Should Co-op / Condo Boards Create a Five-Year Capital-Improvement Plan?

"Very few buildings follow the AICPA recommendation," says Rick Montanye, a partner in the accounting firm of Marin & Montanye. Why? For fear of liability. In a catch-22 situation, if a board is forward-thinking enough to commission an engineering report — which is the basis for a capital plan — and then doesn't implement that report's recommendation before a capital-related accident occurs, the co-op or condo could be liable. So, a lot of co-ops and condos simply don't do them.

Still, not everyone is cowed by the specter of lawsuits. "We do long-range capital planning for all our properties," asserts Michael Berenson, president of Akam Associates, which manages 135 of them. "A lot of buildings want to limit it to five years [because] when you go longer than that, you're doing more of a 'guesstimate' of what capital expenses are going to be. With a five-year plan, it's easier to predict rises in prices, the contractor climate, and material costs."

Why Plan?

Why go to the trouble — and possible liability — of crafting a plan? After all, long-range planning is never easy. Given such unpredictable recent history as 2007's economic downturn and the costly rebuilding from superstorm Sandy, projecting a capital-expenses budget even five years out seems more a matter of crystal balls than of silicon chips.

Four good reasons for planning are: 

No surprises. For 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, "it's about control of money and responsible planning. If we're doing our job really well, anticipating what expenses are coming and having the right capital to fund them, there are no surprises when we deliver information to residents," says the 15-year board veteran. "We're not saying, 'Oooh, we didn't account for this and now you're getting hit for additional money.'" 

You can refinance and better anticipate how much extra money you need to take out for capital work. A good way to get a cash infusion in your reserve account — in these days of low-interest rates — is to refinance your building's underlying mortgage. Capital projects can then be funded from the reserves. "How do you as a board know the right amount to refinance if you don't have a good plan?" Mindlin adds.

You can predict (and eliminate) special assessments, budgeting-in maintenance increases instead. Deran Cadotte, a former board president who has worked on capital plans at the 76-unit co-op at 250 Cabrini Boulevard in Manhattan's Hudson Heights, says you can "foresee any required assessments and, at best, maybe alleviate the need for assessments by regular proactive maintenance increases. Assessments have to be targeted to specific projects. Maintenance increases do not, and they allow you to build up funds for a capital project."

And some lenders are instituting requirements that are easier to address if you have a long-range capital plan. "Some banks are now requiring that reserves be kept aside from specific purposes," says Alvin Wasserman, director of asset management at Fairfield Properties. "In some instances, you can't touch it without their permission, and you have to demonstrate that you're going to use the money for what it's earmarked. If, upon refinancing, the bank does its inspection [of your property] and notices that within a couple of years you're going to have to replace your windows, they might require that the co-op set aside money each year for that capital project." 

As for condos, Fannie Mae — a.k.a. the Federal National Mortgage Association, which securitizes most co-op loans and condo mortgages — "requires condominiums to have a capital plan or to put aside 10 percent of the monthly common charges for future work, as a backup in case of default," says accountant Stephen Beer, a partner at Czarnowski & Beer. "That's not required of co-ops as yet."

How do you create a plan and implement it? Read part 2 on Oct. 8 or just pick up the October issue of Habitat.

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