Can You Afford NOT to Have a Capital Plan?

Planning for capital expenses can be a touchy subject for co-op and condo boards. Many balk at the cost of hiring an engineer to thoroughly assess the physical condition of the building and its systems. Some prefer to rely on the building super for such assessments. Others, in a more head-in-the-sand approach, avoid planning altogether and wait until they’re forced to make repairs.

But the fiscal benefits of a capital plan are substantial enough that boards would do well not to put it off. Mortgage broker Patrick Niland, president of First Funding of New York and a former co-op board member, argues that, in fact, a board should view it as their obligation. “All co-ops and condos should have a capital plan, period,” Niland says. “A co-op board is running a corporation, and they have a fiduciary responsibility to manage that in a prudent fashion. If you were running a business, wouldn’t you be thinking about the condition of your roof, your plumbing, your elevators?”

A capital plan is grounded in a report on the condition of a building’s components, including exteriors, heating, cooling, plumbing and electrical systems, elevators, walkways, and fire escapes. As tools to help guide budget decisions and financial planning, these reports can vary in their degree of thoroughness, depending on what the board wants and is willing to spend.

Having that information in hand puts boards in a better position when they refinance their underlying mortgage. Boards should have an educated idea of how much they need to borrow so they don’t have to go right back to the bank and do it again, says Niland, who specializes in financing for co-ops and condos. “I can’t tell you how many buildings that are pinching pennies borrow too little, and then find out three years into their deal that they need to borrow more money to fix something,” Niland says.

Experts agree that most New York City boards do not do capital studies, usually because of the cost. And those that do try to plan ahead typically don’t hire an engineer, according to David Agoglia, a partner in the accounting firm of Prisand, Mellina, Unterlack & Co., which has more than 300 co-op and condo clients. “Boards usually work with their managing agent and resident manager to go through the building and determine what’s nearing replacement and what’s not,” he says.

Niland says that a competent managing agent, working with a competent super, can give the board a decent idea of building needs over the next five years, although he believes that hiring an engineer is preferable. “I usually lean heavily on the managing agents in situations where the board is being blind to this stuff,” he says. “Ask them, ‘When did you do your roof last, the boiler, elevators?’ They’re usually on top of that stuff.”

A self-managed building may also look to in-house expertise. About ten years ago, the board at the Piano Factory, a self-managed, 49-unit luxury co-op in Manhattan’s Hell’s Kitchen, tapped residents’ knowledge of architecture and construction, plus their long-term familiarity with the building, to form a finance committee tasked with estimating the remaining useful life of major building components. “They put together projections, with a ballpark estimate of replacement costs,” says Bonnie Reid Berkow, a resident who has been on and off the board over the last two decades. “We set the maintenance so there would be enough collected to cover the costs. It seems to be working.”

Berkow, a litigator at Wagner Berkow who represents co-ops and condos, adds, however, that she believes buildings without that in-house expertise should “have an outside engineer do a review of the major building components so they can supply a more accurate estimate.”

An engineer provides an impartial third-party opinion, has specific expertise in construction and restoration, and has more access to up-to-date information for developing accurate cost estimates than people outside the field, says David Chesky, senior vice president of the Falcon Group, an engineering and architecture firm. “A building super might not see a deficient condition because they don’t necessarily have a trained eye to do so,” Chesky says. For example, he explains, a super might not recognize that exposed rebar in a parking garage is a red flag for future failing concrete; or he might use binoculars to check for building facade problems 10 stories up.

Engineering studies vary in their level of detail. RAND Engineering & Architecture, for example, will conduct a straightforward “physical conditions survey” that simply predicts the lifespan and replacement cost of building components. The company also offers a much more thorough and far-reaching “capital reserve study,” which calculates how much a board needs to save annually to cover future capital needs, says Stephen Varone, the company president.

Varone says the price for a basic survey begins at about $10,000 for small properties and can run to well over $30,000 for large complexes. Adding the capital reserve study typically raises the cost by a minimum of $5,000, he says.Those numbers cause many boards to balk. But can those board afford NOT to have a capital plan?