Planning And Managing A ConstructionRenovation Project

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Planning and Managing AConstruction/Renovation ProjectNAHC Annual ConferencePresented by:Bill Henley, The Columbia Property Group

“This Old Co-op”

Planning a Rehab/Renovation Project All planning and projects start at the Committeeand Board level– Board Structure:PresidentVice PresidentTreasurerSecretaryDirector-at-Large– Board Members chair various sub committees

Select Sub Committees Finance – TreasurerMember SelectionPPP Committee (People, Parking, Pets)Improvement Committee– Interior of units - carpeting, tile floors, electrical– Exterior- satellite dish, fence, landscaping,parking lots, tot lots

New CommitteePCI Planning-Capital & ImprovementCommittee responsible for overall capitalimprovements to the property Scope of Work– Identify capital need with Property Manager» Roofs» Grounds (parking, landscaping)» Building exteriors» Windows, HVAC, insulation, electrical Identify/estimate cost of improvement Funding discussion with Treasurer andProperty Manager

Scope of WorkPlanning & FinancingScope of Work If a significant capital improvement, an architectmay be required general contractor, construction manager andlandscape designer should be consultedPlanning Determine “wants” vs. “needs” Identify potential costs with property manager,construction manager, architect, and generalcontractorDetermine how to pay for capital improvements

Definitions Architect – Creates plans and specifications to be used in newbuildings or renovation. Will review buildings for currentcodes, recommend material and specification (i.e. – windows,doors, electrical, etc.) Construction Manager – Construction managers plan andcoordinate construction renovation projects. Constructionmanagers oversee the project, plan and direct a wholeproject, and oversee workers. They coordinate design andconstruction process General Contractor – A person or firm that contracts to supplymaterials or labor for buildings. General Contractors canprovide design build specifications, review current codes,alternative materials and cost proposals based on materialsand labor

Definitions (cont.) Landscape Architect – Design and build theenvironment of neighborhoods. They manager thenatural environment, improve quality of life for aproject. They will evaluate walkway patterns,erosion control, recommend plantings, playgroundenvironments, screenings of parking lots, etc. Maximum Fixed Price Contract – This provides for aprice that is not subject to any adjustment on thebasis of the contractors cost experience. Placesmaximum risk upon the contractor for all costs andresulting profit or loss.

Plan for ImprovementIdentify Sources & UsesSourcesUsesReservesWindowsCash FlowGrounds(funds after expenses, debt service, reserves)Refinance of Present Mortgage-OR-Roofs, etc.

Sources: First SourceReplacement Reserve Subject to HUD approval May not be sufficient for planned workCash Flow May not be sufficient for planned work May require an increase to monthly maintenancecharges

Sources: Second SourceRefinance Mortgages/Loan Identify all mortgages/loans First mortgage Second mortgages State and Local loans HUD Flex Subsidy loans*The Cooperative Board should work with theProperty Manager to identify all outstanding loans.

Refinancing Considerations Determine the cost of the capital improvement (s) Review budgets for income, expenses, replacement reserves,and debt service Review all outstanding debts: 1st Mortgage, Flex Subsidy Loans,Lines of Credit Increasing carrying charges to finance improvements Match appropriate loan structure with capital improvementproject Discuss with NCB how they would finance a cooperative, call:

NCBToll Free at(800) 955-9622Larry Mathe or Karyn Mann

Cooperative Mortgage Considerations Current mortgage rate vs. today’s rate Number of years remaining until the loan matures Amount of capital improvements required andbenefit of a low mortgage Accessing replacement reserves and generaloperating reserves Does the cooperative want to be free of HUD?

Evaluating your HUD 1st MortgageOriginal HUD Mortgage Terms: Originated: 1968-1975 / Type: 221(d)(3) Cooperative Housing Mortgage. BMR: Co-op may be entitled to an interest subsidy. Noterate may be stated at 6.00% to 7.50%; Payment is based ona lower rate of 1.00% to 4.00% Interest Rate: 4.00% Original Loan: 5,000,000 (1969) Principal & Interest Monthly: 20,897

Evaluating your HUD 1st Mortgage (cont.)HUD Mortgage (Originated 1969) 5,000,000 at 4.00% Interest40-year AmortizationMonthly P&I 4-2009**M aturityMortgageInterest Paid Principal PaidBalance 1,884,726 622,904 4,377,095 1,578,984 928,646 3,448,449 1,123,174 1,384,456 2,063,992 324,506 929,309 1,134,683 1,134,683 -

Mortgage Traps HUD Flex Subsidy notes HUD requirements 1% interest rate which accruesannually, no payment until the first obligation ispaid off If the cooperative has a flex subsidy loan, discussthis loan with your Financial Advisor and PropertyManager

HUD Flex Subsidy Trap 500,000 Flex Subsidy note: 1% accrued interest dueat maturity/pay off of 1st mortgage Assumes a 15 year term from inception The cooperative will owe more money than it hadoriginally borrowed

