Strategic Capital Planning and Communication: Essential for Building Maintenance Compliance

With today’s punishing interest rates making refinancing unfeasible, those needing to fund building maintenance and compliance upgrades are often left with little option other than to impose assessments. There are ways to make these more manageable for the community, but the key to financing projects is having a long-term strategic capital plan and, just as important, communicating the building’s needs to shareholders or unit-owners. 

Crafting a Quick Assessment

Some buildings have lines of credit linked to their mortgages, but these have floating rates linked to the prime rate, which can be costly. “You’re looking at an interest rate possibly in excess of 9%, so it’s a big expense in terms of debt service,” says Andre Kaplan, the CFO of Orsid New York. But lines of credit  don’t have to be ruled out entirely if boards offer the option for people to pay the full assessment amount up front or in installments, with the latter using the building’s line of credit at the prevailing rate. “So you would pay an interest component if you choose to pay it over, say, 12 months,” he explains. This was a solution presented to co-op shareholders who were in dire need of a new roof but without sufficient reserves. “The board was extremely anxious about going to the shareholders because it needed to raise a lot of money and needed some of it fairly quickly,” Kaplan says. As it turned out, three-quarters of shareholders opted to pay the assessment up front. With the cash infusion, the co-op did not need to utilize its line of credit to fund the roof project.

Moving the Money

Another option is to use the annual co-op and condo tax abatement for capital needs. While that money is often allocated to the operating budget, channeling it into the reserves instead can help fund infrastructure upgrades. “A building might start with 10%, which used to flow into operations, and put it towards their reserve fund,” Kaplan says. For resale and tax purposes, assessments should be designated as a capital assessment, not an operating assessment. “It’s helpful for shareholders buying into an apartment to understand that this assessment might not be forever,” he says. 

Teachable Moments

It’s always important to communicate to shareholders and unit-owners the cyclical nature of the infrastructure challenges so they know what to expect. “As a board, you don’t want to give anybody any surprises,” Kaplan says. “It’s just like owning your own home, which means necessary maintenance.” And the lesson for boards? Think long term. If interest rates are still high when you need to refinance and the building is not in a position to pull out additional cash for capital repairs, “there needs to be a plan in place,” he says. “You want to keep at least three steps ahead.”