Capital investment: improvements are possible with creativity and foresight.

THESE DAYS, PROPERTY MANAGERS NEED TO BE SAVVY ABOUT HOW THEY SPEND THEIR CAPITAL IMPROVEMENT BUDGETS--especially when they have limited funds. A whole range of projects fall under this umbrella term: replacing roofs, heating and cooling systems, or appliances; fixing or other electrical systems; addressing a parking lot's structural problems; retrofitting to stay current with new building and environmental codes and more.

So how do property managers decide what projects to address during a recession? Clearly, it's better to hold off on less visible projects and undertake others that more directly benefit the bottom line. Tenants and residents will readily see the benefits and owners are more likely to support such undertaking, especially if they will improve ROI.

For example, last summer Sunrise Management & Consulting in Albany, N.Y. began upgrading bathrooms at some of their suburban residential properties. The bathrooms in the eight-year-old apartment complex had linoleum floors and standard-issue cabinets. The company wanted to replace them with ceramic tiles in one of three color schemes. They started renovating the 232-unit building at a clip of three or four bathrooms a month.

Then came the recession: unemployment, financial meltdown and comparisons to the Great Depression. The company had a decision to make: Continue to tile, at a cost of $750 a bathroom, or hold back and wait for better times.

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Sunrise chose to slow down but not stop. Though it may seem counterintuitive when the recession has managers watching every penny, property managers say spending money on capital improvements now is a wise investment. New bathrooms help attract new residents and give current residents one more reason to stay, thereby minimizing expensive turnover, said Jesse Holland, CPM[R], president of Sunrise. And with contractors hungry for work, the price is right.

"In a year like this, everybody tries to pull back, but now is a great time to do capital improvements," he said. "As we come out of the recession 12 or 18 months from now, you'll already be ahead of your competitors."

In other words, you have to spend money to make money.

PRIORITIZE AND READJUST

While Holland continued with the bathroom upgrades, Sunrise temporarily shelved plans to build a new maintenance shop to store pool equipment. Holland said this type of improvement would not be noticed by residents and could easily wait until more funding comes along.

Owen Ahearn, CPM, made similar decisions at his property management company, Ahearn Realty Management in Lakeville, Mass. The company manages apartments, condominiums, and commercial and industrial properties in Massachusetts, Rhode Island and Connecticut.

The company delayed kitchen and bathroom renovations at a multifamily apartment building in Worcester, Mass., because of the cost, but they went ahead with window replacements. Trading the aluminum windows for energy-efficient vinyl ones will help residents save money on their utility bills, making them less likely to leave; it will also save the management company money on utility bills for the common areas.

Even projects that are deemed essential don't necessarily have to happen all at once. Regular maintenance can help put off the need for major capital improvements, Ahearn said. It's better to pay to fix a leak than wait and allow water to damage the roof. If a property owner doesn't seem inclined to share this view, he said, "you lay out the cost of repair versus the cost of replacement. That usually gets their attention."

Knowing the owner's intentions for a property is critical for managers trying to decide the order in which to tackle capital improvements, said Sue Lewis, CPM, Do the owners intend to keep the property for the indefinite future? Or are they looking to sell? If it's the latter, it's better to spend limited capital improvement dollars boosting the property's curb appeal by power-washing sidewalks or planting new shrubbery, rather than on replacing the roof. Lewis warned property managers to be careful about putting off repairs, however, even if the owners plan to sell the building.

"Deferred maintenance will drastically affect the price you're going to get," Lewis said.

Completing a project in phases is another useful tactic to help control cash flow. Karen Hodge, CPM, said her company, ICORR Properties International in Canada, took this approach when upgrading the facade of a building in downtown London, Ontario.

