Capital Project Surprises: How to Deal with Unexpected Costs

Raising money for capital projects is always a complicated process, and it can get doubly sticky when several types of projects get lumped together — and one of them develops unexpected cost overruns. But there are ways to deal with such unpleasant surprises.

Following the Book

Ira Meister, the president of Matthew Adam Properties, has managed a Lower East Side building since it was converted from a factory to a condominium in 1984. For 40 years he has worked well with the five-member board, a revolving mix of professionals in finance, business, architecture and design — “the best board I’ve ever dealt with,” he says.

Recently the board embarked on a many-pronged capital project that included upgrading the elevators, replacing a sidewalk vault and renovating the hallways, lobby and rear courtyard.

“The board followed the book,” Meister says. “We had a meeting of all the unit-owners, and they approved the expenses — approximately $2 million. For those who didn’t have the money to pay the assessment up front, the board arranged a line of credit with a bank, and I’d say probably a third of the unit-owners participated in the line of credit. The board put a display in the lobby explaining what’s going to happen. They really set everything up to make it perfect.”

Things started well. “They did the elevators first, and they came out on target,” Meister says. “Then they decided to do the sidewalk vault. Everything started to move along nicely until we opened up the sidewalk and realized that the facade of the building actually rested on the sidewalk. So it became a massive project.”

Since unpleasant surprises are a part of virtually every capital project, the board had wisely built a 20% buffer into the assessment and line of credit to absorb any cost overruns. But the board realized that the sidewalk surprise meant the remaining projects would have to be scaled back if they hoped to bring everything in on budget.

An Unbelievable Thing To Do

“So we had a meeting,” Meister says, “and one of the board members, a noted designer, spoke up and said, ‘You know what? We’ve got to get the hallways done, so I’m going to donate the carpeting for all 12 floors.’ So that took a nice chunk off the budget. We realized that we’d also have to cut back on the lobby portion of the budget, just do some minor painting. So again, the same gentleman said, ‘We can’t do a half-baked project. We have to do the right thing.’ So he ended up donating a magnificent lobby. That was a very unbelievable thing to do.”

Meister has been in the property management business long enough to know that no good deed goes unpunished, and that lesson was borne out here. A resident of the building — a renter, not a unit-owner — didn’t like the way the lobby and hallways turned out. So he slipped literature under doors, rang doorbells and tried to mount a grassroots protest. A few residents signed on — not an army, but enough to get the board’s attention.

“The board wanted everybody to be happy,” Meister says. “So the board decided, ‘Let’s have a Zoom meeting. Let’s stop this right now.’ And people came onto the Zoom call, and the board made a presentation. It was fantastic. One unit-owner, a noted attorney, said, ‘OK, who wants to come up with $200,000 now to redo the lobby? Or what is it going to cost to undo the lobby? Another hundred thousand dollars? This is ridiculous.’” And that was the end of the protest.

What’s the Takeaway?

“Follow what this board did,” Meister says. “A board has to make decisions. That’s what they’re elected for. They’re not going to please all the people all the time. This board held the meetings in advance, they posted the illustrations, they listened to the comments, positive and negative, and they made a decision in the best interest of all the unit-owners. And that’s the right way to do it.”