An effective approach to capital improvements.

Preparing for the new millennium in the modern real estate marketplace mandates that owners have a comprehensive capital improvement and repair plan for buildings and machinery.

Modern buildings, constructed of steel, bricks, and mortar, face constant expansion and contraction over different seasons that can literally tear a structure apart.

The advent of Local Law 10 in New York City and its latest revisions has forced building owners and management boards to address the exterior shell of buildings. However, in the absence of similar required inspections for mechanical systems, such as water and heating/cooling units, many buildings have deteriorated to an alarming degree.

No real estate topic generates an atmosphere of fear, loathing and suspicion as much as capital repairs. Is it possible to repair an older building without major disruptions? The answer is yes, but to achieve it a board must be realistic and have a long term view of evaluation expenditures.

Most buildings are constructed as speculative ventures and are subject to intense value engineering, a fancy term for cost cutting, during the design and construction process. The aging mechanical equipment may continue to work for years, but without the levels of sophistication and redundancy necessary to be economical over the long term for owners. As a rental property, a building may have received only the minimal amount of preventive maintenance.

How does a board address these issues in an effective and economical fashion? The first step is to perform a complete analysis of all the structural and mechanical systems. A thorough analysis should include data from the architect, engineer, managing agent, superintendent and resident shareholders. Everyday users of the building and the managing agent will know about water damage on the walls and poor water pressure in showers. Superintendents will know what mechanical systems are being nursed far beyond their usefulness and what shareholders complain about most.

The superintendent can be the most cost-effective part of any comprehensive repair plan. The equipment will last for its entire design life and then some if he is properly trained to care for it. However, he shouldn't be expected to maintain complicated and expensive machinery requiring specialized knowledge in lieu of an appropriate service vendor.

The typical Local Law 10 analysis is often limited to a simple visual inspection that may not reveal all problem areas requiring attention. Many young buildings have serious problems due to untested construction methods and material used to reduce the initial cost of the building and/or to achieve a desired aesthetic effect. When it comes to mechanical systems, the inspection failures are much more obvious to all who live in the building. Complaints range from knocking pipes, drain overflows and poor water pressure to inadequate heating and/or cooling. Yet surprisingly, these problems are often written off with an explanation that nothing can be done. Inadequate maintenance or a poor understanding of the technical aspect of a mechanical system can only lead to more costly problems. Owners and management staff need to be aware that routine overhauls to some systems are a preventative measure.

A board and management team should also be aware of "trends" in the building. If plumbing leaks are the rule and not the exception, it might be time to consider wholesale pipe replacement. In many instances, in an attempt to fix a dysfunctional system, additional components and control systems are installed instead of repairing the existing components. A mechanical engineer should be retained to review all mechanical systems and run tests of the components.

In many older buildings, the cooling capacity of an absorption unit is modest, even when all systems are working properly. Therefore, it becomes paramount that these systems be properly maintained. The place to start when the inadequate cooling complaints come in from residents is to review the maintenance protocol of the distribution system - before analyzing the main equipment. The building staff should disassemble every fan coil unit and thoroughly clean and replace all defective parts. It is not enough to simply change filters.

In one 30-year-old building owned by a client, our company discovered that every fan was totally encased in lint and dirt and consequently moved no air. When the fan motor housing was removed, the equivalent of 30 years of dryer lint stretched across the entire back of the coil. These two items effectively prevented any air from passing over the coils to produce cooling. The condensate fans were also rusted to the point that steel debris was flowing down the condensate return piping system. The entire system was snaked and cleaned. The system was restored to proper working order and a maintenance schedule was established for the building superintendent. The overflow problem was solved and the building owners were not required to spend close to $500,000 to replace fan coils.

Another way to preserve equipment is to include the main equipment and all peripheral equipment in a service contract. Quite often the cooling tower is not under any service contract. The care of the tower is not limited to cleaning; attention should be given to fan motors, valves, and water treatment. Superintendents should be aware of when to replace parts. The peripheral equipment in the boiler room consists of pumps, valves and gauges, all of which must be operational.

The pumps are the heart of the building's operation and can be the cause of many problems. Many older buildings were constructed with low speed, high volume pumps. These pumps move large quantities of water with a minimum of vibration. In many instances, however, pumps are replaced with high-speed, low-volume units that vibrate and are noisy. Proper adjustments and re-engineering can resolve vibration and noise problems when new pumps are installed. Renovating the distribution systems and the peripheral equipment can be an expensive exercise, but it is less expensive than the cost of a new A/C machine, which is in the neighborhood of $400,000 to $500,000 and may never operate as designed.

A cost schedule should be developed that includes estimates for labor and materials from contractors, fees for professionals, and increased payroll expenses - either in the form of overtime or temporary workers. The chances are that the total value of the repairs will far exceed the building's ability to pay for it in one or two years. Architects and engineers can include the repairs into a multi-year repair plan.

In order to be successful, a multi-year repair plan needs to identify every repair necessary. Even if you think the budget will not be able to cover the expense of a particular repair, ask that the bids contain this work as an alternate; you can always add it to the budget later. Ask the architect or engineer the ramifications of not doing the repair. Will you wind up throwing away "today's" repair in order to carry out next year's repair. The end result of the exercise is that the board will have a detailed understanding of all the facts, which usually leads to the best decisions.

When architects, engineers and even contractors are told to "just fix what is necessary because the funds are not available," the results rarely have long-term value. Because they do not want to be perceived as pushing you to spend more than you want, architects and engineers sometimes practice a form of self censorship that is of no benefit to the board. Owners shouldn't pre-determine the outcome of the investigation by asking professionals and contractors to report what some people only want to hear. Not knowing about a particular problem often means repairs at a later date, probably at an increased cost. Knowledge is the best route to getting the right job and the exchange of information, opinion, and ideas between the board, managing agent, superintendent and professionals should be encouraged.

These conclusions come after seeing many of our clients increase their mortgages and re-assess repairs, only to find out they must do major projects over again. The result of this is poorly repaired buildings, despondent and suspicious boards, depressed apartment values and unhappy shareholders.

The best way to fund these projects is to initiate a permanent monthly contribution dedicated to repair and replacement, as this method affords the most stability for the expectations of the shareholders. Shareholders object most to frequent and/or short notice changes to the financial obligations imposed by the building. A maintenance increase to replace the reserve allows shareholders to plan their own shelter expenses with greater accuracy.

Buildings that successfully find way to get the best performance out of mechanical systems and are able to coordinate the efforts of the staff, managing agent and building professionals will welcome the new millennium.

(Eric Kornfeld, an executive vice president of Heron Ltd., is also a registered architect with experience in the design and construction of commercial and residential high-rises, hospitals, corporate interiors and single-family homes).