How to Create a Five-Year Capital-Improvement Plan

The first step when creating a capital plan? Define a capital expense. Many people think of it as something that's not recurring. But the Internal Revenue Service defines a capital expense as "something that would extend the life of a building component more than a year," notes accountant Stephen Beer, a partner at Czarnowski & Beer. This includes windows, roofs, and asphalt or concrete structures such as parking lots and walkways.

The next step is to commission an engineering report. This covers the exterior envelope: the windows, fire escapes, bulkheads, sidewalks and retaining walls. It also reviews the building mechanical systems, stairways and elevators, and notes cracks in the interior walls and egress issues. (Are baby carriages blocking the exits?) Finally, there is a chart showing the useful life of all building parts. 

The Personal Touch

Gary Mindlin, co-op board president of the roughly 450-unit 150 West End Avenue, in the Lincoln Towers complex on Manhattan's Upper West Side, stresses also the importance of knowledgeable board members and others who can add institutional history, and their familiarity with a building's quirks and "personality."

"We had an engineering company come in and work with our super and our managing agent to put together the foundation for the plan," he says. "The board then gave its input, which the engineer incorporated into a second and final draft. Once we had the report done, we knew the approximate dollars to assign to different components and build that into our budget. Then we started giving the appropriate information at appropriate times to the residents."

The Engineers' Touch

But, explains attorney Stuart Saft, a partner at Holland & Knight and chairman of the Council of New York Cooperatives & Condominiums, there's an issue you need to face with engineering reports. Engineers, he says, "always come down and say, 'These are the things you should do immediately, the ones you should do over five to ten years, and what you can do but isn't essential.' You distribute this report [to residents] and everybody assumes you have to do all three, and it's $10 million, and everybody freaks out. But in fact, the things that must be done may be only $1 million, and things that should be done over five to ten years may be $3 million over five to ten years."

But Eric W. Cowley, of Cowley Engineering, explains that the idea of the report is to help the building owners prioritize repairs. "It should tell you the first thing you should concentrate on," he says, noting that the cost of such a report, which usually takes about a month to prepare, could run anywhere from $7,000 to $15,000 depending on the size of the building.

Does having such a report increase your liability? Cowley admits that it could, but adds that is no reason not to do one. "It just makes sense."

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