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Tightening Your Belt
Habitat Magazine, March 2006 Feature - Budgets
Where to start, the steps you can take, the little things to remember. From your light bulbs to real estate assessments, Habitat’s key tips to saving money for a rainy (or even sunny) day.

By Leslie Jay

The key to saving money is remembering that if you don’t invest the time, you won’t make a dime.

Last May, when a 75-foot high retaining wall came tumbling down onto a stretch of Riverside Drive in Washington Heights, no one said, “I told you so.” But they could have. The wall, on 183rd Street just north of the George Washington Bridge, is the responsibility of Castle Village, an over-300-unit cooperative that sits nearby. Although the facts are in dispute – and the board won’t talk, citing pending litigation – some say the co-op was getting ready to make repairs on the wall, hoping to shore it up and avoid the sort of accident that finally occurred. “They just waited too long,” observes someone familiar with the board. “Time ran out.”

Emergency repairs – as anyone who has done them can tell you – are inherently costly: their urgency complicates any effort to put together specs and scout around for a good deal (Castle Village’s estimated post-crisis repair bill is in the millions), and craftsmanship, partly because of the necessary speed of the work, can be less than stellar. Nonetheless, many buildings routinely flirt with disaster by putting off today what they can do tomorrow. That’s no way to save money, however, and, in a world of ever-increasing prices, saving money is essential. The bad news? Most main-line items are not controllable; oil, gas, staff salaries, insurance, and taxes are all out of reach. So a savvy board has to look elsewhere.

Clinging to Power
Where do you begin? Start with a thorough examination of what you spend per month. All the experts agree that you can’t contain costs if you don’t know what they are. “[A property] requires constant monitoring,” observes Douglas Condon, a Brooklyn-based accountant who works with small to mid-size buildings and lives in a co-op himself. “The problem is, in a small building, tenant-shareholders don’t have an agent, and they don’t have the time and wherewithal to do it themselves. And in a mid-size building, people have a managing agent, and they think he’s doing it.”

That’s a mistake. With a standard spreadsheet program, almost anyone can calculate what the building has laid out, and demonstrate the long-term impact of choosing new products or suppliers. Intensive oversight will also help the building catch sudden price spikes. Here are some areas where you can contain costs:

Light bulbs. The first place to look is the fuel bill. Typically, a property’s biggest controllable expense is energy consumption, says Ira Marcus, manager of corporate facility operations for a major U.S. company based in Illinois. Buildings that haven’t already addressed lighting will find it a relatively easy target. “Switch incandescent bulbs to compact fluorescent ones,” Marcus suggests. Compact fluorescent bulbs are more expensive, but they last longer and provide illumination at a fraction of the price of incandescent bulbs.

The heating system. Tuning the heating system holds the promise of greater rewards. But the process may be complicated. Lewis Kobak, general manager of the Brigham Park Cooperative, a six-building, 324-unit complex in Sheepshead Bay, Brooklyn, pays close attention to indoor mercury readings.

“In many buildings, the temperature is controlled by an outside thermostat,” he says. “People run the boilers full blast without monitoring the inside temperature.” Instead, he lets apartment temperatures fall a few degrees from 10 P.M. to 6 A.M., as permitted by New York law – a move that makes a significant dent in fuel bills over the seven-month heating season. Many residents don’t mind, but beware: there will always be some people who say they’re too cold and some who say they’re too hot. Kobak has concluded that appealing to shareholders themselves to monitor the heat in their apartments is futile, unless they’re getting individually metered bills. Kobak also keeps tabs on prices for gas (adjusted monthly), and oil (adjusted daily). Because Brigham Park has a dual-fuel system, it can burn whichever is cheaper. As a rule, that means gas. “If the difference is less than ten cents a gallon, you’re better off using gas,” Kobak says. “It’s a cleaner fuel, so there’s less maintenance.”

Properties that rely exclusively on oil can insulate themselves from sticker shock by shopping around at the end of each year and locking in a price, although it’s conceivable that they could be stuck if there’s an oversupply.

For further gains, buildings should make sure that the heating plant is operating efficiently. A professional energy audit will identify ways to improve the system and the structural envelope, so money won’t go out the window. The drawback? While upgrades in this area do eventually pay for themselves, the outlay for them can be significant.

Doing the Building’s Bidding
As the old saying goes, an ounce of prevention is worth a pound of cure. But relatively few properties perform preventive maintenance. “They have a tendency not to do the improvements and maintenance they need, which pushes fuel bills and repair bills higher,” observes Condon. “Small things fall through the cracks and become big things.”

Ongoing maintenance will only go so far, however. Every element of the property, from the windows to the wiring, has a finite lifespan; as Castle Village learned, replacements should be installed before the originals break down and cause widespread damage. “It’s really important to be proactive,” insists Kobak. “It’s no surprise when a 30-year-old boiler has problems. Always look ahead at least five years.”

When you need to bid out a job, prepare yourself for legwork. “Do your research up front,” says Marcus, the corporate facility manager. “Identify the scope of work in the contract. Find out what similar projects cost at other properties.” Talk to co-op and condo groups, which have members who have gone through the same process. Industry trade associations may be excellent resources, too; many publish brochures or post information on their websites. (For an especially big project, buildings might want to hire an independent consultant to develop specs.) Use identical specifications to get quotes from three reputable firms, and (generally) reject bids at either extreme of the scale. If repairmen are working for an hourly fee, keep a log book, so you can verify their hours.

