Daniel Wollman, Chief Executive Officer, Gumley Haft
When it comes to creating a working budget, there’s no such thing as too much planning. Boards that don’t keep a close eye on their money can end up deep in debt, and getting out of the hole often requires strong medicine, which was the case at one of your buildings.
We took over a building about a year ago whose finances weren’t in dire straits but were very problematic. We looked at three years of audited financial statements and at their prior budgets to see where they overspent. What we found was that they had dipped into their reserve fund from time to time to pay certain expenses. They were operating the building at a significant deficit, and they had piled up several hundred thousand dollars of unpaid bills. While they did have a sizable reserve fund, they were planning on doing a significant facade project, and we weren’t clear whether there was going to be enough money to fund it.
So you had to come up with a plan of action.
That’s correct. We spent a lot of time reviewing all the financial data. We created a more realistic budget, and then we worked with the board in creating a four-month assessment, which was intended to pay all of the unpaid invoices and allow us to create an escrow fund for certain expenses. At this building, the insurance is about $100,000 a year, so each month we put aside about $8,000 so that when the bill comes in, we’re able to pay it, and we don’t have to drain the operating account. In addition to insurance, the assessment also lets us self-fund for workers’ compensation and water and sewer. By self-funding those accounts, it helped us even out the cash flow.
And what about the facade program? How did you budget for that?
They were finishing up a Local Law 11 project, and the building was filed as safe with repairs and maintenance. But there were several items that still needed to be completed, and one or two of those items were of significant dollar value. We met with the board and told them that instead of spending $600,000 or $700,000 on doing this, it might be appropriate at this time to really take a deeper dive to determine whether or not there are any other things that need to be done. We engaged an engineering firm and spent a fair amount of time examining the building, and we developed with the board a much larger capital program.
Why was it necessary to do that?
This is a building with some special facade issues. Up at the cornice level, which is right at the roof level, there is a large band of terra cotta, and that band consists of seven different decorative pieces of terra cotta stacked one on top of the other. Most of that had to come off the building in order to do some waterproofing behind it. We’re now working with an architect and another firm to help design a system that will be less expensive than putting back the original terra cotta.
What are your options?
Some of the value engineering is still taking place. We looked at replacing the cornice with some railings and big glass panels at the top of the building. We looked at a panel system that has what looks like the seven pieces of terra cotta precast into these panels, which would have been suspended through an anchoring system. Right now, we’re looking at a GFRC, or glass fiber reinforced concrete, which is a lighter weight material that looks like terra cotta and lasts 50 years or so but is a less expensive alternative.
You mentioned value engineering. Are you taking that approach with other issues the building has to address?
We went ahead by looking at preventative work, because this is a way to save money by not having to remobilize and start work all over again. Let’s say you’re working on the north side of a building and are setting up a sidewalk bridge and putting up scaffolding. It could cost several hundred thousand dollars just to get to the needed location to do the work. Mobilization costs, especially nowadays with site safety plans, is extremely expensive. So one of the things that we’re doing at this building is putting together as much work as possible in a single project rather than having to remobilize the building more than once.
What is the takeaway here for other boards?
Having accurate budgeting is super important. You need to develop a budget that will operate the building on a daily basis and maybe have a little bit leftover at the end, but certainly be close to a breakeven budget. Then you need to plan for the future. You need to be able to design a capital program, maybe five years out, and figure out how you’re going to fund it. Budgeting correctly is probably the single most important thing that you can do.