Repair/Replacement Studies & Funding

CPAs are required to disclose whether studies of future repairs and replacements have been performed, and whether a plan is in place to fund this work.  Most co-ops & condos do not do these studies, instead including boilerplate disclaimers like this one (from an actual audit) in their financial statements:

“[The building] has not conducted a study to determine the remaining useful lives of building systems & current estimates of costs of major repairs & replacements that may be required in the future.  The Board has not developed a plan to fund those needs.  When replacement funds are needed to meet future needs for repair & replacement, [the building] has the right to use available funds, to increase regular assessments, to make special assessments, or to delay major repairs & replacements until funds are available.  The effect on future assessments has not been determined at this time.”

In plain language, here’s what Boards that avoid studies are telling their owners:

“We’ve decided NOT to plan for major capital expenditures.  We choose NOT to have experts review our physical plant & infrastructure in order to advise us what necessary work we should expect, when it will likely be needed, and what it will likely cost.

As a result, we’ve NOT set aside money to prepare for these major expenses, nor do we plan to do so.  You may therefore be periodically surprised by demands—which may be both large & sudden—for additional funds.”

CNYC—the Council of New York Co-ops & Condos—advises against conducting comprehensive capital studies (ostensibly because of concern for fiduciary liability).  ACCO believes that CNYC is an outstanding organization which has helped countless Boards & Board members to excel at their tasks.  However, we think this particular, widespread policy does a serious disservice to all owners.  (Note: if your building conducts such studies and shares the results, congratulations to you & kudos to your Board.)

Owners tend to view their monthly maintenance/common charges as their entire fiscal burden, & are often shocked on receiving an assessment to cover emergencies or future repairs.  Beyond the fact that emergency work always costs more than planned work, failure to perform & disclose capital studies & spending plans causes problems in expectations and comparability.  Some buildings don’t want to perform studies because of competitive issues with buildings that don’t.  However, if ALL co-ops & condos performed studies, there would be no competitive issue.  Apartment buyers could make more objective comparisons & better purchase decisions; current owners could better plan & manage their finances.

Decades of practice have caused this “bad habit” to replace common sense.  Most owners are so accustomed to seeing the audit disclaimer that they don’t even think to ask questions about physical plant condition & planning.

Other states successfully require that buildings perform such capital studies on a regular basis, & disclose in their financial statements specific plans to fund the indicated repairs & replacements.  We’d like to see such a requirement in NY, for the protection of all owners…together with enforcement to give it “teeth.”

>> Read board member dialogue:  Engineering Studies: Habitat online Jan/Feb ’11

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