Know Your Needs

Planning for capital expenses can be a touchy subject for co-op and condo boards. Many balk at the cost of hiring an engineer to thoroughly assess the physical condition of the building and its systems. Some prefer to rely on the building super for such assessments. Others, in a more head-in-the sand approach, avoid planning altogether and wait until they’re forced to make repairs.

But the fiscal benefits of a capital plan are substantial enough that boards would do well not to put it off. Mortgage broker Patrick Niland, president of First Funding of New York and a former co-op board member, argues that, in fact, a board should view it as their obligation.

“All co-ops and condos should have a capital plan, period,” Niland says. “A co-op board is running a corporation, and they have a fiduciary responsibility to manage that in a prudent fashion. If you were running a business, wouldn’t you be thinking about the condition of your roof, your plumbing, your elevators?”

A capital plan is grounded in a report on the condition of a building’s components, including exteriors, heating, cooling, plumbing and electrical systems, elevators, walkways, and fire escapes. As tools to help guide budget decisions and financial planning, these reports can vary in their degree of thoroughness, depending on what the board wants and is willing to spend.

Having that information in hand puts boards in a better position when they refinance their underlying mortgage. Boards should have an educated idea of how much they need to borrow so they don’t have to go right back to the bank and do it again, says Niland, who specializes in financing for coops and condos. “I can’t tell you how many buildings that are pinching pennies borrow too little, and then find out three years into their deal that they need to borrow more money to fix something,” Niland says.

Experts agree that most New York City boards do not do capital studies, usually because of the cost. And those that do try to plan ahead typically don’t hire an engineer, according to David Agoglia, a partner in the accounting firm of Prisand, Mellina, Unterlack & Co., which has more than 300 co-op and condo clients. “Boards usually work with their managing agent and resident manager to go through the building and determine what’s nearing replacement and what’s not,” he says.

Niland says that a competent man - aging agent, working with a competent super, can give the board a decent idea of building needs over the next five years, although he believes that hiring an engineer is preferable. “I usually lean heavily on the man - aging agents in situations where the board is being blind to this stuff,” he says. “Ask them, ‘When did you do your roof last, the boiler, elevators?’ They’re usually on top of that stuff.”

A self-managed building may also look to in-house expertise. About ten years ago, the board at the Piano Factory, a self-managed, 49-unit luxury co-op in Manhattan’s Hell’s Kitchen, tapped residents’ knowledge of architecture and construction, plus their long-term familiarity with the building, to form a finance committee tasked with estimating the remaining useful life of major building components. “They put together projections, with a ballpark estimate of replacement costs,” says Bonnie Reid Berkow, a resident who has been on and off the board over the last two decades. “We set the maintenance so there would be enough collected to cover the costs. It seems to be working.”

Berkow, a litigator at Wagner Berkow who represents co-ops and condos, adds, however, that she believes buildings without that in house expertise should “have an outside engineer do a review of the major building components so they can supply a more accurate estimate.”

An engineer provides an impartial third-party opinion, has specific expertise in construction and restoration, and has more access to up to-date information for developing accurate cost estimates than people outside the field, says David Chesky, senior vice president of the Falcon Group, an engineering and architecture firm. “A building super might not see a deficient condition because they don’t necessarily have a trained eye to do so,” Chesky says. For example, he explains, a super might not recognize that exposed rebar in a parking garage is a red flag for future failing concrete; or he might use binoculars to check for building facade problems 10 stories up.

Engineering studies vary in their level of detail. RAND Engineering & Architecture, for example, will conduct a straightforward “physical conditions survey” that simply predicts the lifespan and replacement cost of building components. The company also offers a much more thorough and far-reaching “capital reserve study,” which calculates how much a board needs to save annually to cover future capital needs, says Stephen Varone, the company president.

Varone says the price for a basic survey begins at about $10,000 for small properties and can run to well over $30,000 for large complexes. Adding the capital reserve study typically raises the cost by a minimum of $5,000, he says.

Those numbers cause many boards to balk, but cost is not their only concern. Frequently, boards are reluctant to commission a formal study because they believe it could open them up to legal liability. Bruce Cholst, an attorney with Anderson Kill, says he hasn’t run into instances in which a capital plan was the basis for a board being sued, but it’s possible that a shareholder could argue that a capital plan had put the board on notice of a building deficiency and that their failure to act constituted neglect.

A case currently pending in state supreme court appears to take this tack. Filed in July by unit-owners at the Walton Condominium, in the South Street Seaport neighborhood of lower Manhattan, the suit cites an engineering report conducted in 2016 that recommended specific steps to strengthen the roof’s load capacity. The suit accuses the board and the managing agent of negligence (among other claims) for not following those recommendations in their entirety, and for taking actions that the plaintiffs claim damaged penthouse terraces.

Cholst says another scenario might involve a recent purchaser who, angered by getting hit by an assessment for a major repair, points to the capital plan as having failed to mention the deficiency, and sues for fraudulent concealment.

In order to avoid that vulnerability, Cholst says, “instead of putting something in writing, boards will sometimes consult with an engineer informally, asking, ‘What do you think really requires our attention?’”

Another way to minimize liability is to keep it out of the financial statements. Auditing principles, as specified by the Financial Accounting Standards Board, require capital studies to be included as supplementary information to basic financial statements. But because of liability concerns, in New York most boards that conduct such studies do not present them as supple - mental data to the financial statements, according to Agoglia, the accountant He notes that his firm does encourage boards to undertake capital studies – but to then keep the study at the board level as a planning tool, never officially adopting it for any purpose. “We advise against promulgating it with the annual financial report,” he says.

Investing in such a study can be especially worthwhile for condominiums that have owners or purchasers who need access to Fannie Mae or Federal Housing Administration financing, says Orest Tomaselli, the owner of National Condo Advisors, which helps co-ops and condos com - ply with mortgage guidelines, such as the requirement that condominiums set aside 10 percent of yearly common charges, earmarked exclusively for future repairs and replacement of common elements. That set-aside must be ongoing for as long as the condominium wants access to such financing.

“The only way to thwart that guideline is to obtain what’s called a reserve study,” says Tomaselli, also owner of Strategic Inspections, whose reserve studies estimate the cost to repair or replace any common area components over a 30-year period. Such a study might conclude that the condo needs to set aside more than the mandated 10 percent a month. “In most cases,” Tomaselli says, “the study drops that contribution down to the more accurate amount.”

Co-ops may also be required to set money aside for repairs if they’re applying for a loan backed by Fannie Mae or Freddie Mac. As part of the underwriting process, the lender must order an engineering report that looks ahead 10 years. “If there’s any deferred maintenance, they might require an escrow fund to pay for it,” Niland says. “Or they may require that a certain amount is put aside every month as a condition of the loan.”

But even if a capital plan is not required by a lender, the question co-op and condo boards may want to ask is: can we afford not to have one?