Surprises Are a Part of Every Capital Project

How common is it for boards to be hit with surprises during capital projects?They’re not unusual, and they tend to pop up in the middle of projects. We have a prewar building with about 100 units on the Upper West Side that commenced a Local Law 11 facade project and discov-ered it had more steel issues and decora-tive terra-cotta issues than it originally envisioned. The project started out at about $400,000 but will end up some-where around $1.5 million to $2 million.That’s a big chunk of change.We considered spreading the repairs out and possibly doing the work in the future, but our analysis led to the conclusion that it would be most cost-effective to bite the bullet and address it all now. Soft costs – things like architectural engineering, bridging, and scaffolding – are such a signifi-cant part of these projects that com-ing back and doing it in phases didn’t make sense.What were the options to finance the project?There’s no magic bullet. There are basically two options for funding the project – taking on additional debt, imposing an assessment, or a combi-nation of the two. In the end, the build-ing chose a hybrid where it borrowed some and assessed for the rest. That decision came after we spent a lot of time analyzing the benefits and down-sides of the options. We also looked at our shareholder population and what would be best for them.What are the demographics in that building?Very mixed. There are people that bought at current market values and renovated, and a big assessment would not hurt their lifestyle. There’s another population of senior citizens and peo-ple who bought in the ‘80s. They have a very valuable asset in their apartments, but not an income stream, and they would have been really pinched.Were you also looking at the bigger financial picture?Yes. Increased debt means increased monthly maintenance. Whether you’re refinancing, taking a second mort-gage, or using a line of credit, you’re paying more interest to a bank. That goes into the operating budget, and it’s going to result in a maintenance increase. There’s often a direct corre-lation between maintenance costs and market value, so you have to analyze that, as well.Any words of advice for boards that get hit with a big surprise and have their backs against the wall?Boards tend to get so involved in the day-to-day issues of the project itself — the engineering details, how to organize it, where they can save money — that they forget about com-municating with the shareholders, which is really important. We’ve had open informational meetings where you bring the architect and do a PowerPoint presentation. You bring a piece of that steel or show them the cracks in the terra cotta so they understand what’s needed, and get their feedback on what they want. It’s incredibly effective.So there’s no one-size-fits-all solution when it comes to financing?Right. You have to be malleable and open in your thought processes. You need to analyze things based on exist-ing market conditions, interest rates, other capital needs you may have in the future. Changing times require different decisions.