Condo Capital Improvements: Lending Solutions for Condominium and Co-op Boards

Capital improvement projects are often a costly necessity for boards and owners of multifamily residential buildings and apartment complexes. How to finance those capital improvements can be an intimidating thought to consider, especially when estimated project costs are in the six to seven figure range.

If your property’s reserve funds aren’t enough to cover the capital expense, many boards resort to imposing a special assessment. Typically, a special assessment requires all unit owners or shareholders to make an unscheduled, one-time payment to the association. Some associations will require payment in full while others offer installment plans spread out over months or even years. While this strategy is the answer to avoid incurring debt, a special assessment can cause financial hardship on owners who can’t afford a large payment.

An alternative option is to take out a loan. Unlike a special assessment, a loan provides immediate access to the full amount needed to complete the capital improvement. With interest rates at historic lows and a competitive banking landscape driving down the cost of capital, this type of financing is an attractive funding strategy to cover capital expenses.

Boards and owners who partner with FirstService Residential have access to FirstService Financial, an affiliated team of lending, banking and cash management professionals. Over the past 20 years, FirstService Financial has customized a wide range of loans for FirstService Residential managed properties across the United States. In the New York region, the team has successfully facilitated more than $1.2 billion in lending for capital improvement projects, major repairs and large, unforeseen expenses.

The following success stories illustrate how FirstService Residential and FirstService Financial work in tandem to help our clients successfully finance capital improvement projects and save money on projected costs without compromising the quality of rendered services.
 

Boiler and Cooling Tower Replacement at Brooklyn Co-op Building

FirstService Residential recently assumed management of a luxury co-op building in Brooklyn. The property comprises 158 residences with a 24/7 concierge, an outdoor heated pool, laundry facilities, and on-site parking. Under previous management, the board was unable to resolve ongoing issues with the building’s boiler system and invested in costly band aid repairs rather than a permanent solution.

FirstService Residential leveraged its broad network of experts to help the board investigate and identify the root cause of the breakdown and eliminate unnecessary expenditures on repairs. This included FirstService Energy, which investigated all mechanical components of the building and conducted a thorough energy review to assess compliance with environmental regulations imposed by New York City under the Climate Mobilization Act. FirstService Project Management, a sister company that serves as board representative for capital improvement projects, facilitated all communication between the board and third-party vendors to ensure the project would be completed on-time, on-budget, and fully within the proposed scope of work.

Following a series of discovery meetings and review of the feasibility study, the board decided to replace the gas-fired steam boiler with a high-efficiency condensing boiler and to replace the existing absorption chiller with an electric chiller. Together, these systems are projected to deliver cumulative energy cost savings in excess of $1.65 million over the next several decades.

With the help of FirstService Financial, the board opted to secure a new first mortgage of $7.5 million and a $1 million line of credit. The new first mortgage will generate approximately $4 million in proceeds to fully finance the project. The line of credit was set aside as a reserve in the event of cost overruns. Throughout the underwriting and approval process, FirstService Financial routinely provided the board with updates to ensure that the loan was executed with care and on schedule.

“The board was extremely pleased with the level of service and final debt product we were able to arrange,” said FirstService Financial’s Vice President of Lending & Cash Management Jordan Muchnick. “After loan closing, several of the board members personally expressed their gratitude for helping them through this process.
 

Multi-Phase Capital Improvements and Building Upgrade for a Queens Co-op

In an effort to modernize a century-old 108 unit co-op property in Kew Gardens, Queens, the board assembled a long punch list of capital improvements including roof, façade and window replacements, elevator upgrades, rehabilitation of the existing steam system and the installation of photovoltaic solar panels to improve the building’s energy performance.

To complete the project, estimated project costs were approximately $2.5 million, a sum that would certainly overstress the board’s existing reserve funds. FirstService Residential coordinated several discovery meetings with the board and FirstService Financial to identify the best alternative funding solution for the capital expenses.

FirstService Financial reviewed various fiscal scenarios and determined that the board could refinance its mortgage, which was expiring within 12 months, at an interest rate of 3.5%. The negotiated 10-year loan had an improved fixed interest rate of 2.99%. That loan was approved within seven days of submission to the lending institution.

By refinancing, net cash proceeds yielded approximately $3 million. These surplus funds were placed into FDIC-insured money market accounts and CDs at preferred interest rates that are anticipated to generate an additional $22,000 annually for the co-op’s reserve fund.

As an added bonus, FirstService Financial successfully negotiated a new $500,000 line of credit that could be used for future capital projects or unforeseen expenses. As a result, the board does not anticipate the need to levy a special assessment or a major increase in existing maintenance fees.
 

FirstService Financial: Creating Value One Project at a Time

With over $4.3 billion in administered funds and a portfolio of more than 7,000 multifamily residential properties, FirstService Financial leverages its access to competitive borrowing rates generally reserved for the country’s largest enterprise corporations. The New York-based team also facilitates account opening, high-level accounting processes, reserve fund management and investment strategies.

For more information about how FirstService Financial can help your board finance large-scale capital improvement projects or improve the management of existing funds, contact FirstService Residential today.