Capital Planning 101

So let’s talk capital planning. What is it, why should boards do it, and why do boards sometimes ignore it?

Boards have a fiduciary duty to understand the needs of the property they’re in charge of, and which projects have to be done over the next several years to maintain it. To do that, you retain an engineer to examine every capital component of your building, from the roof tank right down to the boiler, to determine their useful life. The report should contain the age and the type of equipment, the warranty, and what will need to be upgraded or replaced.

Does the study also lay out the finances that are going to be required each year?

Yes. It’s very important to do that, whether the work is going to be done all at once or over the next 3, 5 or even 10 years, and it’s the board’s responsibility to come up with finances to pay for it. Say you need $1 million worth of work over the next five years, and your mortgage is coming due in two. How much will you need to take out? Should you refinance a little bit earlier? What’s the prepayment penalty going to be? Do you set up a new line of credit against the mortgage, and should you do that now, since it can take three or four months and you might need the money in six months? There’s a lot to consider.

And that’s just with a mortgage refi. There are other ways to raise capital as well.

Right. You have to think about whether or not an assessment needs to be done. And there are other ancillary means to get additional money if you look closely at all the components of your building. For example, if you have a satellite dish on your roof, you could lease or sell the rights to a vendor.

How do you deal with a board that sticks its head in the sand and says it’s only going to look at what’s in front of it that year?

We explain that you have to look down the road at the big picture. If you address things on a year-to-year basis, costs can really escalate significantly. Exterior damage or deterioration issues might get worse. Let’s say there’s a leak into a sidewalk vault, and there’s steel that’s rusting. If you wait three to five years, it could get even more rusted out, and more work will need to be done to replace it. And of course there’s a safety issue.

Do you think the majority of boards are able to grasp this?

It’s surprising, but sometimes they don’t see capital planning as a necessity. When we take over a new property, it’s included in our fee, and we perform the useful-life study as part of our services. Each board member gets a copy of the report, and so does the property manager, the assistant, the financial analyst, the chief financial officer, everybody. It’s a tool we all work with on an annual basis, and we generally sit down two or three times a year to review it and re-prioritize, as needed. Sometimes priorities do change.