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

Working out a building's long term financial health is important—but as a buyer you're left to read between the lines. 

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2019
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Buying property in NYC involves lots of paperwork and financial scrutiny. It might feel as though you’re the one disclosing all your personal details but it’s just as important to do your research into the financial health of the building you want to buy into.

When Dede George (a pseudonym) became a shareholder of a co-op in Manhattan, her attorney was able to review the financial statements and the minutes of two years of board meetings before she made the purchase. She concluded the building was in good shape but quickly realized her mistakeShe was shocked to find out the building did not have a capital plan.

A capital improvement plan, or capital plan, is an evaluation of the building’s assets—the elevator, boiler, sprinkler system, facade, roof—which gives shareholders important information about its structural and financial needs. When George’s co-op building finally pulled together a capital plan, she says over $250,000 in emergency repairs were needed.

When projects are being 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, so it’s going to cost you more money,” he says.

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,” says Von Simson. 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,” says Von Simson.

Digging for details on a capital plan

A buyer's attorney will generally ask the board what capital improvements are planned in the building. 

"It’s the better run, better financed ones that take on a plan with an engineer," says Steven Hafif, an attorney with Abrams, Garfinkel, Margolis Bergson"Others might keep the information in their heads without having anything formally written down," he says. So not seeing references to a capital plan in the board minutes isn't necessarily a red flag.

"The board minutes are not a full picture of what’s been going on," says Hafif. He says 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. 

A buyer will also get access to the building's financial statements. "What you generally see is that the board has not done a long term study," says Hafif.

It falls to the attorney to read between the lines. "The question is whether the board adopted the capital improvement plan and agreed to make improvements," says Elise Kessler, an attorney with Braverman Greenspun

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 $20,000 over the next 10 years, that transparency ahead of time gives people way more options" in terms of handling the cost. 

As for the board, "having this kind of information is extremely important and as the cost of the apartments goes higher, the scrutiny is only going to get more, not less," says Von Simson.