Rehabilitation

Introduction

This brief presents information to help you plan for and undertake the rehabilitation of small-to-medium multifamily (SMMF) properties. It is intended for those who are considering and assessing the feasibility of preservation and want to know what to expect in the rehabilitation process.

Affordable SMMF properties across the country, and particularly those without subsidies, tend to be older and may have deferred maintenance that will need to be addressed to keep the property in good working order, maintain safety, and ensure a good environmental quality for residents. In addition, there may be needed updates that go beyond maintenance – replacing major building systems, improving the energy efficiency of the property to improve operating efficiency, improving the disaster resilience, improving the economic health of the property, and even reconfiguring units to correspond to new kinds of demand.

You will need to determine what this means in practice (i.e., the scope of the rehabilitation) and how to undertake the process. For example, rehabilitation can be completed all at once, completed for groups of units at a time, or completed in phases over time based on the types of changes required.

The scope of rehabilitation required can be a substantial contributor to the overall cost of preserving SMMF properties and have a major impact on the amount and types of capital you will need to preserve a property or portfolio. Because of this, detailed planning and reliable cost estimates are critical to success. You will need to make sure to gain access to the property for assessment prior to acquisition in order to understand the intensity and types of rehabilitation that will be required. Doing this assessment with your general contractor or another construction expert can help you get accurate estimates of cost.

Older buildings tend to present unexpected conditions and problems for even the most experienced construction experts. They also present regulatory challenges, since older buildings often do not meet current building standards and regulations. You will therefore need to assemble a competent team (i.e., contractor, consultants, staff, etc.) to support you in undertaking this work.

Finally, rehabilitation of any scale will directly impact residents. This could range from minor inconveniences, such as short-term inaccessibility of common spaces or disruptions from noise and debris generated during construction, to impacts that require major life changes, such as the need to relocate tenants to another building during construction. It is therefore critical that any existing residents are directly involved in the process and kept up to date along the way (see the Engaging Stakeholders section of this toolkit for more information).

The Integrative Design Project Priorities Survey that is part of the Enterprise Green Communities Criteria provides a great place to start in helping you think through your rehabilitation priorities and consider the implications for your project. It also contains helpful considerations for incorporating green building, resilience and health priorities into your planning (discussed in more detail in the Green Building, Resilience and Health section of this toolkit).

Key Questions to Answer in Planning

• What are the highest priorities you will need to address?

• Are there ways to minimize the impacts of rehabilitation on residents, and, in particular, avoid displacement or long-term relocation from their current home? For example, if you will be doing substantial work within units that requires tenant relocation, is there a possibility of doing construction on small groups of units at a time and relocating existing tenants to empty units within the same building?

• What regulatory considerations will have an impact on your rehabilitation plan and decisions (see section below in this brief for examples and further discussion)?

• How will the options impact the cost and financial feasibility of the rehabilitation?

Engaging Existing Residents

Existing residents of the property (and organizational tenants in the case of mixed-use properties) should be central partners in your rehabilitation and preservation approach more broadly.

Current residents have significant knowledge of the building you are seeking to rehabilitate. Particularly for older buildings, this knowledge can be invaluable. Residents understand the building’s current uses (both formal and informal), the condition of the structure and systems, and in some cases the history of problems that have occurred. They have direct experience with parts of the building (the units themselves) that property management and maintenance staff do not regularly access. They also understand the significance of wayfinding features, culturally significant aspects of the property, and other qualities that have a bearing on the impact of your overall preservation efforts. All of these provide valuable insight that may be missed in standard property condition assessments. Working with residents to understand these issues will make your rehabilitation planning more effective.

Residents will also be directly impacted by the construction process and need to be informed and partnered with to determine workable solutions to mitigate these impacts to the greatest extent feasible. They will experience the construction noise, odors, and building vibrations. They will experience disruptions caused by common areas being temporarily closed and parts of the building such as balconies or entrances being inaccessible. They may also be forced to move themselves and their families temporarily to allow for the construction to take place. This can alter their daily lives and be a major stressor, even for short-term relocations. Residents with physical disabilities, wheelchair users, service-dependent populations and older adults may require special consideration to ensure that impacts do not have major adverse impacts.