YearPrincipal Balance1% Interest1 500,000 5,0002 505,000 5,0003 510,000 5,0004 515,000 5,0005 520,000 5,0006 525,000 5,0007 530,000 5,0008 535,000 5,0009 540,000 5,00010 545,000 5,00011 550,000 5,00012 555,000 5,00013 560,000 5,00014 565,000 5,00015 570,000 5,000

Alternative Flex Subsidy Structure Amortizing the “Flex Sub” 500,000 Flex Subsidy @ 1% due at maturity or pay off Assume 15 year term from inception

1% Interest Monthly Payment 2,992 x 12 35,904YearPrincipal Balance1 500,0002 468,9483 437,5844 405,9055 373,9086 341,5907 308,9478 275,9769 242,67310 209,03711 175,06212 140,74613 106,08514 71,07615 35,715

Today’s Goal To focus on the three major elements to planningand managing the renovation/construction of yournew facility

Major Elements of Risk Management Budget Project Team Development Contract Negotiation

There are some underlying rules tomanaging construction/renovation:1. Time is always a challenge2. Someone has to be responsible3. Construction/renovation is alwaysunpredictable

Obstacles to Taking Action Dissention Deny that a problem existsdifficult to build consensusopposition in communityAfraid to take actionSolution: Communication, Resolve and Determination Uncertainty how to proceed ?magnitude of the problem ?how much it will cost ?potential scope of the work ?how long repairs will take ?

Budget ProjectionsPay Off:HUD 1st MortgageFlex Subsidy NoteTotal Outstanding Debt:1,134,683570,0001,704,683Soft Costs:Appraisal, Environmental, PNALegal (Borrower/Lender)Title (Record/Survey)MiscellaneousTotal Soft Costs12,00025,00020,00012,00069,000Construction Costs:Windows, Siding, Electrical,HVAC, LandscapingTotal Hard Costs2,226,3172,226,317TOTAL BUDGET (Estimated):4,000,000

Project Team Coop’s Primary Contact PersonProject ManagerArchitectGeneral ContractorAttorney

Contracts Parties to the contract- General Contractor andCoop Scope of work- ( new roof, windows, HVAC etc) Roles and responsibilities Scheduled payments/compensation Start and completion dates Dispute resolution/termination clause Allowances Retainage- 10% Guaranteed Maximum Price

Managing Cost Overruns Change Orders Time Materials Labor SchedulingCity InspectorsEnvironmentalAcceptance vs. Approval Contingency –10%/15% - 20%

Management of Risks During ConstructionConstruction Finance is the management of theconstruction loan’s disbursement process Tracking Budget Pre – Construction Meeting Lien WaiversA legal document signed by subcontractors stating that they havebeen paid for work completed on a construction project andcannot make a claim for lack of payment. AIA documentsTitle UpdatesInvoicesConstruction Reports

“Projects fail not because of theircomplex nature or unusual situations,but more often because of ordinaryroutine chores that are not properlyexecuted.”Seen on the wall of the General Contractor’strailer at a construction site

The Sequence of Events Constructing a Business PlanAssessing your facility needsSelecting a professional: Architect, Engineer,Banker, etc.Managing construction & renovationSecuring financingTime line

NCBLarry Mathe –Sr. Vice PresidentKaryn Mann –Vice PresidentToll Free at(800) 955-9622

“This New Co-op”BeforeAfter

Construction ChallengeQuestion:What position creates plans and specificationto be used for the building renovation?Answer:ArchitectGeneral Contractor: Design Build

Construction ChallengeQuestion:The planning, capital and improvementcommittee responsibilities include?Answer:Identify capital needsIdentify cost estimatesIdentify sources of funds

Construction ChallengeQuestion:Name two sources of capital for capitalimprovement projects.Answer:ReservesCash FlowLoan

Construction ChallengeQuestion:What are two major elements to planningand managing the renovation/ constructionproject?Answer:BudgetProject TeamContract Negotiation

Construction ChallengeQuestion:What is a lien waiver?Answer:A legal document signed by subcontractors stating that they havebeen paid for work completed on a construction project andcannot make a claim for lack of payment.

Construction ChallengeQuestion:Name 3 people who should be on the project team.Answer:Project ManagerAttorneyCooperative Primary contactArchitectGeneral Contractor

Construction ChallengeQuestion:What are three things that should be in yourcontract?Answer:Scope of WorkRoles and ResponsibilitiesScheduled paymentStart and completion datesRetainage

Construction ChallengeQuestion:What are two obstacles to the construction project?Answer:Unit owner dissentionCost of projectHow long will the repairs take?Board indecision- not wanting to make a hard decision

Questions?

Management of Risks During Construction Construction Finance is the management of the construction loan’s disbursement process Tracking Budget Pre –Construction Meeting Lien Waivers A legal document signed by subcontractors stating that they have been paid for work completed on a construction project and cannot make a claim for lack of payment.