For property managers, problems range from one-offs to chronic. Can you talk about a chronic problem you’ve encountered recently?
It happened at a three-building, 46-unit garden apartment complex in Roslyn, Long Island, that was built in 1954. So it’s almost as old as I am, which is old.
Which is ancient, right?
Well, it’s 67 years old. And over the years, the heating system has deteriorated to the point where all of the steel piping that delivers heat to the units is pretty much rotted or starting to rot and causing a major problem every winter. In 2018, in anticipation of having to do some kind of a replacement of this heating system, the sponsor, who was then the manager, refinanced the mortgage with National Cooperative Bank. He took out some extra money, about $800,000, and also took out a line of credit – not knowing what the exact cost was going to be, but knowing that there was a major project coming up.
Was the problem the piping underground that went from the boilers to the three buildings? Or was it within the buildings? Or was it the boilers?
All of the above. One building had all six boilers with a heat tunnel piping the heat underground to the buildings and into the risers, which delivered heat to the individual apartments. We needed to re-engineer how to put in new boilers and run new piping to all the buildings that would not rot. So the board and our management team and an engineer came up with a plan.
The solution was to put two boilers in each of the three buildings, as opposed to one central heating plant, and abandon the old piping. What wasn’t anticipated was what would have to be done in each apartment for the risers. It was determined that it would be best to do all the apartment work in one shot rather than spread it out over several years. The boilers cost $817,000, and then opening and closing the Sheetrock in every unit to allow for the new risers to be installed ran another $290,000.
So over a million dollars.
Then they brought me in to look at the finances and see how to pay for this. It was apparent that they were going to be short. So I proposed a couple of assessment scenarios where they could pay back the line of credit over a few years and still have money in reserve for other things that may come up. After reviewing a bunch of proposals and spreadsheets that I put together, they came up with a $225,000 assessment for three years, and that would enable them to pay $75,000 a year to the reserve fund and have something for a rainy day.
This board attacked this chronic problem by fixing it once, fixing it right and being done with it for a long, long time. Right?
You’re hearing that 100% correctly. And you know, there was a time when they were a little unnerved by the riser part. They thought maybe they could get away with not doing it, maybe put it off a couple of years. But we determined that by attacking it now, they were going to save money on their operating budget – because every heating season, there would be massive leaks in the system, and the system wouldn’t be dependable. So between those savings and some of the energy savings from the new boilers, we felt that they really needed to bite the bullet, which they did. And we’re in the process of putting out a letter about the assessment right now, waiting for a little bit of pushback. But I think it’s the best solution to a longstanding problem.