Finally, residents will be the primary users of the property after rehabilitation is complete and should therefore be consulted about and ideally brought into decisions about property design, programming and amenities. This ensures that your preservation efforts align with community needs and reduce the risk of unforeseen negative consequences. This could include helping to select materials and fixtures, determining how common spaces can be best programmed and identifying features of the current site to maintain or rework.

When and how you engage residents will depend somewhat on the nature of your preservation project. If you are planning to acquire and preserve a property, your ability to engage existing residents may be limited until you acquire the property. Community-based organizations acquiring properties may have already developed relationships with residents prior to purchasing the building or may work with community partners to play that role. Other developers have explored strategies to engage residents through the real estate process in more conventional ways, such as during the process of obtaining estoppel signatures.

If you already own the property you are rehabilitating, you can begin earlier. In all cases, this work requires commitment and can be difficult and time-consuming, particularly if relocation is involved. Nevertheless, The Engaging Stakeholders brief in this toolkit presents additional details about where, how and when to engage residents.

Determining Your Rehabilitation Approach

Assessing Property Conditions and Needs

A key step in creating your rehabilitation plan is to assess and understand the property’s current condition and needs. Existing owners can leverage their own, resident and staff knowledge of the property and building systems and review previous maintenance requests and inspections documentation to assess the property. Those acquiring a property will not have this direct knowledge and, depending on the practices, record keeping and openness of the current owner, may have to work harder to obtain an accurate picture. In any situation, it is critical that you gain direct access to the building (including units) prior to closing to walk through and assess it alongside your contractor(s) or other experienced construction professionals to understand the current property condition and implications for rehabilitation. Regardless of other assessments you may do, this direct, first-hand experience is necessary and invaluable for good rehabilitation planning and mitigating unnecessary risks.

In addition to the direct assessment you will do with your contractor(s), you will also typically do some form of professional inspection. This is typically required by lenders and other funders in order to access capital for existing properties. However, the results are also valuable to inform your acquisition and/or rehabilitation planning. Topic-specific assessments focused on health conditions, energy efficiency and other issues can also be conducted alongside these property condition assessments to help you get a more holistic understanding of the needs and opportunities at the same time.

Property condition assessments are completed by a professional consultant who specializes in this type of assessment. The goal is to conduct an in-depth and thorough examination of conditions and determine the implications for rehabilitation. This includes:

• Immediate, medium and long-term repair and rehabilitation needs.

• Examination of property interior, exterior and all property improvements and building structure and systems.

• A review of important documents related to the building, such as evidence of code violations that may need to be addressed.

• A cost analysis over the next 12-20 years for all major repairs and replacements, which can inform both the rehabilitation plan as well as the scale of your replacement reserve.

These assessments involve on-site inspections and tests and usually include sampling a subset of a property’s units. Because they do not typically inspect every unit, this can be a key gap that results in unexpected needs and is a place where direct engagement with residents and maintenance staff can be helpful. Inspections may also involve “destructive testing” (i.e., stress testing materials or structures to determine the point at which they will fail) to identify weaknesses in the structural integrity of building materials.

The assessment results in a report that will comply with specific standards, however, there are multiple property condition assessment standards, so the details will vary depending on the standard used. For example, HUD uses the Project Capital Needs Assessment (PCNA) standard. Fannie Mae and Freddie Mac use Physical Needs Assessment (PNA) and Property Condition Report (PCR) standards. USDA Rural Development and many state housing authorities use the Capital Needs Assessment (CNA) standard.

Whichever standard is used, the resulting report will provide a detailed and professional account of the property's condition and needs. The example below shows some of the topic areas covered in the property summary but clicking the links for each of the standards listed above can provide more detailed information about what is and is not included in each standard. Ensure that an assessment is used that aligns with your priorities for the site, including health, sustainability, and resilience priorities. Understanding the existing conditions related to these priorities will allow you to accurately assess your budget and capital needs.

