How to Run Your Building the Cost-Benefit Way

Using savvy and discipline, one board handled multiple projects and brought them in on time, on budget, without assessments or maintenance increases.

Bob Weiner believes in a business-like approach. “You do a cost-benefit analysis and then you proceed,” he says, making it sound as simple as crossing the street.

Weiner’s matter-of-fact description of how he tackles a problem belies the complexity of the problems facing his 456-unit cooperative at 360 East 72nd Street. The challenges could make anyone want to step down from the nine-person board.

Although you wouldn’t know it when walking into the grand hotel-style lobby (with a bubbling fountain in the center and a sparkling chandelier hanging above it), the place was a series of potential crises waiting to happen. The chief dilemma was the bricks. White bricks, to be exact, the sort that were popular in the 1960s when the building was erected. Unfortunately, no one realized that the white bricks deteriorated much more quickly than traditional red bricks and became dangerously porous. By 2004, the co-op was spending thousands of dollars every year repairing and/or replacing them.

On top of that – quite literally, in fact – the building’s main and secondary roofs (on the setbacks) and its balconies needed repair or replacement. Then there were the elevators (aging machinery and ugly cabs), the air conditioning system (new chiller necessary), and the oil tank (upgrade needed).

How Weiner and his board approached and resolved these problems without raising maintenance or imposing a special assessment is an object lesson in savvy board behavior. “We have, in essence, rebuilt most of the infrastructure of this building in the last five years,” says Weiner.

Organize It

To create and implement a cost-benefit plan, the board at 360 took five steps, which sound simple but actually require a great deal of discipline. The first step is getting yourself organized in such a way that you will maximize the available time of your volunteer board members. Weiner recalls that when he first became president in 1985, one of his first acts was to set up a system of board “alternates” – non-voting “shadow” members drawn primarily from the roster of defeated candidates who ran for office and/or residents who had expressed an interest in some aspect of the property’s affairs. These people would attend meetings, participate in discussions, and take on various tasks.

There were a number of good reasons for this arrangement. While serving on the board before becoming its leader, Weiner had noted that even with nine members, there was too much work for the board to handle and handle well. By dividing up the jobs among more members, the participants could get into greater detail on each area they handled.

The president also set up a series of standing committees, consisting of full-time members and alternates that would report to the board every month. The committee membership was based on areas of interest and expertise. Besides facilitating work, this approach helped educate would-be members on the inner workings of the board – providing on-the-job training for potential voting directors.

Weiner, a lawyer, was not alone in this re-organization of operations. When Marshal Salant, the vice president and a banker, was first elected to his seat over a decade ago, for instance, he suggested to the other directors that they institute a policy of following five-year capital plans, which would be reviewed and updated each year. “We started having capital budget plans,” he recalls. “We became very meticulous about that.”

“The five-year capital plan makes a lot of sense,” observes Phyllis Herman, the on-site manager, who works for Goodstein Management. “Most boards don’t do it. They wait until it’s too late, and they are forced to make a decision. This board is so hands-on; they take in the total picture.”

Such an approach would be crucial in the successful preparation and implementation of the many capital projects in which the co-op would be involved over the next few years. A projected budget helped the board members get a better handle on where they were going and how they should allocate funds. “When we do capital work, we don’t want to do patchwork, we want to do it right the first time. It lasts longer,” explains Bruce Nadell, an accountant and the board treasurer. “So we have an engineer giving us input, telling us the lifespan of each piece of equipment. Then we make our choices.”

Cost-Benefit It

This is where the second step – setting priorities – and Weiner’s cost-benefit approach come into play. The analysis of short-term costs and long-term benefits would be applied to each system and then decisions would be made on how to proceed. With the deteriorating white brickwork, for instance, the board calculated what it was spending on repairs each year and compared that to what it would cost to replace all the bricks. The members decided that, in the long run, the brick replacement – even though it was an $8.5 million job and was expected to take over three years to complete – made more economic sense.

“No one would warrant the white brick repair they did this year would be in good shape in two years,” observes Weiner. Without such a guarantee, the co-op would be facing an unacceptable variable, hard to plan for in the budget. “The brick decision was painful but simple,” says Salant. “The cost of complying with Local Law 11 regulations in the future was such a big projected number that it made more sense to bite the bullet and reconstruct the whole brickwork now and manifestly lower that number going forward.”

In addition, if the brick were removed, the contractor could also re-enforce and waterproof behind the façade, an added plus to the building. “It would be a stronger structure afterwards,” Herman notes.

