How to Avoid Getting Blindsided By Capital Costs

Gene Ferrara, President
JMA Consultants

The Lay of the Land

Blindsiding is a phenomenon I come across a lot when I have to give boards bad news. An example would be when we do a facade inspection. The law mandates it every five years, and the board asks us to tell them what’s wrong with the building and what they need to do.

And I tell them, “Well, you need about $1.3 million worth of work, and your building is unsafe, and you have to put a sidewalk shed up right away.” And then they look at me with a blindsided stare. Is this their fault? Is it management’s fault? Is it the industry’s fault? Probably a little bit of all three, but the major fault is their own.

The last time a report was done on this building, the engineer told the board that within the next 24 to 36 months, it would have to correct all the conditions noted in an inspection conducted under the Safe With a Repair and Maintenance Program. The board reviews the report, signs it, and puts it away because the cost to correct is high. Time goes by, and the building has cycled through two management companies, had two changes of the board (including new board presidents), and several agents at each of the management companies. With changing boards and management companies the focus gets lost, and that’s when blindsiding occurs.

Now What?

So how do boards avoid blindsiding? One way is to understand the nature of soft costs. Years ago, soft costs accounted for about 10 percent of a project’s expense; today it can be half. Soft costs include bridging, engineering, getting a special inspector, environmental testing, scaffolding, hiring site safety managers, permit filing, and landmarks filing. If a board planned its projects 10 years into the future, instead of doing them every five years with the Local Law 11 cycle, these soft costs could be better managed and cause less blindsiding.

Secondly, every board member should get a cheat sheet. It breaks down the exterior, interior, HVAC, and other mechanical things that you need to maintain, plus decorating and things on which you want to spend money. This is an informal notice that’s discussed at every board meeting, and you may not want it to go on the record because you may change it as you go along. But it’s something that’s handed down agent to agent, company to company, board member to board member as you proceed, so that when that elevator consultant comes back in and says, “Remember when I told you about five years ago you’re going to need to do a million-dollar job?” – you’re not going to be blindsided and you’re not going to have to scramble. You’re going to make decisions based on need, not on how much money you have. And that’s important.