Excerpt from Example Property Condition Assessment Project Summary Report

Conducting a property condition assessment, regardless of the standard used, is also a good time to assess the health and energy efficiency conditions of the property. This can help you further prioritize capital needs and develop your approach to operating the property. HUD’s Housing-Related Health and Safety Hazard Assessment provides a helpful approach for doing this type of assessment.

Across the assessments, ensure that you have a comprehensive understanding of immediate repair and replacement needs. Between your own assessment and the professional property condition assessments discussed above, you should have a good picture. However, occasionally, an unexpected issue requires further study. Order any additional assessments or studies you may need to get a complete picture before proceeding to develop your rehabilitation plan. There will undoubtedly be unexpected issues that arise during construction (this is what your contingency is for), but your goal at this stage is to minimize those to the greatest extent feasible.

Create Your Rehabilitation Plan

Once you have fully assessed the property’s condition and needs, you are ready to develop your plan for rehabilitation and determine how these relate to your budget and capital needs. In most SMMF preservation projects, the rehabilitation plan will be a balancing act between the need for critical repairs and code upgrades, your rehabilitation goals, and your total budget and financing strategy. In other words, there will almost never be enough funding available to accomplish everything you would like to during rehabilitation.

In addition, keep in mind the impact your decisions will have on affordability and resident stability goals. The goal of preserving SMMF properties to maintain affordability is undermined if rehabilitation is so costly that it requires raising rents or displacing existing tenants. If you encounter this situation, consider adjusting the rehabilitation scope or identifying alternative financial resources, grants, or partnerships to ensure alignment with this goal.

Your rehabilitation plan will need to prioritize and include accurate cost estimates that you can develop in consultation with your general contractor. High priority items are typically those that involve:

• Life safety.

• Immediate repairs and deferred maintenance.

• Immediate needs that affect building operations and costs, such as improving utility efficiency.

• Immediate or intermediate needs that impact quality of life and aesthetics.

• Intermediate needs that will cost more to repair later or have the potential to create more significant costs if they fail before replacement (e.g., allowing water penetration and damage).

The steps below outline a basic process you can follow in creating your plan.

1. Begin by noting immediate or urgent needs you will need to address. These will be high-priority items such as those listed above and may be non-negotiable for lenders or funders.
2. Check the extent of intermediate needs - are there any big items coming up in the next 3-5 or 5-10 years? Given that you may not be in a position to obtain financing at that point (or financing terms may not be as favorable), would you be able to cover these costs from replacement reserves or other sources? Is there room in the budget to take care of them now?
3. Determine the regulatory considerations that will be relevant for your rehabilitation (see the final section of this brief for more detail). In some cases, advice from planners or specialized consultants may be required.
4. Bring green building, healthy building, or resilience consultants to help determine priorities and opportunities based on the potential scope of work. Some of the changes suggested by these consultants may actually result in cost reductions, benefit from federal, state and local tax incentives or create a different tradeoff between upfront costs and cash flow during operation, so it is important to have a robust financial model to work from in considering this. The Financial Modeling Tool can provide more guidance in this. When these priorities are established early in the rehabilitation process, green, health, and resilience components can often be integrated with minimal additional costs.
5. Depending on the nature of the rehabilitation, you may need to hire an architect and/or engineer to provide designs or architectural drawings for some elements of your rehabilitation. An architect can also advise on material selection, lighting, cost saving measures, and a variety of other issues.
6. Bring your general contractor on board to better define your scope and priorities, help you determine more accurate construction, and consider contingent construction processes and phasing. Your general contractor can also work with your architect to refine designs and determine their cost.
7. Engage existing residents (see Engaging Stakeholders) to discuss and understand their priorities. Understanding the residents’ priorities can inform design, material and equipment selection, and importantly, inform trade-offs that are made during the value engineering stage to ensure impactful decisions are prioritized. In this engagement, set realistic expectations and discuss how their feedback will be utilized, what can realistically be accomplished and how needs will be prioritized.
8. Determine which elements of the rehabilitation scope could or should be bundled to create efficiencies or avoid having to repeat costly and invasive procedures to access and replace major systems or infrastructure. Your general contractor and green building consultants can be helpful partners in determining what makes sense.

