How Not To Be Caught Off Guard By Costly Building Repairs
The coronavirus has the commercial real estate sector focused on the short term. For more than a year, business leaders have been seeking answers to questions such as: Will tenants finally return to offices next quarter? Will more residents be able to pay their rents next month?
An unprecedented disruption like the pandemic will do that, but now isn't the time to ignore the bigger picture, architectural and structural engineering firm Klein & Hoffman warned, particularly when it concerns potentially expensive capital repairs.
In the multifamily arena, a capital reserve study helps a condo board determine whether the association has adequate reserves to cover the costs of major repairs. Klein & Hoffman principal and President Peter J. Power said that this high-level overview of key building components provides a snapshot of the condition and anticipated remaining useful life of the facade, HVAC and other building components.
“The study is a tool for budgeting and financial planning," he said. "It provides a 20-year outlook for when the association should reasonably schedule assessments and budget expenditures."
Twenty years might sound like a long time, but Power said that this exercise shouldn’t be daunting if a condo association is committed to performing a capital reserve study and updating it every three to five years. But if they have been lax, they could be surprised with expensive repair projects.
This isn't a rare occurrence, he said, for condo boards whose members typically have little or no experience in building architectural, structural or operational systems and maintenance. The problem is compounded when the association not only has a poor handle on the condition of its building but also hasn’t saved enough money to pay for repairs.
“It's kind of like the deer in the headlights,” Power said of boards when they learn a building requires major repairs. “They weren't even aware of something even though it is on the immediate horizon.”
Caitlin Maggiano, a senior associate at Klein & Hoffman’s Philadelphia office, said her firm prioritizes educating board members who might never have thought about a reserve study and related issues.
“A lot of people who move into condos don't fully understand that they are actually buying a house within a much larger house — and that they play a part in maintaining that larger house,” she said. “We often have to educate the boards and even the community members about what a reserve study is and how it's going to benefit them and their community.”
Maggiano said that the first stage of a capital reserve study is a physical assessment and analysis of the state of a building’s common elements, including its site components, exterior building walls and roof, interior finishes, and mechanical, electrical and plumbing equipment. The first stage aims to determine which systems will need repairs and/or replacement and when, and then estimate how much those programs will cost.
The second part of the study looks at whether the building’s capital reserves are capable of paying for any issues that come to light during the physical analysis.
“Every condo association should have a reserve fund, which is basically a savings account to fund future repair and/or replacement projects,” Maggiano said. “We analyze how much money they're putting away every year, and then compare that to the projected projects and how much those are estimated to cost. It's often a very telling exercise.”
There is no rule of thumb about how much money a condo association should be saving to maintain its property in a serviceable condition. That will depend on the size of the condo community, the age and idiosyncrasies of the building, and the board’s comfort level for hiking annual contributions and assessments.
“The ultimate goal is to provide enough budgetary allowance so that you're not hit with unexpected expenditures and that you've built your reserves up,” Power said. “It will vary by building.”
A condo association that delays conducting a reserve study may find itself suddenly confronted with several high-priority repair jobs. Even if the association had been diligent about contributing to its reserve fund, few buildings can afford to perform simultaneous capital repairs to common areas.
“In those cases, you have to take a step back and admit it's not technically possible to do five or six capital projects all at once,” Power said. “If they're all a priority, you can use the reserve study as a tool and start to create a five-year capital plan that will go into much more detail on the most urgent priorities.”
Maggiano said that recently she is seeing an additional motivation to perform a capital reserve study.
“Lately banks seem to be requiring associations to not only have an up-to-date reserve study but, in light of recent events, structural assessments if they are seeking a loan to perform projects,” she said. “They want to see that the associations are doing their due diligence in funding and maintaining their property before they give them additional money to complete projects.”
This article was produced in collaboration between Studio B and Klein & Hoffman. Bisnow news staff was not involved in the production of this content.
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