Before you sign a major contract, show it to your lawyer, or a professional facilities manager, or both. Do not proceed on the basis of an oral agreement, warns Marcus, who adds: “Be sure to get a certificate of insurance before letting people do work. The association should be named as insured on the certificate, and coverage should be in an amount that’s appropriate for the project.”

If you’re financing the work out of pocket, collect a special assessment for capital improvements and deposit it in a separate account; otherwise the money may be counted as income. Document the assessment and the project in the building’s minutes, and spend the funds only on the repairs that are listed. “Depreciation opportunities are shrinking,” explains Condon. “The big thing with the government is documenting what you do.”

But remember: as you improve the property, real estate values rise – and so do real estate assessments. Nonetheless, many buildings seek, and win, tax reductions. “Seeing your real estate value go up – there’s a cost to that,” notes Mark Hoffman, principal of Manhattan-based Hoffman Management, which oversees 5,000 residential units. “Every year, we challenge our real estate tax bill.” He keeps funds from draining in another way – by controlling water use. “We check for leaks, track consumption through meters, and change toilets to low-flush models.”

Making Personnel Efforts
To control labor expenses, “You have to limit overtime,” says Hoffman. Surprisingly, when it comes to payrolls, more can cost less. Hoffman and other building professionals recommend the counterintuitive step of hiring temporary workers to provide coverage during holidays and vacations, instead of giving extra hours to staffers at time-and-a-half rates.

A better way to reward regular workers may be to help them get training, from professional certifications to courses in human resources (HR). In New York, the union’s Local 32B-32J holds free classes for members in good standing. But why should they study human resources? “Employees tend to stay for a long time in the buildings they work in,” explains Margie Russell, executive director of the New York Association of Realty Managers and an instructor in 32B/J’s Thomas Shortman Training Program. “The family atmosphere can turn bad. So HR classes are important for everyone. You want your doorman to think of the handyman as his customer, and you want the handyman to think of the doorman as his customer.”

Financial management is another valuable topic, says Russell, who urges buildings to share their monthly budgets with employees. “Every potential buyer gets to see those budgets,” she notes. “Staff should, too. In budget class, we learn that every leaky faucet can cost a building $1,500 a year, so we train people to catch it. Sidewalk repair falls on a building’s shoulders. There’s no reason why a porter or a doorman can’t watch for defects, and photograph them with a digital camera.”
The ultimate goal is to create a sense of ownership in the people who interact with tenant-shareholders and visitors on a regular basis, and are therefore in a position to reduce friction, and with it, the possibility of legal action. “If there’s a flood in an apartment, and an employee doesn’t show remorse, the tenant-shareholder will seek more money in damages,” Russell points out. “If someone trips and falls and is okay, and the doorman rushes out and says, ‘Are you okay?’ there’s less chance of a lawsuit.”

Shopping Around
In a consumer society, the concept of comparison-shopping needs no explanation. Managing agents and large complexes enjoy a pricing advantage, since they purchase goods in bulk. Individual properties may be able to boost their buying muscle by joining housing associations. Many small co-ops just write up a wish list and dispatch a board member to a discount warehouse. Without lots of storage room, however, they can’t just stock up on chemicals.

Brigham Park relies heavily on three vendors and isn’t shy about playing them off against each other. “Periodically, we buy the same items, to compare prices,” notes Kobak, the manager. “One supplier may be higher on certain items; if the difference is minor, it cancels out.” To create a competitive situation, he alerts suppliers that he is also doing business with their rivals. Who does the actual buying and, more importantly, how trustworthy the person is can matter just as much as where he or she shops. Big or small, all properties worry about the prospect of theft. “We order materials ourselves and go to the buildings and check on them,” says Hoffman, whose firm patronizes an established network of vendors (his family has been in management for three generations). “Supers do not order supplies; their time is too valuable. Instead, we have requisition forms for them.”

In the market for professional services? Here, too, co-ops and condos should shop around. “Review attorneys’ and accountants’ fees,” advises Condon. When the building’s insurance comes up for annual renewal, examine the policy, from its price to its coverage, and ask your broker to find out what other carriers might offer. If your building made major capital improvements, for instance, it might want to increase its coverage.

Putting Energy into Saving It
The New York State Energy Research and Development Authority (NYSERDA) has a variety of ResTech initiatives to help multi-family buildings implement energy efficiency improvements. One program covers single-family to four-family properties; the other targets properties with five or more units. Both programs involve an energy audit – a top-to-bottom assessment of the site’s components and operating conditions conducted by a state-approved contractor.

“The auditor proposes the scope and cost of the work,” says Michael Bobker, director of strategic technology at NYSERDA. “If the building agrees, NYSERDA pays for half of the services, and the building pays the agency for the other half.” If the building makes the recommended improvements – such as adding insulation, replacing windows, or upgrading the furnace – the payments go toward that work. “The audit covers all energy sources,” continues Bobker. “The building should be able to see savings of 15 to 20 percent, although savings of 35 to 40 percent are possible with major capital investments.”