Key Contributors to Rehabilitation Costs

It is difficult to generalize about the cost of rehabilitation, since it varies so much with the site, property characteristics, regulatory environment, location and the cost of materials and labor over time. A light rehabilitation in a low-cost market that involves only minor repairs and cosmetic improvements might cost as little as $10,000 per unit. A ‘gut rehab’ that involves major repairs, system replacements, space reconfigurations and unit remodeling can exceed $80,000 per unit or even more in high-cost markets.

That said, there are a few key scope elements that will contribute substantially to the cost of rehabilitation to be aware of, including:

• Whether interior unit rehabilitation will focus on addressing typical maintenance or involve major renovations such as reconfiguring the space. Major renovations carry substantially higher costs.

• Whether and how many building systems such as roofing, electrical, mechanical, plumbing or drainage systems will be upgraded. Each building system upgrade will add substantially to the cost, though some systems (such as mechanical and electrical) can be more efficient when replaced together.

• Whether accessibility features will be added to common spaces or units. For buildings that already have reasonable accessibility, these may be relatively minor contributors to cost. But for buildings that currently lack accessibility and are required to comply with accessibility regulations, this can be a significant portion of the total cost.

• Whether seismic, hurricane or other resilience features will be added. These can add substantially to the upfront cost, even if they also result in substantial risk mitigation in the long run. Some jurisdictions are now requiring these kinds of upgrades, so it is important to be aware of recently passed or upcoming legislation related to resiliency retrofits.

• Whether there are any structural problems that need to be addressed. Depending on the severity of damage, extent and accessibility of areas impacted, these can contribute substantially to costs.

• Whether tenants will need to be relocated during rehabilitation. Tenant relocations can require both time and staff energy to implement successfully, may require the use of dedicated consultants, and can be surprisingly costly. One common strategy is to rotate the units currently under construction to enable relocation within the property and reduce costs and impacts on tenants.

• Whether there is major environmental remediation that will need to be done. Lead-based paint, asbestos and mold are some of the most common remediation needs you will encounter (see The Cost of Remediation in this brief).

As you estimate costs and develop your rehabilitation plan, expect the unexpected. Prepare yourself for unexpected costs, especially in a building you are acquiring that you have less knowledge of and pay attention to macroeconomic factors that impact the cost of materials. It is common for contractors to require larger hard cost contingencies (in proportion to the total construction budget) in rehabilitation projects involving older buildings compared to other projects, because there are nearly always unexpected costs you will encounter. Working with a general contractor who has experience with rehabilitation in older buildings (and ideally in the type of building you are working with) can help to avoid these surprises, but even the best prepared construction team will encounter them.

REGULATORY CONSIDERATIONS FOR REHABILITATION

It is critically important to understand what state, local and federal regulations apply to your preservation project as early on as possible in your planning. Although preserving existing units does not tend to face as many regulatory barriers as new construction developments, since you are not typically changing land use or density, they can still have significant impacts on the scope and feasibility of preservation.

Regulations can set limits on what is allowable or financially feasible for a given property. They may be sensitive to rehabilitation scope or other aspects of your development – e.g., some regulations will not apply to older properties until a certain level of modification is made to the property and the regulation is triggered. This can inform decisions about how much rehabilitation you will choose to undertake. They can also impose additional soft costs in your project if you must apply for waivers, variances, etc. beyond normal construction permits. They may dictate specific design or building features that will need to be added in order to rehabilitate (e.g., disaster resilience requirements).

This section outlines some key types of regulations you will need to investigate for your preservation activities and some considerations for doing so.