Drive and Central Park West, but at that point in history, tenements were more common.

Never Out of Style

And what happened to all the prewar buildings? Well, those that were walk-ups, and those that happened to be in deteriorating neighborhoods such as the South Bronx, began to decline, and many were abandoned. But in other areas, such as Midwood and Park Slope, well-built and well-maintained prewar elevator buildings hung on. Many of them were rehabilitated and converted to co-ops during the co-op boom of the 1980s, when block after block went co-op. And prewar buildings in places like the Upper West Side and the Upper East Side never stopped being fashionable.

Although exact figures are hard to come by, Cara Marino, a public relations spokeswoman for the Real Estate Board of New York (REBNY) estimates that today in Manhattan, about two-thirds of the co-op buildings are prewar, with the remainder postwar. As far as condos are concerned, about three-quarters of the units are postwar, with the rest prewar (the organization only has figures for condo units, not buildings).

What are some of the differences between older and newer buildings in the city? According to Neil Sonnenberg of the accounting firm Rosen Seymour Shapps Martin & Co. in Manhattan, “Aside from their age, I would say the prewar buildings have a more established base of residents, with less turnover. You have more people that are really buying to live there, not to turn over the property. In new structures, many are there for investments—perhaps for flipping.”

Another difference, says financial consultant Marc Taub, of ERE, a Manhattan-based accounting firm, is that the older buildings are “built differently, with different types of materials. They typically will need more repairs of the plumbing lines, and will need pipes more frequently.”

In addition, many prewar buildings are in landmark districts, even though they may not be landmarks themselves. For example, in Brooklyn Heights, even though the brownstones are the main architectural and historic draw, there are quite a few luxurious older apartment buildings, most of them dating from the 1910s and the 1920s. These buildings, just by virtue of where they stand, fall under landmark regulations, and Landmarks Preservation Commission (LPC) approval would be required for any significant exterior renovation or alteration.

Don’t Judge a Building By its Age

How do older buildings’ capital funding needs differ from those of newer buildings? According to Jay Novet, executive vice president of Budget Saving Strategics in Great Neck, L.I., the issue is complicated only “because an older building’s roof, boiler, elevators, windows and pointing may have gone through more generations of change than newer buildings.”

“Let’s consider that a person in their fifties exercising regularly and eating well will have a better quality of life over time than a person in their late thirties doing the opposite. Likewise, if an older building’s financial management discipline has been maintained over the decades, its funding needs can be in better shape than those of a newer building.”

On the other hand, says Novet, “If board discipline has been lacking and/or board dissension has delayed decision-making too many times, an older building might now be financially hemorrhaging compared to a newer building.”

In general, he says, “The key is getting the right people on your team. Unfortunately, outstanding as most property managers are, too often their energies are focused on day-to-day and season-to-season priorities” rather than the big financial picture.

Sonnenberg agrees with Novet that you can’t judge a building’s needs exclusively by its age. “With older buildings, you need more of a capital reserve because [building systems] are more likely to develop problems with age—but we’ve found many problems with brand-new construction too. Sponsors are trying to do things quickly and cheaply to capture the uptick in the market, and things are sometimes not built as well.”

Looking at prewar buildings from an infrastructure point of view, Marino says that “plumbing is a bit of a problem in continuously occupied prewar buildings because there is never an opportunity to replace the pipes the way you would in, say, a townhouse in of a similar era. It’s hard to do it all at once, because there are so many residents whose needs have to be taken into account. Likewise, a prewar building will need to have its electrical wiring updated—although a building built in the 1950s may also need additional wiring to meet today’s demands.”

What she is saying is, of course, that when these apartment houses were constructed, the builders weren’t thinking of providing enough outlets and capacity for computers, printers, multiple televisions, DVD players, answering machines, air conditioners, food processors, shredders, and all the other gadgets and appliances that apartment-dwellers count on today. A few lamps, a refrigerator, a toaster, an electric fan or two, a radio and maybe a phonograph were enough to satisfy a middle-class ‘30s household—but those days are long gone.

Capital Funding Challenges

What unique challenges do older buildings face in meeting their capital funding needs?

According to Sonnenberg, high-end prewar buildings such as those on the Upper East Side and the Upper West Side typically don’t have trouble with funding. “If they need a special assessment, they can get it. They usually keep three months of maintenance payments on hand, and they are able to charge flip fees when they sell apartments.”

On the other hand, he says, “Buildings in the outer boroughs should be more conservative in cash management. They should put more money away for a rainy day.” In general, says Sonnenberg, if the board delegates in the minutes a specific amount for capital improvements, shareholders will reap the benefits when they sell the apartment.

Richard Piccola, a CPA based in Commack, L.I., says many older buildings are just as susceptible to pressures as rising real estate taxes and fuel-price increases. Some buildings charge surcharges—such as fuel surcharges—to their shareholders. At times, surcharges are imposed for other projects as well, such as an across-the-board window replacement.

In general, and not only for prewar buildings, keeping co-op and condo apartment buildings in financially good shape can be a challenge.

“With adverse financial winds of change periodically blasting away at a property’s financial profile, whether from irregularly high insurance rates, spiking energy prices and/or interest rates,” says Novet, “it can cause significant challenges to boards on how to keep their property financially solvent.”

How to Plan for the Future

Thankfully, there are many resources that boards and managers of older buildings can access to help them anticipate and meet their buildings’ maintenance and financial needs.

Piccola says shareholders and board members should have their management company hire a good engineer to look at the building periodically and assess what repairs may be needed. He recommends detailed cost-analysis budgeting, by the building’s accountant or accounting firm in conjunction with an engineer, after the study or audit of the building has been completed.

For example, such an analysis should specify that the lifetime of the boiler is so-many years, the lifetime of the roof is so-many years, the lifetime of the windows is so-many years. The reserve fund should be specifically pegged for these needs. For example, in one year, we will need $100,000, in five years, we will need $500,000, and so forth.

When the time comes that the work is finally needed, says Piccola, the board and management should get three independent bids, then choose the one that seems most reasonable.

On the subject of financing capital improvements, Marino says, that the buildings generally do an assessment on a regular basis. “In some cases, they may choose to refinance the building to increase their reserve funds. The issue of how to raise the capital needed for improvements occupies many hours of board members’ meetings,” she says.

Despite the brand-new architectural wonders being planned and executed throughout the city, New York City remains a place where the new mingles harmoniously with the not-so-new. For every apartment buyer eager to stake a claim in the new Calatrava or Gehry creation, there’s another who couldn’t bear to live without the original crown moldings and marble mantelpieces of the city’s prewar buildings. And that’s reason alone to keep those buildings healthy, both financially and physically. n

Raanan Geberer is a freelance writer living in New York City.

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