The Selby Building is four stories, with retail on the first floor and offices above. Over time, the commercial tenants had taken it upon themselves to display their own signs, creating a visual mishmash of advertisements. ICORR wanted to replace the chaos with uniform signage and install weatherproof stucco that would both improve the building's appearance and protect it from deterioration. The total price tag was $360,000, but instead of trying to do all four sides at once, ICORR took the exterior walls one at a time, each costing $90,000. The company started in late 2007 and will finish the project this year.

CREATIVE FIXES WITHOUT THE FUNDING

Ideally, property managers can pay for capital improvements out of a fund they've been feeding regularly for years. In addition to the annual budget, property managers should budget to pay for improvements that will be needed in the next five to 10 years, Lewis said. That money is more important than ever since the credit markets have dried up, and managers say financing is no longer an option.

"Nobody's borrowing at this point," Holland said.

But sometimes there isn't enough money set aside to cover all the work that needs to be done. That's when managers need to find creative ways to squeeze money out of their properties, Lewis said. She ticked off a list of suggestions without pausing. Consider charging residents for parking, if possible. If the property is located next to a mixed-used area, try renting out residents' parking spots during the daytime. Investigate charging residents for their utility use. Install storage lockers and rent them out, or rent out a common area to community groups.

A variation on that last strategy proved fruitful for Lewis in 2002 during the last economic downturn. She was managing Country Walk Apartments in Lynnwood, Wash. She allowed a Korean church to use the building's cabana free of charge each week for worship services. They even did baptisms in the room's Jacuzzi. Churchgoers would come for services and meet people already living in the community.

"Before we knew it, we had more apartments rented," Lewis said.

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FINDING DEALS

Once a manager has secured the money to move forward with a project, whether taken from a special account or raided from metaphorical couch cushions, there are many ways to save money on the actual improvements. Across the country the recession has forced contractors to drop their prices to win work, as there's simply less of it to go around. Ahearn said as recently as two years ago he had trouble finding specialty vendors to handle jobs; now he's getting cold calls.

Holland said, "When you talk to a contractor, they wanted to start work yesterday. They're willing to accept smaller profit margins, so it pays to negotiate."

Ahearn said prices have fallen between 5 percent and 15 percent from a year ago, and Holland has negotiated roof repairs down by 20 percent.

At the same time, Holland cautioned against driving too hard a bargain. Contractors you've relied on in the past won't appreciate aggressive demands for rock-bottom prices, and it's not worth souring a good relationship to get them. A low cost structure is worthless if a contractor won't help with future problems, whether it's honoring a warranty or being flexible about payment--a need anyone might have in a recession.

During economically challenging times, it pays for managers to do their homework to investigate a company's financial soundness before hiring them to do work, Lewis said. A contractor can't honor a warranty if they go out of business. Also, Lewis suggested checking out changing state and municipal building codes and environmental regulations to avoid costly retrofits. No one wants to install a new HVAC system only to have the state legislature increase energy-efficiency standards a year later.

There are plenty of places to save money when it comes to energy-efficient capital improvements, Lewis said. When she switched the apartment building in Lynnwood to energy-efficient lights, Lewis found government funding to cover more than two-thirds of the $80,000 project. Though the government programs available will differ across the 50 states, it's worth researching.

THE BOTTOM LINE

Sometimes investing in capital improvement pays off in more ways than one. Holland recalled a 256-unit townhouse development that he managed in Albany several years ago. The bathrooms in the post-World War II development contained old sink faucets and showerheads that wasted costly amounts of water. So Holland ordered new bathroom vanities for all the residents, which allowed the company to change the faucets and save nearly one third on their water bills.

The change in bathroom vanities also reduced resident turnover. Pleased with the new bathrooms, turnover decreased from 75 percent one year to 30 percent the next, without any rent concessions.

"We spent $400 and picked up $3,000, and it went to the property instead of paying a resident to stick around," Holland said.

Improved properties are easier to lease to new residents or tenants; it's also easier to persuade current leaseholders to stay. Preparing a unit for a new resident costs between $3,000 and $5,000, so capital improvements that reduce turnover are frequently worth the investment.

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