In undertaking this cost-benefit analysis, the board also considers urgency, listing each project/area in one of three categories:

Necessary – it has to be done sooner rather than later.

Discretionary – it needs to be done, but not immediately.

Quality of Life – it would be nice to do it, but it can wait.

“The evaluation approach tells us a lot and helps us prioritize,” Weiner notes. Adds Salant: “You have to know what you must spend money on and know what you want to spend money on. If you know your boiler’s going to go in two years, it’s stupid going into a capital project without putting aside money to pay for that. If you get your managing agent and engineer together, they can tell you what you’re going to have to replace in the next three to five years.”

Finance It

The third step in the process is finding the money, another factor in the cost-benefit approach. In that regard, the board was in a good position, thanks to luck and canniness. Three years ago, when the projects were first being contemplated, interest rates were hitting record lows. The board saw an opportunity. Why not take advantage of the fact that – since the interest on the co-op’s underlying mortgage is used as a deductible by the shareholders – the building would probably not be paying off its underlying mortgage any time soon. It refinanced, budgeting for an extra $12 million to use for the various projects it had planned.

The co-op’s financial picture was helped by some savvy moves it had made concerning its two commercial spaces and garage. “We were fortunate that we did not sell off our commercial space,” says Weiner. “A lot of East Side buildings did with an eye towards getting cash for future projects. I always thought that was a serious mistake because you lost control of the property and got no further income from it. The income from that helps pay for a lot of the capital improvements.” Once again, the directors kept things as much as possible under their control as they went for the long view rather than the quick fix. They were also lucky that there were no longer any 80/20 tax problems. The essentially defunct tax rule had limited how much commercial income a co-op corporation could receive. “We can now charge market rates,” says Nadell. “One of our biggest assets is the commercial income that we receive. We have a reserve fund of over $3.5 million.”

The board also looked for what Weiner calls “money on the street” – i.e. state and federal subsidies. For instance, the co-op received a loan from the New York State Energy and Research Development Authority (NYSERDA) to replace the chiller in the air-conditioning/heating system – a $975,000 item.

“In the first year, [the new chiller] probably cut our Con Ed steam bill in half,” says Nadell. “The interest rate we’re paying [on the NYSERDA loan] is 1.28 percent over seven years.”

Implement It

The fourth step is implementing the project, and this board made the right moves here, as well. “Planning is only the first step,” notes Weiner. “It can only get you so far. The next step is implementation.”

To some extent, the board must count on its staff to smooth the road. “It’s really a team effort,” Herman says, citing the skills and experience of the building’s off-site management executive Steve Decker, resident manager Danny Sanchez (at the co-op since 1991), and superintendent Luis Perez (on the job since 1984). “And our handymen, porters, doormen – they’ve all been here a long time. The team works well together.” She also cites the invaluable advice of the co-op’s professionals: CPA Carole Newman, a principal at Newman, Newman & Kaufman, and the law firm of Ganfer & Shore,

Just as important is choosing the right professionals. Besides an architect or engineer to design and sign off on work – the co-op chose Accardo Engineering, impressed by the hands-on approach of principal Anthony Accardo – the board realized that, with so much going on at once, there needed to be someone supervising the work.

“It’s very, very important to get a project manager,” says Salant. If you have the building manager operating one way, and the architect/engineer operating another way, you’re going to have trouble. Then there are contractors, and subcontractors, and a building superintendent – you need one person to say, ‘I’m taking responsibility for the whole piece.’”

“We used Goodstein Management and told them, ‘You work with Accardo, but you’ve got to be responsible for everything,’” Weiner notes. “You can’t say, ‘Hey, look – the contractor or the architect did that. It was his idea not mine.’”

“These projects are just too complicated,” adds Salant. “When you have a complicated project with many moving parts, you need one guy in charge. This brick job involved millions of dollars and millions of bricks.”

The last step is actually the main step: stay involved, be active, educate yourself. Through it all, the 360 East 72nd Street board believed that an activist approach benefited the building “This is a very hands-on board. They never let the grass grow under their feet,” notes Herman. “They’re always into upgrading the building, always for the good of the shareholders.”

“The key is people,” says Nadell. “They have to be hands-on. We are. We are involved in everything. The hands-on approach is useful on many levels. You know what’s happening and it also makes the professionals and the contractors much more attentive to their duties.”

Agrees Weiner: “It’s become our culture that we have a plan, and that it is a plan for the benefit of everyone. But the board cannot do this alone. You have to rely on the people. That is your base.”