Bricktionary

What is a capital plan and why is it important for NYC residential buildings?

By Emily Myers | December 16, 2021 - 9:30AM 

A capital plan is an evaluation of the building and its components. In the best case scenario, there’s also a strategy to pay for any repairs identified.

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Buying property in New York City involves a lot of forms and financial disclosures and it can often feel as if the scrutiny is very one sided—namely all the focus is on you, the buyer. However, it is just as important to do your research into the financial health of the building as it is for a co-op board to look at your financials. 

Before you put in an offer, you should be able to look at the proprietary lease, the house rules, the financial statement, and the offering plan. It’s unlikely you’ll be able to access the minutes of shareholder meetings but once you have an accepted offer, your attorney will be able to do so and that will give you the true flavor of how the building is run.

In the best case scenario your building will have a capital plan. This is an evaluation of your building’s mechanicals—the boiler, elevator, system sprinkler—as well as the facade and roof. The plan should identify the life left in those assets so the board can budget for their repair. 


[Editor's note: A previous version of this post was published in February 2019. We are presenting it with updated information for December 2021.]


Having a capital plan helps avoid emergency repairs. If you know the state of the roof, you’re more likely to have basic repairs and maintenance scheduled. When projects are done on an emergency basis, the cost can be between 40 or 50 percent higher than if they are planned, says Peter von Simson, CEO of New Bedford Management, a NYC property management company.

“With emergency repairs, there’s after-hours call-out charges, unexpected shutdowns, and it’s just more difficult to bid out the projects,” he says. That’s particularly relevant right now with contractors being so booked up and supply chain issues complicating repairs. 

Like anything, there’s a budget and premium option when it comes to capital plans. “You can hire an architect to do a true reserve study,” von Simson says. He says getting a licensed professional to assess the building will provide the most accurate information but it comes at a price—usually around $20,000 or $30,000, although for smaller buildings it might be closer to $15,000.

A budget option is a capital plan compiled for free by the property manager. They will check invoices, talk to the super, speak to the elevator or sprinkler system companies, for example, or take a look at the roof and get recommendations on the life expectancy of machinery or assess how long it might be before the facade needs repairs.

“They are not architects so it’s not something you could present to a bank for refinancing purposes, but they can get a pretty good idea,” von Simson says.

Digging for details on a capital plan

The capital plan gives shareholders important information about a building’s structural and financial needs. It is different from but related to a reserve fund. If the capital plan is an evaluation of the building’s parts, the reserve fund is the money available to make the repairs. Both are important. 

When you’re looking for clues as to whether a building has a capital plan, a buyer's attorney will generally ask the board what capital improvements are planned in the building. The city now requires buildings to meet various energy, gas, mold, and facade standards and a competent board will need to be aware of a building’s inspection timetable. An attorney will also be looking for clues as to how any repairs will be funded. 

Some co-ops have the opportunity to refinance their underlying mortgage to build up their reserve funds. Others rely on assessments. Bringing in a flip tax is another option. Some buildings have a hybrid of strategies.

For buyers seeking new, larger conforming loans in 2021, condos are going to be required to have 10 percent of their operating costs set aside for repairs and this recent rule change by Fannie Mae goes as far as preventing buyers from purchasing in buildings with reserve funds under this amount or where repairs have been deferred or unsafe conditions have been identified. 

The best type of capital plan has been developed with the oversight of an engineer, Steven Hafif says, an attorney with Abrams, Garfinkel, Margolis Bergson. However, not seeing references to a capital plan in the board minutes isn't necessarily a red flag. Some buildings might keep the information in their heads without having anything formally written down, Hafif says.

"The board minutes are not a full picture of what’s been going on," Hafif says. He points out that if there is a long-term capital plan, attorneys are generally not given access to it.

That's consistent with von Simson's experience. He says boards would be unlikely to show the capital plan to a closing lawyer. "You want to have transparency—that said it is not 100 percent accurate. It’s a good working document but it’s full of assumptions and anecdotes. It’s not something they’d send out," he says. 

Transparency helps everyone

It's savvy for property managers to prepare a capital plan in order to protect their relationship with the board. When New Bedford Management transfers into buildings, von Simson says a long term plan helps draw a line in the sand so the board members and shareholders are not surprised if there’s a failure in one of their systems.

The preparation of a capital plan helps with the financing of projects, von Simson says. If repairs are going to be $30,000 over the next 10 years, that transparency ahead of time gives people more options in terms of handling the cost, he says.

As for the board, having this kind of information is extremely important. It gives you information for the future.

“When the selection of a contractor is finally made, it is memorialized and then future boards, unit owners, shareholders, if they have questions about how this contractor was selected or what the scope was, it’s very easy for it to be shared,” von Simpson says. 

 

Emily Myers

Senior Writer/Podcast Producer

Emily Myers is a senior writer, podcast host, and producer at Brick Underground. She studied journalism at the University of the Arts, London, and graduated with a MA Honors degree in English Literature from the University of Edinburgh.

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