1. Capital Needs Assessments February 23, 2007 Tom Dillon Dillon Consulting

2. Workshop Overview Introduction and background Uses for a CNA Getting a CNA Working with the CNA provider Expected useful lives and the methods of CNAs Reading a report Asset management with a CNA Using a CNA to make an annual plan Where do we go from here?

3. Tom Dillon Consulting Affordable housing specialist 20+ years working in building inspection and affordable housing 6 years providing CNAs in Vermont Written about 60 reports

4. What is a CNA? A 20 year report investigating the condition a building’s components and predicting when they will need replacement A spreadsheet calculating the cost of replacement and timing of expenditures that compares those costs with current and anticipated reserve funds

5. What a CNA is not An order to replace an item in a given year. It is a tool, not a directive A firm prediction for the future. You need to keep it up to date. We are all idiots about the future

6. Short history of CNAs Used in affordable housing, condo associations, education and other institutions Fannie Mae (1990) “Physical Needs Assessment- Guidance to the Evaluator” by On-Site Insight Adopted by HUD for several programs for housing preservation Widely required for LIHTC projects

7. VHCB/VHFA Perspective Why are CNA's required? -Underwriting new projects -Preserving existing projects -Capital planning -Evolving Codes -Energy efficiency improvements -Improve maintenance and overall project quality

8. Uses for a CNA Establishment of reserve deposit amount Planning annual improvements Long term planning of refinancing and rehab Analyzing whether reserve balance is adequate Identify opportunities for savings and improvements Set priorities within the property and the portfolio Analyze whether current staff is adequate to complete capital projects

9. Getting a CNA done In house vs. consultant  Cost  Capacity  Competence Selecting a consultant  VHFA list  Ask around  Read a report  Get proposals

10. Working with your consultant Provide paperwork  Prints and specs  Operations manuals  Old report Building information  Recent projects, including costs  Planned projects, including estimates  Problem areas  Status of replacements, how many are done  Reserve balance and deposit amount

11. You know more than we do History Special circumstances Future plans Tenant comments and concerns Service history

12. Site visit Interview Inspection Mechanical areas Equipment Foundation Site Exterior Attic “Representative sampling of units”

13. Expected useful life Where it comes from How to use them How reliable are they? Case by case adjustments Some warnings and thoughts  Table developed in 1990  Variation in quality  Areas where they are not helpful

14. Reading a report Draft version  Check for factual errors  Check for accuracy with your procedures  Check for estimating accuracy Final version  Share it  Emphasize the Executive Summary, Spreadsheet, Financial Analysis and Capital Plan Use it, but be skeptical  Pricing  Predictions

15. Areas that get short changed Energy conservation Water conservation Electrical upgrades Environmental concerns Other green building practices Technology changes Marketability improvements

16. Unpredictable capital needs Lemon equipment New and untested items Code and code enforcement changes Tenant damage and unusual wear Environmental costs Poor workmanship in unseen locations Unseen design errors

17. Avoiding the unpredictable Find things that work and stick to them Give specific requests to development staff and participate in sketch plan review Run from the words “we want to try” Identify and hire design and engineering firms with good records Agressively pursue settlements when work or equipment is substandard

18. Asset management with a CNA Take charge, have a strategy Planning, planning, planning Records, records, records Figure it out, year by year, building by building

19. Categorize the property Adequate funding, few improvements needed, shortly after const.  monitor inflationary increases in deposits, watch for problems to develop Inadequate funding shortly after construction,  make immediate increases in funding to reserves, to get to adequate funding level per CNA Active capital improvements with adequate reserves at present  monitor inflationary increases in deposits, watch for problems, don’t fall behind in projects, watch for longer term shortfalls Active capital improvements, reserves that can’t last long,  look for ways to stretch reserves, significant increases in deposits annually until adequately funded, keep up with projects, using the funds available, be sure finance and development people understand the problems and projected date of shortfall. How far away in year 15? Serious current problems that can’t be repaired with the reserve funds available  Identify whatever funds are available within the property to keep the building safe and operating. Seek funding to restructure, pay for rehab and get project back in the black. Consider selling the property.

20. Asset management tasks Set the reserve deposit amount using the report  Minimums  Family new construction$40-50 per unit per month (pum)  Family rehab $45-55 pum  Elderly new construction $35-45 pum  Older buildings $45 and up Plan and complete annual improvements Track progress of improvements and needs Identify operational savings Update the report, create a living CNA

21. Capital Needs Records Every property has a file  Summary of the project  Current CNA  1 page plan for the current year  1 page 5 year plan  1 page financial summary of reserves and deposits  Record of recent capital improvements and costs  Notes on things to watch, building quirks, wish list  Annual inspection results  Strategic plan for that property

22. Annual Plan List of projects for that year with pricing Review the CNA, laugh out loud and figure out what you need to do Timed with annual inspection Review what has changed since last year, new problems Review the current reserve balance Determine reserve deposit amount for coming year, should reflect construction inflation, about $2 per unit per month Where the reserve deposit is too low, increase deposits $5-10 pum to catch up Plan projects for next year, in house vs. contract What can be done with maintenance funds? Update the 5 year plan Update the spreadsheet Add notes to the file reflecting the year’s events

23. Annual plan uses Use it to:  Spread improvements over time  Prioritize among buildings or needs  Set staffing for project management  Budgeting for projects  Coordination and sequencing  Justify reserve and maintenance budget increases  Review progress on projects to be completed

24. Capital needs exercise Identify what needs to be done this year for improvements Identify what can be postponed or is not yet needed Set a reserve deposit amount and justify it

25. Strategies for better asset management Property file for capital needs Annual plan Regular increases to reserve deposits to reflect inflation and changing conditions Better systems for asset management Establish priorities and write them down  Develop a capital needs watch list  Have a strategy for getting a property off the watch list Increase project management capacity Increase construction/rehab capacity

26. Best practices for Vermont What do you do that others should copy? What would you like to do better? What role can VHFA/VHCB play? How do you organize asset management/ maintenance and capital improvements? What would you like to see different?

27. Question, issues, war stories Your questions and comments Evaluation Closing

28. Thanks for coming Go home a changed person Make the world a better place