Cost and Liability Shouldn't Short-Circuit Long-Range Planning

Mortgage broker Patrick Niland, president of First Funding of New York and a former co-op board member, feels strongly about the importance of long-range planning for capital projects. “All co-ops and condos should have a capital plan, period,” he says. 

Yet many co-op and condo boards balk at developing these long-range check lists, for a variety of reasons. One is financial – since a capital plan can cost up to $30,000 for an engineer’s thorough assessment of a building’s systems and ways to pay for their repair or replacement. Another barrier is legal liability – since awareness of the condition of building systems might open the board to lawsuits in the event that an unaddressed building deficiency led to personal injury or financial loss. In such cases, knowledge could become the basis for a charge of negligence. 

A case currently pending in state Supreme Court appears to take this tack. Filed last July by unit-owners at the Walton Condominium in lower Manhattan, the suit cites an engineering report conducted in 2016 that recommended specific steps to strengthen the roof’s load capacity. The suit accuses the board and the managing agent of negligence (among other claims) for not following those recommendations in their entirety, and for taking actions that the plaintiffs claim damaged penthouse terraces. 

Bruce Cholst, an attorney at Anderson Kill, says another scenario might involve a recent purchaser who, angered by getting hit by an assessment for a major repair, points to the capital plan as having failed to mention the deficiency, and sues for fraudulent concealment. 

In order to avoid that vulnerability, Cholst says, “instead of putting something in writing, boards will sometimes consult with an engineer informally, asking, ‘What do you think really requires our attention?’” 

Another way to minimize liability is to keep it out of the financial statements. Auditing principles, as specified by the Financial Accounting Standards Board, require capital studies to be included as supplementary information to basic financial statements. But because of liability concerns, in New York most boards that conduct such studies do not present them as supplemental data to the financial statements, according to David Agoglia, a partner in the accounting firm of Prisand, Mellina, Unterlack & Co. He notes that his firm does encourage boards to undertake capital studies – but to then keep the study at the board level as a planning tool, never officially adopting it for any purpose. “We advise against promulgating it with the annual financial report,” he says. 

Investing in such a study can be especially worthwhile for condominiums that have owners or purchasers who need access to Fannie Mae or Federal Housing Administration financing, says Orest Tomaselli, the owner of National Condo Advisors. The company helps boards comply with mortgage guidelines, such as the requirement that condominiums set aside 10 percent of yearly common charges for future repairs and replacement of common elements. That set-aside must be ongoing for as long as the condominium wants access to such financing. 

Co-ops may also be required to set money aside for repairs if they’re applying for a loan backed by Fannie Mae or Freddie Mac. As part of the underwriting process, the lender must order an engineering report that looks ahead 10 years. “If there’s any deferred maintenance, they might require an escrow fund to pay for it,” says Niland, the mortgage broker. “Or they may require that a certain amount is put aside every month as a condition of the loan.” 

But even if a capital plan is not required by a lender, the question co-op and condo boards may want to ask is: can we afford not to have one?