Delayed Repairs and Financial Dilemma: A Condo's Worst-Case Scenario

DELAYED REPAIRS: A WORST-CASE SCENARIO

Carl Cesarano

Principal,
Cesarano & Khan

“The bearing walls were leaning, giving the condo five days to evacuate the building”

The emergency was sudden. It wasn’t a fire or a flood; it was a vacate order. For the residents of this small converted loft building, life suddenly turned upside down. 

Deferred Maintenance: A Risky Oversight

Over the years, the various condo boards at the building commissioned several facade engineering studies. All of them discovered noticeable cracking and recommended remediation. Each board, perhaps having faith that a long-standing, solid brick building was safe, never moved forward with the suggested fixes. After hiring a new management company, the board brought in another team of engineers to take a fresh look at the facade. During the walk-through, the structural engineer saw that the building’s bearing walls were leaning, and immediately notified the Department of Buildings. A few days later, residents of the condominium were told that they had five days to vacate the building. 

Facing a Financial Dilemma for Emergency Repairs

Compounding the enormous challenges the condo faced was a cash problem. “The question was how to raise the capital to remediate a project projected to cost between $2 [million] and $3 million,” says Carl Cesarano of Cesarano & Khan, who acts as the condo’s accountant. The remediation cost was really a moving target, he adds, and the big spread made raising capital all the more challenging. 

If this were a co-op, he says, the building could be leveraged as collateral and it could get a line of credit. In the condominium structure, however, everyone actually owns their unit, so leveraging the building isn’t possible. The kind of loan a condominium can get is called a common interest realty association, or CIRA, loan. There are only a few lenders who will make a CIRA loan, and the condo’s situation made the search that much more difficult.

“We went to different lenders, and when they heard that this was a potential building collapse, just about all of them said it didn’t meet their underwriting criteria,” Cesarano recalls. “One lender said to me, ‘Are you serious? We wouldn’t touch this with a 10-foot pole.’” Finally, though, a lender was found, but not without conditions. “The lender said it was willing to give us a loan with all the shortcomings of the property,” Cesarano says, “but the owners must also have a chip in the game.” That chip was a cash call to the owners: an immediate assessment of $1.6 million.

A Condo Lender Was Found, but the Loan Came With Conditions

The lender’s stipulation complicated the condo’s borrowing. The need for an immediate assessment was only one part of its requirement; the second part was the creation of a long-term assessment to fund the loan. Cesarano says the lender wanted the condo to create a line item in its budget specifically dedicated to paying back the loan.

This immediate assessment to owners was around $65,000, depending on their ownership percentage. The lender’s $2 million loan, which was a revolving line of credit, was spread out over a six-year payback period, which meant that each unit-owner was assessed, on average, another $77,000 over the six years. All of this was on top of the fact that the owners had to continue to pay their common charges and the cost of living elsewhere while the condo was undergoing repairs.

Keeping an Accountant’s Eye on Expenses

Because the cost of the project wouldn’t be certain until the remediation began, Cesarano took on a new role. “The condo wanted somebody to watch the contractors and almost act as an owner’s rep for financial affairs,” he says. “Not only to track the financial outlay of the project but to augment how the ongoing assessments needed to be structured.” The loan was a revolving line of credit, and the condo didn’t have to draw it at once, so that made tracking the financials all the more important.

“From my perspective,” Cesarano says, “boards should embrace their engineers and have an accountant by their side. A lot of boards feel engineers come in and overkill what’s needed.” Boards, he adds, frequently don’t include their findings in a building’s financial statement. “If they did, it would show that the building is underfunded,” he says. “That’s a double-edged sword.”